Naftogaz CEO: We must not start Naftogaz IPO with Ukrnafta
Exclusive interview of Naftogaz CEO Andriy Kobolyev to Interfax Ukraine news agency
Criticism of the company has significantly increased recently. How fair and unbiased are the allegations directed at Naftogaz?
People are well aware of how the company is being transformed. Naftogaz has become the biggest contributor to the state budget, generating huge revenue and supporting the national economy, which is quite obvious when you look at the figures. Prior to corporate governance reform, the company used to be a black hole in the state budget with UAH 85 billion of net losses in 2014. In contrast, Naftogaz Group paid more than UAH 121 billion to the state budget in taxes and dividends in 2019. Despite the fact that the entire industry is currently going through challenging, we are not asking the government for financial support. We are cash-positive, for the time being at least. I fully believe we will remain so. We have a clear growth perspective ahead of us.
The company also makes every effort to continue its transformation internally, becoming more efficient and reliable while continuing to grow. For instance, we are improving our procurement system once more. This process is expected to not only save 10%-15% of our working capital, but also to accelerate our internal logistics. We are developing new businesses, change our operating model, improving communications, and introducing new technologies. This is a complex process, but we understand that we won’t be able to move forward without it.
Nevertheless, the attacks on Naftogaz continue. I think that one of the main reasons for this is the fact that the company is becoming more and more insulated against political influence due to Naftogaz’s corporate governance system, which has proved highly effective. This effectiveness is most immediately evident in recent achievements including successful unbundling, victory in Stockholm, and the new transit deal with Gazprom secured in late 2019. All of these successes were the direct or indirect results of corporate governance reforms, which enable the company to make rational decisions to the benefit of the company and, ultimately, in the interests of the shareholder, which is the state of Ukraine.
Before 2014, attitudes had been different. Naftogaz acted in the interests of a small group of individuals. The company became a black hole whose burden of losses was then shifted to the state budget. In other words, all Ukrainians were expected to shoulder the burden.
We should keep in mind that the people who used to benefit from Naftogaz have not disappeared. They are in parliament and on TV channels. They have access to considerable media resources and enjoy the support of various interest groups, including Russia. This explains why they never miss at opportunity to attack Naftogaz. Our opponents are opportunists. They try anything to undermine the reforms underway at Naftogaz and are always ready to explore new options.
Why is now a good time to attack?
We are seeing shifts in the Ukrainian political landscape. Earlier, attacks against Naftogaz were coordinated by a single group within government. Now there is evidence of several political forces gaining more weight. New alliances are arising to defend well-established patterns of corruption and political influence.
The first incident was the state audit report, which was leaked and shared with the media. Then, on the day of Naftogaz’s Eurobond issue, a misleading and inaccurate statement was released by the head of the tax office. The tax office claimed to have identified problems at Naftogaz and said they would be imposing a fine. This was a clear attempt to scare off investors. The following day, tax officials came to our offices and requested tax payments.
This not a coincidence. I believe it was coordinated. Our opponents saw a chance in the shape of a power vacuum in central government, so they began attacking us. Even if these attacks do not harm us, they can be used as negotiating tools by the perpetrators. Our attackers go to their sponsors and say, “Well, we have attacked Naftogaz and created a toxic environment. Now we want something in return.”
We now have a situation where, on the one hand, they say to us, “Yes, we understand that it’s nonsense and all allegations are conjured up out of thin air and you need to fight.” But on the other hand, they say, “You are a black sheep. Your corporate governance is an eyesore to everyone, it annoys everybody. No political influence on the company, Naftogaz has it’s own point of view, are you kidding?” We reply that this very point of view generates more than UAH 100 billion annually for the state budget and it has its price. And they say, “Well, yes, it has. But nevertheless, we have our own preferences."
Another problem is that people who don’t really understand the principles of corporate governance fail to see the connection. Shareholders stand to benefit from offering reasonable freedom and power to make decisions. It is extremely unhelpful when management officials regularly go to the shareholder and ask, “What shall we do? Are we allowed to do this or that?” The most recent example is our financial plan, when we asked for permission to invest at the level of parent company. The plan was not approved and we as a separate legal entity cannot invest in the development of fields for exploration and gas production. The government then takes these fields away from us because we don’t invest. Even when we ask whether we are allowed or not, we often receive no answer. When the authorities block licenses and refuse to grant access to new fields, we do not have opportunities to work. As a result, our shareholder loses.
Were recent attacks followed by any proposals concerning appointments within the company, amendments to corporate governance policy, or compromises on the retail gas market?
I have not seen any proposals of this kind so far.
Is the pressure on the company coming from internal or external actors?
If we look at the media that supported the campaign against Naftogaz, I think it’s a combination of both.
The major problem for Naftogaz arising from the current situation was the cancellation of the planned Eurobond issue. How painful will this postponement be for the company?
We’ll know later. It’s too early to discuss it now. We have a clear understanding of the negative trends on the global market, but the situation in Ukraine is not yet clear. It will be possible to give a detailed and fact-based answer in some time.
How serious is the fact that you failed to exchange bonds maturing in 2022 in terms of liquidity?
We are a liquid company now. We believe that the problem of the canceled bond issue is solvable, and we will manage it successfully.
If everything quietens down, when should we expect the bond issue? Could it be in spring 2021 when a COVID vaccine may appear and energy prices may go up?
I can’t comment on this.
How plausible is speculation that the audit report is part of efforts to create a negative image of the Ukrainian state in the eyes of the country’s Western partners?
What do you mean? Are you saying that everything produced by the Ukrainian state cannot be trusted and should be thrown in the garbage without hesitation?
Figuratively speaking, yes.
The most interesting and striking thing in this report is that the state auditors believe Naftogaz was not eligible to make provision for doubtful debts. This is very important to Western partners because the government, as the sole shareholder, believes that allowing or prohibiting this provision is at their discretion. This means that the government may assume the right to distort the financial statements of state-owned assets. This is unacceptable. Any state, government, or government agency that believes it can manipulate financial statements will just lose everyone’s confidence, including creditors and investors.
Bad debts are not at the shareholder’s discretion. It is the management’s duty to make the necessary provisions, regardless of the shareholder’s desire, otherwise confidence will be lost. No one will want to deal with a shareholder like that or their companies, especially with regard to funding.
Could this attack by the state audit service be a case of simple incompetence?
I talked to some of the people behind the audit and I wouldn’t say that they are absolutely incompetent. My impression was far from that. Let’s start with the fact that this audit story had been discussed earlier and the first figures were announced by well-known politicians. You can track that in the media. That is why I see a clear political imprint here. According to my sources, there were attempts to exert pressure on the auditors. I think you should ask them who they were discussing the report with, who saw it prior to publication, and who contributed to making this report. Those are very interesting questions that deserve scrutiny.
Do you see any connection between elections in Ukraine and the US?
I don’t see any connection. In the context of the US presidential election, the audit of Naftogaz would not be considered of interest.
One last question on this topic. Is there any effective response to this situation or any investigation?
Yes, we have received some documents saying, “Naftogaz management was acting to the benefit of foreign states and agents during the military aggression in the east of the country.” This wording refers to article 111 of the Criminal Code, which is high treason. They say, “Don’t worry, it’s just a formal investigation, no charges against you.” Well, thank you for these reassurances, but when you mention Naftogaz management, I’m definitely included. I was once fined UAH 8.3 billion, but I don’t remember any high treason cases. It’s a new stage in my career.
Will Naftogaz Group be loss generating in 2020?
I cannot say yet.
Ukrgasvydobuvannya forecasts a production decrease in Q4, and there are pending PSO debts. If you take these difficulties into account, Naftogaz Group is unlikely to improve on the losses incurred during the first six months of the year.
Ukrgasvydobuvannya did not generate losses in the first six months. This is important. The problems of the first six months lie in traditional in gas sales, particularly to those customers who received gas under the PSO system and did not pay. Nor do they appear ready to pay. This causes major losses.
As for production and accumulated stocks, we see some rebound in gas prices. We assume that the lion’s share of gas will be sold at a profit during the winter season. If we manage to monetize that gas and receive money for it, Naftogaz’s financial position will be stable. This position will not be extremely good, as heat producers and their collection rates are likely to cause some problems.
As for households and gas retail companies, we are offering our gas to all gas retail companies, but there is one condition they are still unwilling to accept. They must offer either advance payment or payment guarantees. Then they can buy gas at the market price.
Gas retail companies have a huge customer database. We understand that a significant share of this customer database is passive and will not leave their current providers quickly. We also understand that those customers are disciplined payers. The collection rate is close to 100%. Why gas retail companies think that they can collect 100% from households and pay us nothing is a complete mystery for us. We believe it’s not right and we will stand our ground.
By the way, there is a draft law in parliament suggesting the creation of an auction committee to set the price of gas produced by Naftogaz Group. This repeats the approach to Ukrnafta sale prices. It is a pure copy of the existing scheme whereby a group of officials I’ve never seen before decides the price Ukrnafta will sell its oil. They want to project this onto Naftogaz. They are likely to determine payment conditions too, and we’ll get yet another PSO scenario. There will be a group of companies, which will take gas without payment or pay a minimum price for it, and then they will do whatever they want with that gas.
All the talk about the accessibility of Ukrgasvydobuvannya gas is nonsense. They don’t only need access to Ukrgasvydobuvannya gas, they need access to gas they can avoid paying for. We should call things by their proper names.
By the way, a recent meeting with the prime minister was attended by a large group of private producers who won a competition for production sharing agreements (PSA). They discussed a very interesting question. The government would like to get money instead of gas within PSAs, which is quite reasonable. But all the participating companies refused because there is a risk in our gas market that you may fail to collect money for the sold gas and hence fail to pay the state. This will lead to allegations of stealing gas and under-pricing. Everybody said, “We don’t want it. Take the gas.”
When somebody says producers can sell their gas easily, the market doesn’t support such claims. Selling gas in Ukraine is a complex process related to risks and the ineffective market.
I would like to reiterate that the payment issue was the major cause of Naftogaz’s losses in the first six months of 2020. It’s not about gas price reduction, which we were not obliged to implement, and we were right when we didn’t do it. It’s about UAH 1 billion that was related to price reduction for gas we are to sell in the near future. The price remains the same as it was on the balance sheets. The price has rebounded now. So, most of losses are related to the provision for doubtful debts. I wonder if someone at the State Audit Service heard something about where gas retail companies could spend this money. Naftogaz did not receive UAH 11 billion from companies we were obliged to sell our gas to under PSO. Perhaps it makes sense to hold a state audit of those companies.
Gas retail companies are not state-owned enterprises. This must be a case for law enforcement agencies.
But we don’t see any results. Moreover, the state audit report contains the old reproach from the tax office: why didn’t Naftogaz record all gas sales to its own account and why didn’t the company give nominations to a number of heat producers with substantial debts? What would happen if we followed this logic? We would acknowledge the sales at the PSO price, then calculate VAT and income tax. We didn’t sell. This means that those gas users without nominations were balanced by Ukrtransgaz where gas prices are higher. In other words, they used gas from Naftogaz, but at a higher price. What are the implications for the tax office? More VAT and income tax. What is the tax office saying? It’s wrong. Well, the tax office says the chosen transaction bringing more revenue to the state budget is wrong, and the budget doesn’t need additional revenue.
This story began back in 2016. I am well aware who inspired it. We were managing it for a long time and won the case at the Supreme Court. Now the state audit report says, “Well, we have revised this opinion of the tax office and decided that you were wrong and caused losses to the state budget.”
Do you see any litigation prospects in terms of enforcing gas retailer debts?
Unfortunately, gas retail companies are dummies. I wouldn’t be surprised if they didn’t even have furniture on the books. Something happened there, and even those guys from the Energy Community Secretariat, who were telling us about unbundling for so long, are not commenting on it. If Naftogaz held a full- fledged unbundling, gas retail companies were not really unbundled from regional gas companies. They have the same shareholder. It’s not only about the Firtash group. It’s about all regional gas companies. Each regional gas company has its own gas retail company, both being owned by the same shareholder. Our opponents say, “But you have the same story with Kirovohradgaz.” Ok, let’s unbundle together. We are ready. We will leave the retail company, it’s our business, and sell the Kirovohrad regional gas company to someone else.
The question is how a “Plunder and Flee” company was granted a right to sell together with a customer database and so forth. The answer is because gas retailers are part of regional gas companies, otherwise they would never have managed that.
With the cancelation of PSO, Naftogaz has not been obliged to sell gas to gas retail companies for household customers at low prices since 1 August. Can we state with confidence that this will have a positive effect on financial statements in Q4 and beyond?
Only if they don’t vote for another legislative absurdity obliging us to do that again. I’ve already mentioned that there is a draft law of that sort in parliament. For now, we are not expecting any growth in retailer debts.
And what about heat producers?
This will depend heavily on the regulation of heat producer–gas supplier relations to be adopted by parliament. I believe the time has come when we cannot backslide. This season, we should adopt a law on powers and responsibilities regarding the management of heat producers. Currently, municipal heat producers, except for state-owned CHPs, are ruled by local authorities. There should also be consolidated responsibility.
Such as guarantees from the local authorities?
There are many mechanisms. It is important to implement the principle of balance between responsibility and power. If a city mayor wants to manage a heat generating enterprise, he or she should also bear responsibility for it. If a heat producer does not pay, then the city must pay for it. Mayors were happy to engage in self-promotion in October, talking about how they were good guys who provided heating to local communities. That’s fine, but please be responsible in terms of payment for the supplied gas.
The only people I hear talking about the introduction of payment discipline for municipal heat producers at the expense of local budgets are Naftogaz sources. Does anyone among the current crop of MPs or ministers support this initiative?
We have discussed it with many MPs. They understand us and typically answer, “We need to find a window of opportunity when it would be realistic to do this politically.” I cannot predict when this window of opportunity will appear. It is important to understand that they can no longer use us financially. We don’t have sufficient funds to sponsor heat producers as we did before, as we have lost gas transmission and transit revenues.
If a city doesn’t want to assume responsibility or cannot do so due to lack of funding, is Naftogaz ready to take control over the relevant heat producers?
If a heat producer is municipal property, no way. The only case where we are ready to lenc a hand to the government is via state-owned CHPs.
Taking control over state-owned CHPs, as I understand, is to the benefit of Naftogaz, as the company will be able to make sure that the money is not being siphoned off?
During the last heating season, state-owned CHPs owed us nearly UAH 1 billion. Where is the money? I think that CHPs and the State Property Fund should explain this to auditors and law enforcement agencies. We would like to know the answer, too, but we care more about the UAH 1 billion we did not receive. This is a large amount. All this goes towards the provision for doubtful debts. Even MPs say in their explanatory note to draft law No3800-1 that there is no source for repaying those debts to Naftogaz. When our auditors read this, what provision do you think they will set for us? 100%, of course, if there is no source for repayment.
We say to the government, “If you have any other trustworthy company which could manage those CHPs effectively, start paying us 100% and repaying old debts later. We will gladly support this approach. Hugs and kisses. But it shouldn’t be a company like the one which managed CHPs in Novyi Rozdil and Novoyavorivsk before us.
We at Naftogaz have a rational attitude toward the insufficiency of the market. For instance, when we began our saga of production increases in 2015, there were no proper rigs for drilling deep wells. We had to buy them. If there had been a market, we would have rented them instead of buying. But there was no market. For instance, the market of fracking services exists, and we do not buy fracking equipment. If the market exists, we work with the market.
The same is true for CHPs. If there was a company capable of managing them better than we do, give them to that company. We will be happy about that. I have enough work to do. Heat producers are the last thing Naftogaz should be worrying about. But when the management every now and then says they don’t have money to pay, we have no choice but to offer our help in order to ensure full payment for gas.
How realistic is the privatization of state-owned CHPs?
I think it is currently impossible. The reason is simple. The CHPs in question owe us UAH 1 billion. Who would buy CHPs with a UAH 1 billion debt? We cannot waive the debt. The state auditor is very clear about that. Furthermore, we have to charge fines and penalties. Look at the huge debts generated, for example, by the Kryvyi Rih CHP. Any reasonable investor will ask, “Do I need this?”
The State Property Fund says there are some investors that are ready to enter the market. They even mentioned PGNiG.
I called PGNiG and asked them about this, just for fun. We have long-term business relations with them. They inquired what we were smoking and asked us not to make fun of them.
OK. What is the progress in negotiations between the State Property Fund and Naftogaz concerning state-owned CHPs?
At a recent meeting, the prime minister asked for clarity on what we plan to do with CHPs. During the video conference, State Property Fund head Dmytro Sennychenko said, and this was recorded in the minutes of the meeting, that six state-owned CHPs were fully prepared for the heating season and would be launched in time, everything was OK, and no gas debts. However, I had a different table saying that debts do exist. They promised to repay those debts. As far as I know, there are some discrepancies between the reality and the statement. The situation is not as good as they presented it to be.
Naftogaz’s position is as simple as that. If everything is OK and the collection rate is 90%, or ideally 100%, then we have no questions. We deliver gas, you deliver heat. If you think that the eyes of Naftogaz managers are shining with joy when they are told to take control over CHPs, you are mistaken. But if the government wants to hand those CHPs over to us, we’ll take them. We saw a remarkable thing in Novyi Rozdil and Novoyavorivsk. What was the previous management doing? They used excessive amounts of gas and discharged heat in atmosphere. They did not collect money for heat supplies but sold electricity as much as possible. That was their business model. That is why they are up to their ears in debt, having failed to pay UAH 3.4 billion for gas.
We believe that if a decent management team, who will not steal and will use their brains properly, takes over the running of state-owned CHPs, losses will definitely decrease. Then we can discuss changes to the tariff policy, modernization, or the launch of some satellite businesses like balancing capacity.
To do all that, it’s not enough to just give us control over CHPs. If we know that the facility may be taken away from us, we will not invest in it. We need ownership, then we will invest in CHPs. There are no alternatives if no one can buy them with their huge debts. We understand the situation and are ready to help as partners.
Continuing on the subject of CHPs, does the company really have business plans to develop flexible gas generation based on CHPs?
This plan is being discussed with the government. There are some questionable aspects, however. How much is the market ready to pay for this service? What would be the cost of reserved capacity? We are looking at the green energy business and we have concerns regarding possible claims. Calculations look quite good, but what are the guarantees behind those figures? That is the question.
We understand that sooner or later, Ukraine will have to use flexible gas capacity. Gas is cleaner and faster that coal. The question is whether the market is ready to pay for it. Please explain to us how we will compensate all our costs and earn some margin. We don’t want to hear “it-is-too-expensive” feedback at a later date.
Should we expect PSO to be lifted in the heat supply market next year?
We hope this will happen. This is one of the reasons why we are so open to the option of handing the six state-owned CHPs over to us. Our concern is that they will not give us those CHPs, and investors will not arrive, which will prevent PSO cancellation in heat generation. They are the biggest problem in the heat supply market. If those six CHPs solve their problems, this will remove 80-90% of all problems in the market. Moreover, this would demonstrate that the problems in the heat supply market are solvable.
As a company, we are grateful to the government for solving the PSO issue in the household segment. The government solved it very rationally and courageously. As we see now, the solution was right: no cut-offs of gas supply, the system is functioning, and the market is functioning. They are telling stories that the opening of the gas market for households will cause gas cut-offs, everyone will freeze and die, but this is nonsense. Donetsk region had to use the supplier of last resort. We managed it. The last resort supplier works. We hope that the practice of constructive partnership will continue, as the current economic conditions do not let us live the high life and give away gas for free.
Let’s return to relations with the State property Fund. Given the growth in gas prices, is Naftogaz still interested in concluding a tolling contract with Odesa Port Plant?
Yes, we are interested and ready for cooperation. But we would like to participate in a contest for a long-term contract. They often ask us, “Hey guys, please come and work here,” when the situation is tough, but when it gets better, they say, “Goodbye, Naftogaz. We have another company.”
What term would be acceptable to Naftogaz?
I think at least a one-year contract would be interesting.
Is it because the company has substantial gas stocks now and it has to do something with them?
No. We believe that the state has failed to generate much profit in this business. We could earn more there and pay more dividends to the state while the Odesa Port Plant could repay its debt to us, which exceeds UAH 2.2 billion.
Does Naftogaz see new business opportunities arising from the opening of markets? For instance, fuel station operators entered the agricultural segment, fertilizers, and retail. As you have capacity, you can deliver additional services.
I believe that retail is a great challenge for us. Naftogaz’s presence in the retail segment was previously insignificant. For our team it means building a new business unit based on new operating principles and rules. This business cannot operate within Naftogaz’s old corporate culture. We are implementing a number of projects now. For instance, we are creating our brand in this segment. For us, as a big producer and former gas transporter who have never operated in the retail segment, it is a tectonic shift in people’s minds to start doing it now.
We must build a customer database. Customers should regard Naftogaz as a company that delivers value. They should choose us consciously. Most gas retail companies just inherited their customers from regional gas companies. It was not an informed consumer choice. As a new player on the market, we must involve customers. To do that, we need to demonstrate the value we can deliver. If we manage to prove that we can deliver more value for our customers than other companies, then we will be able to extend these relations in many ways. That is why we regard relations with end customers as one of keys to our business.
We have achieved some progress, but we cannot say that development is fast. We are operating online so far. Our joint project with Privat24 has been launched recently. It was a long path to reach this point. We hope that another big state-owned bank will start to cooperate with us soon. We have started to work with PUMB bank and received an offline network as well. We don’t want to build our own network as it doesn’t make sense.
When the two-month period of services delivered as the last resort supplier expires, will Naftogaz be able to maintain at least 50% of customers in Donetsk region?
We aim to involve as many customers as possible. What will be the share? I wouldn’t like to make any forward-looking statements. It’s a kind of experiment. The implementation is not smooth. When it is over, I’ll comment on it. But it’s a challenge. Especially in Donetsk region.
Product Sharing Agreements. You’ve mentioned your meeting with the prime minister. Have you managed to achieve a compromise on signing agreements as soon as possible?
PSAs had been discussed even before our meeting at the level of inter-agency groups. Fourteen months have passed, and the PSAs are still not signed. We hope that the prime minister will be able to help us get the ball rolling where the inter-agency commission failed. The major problem with those agreements now is to ensure a balance of interests at the highest level. A sole representative of any of the involved agencies cannot do that.
For instance, the tax office wants more taxes, geologists want to explore more, investors also want to receive more. Striking the right balance is a question that must be decided at the highest political level. I think that the inter-agency commission is unable to do that without the prime minister and the ministers saying, “OK. The balance of interests shall be the following. We give this and we want to receive that in exchange.” And then they should go through everything, point by point. Rotations and changes at the ministerial level have had a negative impact on the process. As a result, there has been no consistent decision-making center. I hope this consistency will appear eventually, and we will be able to sign the necessary agreements.
We had a constructive meeting with the PM. Investors, the government, and Naftogaz officials shared their views and understood each other. I hope this path will lead us to success. Let’s try to achieve it together.
Has the government acknowledged that the previous scheme of approval through the inter-agency commission cannot be effective under the current conditions?
That’s not quite right. There is another problem. The competition itself contained a number of issues. We warned that the competition model would be troublesome. It would be difficult to sign an agreement based on a competition like that. These assumptions proved to be true. I don’t want to comment on the contest itself. I believe everything that happened back in July 2019 will be revealed sooner or later.
We should now try to use the legacy of that competition to sign a proper agreement ensuring the right balance between the interests of the state and private companies. It’s a very challenging task. Senior government officials need to set the rules for this balance of interests now.
I’ve given you an example. We need to decide on payment. Shall the companies pay with gas or with money? No one in the commission has the authority to decide how. They cannot agree. They say, “Let’s leave two options.”
But two options are the worst-case scenario where we will need to build two systems: one for gas sales and the other for control over gas sales. It shouldn’t be that way. If I were the government, I would want to receive money too, as it means revenue to the state budget. I understand that. But the gas market with its current problems is not completed yet. Considering the GTS Code and other problems, it’s not easy to sell gas. Furthermore, a conflict of interest naturally arises. When a producer sells its own gas, which is the government’s share and whose gas should be sold first? Which customer will it choose for its own gas, and which for the government’s gas? I think the answer is obvious. Each party will pursue its own interests.
All these things need to be resolved. We can then move forward. The government’s intervention was the right step, as there are just two months left. During this period, we need to decide on the principles and the text of the agreement, and then we must sign it.
What about Yuzivka? Is Naftogaz Group interested in this PSA? Is it ready to develop this field on its own or with a partner?
We are ready to start drilling on our own. If this field is given to us, we will be able to start drilling within six months of signing all the relevant documents.
The conditions of this PSA that were signed with Shell or Slovak Nafta cannot be signed again this time with Naftogaz. Am I right?
I cannot answer this question as we haven’t seen the documents. On 22 October, the responsible agency asked the government for permission to give us the copies. I cannot comment on things I haven’t seen. I hope everything is as they told us.
The story promoted by a well-known group of people under the name Yuzgaz was stillborn from the very beginning. We told them about it, we told everyone about it. You cannot just get assets through a doubtful competition and then resell them. First, they will become toxic, and respectable companies will never buy them. Second, you are unlikely to complete the project. And that was the case. We would like to recall some key facts. Within that field, there happened to be a licensed area of Naftogaz. We happened to drill in that area. Arguably, we are the most competent and transparent operator for the development of the entire field. We had started drilling long before all those events. Fracking, seismic studies by Schlumberger, interpretation and understanding of the new model. There were completed wells there. Finally, we got answers to all of our questions. The idea was to let Naftogaz begin work in order to understand what was there and then give to the entire field to Yuzgaz for free. Of course, I understand that Ukraine is a kind of Wild West in many ways, but not to that extent.
Yuzivka is a very interesting field to test the concept of tight sandstone. Confirming this concept is a big issue for us. We have a working assumption that needs to be checked. Our geologists will say if it’s right or wrong soon.
By the way, many people who worked on this project for Shell continue to do so with Ukrgasvydobuvannya. We hired not only professionals but those who know the site well. We were preparing to develop tight sandstone and we are ready to test this assumption. If the test is successful, I think we will be able to develop the field either on our own or in partnership, if we receive an interesting commercial offer.
Let’s proceed to international litigation. I understand that coronavirus disruption has delayed the decision on Ukrnafta in London?
If you are asking about the dispute with Ukrnafta minority shareholders, there’s nothing interesting or new besides the impact of COVID-19.
As for the case regarding Crimean assets, we have submitted all the relevant materials and are waiting for the tribunal’s decision on whether there will be a hearing or not.
As for other interesting cases, we have signed a settlement agreement with Karpatygaz.
Have you paid?
No. We are waiting the enforcement of the agreement in the Ukrainian courts. We need to pass certain proceedings here and receive all evidence.
Can’t you pay without it?
We can. But state auditors will say it’s not correct. They will definitely say it’s not right, though the Ukrainian court says it’s OK.
Now on to Ukrnafta. If will follow if parliament adopts the draft law on payment settlement?
Nothing has changed here. We will suggest the next step, which is the division of the company.
Under what terms?
The terms will to some extent depend on debt repayment. Perhaps there will be a decision in the arbitration process between the state and minority shareholders by the end of the year. A combination of these two will enable us to negotiate with minority shareholders on what to do next. It doesn’t make sense to hold these negotiations now, as minority shareholders ask only one question, “When are you going to make the first step?” We must therefore make the first step and then we will enter into negotiations and will be able to comment on the terms. We have some ideas, but it wouldn’t be reasonable to put our cards on the table before negotiations begin.
How realistic is the division of licenses from the legal point of view?
We are working on the legal mechanism. It’s unconventional. You are right to be somewhat skeptical as the licenses were granted to legal entities and so cannot be transferred together with assets. If the assets are divided, we will need to go to the government and ask them to reissue the licenses. The government, however, may say, “No, we want a competition because we want fair and transparent competition everywhere.”
We understand this, but, unfortunately, there are no easy solutions. We will need to look for ways out and suggest them. We have currently established a good dialogue with the state, I believe. It is more constructive in terms of relations with the government: we fulfill some tasks, they give us more and support us. We also hope for a constructive and pragmatic dialogue on this issue. The state has its interests and minority shareholders have their interests. We need to find the right balance and get things done. The problem needs to be solved. At Naftogaz, we want to have an integrated group without toxic elements in order to launch an IPO. It is impossible to do that with Ukrnafta. No way. Frankly speaking, I wouldn’t dare to try selling that to investors. That is why we need to complete the division and move forward.
Which of Ukrnafta’s assets are interesting to Naftogaz in the context of the division? What about the network of fuel stations which is big but not performing well?
The answer is in your question.
The network of fuel stations as a business is questionable now. CNG (methane) is far more attractive to us.
Has Gazprom ordered additional capacity for November?
That is confidential information.
The last question is about the ownership policy for Naftogaz approved by the Cabinet and the strategy. They gave you three months.
I think we’ll keep within the schedule. The strategy is almost ready.