10:52 12.03.2021

Change that management team of Naftogaz would be a big mistake for Ukraine - Chair of the Supervisory Board

18 min read
Change that management team of Naftogaz would be a big mistake for Ukraine - Chair of the Supervisory Board

An exclusive interview of Chair of the Supervisory Board of NJSC "Naftogaz of Ukraine" Clare Spottiswoode to the Interfax-Ukraine agency

Text: Dmytro Koshovyy

 

The main event that took place last week was the presentation of Naftogaz's strategy for 5 years. As far as I understand, strategy should be approved by the Board

- We have obviously been involved in the creation of the Company Strategy. We have regularly discussed it at the Board and seen its various development phases. So, we are absolutely behind that strategy. We think it’s very important for Naftogaz. And we very strongly encourage it’s implementation

 

- And yet, there must be confirmation from the supervisory board, some official decision in this regard? Does everything that was said there suit you, or do you have any questions or topics or do you need additional information?

- It’s evolving. Clearly, this is the strategy as of today. But there are vast parts of that strategy that will continue to evolve over the years. So, for example, we have made a commitment to go to carbon zero by 2040. Now, we don’t know yet how we’re going to get there. They are parts of the strategy, but there is a lot to evolve between now and the next few years on how we get there. So, all of our whole green agenda is very much being worked on right now. For example what is appropriate....

For Naftogaz to get involved in and what is appropriate to leave to other companies. It is very painstaking work, but we know our tasks for next year and we know our ultimate goal.

As for the formal decision, we have already adopted it and approved the strategy.

 

- My question is related to the fact that during the presentation a rather large amount, necessary for its implementation, was mentioned: 7.3 billion US dollars. Do you already understand the sources of raising these funds and what, in your opinion, can be the main sources?

- There is a combination of our own internal reserves as we make profits and retain some of those to pay for the investment.

But we absolutely are dependent on going for a bond issuance. And for a bond be successful, first of all, Ukraine itself has to be politically stable, and investors will need to know that Naftogaz is going to be allowed by the Government to earn the money required to pay back that bond.

So, yes, raising a bond is really crucial to being able to implement our strategy. Which means we need the conditions to enable investors to make the decision to invest in us.

 

- The strategy is approved by the supervisory board, but the Company's profit is distributed by the government. We know that last year 95% were sent to budget. How to reconcile these external conditions with implementation of  this strategy and to provide the necessary funding? How do you see communication with the government to implement this strategy?

- We have alternative plans if we aren’t allowed to keep some of the money for investment and if we can’t issue a bond …. clearly, we cannot invest money we do not have.

Given we are a state owned company it is crucial to communicate with Government so Government understands what we propose to do what we want to do and why and we understand the Government’s position. 

Again, providing profit for the state budget is a joint enterprise with the Government. If the government will choose instead to step back from the reform and, for instance, keep price cap for the households, they should also understand, that such decision will stop Naftogaz development and ruin company’s ability to attract investment.

 

- There was criticism of this strategy that Naftogaz deviates a little from its main profile and spends investment in some new sectors - alternative energy, solar energy, energy efficiency, electricity trade. To what extent, in the opinion of the supervisory board with international experience, is this approach to doing business now relevant and will increase the Company's capitalization?

- The whole intention is it increases the capitalisation. What is absolutely clear in the world is that companies that are in the oil and gas business have to work out how they are going to work in a green future. And that is one of the things, I would say, we’ve been slightly late in that. It’s something I keep on bringing up.

What we are now seriously considering within Naftogaz is how we move to a new world. Now, we need to build on the capabilities that we have.

So, for example, we probably are not going to go into solar. I mean we might, but it’s not a commitment because others might be more appropriate investors. Solar does not necessarily build on our core strengths, unlike Hydrogen.

Ukraine has got a huge agricultural sector with lots of agricultural waste that can be used to create biogas. Again, that’s something that’s in our core competence.

We are in a continuous process of working out how we move from where we are today to this new world over time in a sensible cautious but well thought through way to make sure that we are able to afford it and that it will make money. There is no point in investing in anything that does not make profits because those profits are for the Company and for the people of Ukraine.

So, we are guardians of an important company in Ukraine. We’d better make sure that it works for the Ukrainian people.

 

- When we talk about public companies, when presenting such strategies, as a rule, always give some financial forecasts, profit, because it is of interest to shareholders, or again it is possible to increase the value of the company, capitalization to get these growth through stock value. We did not hear this during the strategy. Do you have such predictions? Did the Management Board and the Company's management provide you with such forecasts?

- First of all, companies don’t give predictions often. Because profits depend, for example, hugely, in our case, on gas prices.  Fore casting gas prices …  we may think we can do it, but frankly we can’t and nor can anyone else.

But what we do have is scenarios. So, we look at high-price, low-price, mid-price gas and look at the profits.

The key change within Naftogaz is transformation.  We are making sure that we know the individual who is responsible for delivering.  Everything we do will have someone responsible for delivering it with their team. We will give that team proper measurement targets to ensure that we all understand what that team is supposed to deliver and whether they then deliver those targets well or not.

Іnternally we have much more discipline than we ever had in the past. This transformation is in the process of being rolled out throughout the organisation.  Otto is doing a really good job spreading that whole culture through the organisation.

Some of our profitability is not in our hands, because things are outside our control. Where things are in our control, we absolutely have projections and forecasts. Аnd we judge our teams on their performance.

 

- You just said about the prices. We really see prive up and downs, that are now taking place on the world market. On the one hand, gas began to fall in price, but oil rose to prices that few expected a few months ago. To what extent do you think this strategy is dependent on world market prices? Are you satisfied with the fact that there are any factors that allow to ensure its implementation in the rather large fluctuations of these prices, which we see in recent years? What is the protection system? Will there not be a recurrence, because one of the reasons why the 20/20 program failed is that it was developed when prices were high and prices really fell dramatically?

- We clearly manage our portfolio based on a series of projections. Things have to work in low prices and high prices. So, when we look at investments in new discoveries, in new wells, one of the things we look at is the projection of prices and then what the level of prices has to be for not making money.

And if you can make it profitable at a very low price, you are fine.

And the other action you can take is to hedge your price risk. We can hedge against both high prices and low prices. Hedging costs money, but protects against losses. Hedging is not available for more than two or three years in advance. So although you can’t hedge out, say ten years of risk, you can hedge the risks of the first two or three years. And that Makes a huge difference to having some confidence in your cash flow.

 

- Another question about Ukrnafta. We already know that Naftogaz's management has proposed the first steps to split the company. To what extent is this agreed with the supervisory board? Do you support these steps or not?

- Yes, because oil is a different business. As it is a different business it can be managed separately as an independent business.  So yes, I do support it.

 

- Is it a complex business simply because it is a complex business, or because Naftogaz's partner in this business is the Privat group? And we constantly see new accusations against Ukrnafta that it sells gas cheaply, sells oil cheaply.

- Ukrnafta  has been a real problem for us. Because, for example, the accusations are correct that Ukrnafta has been selling gas too cheaply to its owner, one way or another. But the problem is, the way that the auction has been set, it enables manipulation of the price.

It’s something we’ve been well aware of. We tried to change the rules. We haven’t succeeded because the rules are set by the government and the law  (Oil and gas bill, article 4- ed.) We as Naftogaz can’t change the rules and the current rules create the ability to manipulate prices.

If we can separate that business from the rest of Ukrnafta and divide into two, so We have some control over our part of the company things will be hugely cleaner. And we won’t have to deal with all those issues.

Because the other issue is, we struggled to have their accounts, we struggled to get the audited numbers from Ukrnafta, because they have tried to keep us out. And we are a majority owner of that business.

I find that extraordinary. We can’t get data from a company we have majority ownership in meaning we can’t manage the business or check on accusations.

 

- Maybe you want to add something to the strategy, something I did not ask?

- I think, people from outside shouldn’t underestimate the changes that are going on at Naftogaz. The transformation of the way in which we do business through the cultural changes, through the transformation effort is just huge. It will change enormously the way in which management responds to the demands of the business, and the ease with which we can make sure that the Company does the right things. It takes a lot to change the culture of business, but it is being changed.

 

- Does it make sense to change the supervisory board during the implementation of such a large-scale strategy? And leadership?

- First of all, I think, we’ve got a superb management team. And one of the key tasks of a supervisory board is to ensure that a particular CEO is right for the job, that he makes right judgement calls, that he is good in collecting around him a very good team, and making sure that team works as a team.

And frankly, Naftogaz is working really well right now. I believe the Supervisory Board has had a good hand in ensuring that we help and encourage the right things to be done.

So, obviously, I personally don’t think that either the Management Board or the Supervisory Board should be changed.

But that is, at the end of the day, for others. But if the management team was changed, I would be really upset because, I think, they are doing a very good job for the people of Ukraine. And to change that management team would be a big mistake for Ukraine.

 

- I have already heard the response to the accusations against the management and a proposal to change it. But there are also accusations not on your side, but against, I still think, the shareholder who forms the supervisory board, for the absence of it, according to Mr. Vitrenko, for example, specialists in gas production and international financial reporting. Could you comment on them?

- On the audit side, I’ve got a very strong background in audit. I’ve been an audit chair of companies in the UK andI sit on lots of audit committees. Both big companies and small.  So I understand audit. As does Bruno. He has also been audit chair and set on many audit committees.

So we both understand audit matters and we’ve worked with auditors for decades. So I certainly don’t think we need a qualified auditor on our board itself.

We also employ really good independent qualified auditors to audit our business.

And we have an extremely good CFO, Peter. So, I think, we have audit abilities coming out of ears. We certainly don’t need an additional audit person on the Bord itself.

When it comes to production, I was upset when Steve Heysom resigned because he did understand production and we did not want to lose him.

Steve resigned at our first board meeting. I believe because he just did not want to get involved with the Ukrainian politics. He just did not want to get involved with the complexities. He wanted to do his job with production and be able to do that freely, and he just felt he was never getting allowed to really do his job properly on the Board.

Since then, it’s been difficult to recruit someone. I personally have looked for people from the production site to add to our Board. 

Вut the Government appoints the Supervisory Board.

It is not easy to recruit good board members with all the changes and political uncertainties there have been in Ukraine.  However within the company I now believe we have within Naftogaz a very strong production team as well as a strong audit team.

This team is Led by Otto Wallender. Who is very knowledgeable about production, and he is bringing discipline and understanding to that side of Naftogaz which I don’t believe we’ve ever had before enough.

We are partnering with organisations and people from outside the country, because we are dealing with things we have not seen before in Ukraine.  We need to use expertise from people who have got this experience. For example we are dealing with tight gas.

So, one of our tasks is to ensure that we partner with people who have superb expertise from around the world. And again, you need political stability, and you need Naftogaz’s stability to attract these partners.

There is no doubt I would like to have someone with production expertise on our Supervisory Board. But we don’t need it because I trust the people we’ve got on the ground and I trust our partners.

And I’ve regularly had meetings with our partners outside Naftogaz in Europe, in London to talk to them about partnership. And we have some really good partners now.

 

- I have not heard any accusations lately that independent members of the supervisory board are dependent on the government, but from time to time there are accusations that there is dependence on management. Could you also comment on that?

- I would find this question kind of a bit odd because clearly none of the Supervisory Board is in any way in any way dependent on management team. We have no problem at all in disagreeing with management and telling them what we think. We all say what we think and do not hold back

However, if we were antagonistic with that management team, and in particular with our CEO, it would mean that we had no faith in that CEO. And frankly, at that point we should have changed out that CEO.

And I’ve been involved, throughout my career, in a number of cases where I’ve led the dismissal of a CEO , the dismissal of a сhairman, because I didn’t feel they were doing the right job for the company.

If you’ve got the CEO who you trust to do the right thing, who’s got the right integrity, makes the right judgement calls, then we shouldn’t be always objecting to everything he does and standing up to him. Because, frankly, he is doing the right thing.

So, I think it’s a good sign that we trust him and that we think, in general, he does the right thing. It doesn’t mean that we don’t have questions. Certainly, if we ever disagreed, we would make our views very strongly felt. But if we were always in antagonism with him, that would be something wrong.

 

- One more question. Recently, there has been a discussion about KPIs for members of the supervisory board. How do you feel about that? How would you suggest evaluating the effectiveness of your work?

- No Supervisory Board in any company that I’ve ever been involved in has got any KPI’s because that should be really difficult to set. Our success is really the success of the management team. And if there is no right management team, that is our duty to change out that team. And we’ve got a really good management team. So, I think that’s a key measure of our success.

Our success is really through the Company’s success.

And the success of the company will be dependent on the strategy. The SB is very international which gives us very wise experience of business and good practices across the world. We bring that experience in a controlled and thoughtful way to one of the most important companies in Ukraine.  That should make Naftogaz more successful and profitable.

So, I think, part of it is making sure that Naftogaz is fit for the future world. And I think again how do you set KPI for that? If we are not pushing to keep the agenda moving then we are not doing our job.

I hope you can see that Naftogaz is changing. That is has good ethics and a good top team. Most of that is due to our CEO and a good and much improved management team. Which means we are also doing out job as Supervisory Board right.

 

- By the way, the issue of KPI was discussed with Mr. Vitrenko, he has the same opinion. The last but one question is, are you ready to extend the contract if such a proposal comes from the Cabinet of Ministers?

- I will accept as long as I believe I am making a difference - through the company and our results for the benefit of the people of Ukraine.

As long as I can continue to do that, I would very much like to do that. So, the answer is yes, because I believe we are making difference. And I would like to see that difference continue.

 

- Regarding COVID-19, I also heard a lot of discussions among the members of the supervisory boards, and this was really a problem, especially at the beginning of the quarantine. How much did it hinder Naftogaz? Have you learned to work in these new conditions? To what extent is this now a really serious reason that hinders the work of the supervisory board?

-- The really big changes being that we haven’t been able to come to Ukraine recently because of Covid 19. And that’s a real shame because I used to really value my visits to Ukraine because I was able to meet the IMF, the G7 embassies, the people within Naftogaz. We were able to do a lot of diplomatic work on behalf of the Company with the Energy Community.

That’s much more difficult to do now. But I think the Board itself is actually working amazingly well remotely. And we’ve done some site visits remotely, which were very effective. Because we can go to places that would be very expensive and difficult to take the Board to by video and drone. And it works rather well.

So, I don’t think the Board itself has suffered that much, so much to my surprise. But I’ve already had my first vaccine, because the UK is well ahead of other countries. So, in three week’s time I’m going to be pretty much fully protected against COVID. So, I could actually travel. But the problem is nobody else can so. I think, we’re going to continue to work remotely for a while.

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