For Ukraine, energy independence doesn’t just mean weaning itself off imported Russian gas.
For Ukrnafta, Ukraine’s state-owned oil and gas extractor, financial independence means breaking free from shareholders who have brought the company to the verge of bankruptcy or a possible fire-sale price to a private owner.
A new management team wants to overhaul the company, but such a step will require the approval of the company’s government and private shareholders. The Hr 18 billion ($700 million) in debts, including Hr 10.6 billion ($424 million) to the Ukrainian government alone, were accumulated from allegedly fraudulent schemes by minority shareholders.
Ukrnafta produces more than 86 percent of the country’s daily oil output of 40,000 barrels and it also extracts more than 16 percent of Ukraine’s total annual gas production of roughly 20.5 billion cubic meters.
Ukrnafta is 50 percent plus one share owned by the state-controlled Naftogaz energy firm. Billionaire oligarch Ihor Kolomoisky owns 42 percent through Privat Group, while another 8 percent belongs to pension funds representing former employees.
Privat did not reply to multiple requests for comment. Kolomoisky has responded to allegations of wrongdoing by arguing that the company owes him money.
How did the debt pile up?
According to Samopomich Party lawmaker Victoria Voytsitska, “Ukrnafta is not just a legal entity… it’s a source of cash” through improper pricing agreements.
At the center of the allegations is Kolomoisky, whose companies, known as informally as the Privat Group, began to acquire shares of Ukrnafta in the early 2000s. The company had total income of Hr 28.94 billion (more than $1 billion) in 2015.
Privat Group also controls Ukraine’s only oil refinery – the Kremenchug plant. Kolomoisky allegedly ran a scheme in which Ukrnafta sold its oil at rates far below market price to traders that Privat Group controls, who then resold it to customers at market rates, giving Privat a huge windfall profit while starving Ukrnafta of cash.
Although this scheme was halted last year, Voytsitska said that Kolomoisky restarted it in April to September of 2015. During that time, Voytsitska said, the company was in the process of selecting a new CEO – British citizen Mark Rollins – who “physically took control of the company only in October of last year.”
Voytsitska claimed that the absence of a CEO from April to September 2015 opened up a gap in oversight that allowed Kolomoisky to restart the schemes.
“It’s a state company that must sell gas and oil, and there’s only one refinery,” Ukrnafta Executive Vice President for Sustainability Gennadiy Radchenko told the Kyiv Post in an interview.
Another abuse saw Privat’s representatives fail to turn up to shareholder meetings, blocking company decision-making, including the payment of dividends to shareholders. Though debts from this scheme remain, a new law changes management rules for state-owned companies and prevents the minority shareholders from repeating the same maneuver.
Still, these schemes left the company so deep in debt that the next step could be bankruptcy and a forced sale at rock-bottom prices, a potential coup for Kolomoisky.
Radchenko echoed Voytsitska’s assessment, albeit with a different spin.
“These companies are seen not just as suppliers of gas, but as producers of money,” Radchenko said. “For me personally, it’s very odd that everyone talks only about money and not about how to make Ukraine energy independent.”
He argued that a lack of focus on the company’s main business of extracting oil and gas had effectively hobbled it, leading to production dropping by up to 20 percent each year.
“There’s no development, no resources, no research, no new drilling, no exploration,” Radchenko told the Kyiv Post.
Armed men affiliated with billionaire Igor Kolomoisky guard Ukrnafta’s Kyiv headquarters on March 22, 2015. (Volodymyr Petrov)
The plan
Ukrnafta’s management is now trying to get the company out of the crisis and repay its debts while also transforming it into a profitable company. Debt restructuring would buy the company time.
In the meantime, Radchenko says, Ukrnafta can attempt to reduce its operating costs. The firm employs 26,000 people across Ukraine and many of these positions are unnecessary – a common problem in the government sector.
“Only 500 work in Kyiv, the rest work elsewhere,” Radchenko said. “But if you reduce what isn’t necessary, what’s ineffective, then a big social problem appears. And as these people are also protected by state social guarantees, and by unions, it’s very difficult.”
Still, the company plans to double its oil and gas output over the next 10 years by investing revenues into exploration and modernizing its Soviet-era technology.
What is to be done
After months of delays, the company’s supervisory board took a tentative step towards approving the plan in a May 24 meeting.
Speaking about the results, Kolomoisky told the Kyiv Post it went well. “All the participants voted unanimously,” he said.
The ongoing delays prompted Voytsitska, along with fellow Samopomich Party lawmaker Andriy Zhurzhiy, to file a complaint against Naftogaz CEO Andriy Kobolev. The lawmakers allege that Kobolev is being “criminally negligent” by failing to act on the debt-reduction proposals, allowing the company’s arrears to grow.
Kobolev, also at the May 24 meeting, said the final decision on company’s plan will be made at a July 7 general shareholders meeting.
“If we see we can’t reach a compromise with the main creditor, which is now the State Fiscal Service, then the restructuring will make no sense,” Kobolev said and Ukrnafta will more than likely have to “stop its activity.”
Referring to Kolomoisky, Voytsitska said: “It’s a blackmailing of the entire state.”
