Expensive Naftogaz: Where does company spend 1.8 billion of budget funds?

Author : Olena Holubeva

Source :

Vice Prime Minister Volodymyr Kistion in an interview said that the "superstructure" of Naftogaz Ukraine spends on its maintenance 1.8 billion UAH per year. He suggested that this superstructure should be liquidated
22:34, 25 October 2017

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The figure of 1.8 billion UAH, about which Kistion spoke, is included in the article "administrative expenses" of the financial plan of Naftogaz Ukraine Company for 2017. As you know, this document was generally approved by the government, which had comments only to the price of gas for domestic consumers. As it follows from the Explanatory Note to the draft financial plan of Naftogaz Ukraine, for 2017, in comparison with 2016, the administrative expenses of the state company are increased by UAH 262.9 million and to be precise, are at the level of UAH 1802.4 million.

A significant part of the expenses - UAH 662.3 million - is a payment to employees of Naftogaz Ukraine, whose number in comparison with 2016 was increased by 3%, to 651 people. The cost of salaries this year compared with the actual figure of last year increased by 68 million UAH. The increase in labor costs was a result of the fact that part of the employees in mid-2016 were transferred to the contract form of the work. The management of the state company and contracted employees in mid-2016 received increased salaries, while this year there is no change in their level, the text of the explanatory note says.

It should be noted that salaries in Naftogaz are big, especially of the company's top management. In January 2017, the Economic Truth published documents according to which the head of the Naftogaz of Ukraine, Andriy Kobolev, receives a salary of more than 2 million hryvnia a month. The head of the Ukrhazvydobuvannia mining company, which is part of the Naftogas company, Oleg Prokhorenko, according to the newspaper, receives a salary of 398 thousand UAH per month. Moreover, Prokhorenko himself confirmed this information.

The second largest expense item of Naftogaz of Ukraine is payment of legal services, for which in 2017 it is planned to spend 511.1 million UAH. This is 7.7 million UAH less than in 2016.

In particular, 6 million euros (188.1 million UAH at the current rate) are envisaged for payment of legal services in a dispute with Gazprom. On legal services in disputes related to the loss or inability to use property in connection with the temporary occupation of Crimea by Russian Federation there were spent $ 8 million (212.24 million UAH at the current rate). The costs of legal services to represent Naftogaz Ukraine's interests to third parties in courts of foreign jurisdictions and in international arbitrations, including in the London Arbitration Court, in connection with the appeal of minority shareholders of PJSC Ukrnafta - Littop Enterprises Limited and Bordo Management Limitied (according to the media, associated with the founder of the Privat group Igor Kolomoisky) –were spent  978 thousand dollars (25.9 million UAH), for legal services related to the provision of legal assistance on issues that arise during activities of the Naftogaz Supervisory Board and committees  - 11.2 million USD.

It is interesting that spending on the work of the Supervisory Board of the company is envisaged in the amount of 33.6 million UAH. Of this amount, the remuneration for the members of the Supervisory Board amounts to UAH 24.2 million, the cost of living, arrival and other services cost UAH 9.4 million. As you know, the situation with the company's council is now difficult - the last independent members of the Supervisory Board of Naftogaz, Paul Warwick and Marcus Richards, completed their work on October 5, before submitting their resignations. Previously, a member of the supervisory board of Naftogaz Ukraine, independent director Charles Proctor, resigned. In April of this year, Julia Kovaliv left the post; she was the representative of the state. Thus, the quorum, which starts in the National Assembly with 4 votes of its members, is not present - only one person remains in it - the former minister of energy and coal industry Volodymyr Demchyshyn.

The amount of 1.8 billion UAH also includes the costs of Naftogaz for the services of external advisers in the amount of UAH 143.2 million ($ 5.2 million). Among other things, $ 0.9 million (23.8 million UAH at the current rate) is envisaged for the services of branch of the gas transportation business. As the company reported last week, these services would be provided by company Rothschild S.p.A. In addition, the responsibilities of this company will include assistance in attracting a qualified partner in managing the GTS: creating conditions for its successful selection, drafting the terms and conditions, the procedure for conducting the tender and the selection criteria, preparation of the list of potential partners, the definition of the main commercial terms, the structuring of the transaction. And also $ 0.5 million (UAH 13.2 million at the current rate) and 2,1 million dollars (55,7 million UAH at the current rate) required to pay for services to attract a partner to the GTS management and legal structuring..

The total expected cost of purchasing services from Rothschild S.p.A, according to the press service of Naftogaz Ukraine, is provided in the amount of 193.3 million UAH.

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Another 1.5 million dollars (39.7 million UAH according to the current exchange rate) are provided for investment banking services in respect of the company's assets in Egypt. As you know, on December 13, 2006, Naftogaz concluded a concession agreement, of which the Arab Republic of Egypt and the Egyptian General Petroleum Corporation are also parties. The contract is concluded for 30 years. As part of the transaction, on April 18, 2011, a subsidiary of Naftogaz, Petrosannan Company, was registered, which performs all the work on the development of the Alam El Shawish East site, which is located in the Western Sahara (Abu Haradig basin). The plot has a total area of 974.256 sq.m. As of March 2017, 49 wells have been drilled in the territory of the license area of Naftogaz in Egypt. As of March 6, 2017, 10.17 million barrels of commercial oil and gas condensate were produced and delivered, as well as 0.43 billion cubic meters of natural gas.

It should be noted that in August, the press service of Naftogaz Ukraine reported that it will hire the Lazard Freres SAS investment company (France) to help in the possible sale of Naftogaz assets in Egypt.

Another 72 million UAH are planned for the maintenance of other foreign offices and branches of Naftogaz. In particular, 500,000 euros for each representation of the state company in Belgium and Hungary, 200,000 US dollars for representation in Russia, 180,000 dollars for a branch in Turkmenistan, 30,000 dollars for a branch in Libya, 33.9 million UAH – for Metrological Center in Boyarka.

Let’s look at the company's spending on consulting and information services. These spheres are provided with 13 million UAH, more than in 2016 - 28.1 million UAH, out of the amount of 1.8 billion UAH. These services include payment for the Platts international news agency, which provides quotes for oil, petroleum products, natural and liquefied gas (total cost of services $ 220,000), Bloomberg LP agency, which provides information on reviews and indicators of the international energy market ($ 80 thousand), Thomson Reuters ($ 30,000), Reed Business Information, ICIS Energy Division (£ 15,000). For information and consulting support of Naftogaz's activities in Ukraine and abroad, as well as providing services aimed at developing effective relations with the professional community, representatives of EU institutions, public authorities of the countries of the Energy Community and the United States, international media will receive 16.2 million UAH . At the same time, for the coverage of current issues of the company and services of domestic media, only 200 thousand UAH are provided.

Among other things, Naftogaz spends UAH 3.3 million on insurance services, UAH 7.6 million on property valuation, UAH 22.9 million on banking services, UAH 4.2 million on conferences and exhibitions, 11.9 million UAH on maintenance of buildings. The state company spends 4.4 million UAH on communications services, 5.6 million UAH on stationery and consumables (the cost includes the purchase of spare parts for office equipment, household equipment, air conditioners, ventilation systems and water supply of administrative building). On protection of Naftogaz objects in 2017 it is provided 8,4 million UAH. Also, this year the company's expenses for paying business trips of employees increased by 11.4 million UAH, up to 27 million UAH. In the explanatory note to the financial plan this is explained by the growth of the minimum wage and the change in exchange rate of foreign currencies.

This is the "superstructure" that Mr. Kistion wants to liquidate. Whether it is possible to do this, and what is possible to reduce - this is a rhetorical question.

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