U.S. Hits Kiev Over Broken Contract

KIEV -- The United States on Wednesday criticized Ukraine's decision to break off an energy exploration and extraction contract in the Black Sea with U.S. firm Vanco Energy.

The government annulled Vanco's 30-year license this month and said Wednesday that it had unilaterally withdrawn from the agreement in order to protect state interests, despite a ruling by the prosecutor general that suspended the annulment.

"For the government of Ukraine to attract investors, particularly in those sectors vital to its energy security, it needs to make clear that it respects the sanctity of contracts and the rule of law," U.S. Ambassador William Taylor said in a statement.

"We urge the government to reconsider its decision and return to a policy of dialogue, so this project, important to Ukraine's energy security, can get back on track," he said.

Prime Minister Yulia Tymoshenko has said Vanco broke a number of rules and conditions of the agreement but also voiced concern that the firm was willing to sell the license to large multinationals, such as Gazprom.

Ukraine, which has frequent disputes with Moscow over the price of gas imports, is sensitive to any further encroachment of Gazprom on the domestic market. The parliament passed a law in 2006 forbidding the privatization of energy assets.

"We've made all the necessary decisions to defend our national interest," Tymoshenko said after a Cabinet meeting Wednesday.

Vanco has denied ever wanting to sell the licenses and said last week that the disagreement was a "misunderstanding in the government about procedural issues." It has threatened to take the matter to international arbitration courts.

The contract allowed Vanco to explore and extract in the Prykerchensky block -- an area of just under 30,000 square kilometers at the northern end of the Black Sea and 13 kilometers offshore.

Vanco won the initial contract in early 2006 then spent 18 months in talks about the contract's details and only received the go-ahead last October. It had said it would spend as much as $3 billion in the long term.

Ukraine had said the deal would allow the country to raise gas extraction by 4 billion cubic meters on top of the 20 bcm now and by 3 million tons of oil in addition to the 4 million tons now.