Privat won the lawsuit on the right to sell gas extracted in Ukraine to its own structures

The Supreme Economic Court of Ukraine allowed the Privat group, which practically controls Ukrnafta, to sell 2 bn cu m of gas extracted by the latter to producers of mineral nitrogen fertilizers. The court ruled that Naftogas Ukrainy and Ukrtransgas not obstruct Ukrnafta from withdrawing this volume of gas from underground gas reservoirs. Experts say Dniproazot and the Odesa Portside Plant (OPP) fully controlled by Ihor Kolomoiskiy in the Odesa oblast are potential buyers (the governor of Odesa is a long-time manager of Privat Ihor Palitsa).

Why did they win?

Privat, the private shareholder of Ukrnafta with 42% of the shares in the company, won lawsuit that has been ongoing since 2011 thanks to a legal fine point. The law of Ukraine On the Basis of the Natural Gas Market Functioning, which obligates companies, in which the state owns more than a 50% share, sell the entire amount of extracted gas to supply the needs of households took effect on July 24, 2010. The volumes of gas that Privat is contending were extracted and pumped into underground gas reservoirs in 2006. «Under the current law, there are no norms regarding its impact on natural gas resources extracted in the past, that is before the law took effect,» read the conclusions of the Supreme Economic Court.

In addition, when this law took effect the Cabinet of Ministers put forth a resolution on December 27, 2001 On the Provision of Consumers with Natural Gas, requiring that state-run companies with a share of more than 50% supply all extracted gas to households. This requirement was also supported by the laws of the national budget that are approved every year as they contained the same norm. However, as we see the Supreme Economic Court took into consideration a fundamentally different law and based on it ruled in favor of Ukrnafta. In truth, the court recognized the very first ruling in this case passed down by the Economic Court of Kyiv on January 20, 2011.

Who took advantage?

In April 2011 encouraged by its first victory in the gas dispute, Privat leased out its Dniproazot property to Ukrnafta. From that time, the producer of ammonia and carbamide has obtained natural gas of domestic extraction. The acquired volumes were 599 mn cu m in 2012 and 657 mn cu m in 2013, Director of the Cherkasy State Scientific Institute of Technical Economic Information in the Chemical Industry Tamara Kovenya informed.

She said other nitrogen producing enterprises were forced to directly or indirectly purchase imported resources from Gazprom. This is a pure matter of price. While Ukrnafta sold gas to affiliated consumers for UAH 400-500 per cu m, other chemical plants were forced to pay US $400-500/cu m or even more in recent years. In the end, over the past three years Dniproazot became the most profitable plant in this industry. For example, its net profits in 2013 were UAH 1.3 mn, in 2012 — UAH 554,000 and in 2011 — UAH 563.4 mn against losses of UAH 145.2 mn in 2010, when the company did not run on its own extracted gas.

On the contrary, since 2012 the losses of other Ukrainian plants producing nitrogen only increased. Ukrnafta did not respond to the question posed by a journalist of Capital to whom Ukrnafta will sell the natural gas that it won over from Naftogas Ukrainy. However, experts believe that Dniproazot, which according to Kovenya needs 0.6-0.7 bn cu m of this raw material annually for full load, will receive this gas. This means that the aforementioned volume will be sufficient to allow the enterprise to operate for another 3 years.

Interest in the OPP

President of the Union of Chemists Oleksiy Holubov assumes that Ukrnafta may also sell gas to the Odesa Portside Plant, which since this year is in desperate need of domestically produced gas as an alternative to gas delivered by Gazprom.

As Capital wrote, in 2014 Ostchem owned by Dmytro Firtash stopped supplying the company with resources. «For this reason, we are trying to gain access to reverse supply of gas from Europe, where it is cheaper. For us this is raw material and we have to try and save every penny to get it at a lower price,» Deputy Director of the OPP Serhiy Nazarenko told our publication.

The OPP needs 1.3-1.4 mn cu m of natural gas annually, according to the data that Kovenya possesses. In total, the annual consumption of the resources of the OPP and Dniproazot with a full load of their capacities is slightly more than 2 bn cu m, which Ukrnafta currently has. By retrieving this volume, Privat could guarantee for itself uninterrupted and profitable operation of the enterprises in this sector.

Privat expressed its interest in the OPP back in 2009. Then the Nortima company participated in a tender for the privatization of the OPP and won for a price of UAH 5 bn. However, then premier Yulia Tymoshenko annulled the results of the tender accusing its participants of collusion and lowering the value of the OPP. She had hoped for no less than UAH 8 bn for the company’s assets.

Taming of the OPP shrew through gas supplies, as Firtash did, would be a smart move for Privat, says head of the Infoindustria investment company Dmytro Hordiychuk, particularly at this time in conditions when the supply of gas from Russia to Ukraine is being cut off.

In addition, it remains unclear how long other plants supplying nitrogen controlled by Firtash will continue to operate and turn a profit. «The sale of the OPP was planned for December of this year and one obligatory condition in all previous tenders for the sale of this enterprise was guaranteeing its investors the supply of natural gas,» says Hordiychuk. In his opinion, having access to cheap Ukrainian gas Privat has all the chances of contending for the purchase of the OPP. After all, even plants controlled by Firtash in 2013, when businessmen were not excluded from the scheme of the supply of Russian gas, had the privilege of exploiting the production of Ukrainian gas.