Deane Group International Ltd:  Investing in Ukraine

Legal and Fiscal Issues

The Ukrainian government continues to work hard to improve the legal and
fiscal framework to provide the long-term clarity, stability and consistency
needed to sustain the significant level of foreign investment required by the
country.  It is unrealistic to expect an overhaul of the entire legal and fiscal
regime overnight, but there are significant steps which are now being
taken. In addition to radical reforms of the taxation system currently being
introduced, one of the most important improvements has been the
adoption some years ago of production sharing legislation. This form of
legislation, which is an effective and speedy method of jump-starting the
energy sector, has been successfully adopted in many other countries
around the world and is a proven means of reducing the perceived risks of
investing in an otherwise rapidly evolving fiscal and legal environment.  
Ukraine enacted a production sharing law together with the essential
enabling legislation necessary for the production sharing law to operate
effectively.  These essential pieces of legislation have recently been
revised and updated to meet the requirements of today’s investors.  This
key development in Ukraine’s legislative framework will be welcomed by
all potential investors in Ukraine’s natural resources and energy sectors.

Advanced Technology

In addition to the creation of the right business environment, access to the
best available technology is needed to unlock Ukraine’s full natural
resources potential.  Huge advances in exploration and production
technology have been made by the industry over the last twenty years,
enabling the identification and commercial exploitation of increasingly
more complex reserves.  Unfortunately, many of these advances have not
generally been available in Ukraine, primarily due to severe shortages of
funding.  On the other hand, Ukrainian technologists are highly innovative
in making the best use of tools when they are available.

3D Seismic

One of the major advances in exploration technology has been the
development of three-dimensional seismic technology and - equally
important - the associated processing and interpretation techniques. This
technology has significantly improved understanding of the geology of
prospective areas and has enabled the identification and exploitation of
hitherto unrecognized structures. For example, barely twelve years ago the
accepted wisdom in the industry was that both the UK North Sea and the
US Gulf of Mexico were highly mature basins, with relatively limited
remaining potential.  However, in both these regions the development and
application of three-dimensional seismic technology has enabled the
imaging and identification of new geological structures with enormous
hydrocarbon potential. The net effect has been resurgence in both
exploration and development activities in areas previously considered
more or less fully explored.

This has some interesting implications for Ukraine which appears to have
large areas with closely analogous geology to that of the UK North Sea
and the US Gulf of Mexico. The application of three-dimensional seismic
technology could offer the possibility of identifying and exploiting significant
new reserves in Ukraine, whose potential was previously unrecognized.  A
privately-owned Ukrainian exploration and production service company
has been offering for some time world class 3D seismic services
including both data acquisition and data processing.


In the drilling area, there are a variety of technologies which could
materially increase Ukraine’s oil and gas production and improve overall
recovery rates. These include, for example, drilling deviated, high angle
and horizontal wells to access reserves more efficiently, and applying
multi-lateral well completions, to enable simultaneous production from
several different horizons. Advanced drilling technology such as this will
allow gas production to be accelerated while reducing the total number of
wells.  This in turn will reduce the overall capital costs and thus make it
economic to exploit even smaller and technically more challenging


When considering technology, it is too easy to be blinded by the
specialized equipment, the computing power, and the advanced materials,
and to forget the know-how and experience of people.  It is important that
western resource companies planning to invest in Ukraine are prepared to
share the best technology and know-how with Ukrainian specialists to
ensure that technical solutions are found that are appropriate to local
needs and which will create the maximum value added to any joint
activities.  In Ukraine, where there is already a highly skilled and
experienced technical resource, sharing technology and know-how will
undoubtedly produce major benefits to any exploration and production

Amongst oil industry specialists working in Ukraine there is a widespread
belief that, in spite of the challenges, the benefits both for investors and for
the country from successful oil and gas exploration/production projects are
potentially very substantial. Currently a great deal of work is being done in
Ukraine by many dedicated individuals in government and in state
organisations to maintain and extend the improvements in the legal, fiscal
and business regimes.  Such effort is now being rewarded by a steadily
improving climate for upstream investment.  As a result the future for
Ukraine’s oil and gas sector is now brighter than at any time previously.

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