Naftogaz Makes Record Profit on Gazprom Ruling
Ukraine gas monopoly Naftogaz Ukrainy reported record 2017 financial results following its "historical victory over Gazprom in the finale of the Stockholm arbitration proceedings," CEO Andriy Kobolev said in the annual report published July 17.
Some of the proceeds are to be shared as bonuses among the management and some staff, following a decision in May by the supervisory board; however so far no money has been paid by the Russian export monopoly Gazprom which has challenged what it saw as the ruling's inconsistency. Further court action is now ongoing in a number of countries to seize Gazprom's assets there.
Naftogaz posted the highest net profit in its 20-year history: hryvnia 39.4bn ($1.4 bn) compared with hryvnia 17.8bn in 2016. If there had not been a positive outcome in the transit case, the group would have suffered a net loss of hryvnia 7.4bn, Kobolev said.
“Years of hard work finally resulted in the historical Stockholm Arbitration victories in December 2017 and February 2018. We managed to eliminate the risk of an unprecedented debt burden from the country’s shoulders and were awarded almost $4.7bn in compensation,” he commented. In line with the results of the two arbitration proceedings, Gazprom must now pay Naftogaz $2.56bn adjusted to a $2.1bn set-off for gas delivered in 2014.
For the future, he said the company's goal was to transform Naftogaz into an efficient and profitable European energy corporation. It already discloses plenty of data regarding its operations. Wholesale gas import and sales are now open for competition in Ukraine and the segment has already been integrated into EU markets. Dozens of new players, including major European and global gas suppliers, have entered the Ukrainian market and are competing, he said.
According to OECD standards, Naftogaz is the first Ukrainian state-owned enterprise with a professional independent supervisory board. Though yet to be fully empowered, it has already become an effective barrier to unhealthy political interference in Naftogaz’s operations. "Perhaps for the first time in the history of Naftogaz, its management is pursuing the interests of the company and its ultimate owner – the Ukrainian people – rather than the interests of financial-industrial groups, politicians, or other vested interests," he said.
The first and the most important precondition for Ukraine’s success in the gas sector is the elimination of corruption in gas supply for households and the establishment of a transparent competitive market in this segment. Gas production and sales to regional gas supply companies for resale to households yielded only a 3% margin. Opaque intermediaries between Naftogaz and households remain the major problem of this line of business. Because of the debt generated by regional supply companies (more than $1bn over the past two years), the average margin in this segment based on net cash flow in 2016–2017 was a mere 3%, the report said.
The second precondition is the completion of transmission system operator unbundling with non-discriminatory access for all players. The third precondition for success is the completion of corporate governance reform at both Naftogaz and other state-owned enterprises, Kobelev said. Naftogaz this week authorised consultancy PWC to step up its work on unbundling its pipelines and storage assets.
The present supervisory board, appointed at the very end of 2017, has not been able to progress the work ahead of it, leaving the situation as it was when the previous board resigned out of frustration. "We lack efficient tools to bring Naftogaz and its group companies to where they need to be. However, we are determined to complete the reform and govern the company and Naftogaz group to increase their value for the benefit of the people of Ukraine," said Naftogaz's chair Clare Spottiswoode.