Subsoil use reform in Ukraine: how changes to the legislation will affect subsoil users, the state and citizens

For the first time in many years, the primary document that governs the rules of subsoil use in Ukraine has undergone significant amendments. Law №2805-IX, dated December 1, 2022, titled “On Amendments to Certain Legislative Acts of Ukraine on Improving Legislation in the Field of Subsoil Use” (hereinafter referred to as Law №2805), is set to come into effect on March 28. This signifies that the extractive industry will begin operating under new regulations from this date.

There are many different opinions about this document in the media, both positive and negative. But what consequences will the adopted Law №2805 actually bring to the state, the community and Ukrainian business, we analyze in this article.

The new version of the Law: what should you know?

Before its enactment, Law №2805 underwent thorough discussions involving industry experts, government officials, business representatives, and leading non-governmental organizations. Notably, Ukraine’s inaugural Subsoil Use Committee at the European Business Association also participated in the deliberations of the document and contributed proposals that truly meet the needs of subsoil users.

Dmytro Kashchuk, Chairman of the EBA Subsoil Use Committee, highlighted that in evaluating legislative changes, it is crucial to first acknowledge that the fundamental rules for subsoil use in Ukraine have already been established through Law №2805. “In the next 5-10 years, all subsoil users will be governed by these rules. They are unlikely to undergo radical changes, as altering a law in parliament is significantly more challenging compared to, say, a resolution of the Cabinet of Ministers of Ukraine, which can be amended by the government under much simpler conditions. Therefore, any proposals for the law necessitate more substantial justification, ” Dmytro Kashchuk explained.

Therefore, anyone planning to commence or who has previously planned to start working with subsoil and will not finalize these processes before Law №2805 comes into effect must swiftly adapt.

Subsoil users also presented their suggestions to the draft of Law №4187 (now Law №2805).

Valeriy Senko, Director of Water Resources at IDS Ukraine (Morshynska), notes that Law No. 2805 primarily aims to enhance the subsoil use industry in Ukraine and safeguard it from numerous challenges. “During the discussion of legislative changes, we put forward our proposals. Notably, we, along with other subsoil users, suggested eliminating the mining allotment for groundwater extraction. This suggestion was incorporated into the law, which I believe is one of the positive reforms for our industry,” stated Valeriy Senko.

What changes and for whom, according to the new Law?

Foremost, it’s important to acknowledge that the extractive industry in Ukraine, crucial for the country’s defense capabilities and energy independence, has been in dire need of modernization and alignment with European legislation for some time.

Iryna Suprun, an expert in the field of subsoil use and the founder of the Geological Investment Group, a business consultancy specializing in subsoil use, emphasizes that the regulations governing subsoil use in Ukraine have long required modernization. These changes are essential to facilitate the development of the industry and enhance its investment appeal.

“For the first time in many years, the subsoil use industry in Ukraine has undergone such significant changes. When Ukraine gained independence, our economy was not yet structured as a market economy, leading the extractive industry to follow the Soviet economic model. Consequently, the subsoil use regulations, which until recently formed the foundation of our legislation, were a remnant of the Soviet model. These regulations failed to meet the challenges and needs of businesses, let alone international standards. However, with the enactment of Law №2805, the subsoil use industry has embraced an entirely new approach,” stated Iryna Suprun.

In addition, Volodymyr Mykhalevych, Chief Geologist at Dickerhoff Cement Ukraine, while commenting on Law №2805, opines that approximately 80% of the amendments will positively affect subsoil users’ operations. “Yet, there remain several contentious issues that require further discussion and refinement. Regrettably, we are unable to make any changes now, as these reforms have been implemented at the legislative level. Even if we suggest improvements, amending the rules established by the law will be a slow process, given the inherent challenges in altering legislation,” Mr. Mykhalevych explained.

Obviously, there are both positive changes and those that may complicate the work of subsoil users to some extent. Below, we analyze how legislative innovations will affect a particular social niche: business (subsoil users), the state, and citizens.

Law №2805: what will change for subsoil users?

First and foremost, it’s notable that for the first time in 30 years, Ukraine is set to establish a unified, open, and electronic geological information system. According to the law, this comprehensive state electronic geographic information system for subsoil use will encompass all vital components of the industry’s resources, including an electronic cabinet for subsoil users. This development will pave the way for making information about subsoil, which was previously highly restricted, publicly accessible. Regrettably, the topic of access to subsoil resources was not as transparent as other areas — much data remained classified, a practice deeply entrenched in Soviet times. During that era, most crucial information was concealed from ordinary citizens, accessible only to a select few.

Infographics: Geological Investment Group

Despite Ukraine’s significant progress in digitalization, being a role model for countries worldwide in this area (evidenced by the Diia app, e-passport, e-driver’s license), the daily paperwork required of subsoil users has long been in need of a comprehensive shift to an electronic format. This includes electronic submission of documents, electronic reporting, and similar processes.

With the enactment of Law №2805-IX of Ukraine, dated December 1, 2022, the state has also expressed its intention to digitalize the subsoil use sector. It appears that the administration of licensing procedures in the field of subsoil use is progressively transitioning to the electronic domain. However, concerns regarding the security and potential for unauthorized modifications of data stored in the electronic cabinet remain unresolved. Specifically, the full functionalities of the geological portal cannot be utilized presently, as much of the information on subsoil remains concealed for security reasons due to the imposition of martial law.

It is essential to highlight that with the implementation of Law №2805, businesses will now have the opportunity to validate their reserves in accordance with international standards. This development comes as the State Expertise and Evaluation of Mineral Resources and Reserves adopts these global benchmarks.

Furthermore, the law introduces a reform of  “small-scale subsoil use”, enabling landowners to explore or initiate mining activities on their land plots without an auction, provided they own no more than 25 ha. This practice has been prevalent in Europe for quite some time.

Additionally, under the new law, the owner of a special permit can fully or partially transfer subsoil usage rights to another legal entity or individual. However, several ambiguous aspects could pose practical challenges. These include the agreement’s format, the timing of the permit’s ownership transfer, the transfer of the subsoil user’s rights and obligations, valuation of the permit, environmental impact assessment (in cases where part of the rights are transferred), transferring rights to project documents, and lease rights transfer of state and municipal land plots, among others.

Infographics: Geological Investment Group

Law №2805: what will change for the state?

In the 9th year of the war, Ukraine has legislated to deprive persons registered in a state recognized as an aggressor state of the right to use subsoil. This is an important step that should have been implemented long ago.

Infographics: Geological Investment Group

It should also be noted that the long-awaited amendments to the Law should have been aimed at increasing the amount of state budget revenues needed in wartime and post-war times and developing the subsoil use industry. However, the situation here remains ambiguous, as only a part of the changes will meet the expectations.

For example, financial compensation of losses to the state for illegal use of subsoil has been introduced. Until now, the liability was only criminal and did not bring any revenues to the budget. On the contrary, some of the innovations do not take into account the real situation that is currently taking place in Ukraine, because, according to the Law, geological exploration will be carried out exclusively at the expense of budgetary funds. In the postwar period, the country will have no funds for subsoil exploration. Geological exploration by the state should be an alternative, not the only option. Given that geological exploration of strategic minerals is expensive.

Infographics: Geological Investment Group

Regrettably, the legislator has once again neglected the issue of land reclamation after the completion of field development. As it stands, only the subsoil user is liable for evading reclamation responsibilities, and this status ceases upon the expiration of the Production Sharing Agreement (PSA). Consequently, regulatory authorities are left without a responsible party to hold accountable.

Law №2805: What сhanges  will it bring for citizens?

A significant innovation impacting Ukrainian citizens will be the entitlement to a share of state budget revenues derived from rent for subsoil use in mineral extraction. While this practice is common worldwide, it’s clear that Ukraine has just begun laying the groundwork for its implementation. This measure necessitates a separate law on an economic passport, and much will hinge on its drafting, particularly regarding which citizen categories will qualify for income.

Furthermore, citizens will gain access to all state-owned geological information, barring exceptions stipulated by the Laws of Ukraine ” On State Secrets”  and ” On Sanctions”, facilitated through its digitalization. However, this access is contingent upon the cessation of the war and the subsequent lifting of martial law.

Infographics: Geological Investment Group

These are the rules that the extractive industry will live by in the coming years. However, we will see whether the changes, which the government believes are positive, progressive and innovative, will meet the expectations of business only after full adaptation to the new rules.