You're reading: Kolomoisky affiliated companies sue Naftogaz in London arbitrage court for reported $5 billion

It appears that billionaire partners Igor Kolomoisky and Gennadiy Bogolyubov are not giving up their fight for control over majority state-owned Ukrnafta, Ukraine's largest oil producer and operator of the biggest chain of gas stations. The two are joint owners of Ukraine's largest privately-owned bank PrivatBank.

On July 16, three Cyprus-registered companies
affiliated with the pair’s so-called Privat Group – Littop Enterprises, Bridgemont Ventures and Bordo Management – filed a lawsuit against Ukrnafta’s
owner, state-owned Naftogaz, at the Arbitration Institute of the Stockholm Chamber of Commerce.

The three companies jointly own 40 percent
of the oil producer, while the state, through Naftogaz, owns 50 percent plus
one share. The litigation seeks compensation for losses incurred as a result of
the government allegedly limiting the company’s ability to sell natural gas in
2006-2014, according to an emailed note from Kyiv-based Dragon Capital on
July 17.

The same shareholders in January sent
Naftogaz a letter demanding $5 billion in compensation, citing the identical losses
they had allegedly incurred.

The legal action comes one week before an
annual general shareholders meeting is scheduled
to take place at Ukrnafta on July 22 where, among other important decisions, a
new CEO is supposed to be appointed.

“It is possible Privat will succeed in
receiving an interim injunction preventing Ukrnafta from convening the AGM,
thus blocking Nafogaz’s attempt to appoint a new CEO and reshuffle the
supervisory board,” read the Dragon Capital note.

According to Dragon’s energy analyst,
Dennis Sakva, the government has six supervisory board members, whereas five
are from Privat. To be effective as a corporate governance body, it needs a
quorum of eight members to convene, such as, to call an extraordinary
shareholders meeting. Kolomoisky and Bogolyubov sit on the supervisory board.

In spite of commanding a minority
stake in Ukrnafta, Kolomoisky has for years controlled the lucrative company by
installing his management team there, and thus runs the nation’s biggest and only
fully functioning refinery at Kremenchuk in Poltava Oblast.

Ukrnafta’s accounts for 68 percent of the nation’s yearly oil and
condensate share of production, and 11 percent of the natural gas market,
according to the company’s website. It owns six regional production divisions,
three gas processing plants, as well as three drilling divisions, and a
considerable number of other oilfield services units. It operates 563
wholly-owned gas stations under the Ukrnafta brand with a presence in most
regions of the country.

The current post-EuroMaidan
government has criticized Ukrnafta for partially or wholly blocking shareholder
meetings from convening, not distributing profits and dividends, and for not
paying royalties to the state budget.

“Last year Ukrnafta
stopped fully paying royalties,” Sakva told the Kyiv Post by phone.

Ukrnafta still hasn’t
paid the state its share of dividends worth Hr 1.9 billion for the years of
2011-2013, despite shareholders having approved the measure on Oct. 10 during
an extraordinary meeting.

In exchange for paying
the state dividends for profits earned in 2006-2009, the state signed a crucial
shareholders agreement with the Privat Group in January 2010 in the waning days
of Yulia Tymoshenko’s tenure as prime minister. It stipulated that Privat
members have the right to choose Ukrnafta’s CEO.

This means that as a
majority stakeholder, the state cannot appoint its CEO if it doesn’t want to
violate the shareholder agreement, Dragon’s Sakva said.

The agreement renders
meaningless parliament’s move on March 19 to reduce the quorum required to hold
shareholder meetings to 50 from 60 percent.
Soon after parliament’s
decision, the $5 billion letter was made public.

Current litigation in
London stems from regulatory price controls.

In 2006, regulators introduced
below-market prices for gas – by law, Ukrnafta is supposed to sell the gas it
produces to Naftogaz, which in turn sells it downstream to household consumers.
Instead, Ukrnafta started selling gas to industrial consumers who pay more. It
reportedly pumped more than 11 billion cubic meters of gas into the domestic gas
transit system without signing contracts to sell any of this volume, according
to Dragon.

“Taking advantage of legal loopholes that
existed prior to 2011, Ukrnafta was able to secure ownership rights to part of
the gas in storage and obtain court rulings to sell it to industrial customers.
In 2012 and 2013, the company reportedly supplied 0.58 billion cubic meters and
0.60 billion cubic meters, respectively, to Dniproazot, a nitrogen fertilizer
plant whose assets Ukrnafta leases (from Privat),” according to Dragon.

It received a court’s permission last year
to sell an additional 2 billion cubic meters of gas from storage.

Title to the remaining eight billion cubic
meters volume is being disputed by Naftogaz.

Kyiv Post editor Mark Rachkevych can be reached at [email protected].