The new head of Ukrnafta faced everything: criticism from the National Joint Stock Company, the Cabinet of Ministers, and the Verkhovna Rada, pressure from the State Fiscal Service, "prompts" from Privat's management, and "bad" press. Ultimately, he made fundamental proposals to the government, which he clearly didn't write. As one market participant aptly noted, Rollins' proposals are a list of Privat's "dreams," reports The mirror of the week. Ukraine.
The hour has come for Ukrnafta. More than four months have passed since the appointment of new CEO Mark Rollins, and the time for the first decisions is approaching.
Even the scant information from the new management confirmed the worst expectations: there is
9,5 billion hryvnias in tax debt, 3,6 billion in dividends, and… zero hryvnias in accounts.
Mark Rollins says he's not a judge and doesn't want to assign blame for the company's current state. Meanwhile, it's absolutely clear that the money was siphoned off in 2015 by Privat Group management, who, it turns out, were informally receiving millions in "pension supplements" from the Dnipropetrovsk-based group.
At the same time, Mr. Rollins attributes the solution to the crisis entirely not to the minority shareholders who openly robbed Ukrnafta for 12 years, but to the majority shareholder—the state. The British specialist is demanding the repayment of debts and the provision of benefits and preferences.
The Briton is not to be envied, that's a fact. He's being asked to sort out what the state itself has failed to address in the 12 years since it lost operational control of the company. And it all ended spectacularly: Ukrnafta hasn't paid oil production taxes (rent) since August 2014, accumulating a staggering debt of UAH 9,3 billion (including VAT and profit arrears).
To be fair, it should be noted that Rollins' appointment allowed this situation to be reversed, and the company at least began paying current taxes and even paid UAH 1,2 billion in dividends for 2014 (50% of which went to the state, represented by Naftogaz of Ukraine).
Is the only hope in the state?
But then come the difficult decisions. How to pay off debts if there's no money? The company leader's position is somewhat odd: in his proposals for resolving the company's crisis, submitted to the government last week (see the document on the ZN.UA website) and currently marked "Confidential," Mr. Rollins proposes that the state repay Ukrnafta the debt for 11 billion cubic meters of natural gas expropriated between 2006 and 2013. The Briton estimates its value at UAH 51 billion (based on a price of UAH 4518 per thousand cubic meters).
In his letter, the head of Ukrnafta generously promises Prime Minister Yatsenyuk, Finance Minister Yaresko, and Naftogaz top manager Kobolev ( read more about him in the article " Andriy Kobolev: An Inconspicuous "Veteran" of the Gas Pipeline ") to "close" all debt issues if they give him UAH 12,7 billion by the end of the year. The top manager of the semi-state-owned company agrees to restructure the remaining UAH 38 billion in government debt over seven years.
Sorry, but anyone can pay off debts like that. So the most interesting thing is that Rollins isn't particularly concerned with the question of where the money from Ukrnafta's accounts went before he took over. Moreover, Naftogaz has been demanding detailed financial statements for the first nine months of 2015 from Ukrnafta's board chairman for a month now.
"These reports take ten minutes to prepare using the most basic accounting software, but they're not being given to us," says a source at Naftogaz. Rollins himself, on November 25, attributed this "inconsistency" to the lack of a financial director on staff, who is supposed to prepare such information.
This position was previously held by Artem Shcherban, who was dismissed from the company under strange circumstances, backdated, back in 2014. But how, then, does the company prepare financial reports for government agencies and report to the Unified State Register of Enterprises? For example, who prepared the same report for the first nine months of 2015, which shows that approximately UAH 11 billion was siphoned off from Ukrnafta as prepayments? According to Ukrnafta's official financial statements, the company's accounts receivable for this period amounted to UAH 7,3 billion, and accounts receivable for advances issued amounted to UAH 3,6 billion.
"These are prepayments; they're simply withdrawing money," a stock market analyst, who wished to remain anonymous, commented on the report.
An examination of primary data shows that such sums could only have been siphoned off to Privat's entities: Ukrtatnafta Oil Refinery (which received approximately UAH 8 billion in the first nine months of 2015), Nikopol Ferroalloy Plant (UAH 2,5 billion), Zaporizhzhia Ferroalloy Plant (UAH 400 million), Marganets Ferroalloy Plant (UAH 450 million), and Dniproazot (UAH 2 billion). Thus, a total of UAH 13,5 billion was transferred to Privat, while the company's total revenue for this period was UAH 21 billion.
At the Petroleum Ukraine 2015 conference, Mr. Rollins was asked whether he was inquiring with Ihor Kolomoisky about the return of withdrawn funds. The top manager assured that such discussions were ongoing. However, the proposals submitted to the government failed to mention the return of withdrawn assets as a source of the company's funds. Whether the Briton wants to settle the matter quietly, without scandal, or is effectively covering for a minority shareholder, will become clear soon.
Who will remember the past?
An even more interesting question: who will answer for the money stolen from Ukrnafta before 2015? Following Rollins' principle of equal distance from all shareholders, the issue of debt repayment should be raised not only with the state but also with the private shareholder. The only difference is that the state's gas debt is documented, while the withdrawal of multi-billion dollar sums from Ukrnafta is more of a "conceptual" matter.
So, everyone understands that between 2012 and 2014, several billion hryvnias were siphoned off under the guise of fictitious consulting contracts. This has been proven, among other things, by tax authorities. Or how, in 2009 and 2010, Ukrnafta lost at least $1,2 billion due to undervalued oil prices, which Privat structures bought up after corrupting relevant government officials and altering the bidding procedures. And how much money was lost through inflated prices on petroleum products, the export of ferroalloys, urea, fuel oil, urea, and other "non-core" goods, which Ukrnafta purchased from Privat enterprises domestically at unclear prices and then exported to them at unclear prices? How much tax revenue was optimized in this way?
Incidentally, a similar embarrassment almost befell Rollins himself: the initial draft agenda for the Ukrnafta Supervisory Board meeting on November 26 included an item on concluding a contract for the purchase of cigarettes worth UAH 250 million (ZN.UA has a copy of the document). However, this item was later removed from the agenda.
All that remains is to say that, in addition to cigarettes, Ukrnafta processes enormous volumes of chocolate, carbonated drinks, motor oils, and other products vital to the oil company. And yet, it also has an equally hefty tax debt to the state. Mr. Rollins also avoids answering directly whether he will renew these contracts, which are clearly intended to siphon funds from the company and optimize taxes.
Clearly, it's not Rollins who should be asking Privat about the longer-term future, but rather those same officials from Naftogaz, the government, or the presidential administration. But for some reason, no one is asking. Preliminary calculations suggest that, from underpricing oil alone, Privat earned an amount comparable to the state's gas debt.
Take and cancel
As for other anti-crisis initiatives, all of them are also addressed to the state and essentially constitute a program for reforming the tax system in the oil and gas industry. Rollins proposes, in particular, eliminating the advance payment method for profit tax and rent, and completely exempting fields with hard-to-recover and depleted resources from rent. Furthermore, Ukrnafta is counting on tax breaks for mothballed fields and areas requiring new investment.
Rollins is asking the state to facilitate the acquisition of new licenses and the renewal of existing ones, and is attaching a list of 96 permits for renewal and five new fields.
The director is also confident in the advisability of paying out only 30% of dividends over the course of two years, or even better, 10%, while directing the remaining funds towards development.
All these demands seem logical for a major oil company facing a difficult situation. Tax breaks and support for the development of new projects are what both Ukrgazvydobuvannya and private mining companies have been clamoring for for years.
Everything would be fine, but Rollins' proposal contains points that directly indicate the strong influence of minority shareholders on it.
Rollins' most bizarre proposal is to abandon auctions for oil, gas condensate, and liquefied natural gas, switching to bilateral agreements. He argues that auctions are a rather complex process, and that failure to hold one threatens to disrupt tax payments. He believes that no one but Privat will buy this oil anyway. NAK considers this a misconception.
"No other participants except Privat companies participate in Ukrnafta's auctions because, over the years, Privat's management has sent a clear message to everyone in the market: Ukrnafta will only ship oil to its own companies. The Ukrainian Interbank Currency Exchange, where the auctions take place, will create all the necessary barriers to prevent outsiders from entering. Thus, the auctions have become a formality, but they do determine an objective market price," a source in the Auction Committee explained.
It's telling that abandoning the auctions introduced by Yulia Tymoshenko in 2000 is the Privat Group's cherished dream. Since 2007, Privat Group has employed several schemes to obtain reduced prices. These included changes to trading regulations, manipulation of exchange requirements, and changing delivery terms—all aimed at discouraging anyone from buying this oil. To this end, in particular, the railway loading racks at Ukrnafta fields were dismantled, and pipeline shipments were carried out exclusively to Privat refineries, where outsiders were off-limits. The situation was only rectified this year, with the elimination of the 15% discount and the removal of Ukrnafta representatives from the Auction Committee, who had frequently disrupted or destabilized its work.
Incidentally, Kolomoisky is already playing this card. Before Rollins submitted his proposals to the government, two auctions were disrupted. Furthermore, according to sources at Naftogaz, the oligarch has resorted to open threats to refuse to purchase Ukrnafta's raw materials if Volodymyr Pustovarov, the executive director personally responsible for siphoning off funds to Privat Group entities and accruing budget debt, is fired from the company.
However, these threats to abandon Ukrainian oil and switch to supplying the Kremenchuk Oil Refinery by sea are nothing more than a bluff. The emergence of even one real buyer, such as Naftogaz or Ukrtransnafta, would immediately destroy this myth. Not to mention the fact that the state could ensure the refining of this oil at a European refinery under a tolling scheme.
The most interesting thing is that the scenario that would arise if oil auctions were abandoned can already be seen in the example of the company's liquefied natural gas auction. One gets the distinct impression that Ukrnafta's CEO simply hasn't figured this out. Ukrnafta's auctions employ a system in which 70-80% of the liquefied petroleum gas is purchased by a company from the Privat Group at a price below market value. No market participant dares interfere, as the punishment of refusing shipments under various pretexts is a well-worn procedure. For good behavior, Privat Group employees give traders the opportunity to snap up the remaining crumbs at market price. Ukrnafta loses approximately $1 million each month on these "fixed deals." This also applies to the months when Rollins was already the company's CEO.
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The new head of Ukrnafta faced a barrage of criticism: criticism from the National Joint Stock Company, the Cabinet of Ministers, and the Verkhovna Rada, pressure from the State Fiscal Service, "prompts" from Privat's management, and "bad" press. Ultimately, he made fundamental proposals to the government, which he clearly didn't draft. As one market participant aptly noted, Rollins' proposals are a list of Privat's "dreams."
This shouldn't be surprising, as no one from the old team has been dismissed, and the first appointments may only take place after the meeting of Ukrnafta's supervisory board. The British executive has submitted four nominations for new board members, two of which are foreign specialists. The top manager promises to replace the entire board by the end of the year. But will his approach to the company's development, based solely on state support, change?
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