Naftogaz’s financials are creating worry as Ukraine and Russia struggle to finalize their gas deal

Naftogaz's debts continue to rise - from eizvestia.com

Despite signing a key agreement on the development of gas sphere relations over three weeks ago, Ukraine’s Naftogaz and Russia’s Gazprom have yet to draw up and agree upon the technical and commercial contracts needed to make the deal final.

April 1st had been the anticipated deadline for reaching a solid agreement, but negotiations have now spilled over into the second week of April.

Meanwhile, March 31st was also the extended deadline for Naftogaz to fulfill its creditors’ requirements on a portion of its outstanding debt. Representatives of two of Naftogaz’s main creditors visited Kyiv in late December to push for progress in reaching the requirements on a $500 million Eurobond. Negotiations with government officials convinced the lenders to push back the January 1st deadline. However, the regulation–publishing Naftogaz’s 2006 IFRS report–has yet to be completed (though financial information on the company is available and has been analyzed by Ekonomichesky Izvestia), threatening the financial viability of the company.

Naftogaz is looking to get another two-month extension on publishing the financial report, which should be ready in a couple weeks according to information a source gave Reuters. Ernst and Young, Naftogaz’s auditors, have apparently been hesitant to certify the 2006 results without first knowing the company’s future tax burden and other prospective information. This uncertainty was exacerbated when a Cabinet of Ministers meeting last week failed to approve Naftogaz’s financial plan. The issue is set to be reexamined at another meeting on April 9th.

Ukrainian President Viktor Yushchenko warned of Naftogaz’s dire financial situation, saying the company “has never been closer to bankruptcy.” This elicited a quick response from PM Yulia Tymoshenko, who has asserted that her government will not allow a financial tragedy to befall the national energy company. Indeed, this year’s budget contains a $2.4 billion bailout in the form of sovereign guarantees, should it come to that. The Cabinet is also promising to lower Naftogaz’s tax burden.

Naftogaz's profits have also dramatically increased - From eizvestia.com

If the government can escape from this latest debt issue–which is compounded by outstanding debts to Russia for recent gas deliveries–then Naftogaz has a solid chance of turning its economic situation around.

In 2007 Naftogaz reportedly made about $620 million, and the new version of the gas scheme should increase the revenues to the energy company and its subsidiaries. That’s assuming, of course, that a deal that replaces the current structure can ever get signed.

Amidst gas negotiations with Russia last month, Ukraine’s Cabinet of Ministers amended the draft agreement on the future of the gas scheme, capping the amount of gas Gazprom will be allowed to sell on the internal market at 7.5 billion cubic meters (bcm) per year. The original deal stipulated only no less than 7.5 bcm, but gave no maximum. Other amendments, however, remain unknown as the current version of the agreement has not been publicized.

The shifting terms of the deal make predicting Gazprom’s response difficult. Nonetheless, Naftogaz is continuing to work at expelling Ukrgazenergo from Ukraine’s gas market–a key term in the prospective deal.

One of Ukrgazenergo’s main jobs–buying gas at the border of Russia and Ukraine from RosUkrEnerg–is set to be transfered officially to the hands of Naftogaz, according to the draft agreement. (Indeed, this is likely already happening, due to an anxious Ukrainian government backed by the services of customs officials.)

Naftogaz refuted claims it was resorting to gas cutoffs in order to pressure holdout industrial customers

Ukrgazenergo’s other central job is selling some of that gas to industrial consumers within Ukraine. Tymoshenko employed the National Energy Regulation Commission to severely limit the amount of gas Ukrgazenergo is regulated to sell to the industrial sector. While the gas trader is fighting that decision in court, Naftogaz’s subsidiary Gaz Ukrainy has stepped into the void created by the commission’s decision.

Last week, the chemical factory Rivneazot complained that its gas pressure had dropped by about 20%, creating a potentially dangerous situation within the plant. The factory blamed Naftogaz for the drop in pressure, telling the company–which is in the process of replacing Ukrgazenergo in supplying Rivneazot–to “stop experimenting in the country’s gas sphere.”

“Irresponsible actions of Ukraine’s Cabinet of Ministers and Naftogaz in settling the situation in the gas industry are destabilizing the work of Rivneazot which could potentially lead to severe environmental and humanitarian consequences in the Rivne region [of Ukraine].

“Rivneazot also calls on the judicial organs of Ukraine to give a proper assessment of the actions of Naftogaz and its responsible figures, who by virtue of professional incompetence, negligence or design [intention], provoke a technological catastrophe in one of the largest chemical producers in Ukraine.”

These complaints of decreased pressure were echoed by the Krimsky Titan and Krimstky Soda factories. Not coincidentally, all three enterprises are owned by Dimitry Firtash, the major Ukrainian shareholder of the maligned gas intermediary RosUkrEnergo (RUE). Tymoshenko has long tried to remove RUE from the gas scheme, but for now is targeting RUE’s 50% owned subsidiary, Ukrgazenergo.

The three factories are trying to hold out for the fulfillment of their contracts with Ukrgazenergo, and conflicts over signing new agreements with Naftogaz likely led to this latest row.

Naftogaz responded by calling the accusations of decreased gas pressure “provocation and indirect pressure from the owners of RosUkrEnergo against representatives of Naftogaz on the eve of the next round of talks with Gazprom.”

“The company figures the statement by the press service of Rivneazot concerning the reduction of the volume of gas to the company from April 3rd of this year to be unreasonable, merely political in character and a form of sabotage against the process of transition to direct negotiations with Naftogaz.”

Besides facing resistance from such industrial consumers, Naftogaz will likely encounter other problems as it attempts to insert itself further into the gas supply scheme. Not the least of these is actually signing the new agreement with Russia, something that hopefully will be completed within the next week.

But also key will be resolving the debt situation, as becoming a major gas supplier requires significant credit–a characteristic not likely for a company flirting with default.

Note: There were rumors that Naftogaz (50% shareholders of Ukrgazenergo) would press Gazprom (25% ownership) into voting to liquidate Ukrgazenergo completely and legally at the company’s April 1st shareholders’ meeting. However, the meeting was not recognized due to a lack of a quorum. The next meeting apparently isn’t likely until October.

I’m still waiting for word on the results of the latest attempted Ukrtatnafta shareholders’ meeting. (Though here’s an amusing rundown of the attempted meeting in mid-March on the Kremenchug premises, replete with unmarked private security guards, buses full of thugs and a fire drill.)

The latest Dneproenergo and Kievenergo shareholders’ meetings also faced problems, apparently due to the absence of the companies’ registers, which are under the control of Privat-affiliated Ukrneftegaz. I hope to post on these issues–as well as more on the spy allegations at TNK-BP–as more info comes out.

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9 responses to “Naftogaz’s financials are creating worry as Ukraine and Russia struggle to finalize their gas deal

  1. Have u seen an originating story regarding the following from Bloomberg?
    “Ukraine Denies Gas Market ‘In Chaos’”
    http://www.times.spb.ru/index.php?action_id=2&story_id=25616

  2. Here’s an Ekonomicheskie Izvestiya article on it:
    http://eizvestia.com/markets/full/34284

    Here’s the Vedomosti article quoted by the Bloomberg report in the S.P. Times:
    http://www.vedomosti.ru/newspaper/article.shtml?2008/04/07/145235

  3. Hans, Many thanks but I can’t locate any such article on Bloomberg.com
    not questioning the veracity of the story but just want to know how B got involved in the mix because the original story is not from Bloomberg (do they have a russian online version?)

    and did u see the following?
    “Ukraine Court Upholds Ban on Dniproenergo Share Sale (Update1)”
    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=amWWKu5loGac

    “Верховний Суд скасував рішення зборів акціонерів “Дніпроенерго””
    http://www.unian.net/ukr/news/news-245350.html

    Is this why such an interest in getting Stanik back on the bench? or unrelated?

  4. From Reuters
    “Ukraine court rules against magnate in share case”
    http://uk.reuters.com/article/oilRpt/idUKL0877923020080408

    and at a time of rising prices and hyper-inflation this is not the type of news item anyone wants to read
    “Ukraine growers forced to toss rotten grain into the Black Sea”
    http://unian.net/eng/news/news-245353.html

  5. News item about grain losses
    “Україна втрачає зерно”
    http://news.1plus1.ua/ukrayina/ukrayina-vtrachaye-zerno.html

  6. Not sure about the Bloomberg piece, maybe it got lost somewhere…

    Thanks for the Dneproenergo update — I thought that decision might come down soon. That helps grease the wheels for Tymoshenko’s plans, especially in combination with the recent Supreme Court ruling on Ukrtatnafta.

    The Stanik issue doesn’t relate to these rulings because she’s up for the Constitutional Court. But it sounds like some gas issues are headed that way because it’s unclear who has authority (pres or pm) in restructuring the gas sphere.

    http://eizvestia.com/state/full/34287

    As for the grain dumping — I’m pretty sure that happened last year, and the Economist made a bit of a mistake. I definitely remember hearing a lot of it last year because of the unexpected nature of the export quotas installed by Yanukovich. But I’ll check with a grain trader friend and see. (Hard to believe that Ukraine could already have a harvest to export, anyway.)

  7. RE: PGNiG and Gazprom. The real dispute is between the Energy Regulation Department (URE) — who is busy deciding on price hikes — and PGNiG. URE wants to raise prices by 28%, and PGNiG wants 33.7%. PGNiG signaled that if URE doesn’t decide quickly, then no money left for investment projects like the LNG terminal. With soaring gas prices, PGNiG’s solution is to raise tariffs.

    http://www.rp.pl/artykul/117773.html

    That’s one take. The other is that Gazprom wants to wrestle control of Europolgaz and increase its stake in the company. This is been going on for two years. PGNiG and Gazprom each own a 48% stake in Europolgaz, with Bartimpex owning the rest.

    http://www.iht.com/articles/2007/01/16/business/gazprom.php

  8. Pingback: Kremlin, Inc » RosUkrEnergo to remain Ukraine’s gas supplier

  9. Pingback: Kremlin, Inc » Firtash and Privat resist Naftogaz’s encroachment on Ukrgazenergo as Gazprom prepares to enter market

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