Privat retained operational control over Ukrnafta

Photo: Reuters

Last Friday, after a three-year interval, Ukraine’s largest oil producer Ukrnafta held a meeting of its shareholders. The government managed to force the company to pay dividends and change its supervisory board. However, shareholders of the Privat group maintained control over the management of the company and resolved the money issue in its favor and retained the gas, which must be purchased by Naftogaz of Ukraine at a very cheap price and used to support households.

Cash up front!

The shareholder meeting of Ukrnafta, in which the government represented by the national joint stock company Naftogaz of Ukraine owns 50%+1 stake and shareholders representing the Privat Group, in which businessman Ihor Kolomoiskiy and his partner own approximately 42% of its shares, was held on October 10.

The last meeting of the company’s shareholders was held in March 2011. After that there was not one meeting held due to disagreements between the company’s major shareholders: all attempts of public managers to receive dividends failed as they could not convene the 60% quorum of shareholders in order for the meeting to be deemed valid.

This time the shareholders got together and resolved a number of issues that accumulated over this time. In particular, they distributed profits for the period 2011–2013. The press service of Ukrnafta reported that almost 100% of the company’s profits went to pay out dividends, which was much higher than the minimum level of 30% stipulated by the law for companies in which the state’s share exceeds 50%. “The total amount of Ukrnafta’s dividends for 2011–2013 is close to UAH 3.8 bn,” the statement reads.

Earlier, Minister of Energy and Coal Industry Yuriy Prodan said that based on the results of the meeting the government of Ukraine expected Ukrnafta to transfer to the state budget close to UAH 1.3 bn. As a result, the government received much more than it had requested.

Changing of the guard

Ukrnafta’s new Supervisory Board was approved at the company’s shareholder meeting. CEO of Naftogaz Ukrainy Andriy Kobolev was elected its new chairman. Among other members of the Supervisory Board are such representatives of Naftogaz as Serhiy Pereloma, Serhiy Konovets, Petro Stolyar, Yaroslav Teklyuk, Polina Zahnitko and private shareholders Ihor Kolomoiskiy, Hennadiy Boholyubov, Mykhailo Kiperman, Timur Novikov and Uriel Tzvi Laber. “Traditionally, the head of Naftogaz becomes the Chairman of the Supervisory Board at Ukrnafta,” said Director of the Analytical Department at Eavex Capital (a minority shareholder in Ukrnafta) Dmytro Churin.

But, by and large, the change in the supervisory board is none other than a scenic procedure. Earlier, the government could not influence the decisions made in Ukrnafta, even having a controlling share, because operational control was in the hands of Privat. After the last meeting the situation has not changed since the issue of changing of the board of directors at Ukrnafta was not considered on October 10. Churin explained that the economic activities of the company are usually determined by its general director or chairman of the board, while the supervisory board has no direct relation to this.

Therefore, even after the change of the supervisory board, in which the majority of the votes was given to representatives of the government, Privat retained its influence on Ukrnafta. “We believe that the economic activities of Ukrnafta will be conducted according to the same principles as earlier. We assume that the issue of changing the management was not on the agenda due to an agreement between the two largest shareholders – namely, the government and Privat Group”, says Churin.

Head of the Analytical Department at the Concorde Capital Oleksandr Parashchiy said the change of the supervisory board brought it in line with current political realities, and that’ all. “Seeing as the meeting was held, we understand that it had the approval of Privat. Meanwhile Privat is clearly not interested in making serious concessions regarding operational control. What is the point for the group to lose such control, once it already has it?” said the expert.

We will keep the gas

As a reminder, initially the meeting of Ukrnafta’s shareholders was scheduled on September 11, but it did not take place apparently for certain technical reasons. Noteworthy is that the issue of signing of agreements between Ukrnafta and Naftogaz of Ukraine for the supply of natural gas in 2006–2014 to build up gas resources for the needs of household consumers was included on the agenda of the failed meeting. Pursuant to the law, all gas produced by Ukrainian companies, in which the government owns more than 50%, must be purchased by Naftogaz at a low price and be used for supplying households with cheap fuel. For example, this pertains to gas fully produced by the state-owned company Ukrgazvydobuvannya. But the situation at Ukrnafta is different as the company manages extracted resources independently. Earlier, a senior analyst at Dragon Capital Denys Sakva predicted that this issue was the cause of conflict between the government and Privat, which has been trying to dodge observance of this rule for years.

At the shareholder meeting on October 10 the matter of gas purchase from Ukrnafta at a discounted price was not discussed. It is obvious that agreement on the issue has been a key condition for the meeting of shareholders to be held. As a result, the government received its dividends (and even more than it expected), while Privat received gas.

However, the price of the retained resource is much higher than the amount of paid dividends. Every year Ukrnafta produces close to 1.9 bn cubic m of gas. At the same time, Ukrgazvydobuvannya sells its gas at UAH 349 per 1,000 cubic m, VAT excluded. In early August, Chairman of the Board of Directors of Ukrgazvydobuvannya Serhiy Kostyuk said this price was even lower than the cost of production, which for the company was UAH 738.

But the market price of gas is much higher – according to the Ministry of Economic Development and Trade the average customs value of imported gas this July was US $358.94 per 1,000 cu m, or UAH 4,512 at the exchange rate of UAH 12.57/US $1. This means that with such a difference in gas prices and Ukrnafta’s annual extraction of 1.9 bn cubic m of gas, the “gas issue” that was removed from the agenda cost Ukrnafta UAH 7.9 bn a year. This amount is based on a rough calculation, as it does not take into account changes in the market price of gas for the aforementioned period (2006 – 2014) and fluctuations of the exchange rate. Nevertheless, Sakva earlier predicted that the sale of gas at market prices was more a matter of principle for Privat than payout of dividends to shareholders and that it would prefer to pay the government than lose its gas.