The government has been apparently seeking to keep 30% of the extracted oil until the project starts making profits, and 50% afterwards, according to people familiar with the situation.

The government's rejection the PSA will postpone for at least three months the project that once had been described as the key for reducing Ukraine's dependence on Russian oil and gas imports.

The government instructed a special commission, led by Deputy Prime Minister for Energy Andriy Kliuyev, to draft and to submit the new PSA by Jan. 18, 2007.

Vanco, a Houston-based independent oil and gas company that is engaged in international exploration, emphasizing deepwater, won the tender in April for the right to explore and produce oil offshore Black Sea near Kerch.

At the tender Vanco outbid ExxonMobil and Shell, which filed a joint bid, but also Hunt Overseas Oil Company, the world's largest privately-held oil company, and UkrNafta, Ukraine's largest oil company.

The tender was announced by the government of then Prime Minister Yuriy Yekhanurov, a liberal economist and pro-Western figure, as a step to reduce dependence on Russian energy imports.

The Yekhanurov government hoped the Kerch oil project would generate up to $2 billion in investments for exploration and extraction of what is believed to be perhaps Ukraine's most lucrative oil field.

The area of the field near Kerch is 12,960 square kilometers, at depths of water from 70 to 2,000 meters, the depth level that make it impossible for Ukrainian oil companies to extract the crude.

However, the fortune of the project changed after the Yekhanurov government had been replaced in early August by the government of Yanukovych, a pro-Russian figure.

The Yanukovych government over the past two months has been persistently trying to challenge the pro-Western course of President Viktor Yushchenko by trying to postpone accession to NATO and the World Trade Organization.

Both moves by Yanukovych are apparently aimed to please Russia in order to win a better deal on natural gas supplies this year and next, analysts said. (sb/ez)