Ukrnafta to choose a stock exchange for the sale of oil and gas independently

Photo: Reuters

The Ministry of Energy and Coal Industry has prepared a draft resolution of the Cabinet of Ministers approving a new procedure for the sale of oil and gas condensate extracted and produced by mining companies with a state-owned share of 50% and more. The main feature of the document is that the owners of the resource will be able to choose the platform for its sale independently. This will put an end to the conflict between the government and the largest private shareholder in Ukrnafta – Privat Group and will make it possible for the latter to earn billions through the non-transparent sale of hydrocarbons produced by Ukrnafta.

New old rules

The current procedure for the sale of resources for oil and gas companies in which 50% or more is owned by the state was approved back in approved in October 2011. The document regulates the sale of resources owned by Ukrgazvydobuvannya (the state owns 100%) and Ukrnafta (the state owns 50%+1) on auctions. These companies have to sell all produced oil and gas condensate on the stock exchange chosen by the Ministry of Energy and Coal Industry.

The ministry held the tender for the exchange this June. The winner was the Ukrainian Universal Exchange (UUE). However, Ukrnafta opposed the sale of resources at the UUE, giving preference to the Ukrainian Interbank Currency Exchange (UICE). As a result, the UICE drew the Ministry of Energy and Coal Industry into a legal battle, which, according to lawyers, could drag on for months.

We did not manage to find out why the ministry initiated the drafting of a new procedure for the sale of oil on the stock exchange. The ministry did not reply to the request of Capital. Ukrnafta also did not give any comments.

Fatal discount

However, the draft resolution contains another important detail: the so-called reduction factor of 0.85 used to set the starting price of Ukrainian oil was preserved in the new version. It allows setting a 15% discount rate on domestic oil compared to the price of imported resources, though the domestic product is not inferior in quality. Director of UUE Oleksiy Vlasenko says the Finance Ministry insisted on cancellation of the discount since due to its use the half-state-owned Ukrnafta loses approximately UAH 3.3 bn (including VAT) a year in the sale of oil on auctions.

General Director of the Consulting Group A-95 Serhiy Kuyun said the standards of the draft resolution of the Cabinet (not without involvement of Ukrnafta’s lobbyists) are written in such a way that the sale price of crude oil on auctions will be extremely low. “This is an unprecedented rate of discount in oil trading. The best that you can count on is 1–2%. So, 15% is a great discount! The draft resolution envisages everything so that Ukrnafta controlled by the Privat Group could sell oil at such a discount rate to Ukrtatnafta, which is also controlled by the group,” he said.

The expert stressed that the issue of the 15% discount is more important than the issue of the exchange, which permits trading at such a discount. Selling oil through a controlled exchange simply makes it possible to hedge against competitors, “which can come and ruin everything”. “The reason is that a controlled exchange could halt trading in advance to notify about registered applicants,” said Kuyun. He estimated that the profits lost by Ukrnafta and earned by the Privat Group are UAH 3 bn a year.

Big business

“Ukrnafta is the largest oil company in Ukraine. It has special licenses for the extraction of oil and gas in 96 fields in the Dnipropetrovsk and Donetsk Basin in the east of Ukraine and in the Prykarpattya Basin in the west of the country. As of December 31, 2011 the company operated 2,025 oil and 208 gas wells (Ukrnafta did not publish any recent data).

In addition, the company is the largest consumer of services related to operation of oil and gas fields in Ukraine and at the same time owns the country’s largest drilling and well servicing business. Ukrnafta’s assets also include the Hnidyntsi, Dolyna and Kachanivka gas processing plants.

In addition, the Privat Group, which controls approximately 42% of the shares in Ukrnafta, owns the majority stake in Ukrtatnafta, created on the base of the Kremenchuk oil refinery – the only currently operating refinery in the country. This allows Privat to refine oil extracted by Ukrnafta and sell refined products through a chain of gas stations (approximately 1,600 facilities) controlled by the group. Overall, these stations make up the largest chain in Ukraine.

Second concession

In case the Cabinet allows Ukrnafta to sell oil through its controlled exchange, this will be another fundamental concession to the Privat Group on the part of the Ukrainian government. The first concession was made on October 10, when the meeting of shareholders of Ukrnafta was held thanks to the agreement between its two major members. During the meeting the company’s shareholders distributed profits in 2011 – 2013 in the amount of UAH 3.8 bn, which brought the government its stake of UAH 1.9 bn and as an expression of its gratitude the government agreed to remove from the agenda the issue of the sale of gas produced by Ukrnafta.

Under the law all the gas produced by Ukrnafta must be sold at a low price to provide households with cheap fuel, while in practice the company leaves it for itself. During preparations for the meeting of shareholders, the government attempted to force Ukrnafta to share its gas. But in the end this issue was stricken from the agenda. Then experts said that the government agreed to compromise with the Privat Group, having received dividends and leaving Ukrnafta its gas in exchange. This resource costs more than dividends over three years. Its approximate value is nearly UAH 8 bn a year based on rough estimates.