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Why Ukraine's Cabinet extended contract with Naftogaz national oil and gas company CEO

Author : Olena Holubeva

Source : 112 Ukraine

Ukraine’s Cabinet of Ministers has rejected the idea of changing the head of the board of the NJSC Naftogaz Andriy Kobolev for another year
15:00, 22 March 2019

Ukraine’s Cabinet of Ministers has rejected the idea of changing the head of the board of the NJSC Naftogaz, national oil and gas company of Ukraine, and extended the contract with its CEO Andriy Kobolev for another year. The decision was made under pressure from the ambassadors of the G-7 countries, who had previously met to discuss this issue with PM Volodymyr Groysman. On the one hand, having achieved the displacement of Kobolev, as our sources say, Groysman could play to at least four centers of influence, behind which well-known oligarchs and politicians who have an interest Naftogaz stand. On the other hand, it would be awkward for the PM to quarrel with influential representatives of the international community. Preserving Kobolev as head of Naftogaz means that, at least until the end of the year, the situation on the gas market in Ukraine will not change: we will observe a rise in gas prices for the population and a confrontation with Russia's Gazprom. But what would happen after 2020, after two presidential and parliamentary elections, after the transit contract with Gazprom expires?

 

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The decision of Ukraine’s Cabinet of Ministers to extend the contract with Naftogaz CEO Andriy Kobolev during a government meeting was not a big surprise. Our own sources in diplomatic circles reported that the prime minister had already changed the decision on Kobolev, and the government cancels the decision to hold a competition for the choice of the new CEO of Naftogaz after meeting with ambassadors of the G7 countries. Kobolev himself called the government’s decision "a compromise that is a sign of a constructive and effective dialogue." He did not comment on the terms on which the contract will be extended to him, promising to do so after receiving a written decision of the Cabinet of Ministers.

Related: Hungary, Russia agree on Russian gas supplies in 2020

In early March, PM Groysman stated that the Cabinet intended to replace the Naftogaz board. Although, it was clear that his aim was the dismissal of Kobolev, with whom he had a conflict. Groysman has recently openly criticized Kobolev and the top management of the entity.

Thus, the head of the government did not like the unreasonably high salaries of Kobolev and other top managers of Naftogaz. It is known that the Naftogaz Supervisory Board recommended the Cabinet to extend the contract with Kobolev, appointing him a salary of 72,000 USD. Kobolev was also criticized for disrupting the 20/20 program, which meant increasing gas production by the state companies to 20 billion cubic meters by 2020 (and 27,6 billion cubic meters by all gas producers of the country). This would allow Ukraine to abandon gas imports and become less volatile (Ukraine’s annual need for gas amounts to 32 billion cubic meters), depriving Russian Gazprom of potential levers of pressure on the economy. In reality, Naftogaz’s affiliated company Ukrhazvydobuvannia is hopelessly lagging behind the plan. In 2018, it was to produce 16,5 billion cubic meters of gas. In fact, the company practically did not receive new licenses and produced only 15,5 billion cubic meters.

Another topic of confrontation between Groysman and Kobolev is connected with unbending. The Cabinet insisted on transferring the gas transportation system to the Trunk Gas Pipelines Company, but under the influence of the Energy Community, whose representatives listen to Kobolev, was forced to admit that it could not be fulfilled (at least until the end of this year), until the expiration of the contract with Gazprom.

The most striking is the conflict between the current Naftogaz leadership and Ukrainian oligarch Dmytro Firtash. Firtash owns the Regional Gas Company (RGC), which includes 20 out of 44 gas distribution network operators. Naftogaz has a fierce dispute with the companies in the courts over the debts owed to the state company.

Related: How could gas price decrease in Ukraine?

At the beginning of March, Kobolev accused gas sellers of reselling gas, which is supplied at a lower price to commercial companies for the population (they must buy gas at a higher price, which corresponds to the market price).

Ukraine’s MP Oleg Lyashko has made a scene in the Cabinet in protest against the statement of the Cabinet on the intention to extend the contract with Kobolev for another year.

There are some reasons for the conflict with Ukrainian oligarch Igor Kolomoisky, who is a minority shareholder in Ukrnafta (part of Naftogaz). In particular, Naftogaz and minority shareholders disputed Ukrnafta’s corporate governance issues (on the distribution of powers to appoint supervisory board members) in the London Arbitration. For several years now, disputes in relation to the disputed 10 billion cubic meters of gas have been considering in the Stockholm arbitration and in the Ukrainian courts. Ukrnafta (its minority shareholders) are demanding monetary compensation in accordance with the market price of gas. March 28, Naftogaz has announced the replacement of Mark Rollins, the head of the board of Ukrnafta company, often accused of acting in the interests of oligarch Kolomoisky.

Related: Ukraine's corruption schemes are called gas independence

How can the current president benefit from the dismissal of Andriy Kobolev? It might be a part of election maneuvers. The society is dissatisfied with Kobolev’s high salary, a scandal with the bonuses, obtained by the company managers for winning the Stockholm arbitration. Kobolev’s dismissal could add a couple of percent to the presidential rating.

In addition, Kobolev has rather uneasy relations with Energy Minister Ihor Nasalyk, who is considered close associate of Poroshenko’s good friend Igor Kononenko, one of the leaders of his party. Nasalyk said recently that "Kobolev has failed everything that he could fail." Naftogaz CEO has also harshly criticized the minister.

Most financial-industrial groups are dissatisfied with Kobolev, our sources in coalition factions assure. According to them, his reluctance to share causes irritation. “He believes that he has only one employer,” our sources say, hinting that the appointment of Kobolev as head of Naftogaz in 2014 was lobbied by American businessman George Soros.

Related: Ukraine's Cabinet vs. Naftogaz: Who to become new gas monopolist?

According to our sources, Yuriy Vitrenko was considered as a candidate who could be suitable for the current Supervisory Board. Until recently, he was a close associate of Naftogaz head, but after Andriy Favorov, former co-owner of ERA Trading, one of the largest gas traders, was appointed the head of the gas division, Vitrenko and Kobolev had a little on edge with each other.

Vitrenko has become the executive director of Naftogaz, and a war broke out between his team and Favorov’s people for control over the direction of gas trade. Vitrenko initiated a compliance investigation into Favorov, allegedly in connection with transactions that allowed him to receive the undue benefit of ERA Trading. So far, the results of the investigation remain unknown.

Experts believe that the current situation with the attempt to remove Kobolev means that politics still affects the situation in Naftogaz. “Today, Naftogaz is the most efficient economic company in Ukraine. At the same time, due to the influence of the political component, it has already lost one of its most efficient managers – Oleh Prokhorenko,” Newfolk Oil and gas consulting center CEO Andriy Zakrevsky complained.

“Naftogaz is now quite different than it was under Kobolev’s predecessors. Previously, a political force that received the most electoral support usually appointed its head of the Naftogaz, and this person led Naftogaz in the context of the interests of the appointed political force, we have been observing a different situation since 2014. The state-owned company really ceased to be a cash cow for certain political forces, as it was before," Hennagiy Kobol, ExPro Consulting CEO, says. At the same time, according to him, Kobolev is not a perfect candidate: "Unbundling is stopped. The transition to the daily balancing of the gas market has been postponed several times, including due to the unavailability of the software product (the platform on which it runs)."

Related: Gas prices might not go up, - Naftogaz

Kobolev remains on his position, and this means that we would continue observing the processes, typical for Naftogaz. In particular, in the near future, the focus will be shifted to the topic of liberalization of gas prices for the population.  

According to ExPro Ukraine CEO, the gas market in Europe is safe from being shuttered by a high supply in the near future. “Even if Gazprom sharply reduces gas supplies to Europe, other suppliers will quickly take its place. Like Qatar, Norway, USA. Gazprom’s share is not growing due to high competition in the European market. Last year’s results were 33%. Gazprom is struggling to maintain its share, reducing prices. Gas supply in Europe is simply enormous: it has grown even more since Japan sharply reduced LNG consumption by resuming operation of its nuclear power plants. LNG share in Europe (from 2016 to 2018) doubled from 8 to 16%," the expert assures.

According to him, there would be no prerequisites for a sharp increase in gas prices at least until mid-summer. However, this might happen closer to the fall. It is known that it is a possible rise in prices that is the main deterrent for the government. And Ukraine’s PM recognizes it. Commenting on the Naftogaz offer, the prime minister called it a trap. "They say that they offer us to cancel the price limit. And if we cancel the limit of 8.55, tomorrow Naftogaz can say that the price should be 10 or 11 thousand UAH (360-400 USD). I can’t let this happen," Groysman stated.

Related: Naftogaz, Finance Ministry to discuss gas prices with IMF

In this regard, experts cannot predict the government’s decision on the liberalization of gas prices for the population. In addition, the prospects for the gas market are still misty after 2019.

Taking into consideration Kobolev’s comments, it is obvious that he lauds the idea of the extension of his powers until the end of this year. And this is quite logical. It is now incredibly difficult to imagine what would happen in Ukraine, including its gas industry, after January 1, 2020. Too many variables are involved, Kobal notes: “The fate of Nord Stream 2 is unknown” (it will allow Russia to send significant volumes of gas to Europe bypassing the Ukrainian gas transport system, - ed.).There is a small chance that the construction of Nord Stream 2 will still be stopped, although with each month these chances decrease. Therefore, the fate of the transit contract with Gazprom, which will end at the end of the year, is also unclear."

Related: Ukraine's corruption schemes are called gas independence

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