After a three-year hiatus, Ukraine has resumed the process of attracting investors to mineral development.
The pioneer was the Yuzovskaya gas-bearing area, whose operator at the end of July 2016 was a company with mysterious Dutch investors, Yuzgas BV.
Nothing is known about its real owners or its actual financial potential. For this reason, the lucky winner of one of the most attractive oil and gas fields in the country was immediately linked to representatives of the Ukrainian government.
This theory even began to accumulate facts indicating an indirect connection between Yuzgas BV and the Ukrainian president's inner circle, led by his army comrade Igor Kononenko.
However, it is wrong to accuse energy frontrunner Petro Poroshenko of being fixated on one project.
As Ekonomicheskaya Pravda has learned, the team of the deputy head of the BPP faction is preparing for a radical change in the rules of the game in the area of issuing special permits for subsoil use.
Dozens of gas fields belonging to the state-owned Ukrgazvydobuvannya are at stake, but no one is shy about laying claim to their division.
Poroshenko's team is convinced that if their plan is not followed, the gas-bearing subsoil will become a platform for billions of dollars in profits for the founder of the EastOne group, Viktor Pinchuk, who is considered the unofficial curator of Ukrgazvydobuvannya.
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What is known about the Dutch company Yuzgas BV, which has been awarded the right to begin exploration of one of the most promising Ukrainian deposits, according to the Ministry of Ecology?
To describe its experience and investment potential, it is enough to mention just two figures: June 14, 2016 – the date of its foundation, 1 thousand euros – the size of the authorized capital.
How could a company with such an application win an investment competition? The answer can be found by carefully examining the composition of the committee that selected the most "promising investor."
Five of its eight members are directly or indirectly related to Petro Poroshenko’s team: Minister Ihor Nasalyk (Read more: Igor Nasalik: The Criminal Face of Ukraine's Energy Sector), his employee Oleh Zhizhko, Deputy Minister of Environmental Development Yuriy Brovchenko, and MPs Anatoly Matviyenko and Andriy Lopushansky. The officials were appointed to the ministry through the BPP quota, and the MPs are members of the presidential faction.
Petro Poroshenko during a working visit to the Carpathian region. On the left is Energy Minister and then-candidate for mayor of Ivano-Frankivsk Ihor Nasalyk. Photo: firtka.if.ua
In making their choice in favour of Yuzgas BV, the committee members relied on dry calculations.
This company's proposals were the most lucrative among its competitors. Its minimum work commitment was drilling (restoring) 15 wells, while the other bidders' proposals were three to five. Furthermore, the winning bidder promised to invest $200 million in geological exploration during the first five-year phase. Its competitors offered amounts half that amount.
However, this still does not change the fact that the Dutch company was created specifically for the competition that selected the winner of the Yuzovskaya Square development.
However, even if we accept the version of foreign investors Yuzgas BV, voiced by this company's spokesman, Yaroslav Kinakh, former head of the Ukrainian office of the EBRD, as a basis, it does not resolve the main problem.
The fact is that it is unlikely that anyone will invest in the development of Yuzovka in the near future.
The lower borders of Yuzivska Square, which stretches from the south of the Kharkiv region to the center of Donetsk, are just a few kilometers from the borders of the ATO zone, which could become a front line at any moment.
Investors, remembering such prospects, have only one desire: to exit the risky project.
In fact, this is exactly what the first investor in the Yuzovskaya area, the Dutch company Shell, did in 2015, taking advantage of the right to force majeure.
At that time, the international group was unable to retain either the right to duty-free import of equipment or the unprecedentedly low individual tax conditions (1,25% of rent) stipulated in the production sharing agreement (PSA) it signed with Ukraine.
Why does Yuzgas BV, created a month before the competition, feel more confident than Shell, which will soon celebrate the centenary of the first well drilled?
Perhaps because the Yuzgas BV beneficiaries' priority is maximizing their concentration of promising sites, which they can then, at the right moment, sell to real international investors.
If this is true, former President Viktor Yanukovych's lawyers could now sue Petro Poroshenko's team for plagiarism.
Firstly, the model of registering PSA participants in the names of front men was patented during the time of the fugitive president.
The "old" PSA for the Yuzovska area, with Shell's participation, incorporated a "family" stake in the form of SPK-Geoservice LLC, under the guise of a third party. Formally, this company was registered to geologists Sergei Stovba and Igor Popadyuk, who at the time (like Yaroslav Kinakh of Yuzgas BV now) actively assumed the role of enterprise overseers in their media interactions.
Secondly, the idea of consolidating undeveloped areas under one roof is the result of the brainwork of Yanukovych's team, under which three dozen oil and gas fields, occupying a total of 30 square kilometers of Poltava Oblast, were registered to Golden Derrick LLC, a company close to his entourage.
It's like the territory of Belgium, where geological exploration alone requires $2 billion. Investments in exploring the Yuzovskaya area are much more modest—around $500 million—but still significant.
Work liberates
Perhaps for this very reason, Petro Poroshenko's team decided not to focus too much on long-term investments in the Yuzivska field, but to focus on developing deposits that are already generating cash.
The first to fall under fire was the state-owned company Ukrgazvydobuvannya, the country's largest natural gas producer.
On June 6, Andriy Pisotsky, head of the regional branch of the presidential party and acting head of the Poltava Regional State Administration, signed an official letter. In it, he asked Prime Minister Volodymyr Groysman to support the initiative to convert special permits for subsoil use held by Ukrgazvydobuvannya into production sharing agreements (PSAs). In other words, he effectively proposed attracting private investors to gas production.
Groysman forwarded this request to Nasalyk, who, a week later, on June 21, formulated a response: to submit the issue for consideration by the “Interdepartmental Commission for the Organization of the Implementation and Execution of the PSA.”
At its meeting on June 24, it was decided to establish a working group to assess the economic feasibility of transferring Ukrgazvydobuvannya's special permits to a production sharing agreement (PSA). A month and a half was allocated for the task, which expired on August 8.
Why couldn't the deadline be met? It's simple: the aforementioned working group is led by representatives of two opposing camps: Ihor Nasalyk, who heads the Ministry of Energy under the BPP quota, and Oleh Prokhorenko, head of Ukrgazvydobuvannya.
De facto, he is part of the inner circle of the head of the NAK Naftogaz of Ukraine, Andriy Kobolev (Read more about it in the article Andrey Kobolev. An unnoticed "veteran" of the gas pipeline.), associated with Arseniy Yatsenyuk's camp. However, Poroshenko has recently been pushing for a different governance structure.
According to representatives of the presidential team, Ukrgazvydobuvannya is now de facto controlled by former managers of Viktor Pinchuk.
"He is represented at the company by his first deputy, Oleksandr Romanyuk, and deputy Olga Belkova, who is 'packaging' Romanyuk's initiatives into legislative channels," claims an EP source in the Ministry of Energy and Coal Industry.
It's difficult to dispute this connection, especially in the case of Romanyuk, who previously managed a joint venture between Ukrgazvydobuvannya and Dion, a company within Viktor Pinchuk's sphere of influence.
Incidentally, Dion is the only company that managed to find common ground with the current management of Ukrgazvydobuvannya, convincing it not to initiate contract termination.
"At first, we thought Pinchuk was planning to expand the joint activities of Dion and UGV with several more licenses. Now we see that they want to create a mechanism for utilizing the state company's funds. Their cards were revealed after the initiative to conduct 100 hydraulic fracturing projects in the Poltava region.
"Billions will be allocated for these projects. The purchase of pipes from Interpipe for 565 million hryvnias is just the beginning," Poroshenko's team says of the "Concept for the Development of the Gas Production Industry," which the Cabinet of Ministers approved last week, thereby making mandatory the plan for Ukrgazvydobuvannya to carry out 250 hydraulic fracturing operations over the next five years.
CONCEPT FOR THE DEVELOPMENT OF THE GAS PRODUCTION INDUSTRY
Active ballast
If Petro Poroshenko's team is indeed confronted by Viktor Pinchuk's group, this greatly increases the importance of what is happening.
Ukrgazvydobuvannya has no chance of survival: if the former wins, the state-owned company will be left without its most liquid fields, and if the latter, without money.
For now, the BPP team has the better chance. They are working on new PSA terms, which will involve a private partner, Ukrgazvydobuvannya.
The draft law "On Amendments to Certain Legislative Acts on Facilitating the Exploration and Production of Oil and Gas in Ukraine" will serve as the regulatory framework for signing production distribution agreements.
EP sources claim that this document is planned to be submitted to parliament for consideration this fall. If the deputies vote "yes," Ukraine will be in for a renaissance in gas production. This is primarily because the bill does not stipulate the mandatory selection of a PSA participant through a competitive bidding process.
Accordingly, to become a participant in the PSA, any company only needs to obtain approval from the Interdepartmental Commission for the Organization of the Conduct and Implementation of the PSA, headed by Gennady Zubko, Minister of Regional Development for the BPP quota.
Several years ago, companies from the circles of Dmitry Firtash, Oleksandr Onyshchenko, Mykola Martynenko, and Volodymyr and Viktor Pinchuk became partners of Ukrgazvydobuvannya under this formula.
True, there is one difference: back then, businessmen were given individual wells, but now they are given full-fledged fields.
Synchronized swimmers, water polo players and divers
From the outside, it looks like everyone and their dog is working on the PPP issue. That's not entirely true.
EP's sources claim that the authors of this topic are the first deputy head of the presidential faction in the Verkhovna Rada, Igor Kononenko (Read more: Igor Kononenko, the President's Army Buddy) and the former head of the Ministry of Ecology, Nikolai Zlochevsky (Read more: Why does the devil wear Prada and Zlochevsky wears Zlocci?.
Nikolay Zlochevsky
Mykola Zlochevsky won't be back in Ukraine anytime soon. The former minister is accused of illegally
acquisition of assets on a large scale
Their arguments are summarized in four simple points.
1. Volodymyr Ignashchenko is responsible for PSA matters at the Ministry of Energy. His current position is as a freelance advisor to Nasalyk, but market participants remember another one better. In 2010, Ignashchenko was an advisor to the Minister of Ecology and Natural Resources, Mykola Zlochevsky.
2. Ignashchenko is the author of the “Procedure for Conducting and Conditions of the Competition,” on the basis of which the Yuzovskaya Square was awarded, and Yuzgas BV was recognized as its operator.
3. Yuzgas BV's main competitor in the competition was the Cypriot offshore Burisma Holdings Limited of Nikolai Zlochevsky.
4. The aforementioned draft law No. 3849 was presented in March 2016 at a meeting of the parliamentary committee on the fuel and energy complex by its then member Igor Nasalyk and was supported by Kononenko, who was present at the meeting and at whose suggestion Nasalyk subsequently became head of the Ministry of Energy.
In a conversation with UP, Ignashchenko categorically denied any involvement with Zlochevsky's team. He also dismissed Zlochevsky's involvement in his current work at the Ministry of Energy.
Even if this is true, there's no way to refute Kononenko's connection to Zlochevsky. Besides their hairstyle, they share the remarkable experience of Zlochevsky's team in distributing mineral deposits.
A source from the Ministry of Energy and Coal Industry notes that back in 2015, Zlochevsky advised Kononenko to take operational control of the State Service of Geology and Subsoil—the only agency in Ukraine responsible for issuing special permits for subsoil use.
In early 2000, thanks to the Geoservice, which Zlochevsky then headed, gas production companies from his Burisma Holdings, such as Pari, Esko-Pivnich, and First Ukrainian Gas and Oil Company, acquired fields.
Kononenko's associates failed to gain control of the State Geological Service, so on May 28, 2015, Petro Poroshenko signed a decree implementing the National Security and Defense Council's decision, which implied "the transfer of functions for issuing special permits for hydrocarbon production" from the State Geological Service to the Ministry of Energy, which is under Kononenko's control.
Igor Kononenko was unable to comment on this matter. However, his involvement in the situation can be judged by the behavior of his opponents, who are acting in the opposite direction.
Take Andriy Kobolev, for example. What's his plan? Blocking any actions involving the assets of NAK companies through the Naftogaz Supervisory Board, which oversees all companies in his group, including Ukrgazvydobuvannya.
Kobolev hopes to achieve this through Yulia Kovaliv, head of the NAK supervisory board, who, under the patronage of former head of the Presidential Administration Boris Lozhkin, holds the post of first deputy head of the Ministry of Economy.
However, an unpleasant surprise awaits the head of Naftogaz. His opponents have already begun information campaigns against an even more important member of the NAK supervisory board—the three independent members: Marcus Richards, Paul Warwick, and Charles Proctor.
On the one hand, their cultivation is being carried out by Zlochevsky's team, which leverages the connections of Robert Hunter, a member of the board of directors of Burisma Holdings and the son of US Vice President Joseph Biden. On the other hand, Nasalyk is engaged in educational work.
According to UP sources, letters have recently been sent in his name to members of the NAK Supervisory Board, citing the dire financial situation of Ukrgazvydobuvannya, which means it cannot independently develop its fields.
This statement is difficult to reconcile with the Cabinet of Ministers' recent decision to sharply increase gas prices for households, after which Ukrgazvydobuvannya's revenues doubled to UAH 60 billion per year.
Perhaps it was precisely because of this discrepancy that Nasalyk did not sign this letter. But even if this appeal is fake, it's hard to ignore. This is a high-quality English translation of the aforementioned letter from the Poltava Regional Council to Volodymyr Groysman.
His main message is that Ukrgazvydobuvannya is incapable of sustaining rapid gas production growth on its own. Therefore, it must be rescued by a private investor. Urgently.
Read more: Igor Nasalik: The Criminal Face of Ukraine's Energy Sector
Why does the devil wear Prada and Zlochevsky wears Zlocci?
Igor Kononenko, the President's Army Buddy
Dmitry Ryasnoy, EP
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