Chairman of the Board of Ukrnafta: Naftogaz refused to fulfill court's decision to return debt for over a year

Peter Vanhecke has spoken in an interview with UNIAN about what it is like to work in conditions of “non-stop war” against the company, political squabbles over it, and also about the demands of one of the shareholders to fire him.

The country's largest oil company Ukrnafta has been for six months subject to attack by various political forces. Under the guise of restoring state control over Ukrnafta (50% + 1of the  company’s shares belong to Naftogaz Ukrainy anyway) and attempts to get it to pay dividends at all costs, the Ukrainian parliament has passed a series of "anti-Ukrnafta” laws.

The chairman of the board of the state company spoke about how the events surrounding the Ukrnafta would affect the investment climate in Ukraine, who is actually responsible for the non-payment of dividends, and why it was not possible to implement a strategic development plan proposed by the management team that took over in 2011.

Peter, last week the whole country had the opportunity to watch a meeting of the supervisory board of Ukrnafta. What are your impressions as chairman of the board?

In my professional experience, I have never seen such kind of a meeting of the supervisory board. For 15 years I’ve been working in various Western companies and also across the CIS, but I’ve never encountered anything like this. It’s been four years since I came to Ukrnafta and there has never been a meeting of the supervisory board to which members of the board were invited. And here I come, along with my team, to the first such meeting, and I see a dozen TV cameras. A group of members of parliament and journalists was also present.

In my opinion, it was a show, rather than a constructive dialogue on the subject of the company’s future. I got the impression that it didn’t have the purpose of discussing the company's strategic plans, understanding the problems in its activities and making an attempt to understand the reasons. Draft resolutions have all been pre-prepared.

I want to emphasize that I am not against transparency. I don’t mind the media coverage, explaining things to cabinet members and MPs.

At the same time, I would like to have a constructive meeting with the Supervisory Board, in order to explain and discuss the company’s issues.

Is the TV coverage of meetings of the supervisory board standard practice abroad?

No. In a public company, supervisory board meetings are held at least four times a year. Not to mention that the dialogue between the management and shareholders never stops.

The supervisory board always considers strategic documents, amends them. There should be painstaking and effective work by the company’s management body. Of course, you cannot put any information on public display until the final version of the document is ready. It’s not how it’s done in civilized countries. But, as you may see, in Ukraine everything is possible.

After the Revolution of Dignity the board of Naftogaz Ukrainy changed. This company owns over 50% of shares of Ukrnafta. How did the meetings with the new team go?

In April 2014, the Board of Ukrnafta met with the top management of Naftogaz. We presented our plans and projects, while our strategy was clear and simple - to transform Ukrnafta into a public company, transparent to investors. This would have solved many existing problems between Naftogaz and Ukrnafta, and resolved the conflict between the owners.

We have received no response to our proposals to date. Just some minor issues continue to be addressed.

Of course, we can’t say that there is no communication between the boards of Ukrnafta and Naftogaz. There is [such communication]. Ukrnafta is constantly in contact with Naftogaz on various issues, including such painful and acute issues as the payment for gas. But we see no will on their part to help us in any way.

There is also no will to engage in constructive conversation about the company’s issues, or to solve strategic problems. Instead, we heard that the management had been performing poorly.

Do you consider unfair the negative remarks on your work from Naftogaz Ukrainy, your main shareholder?

Let me explain my position. Last week, on Friday, a meeting of the supervisory board was held. I’d like to stress that this was the first real meeting of the supervisory board with the participation of management in the four years since my arrival in Ukrnafta. Again, in Europe, a company’s supervisory board shall meet once in three months. And the members of the supervisory board constantly hold consultations with the top management.

This Friday, one of the shareholders prepared a resolution in advance, stating that our job was unsatisfactory. The resolution has been prepared without the statement of the audit commission, which started its work just two days before the meeting of the supervisory board. Meanwhile, the audit commission decided that the estimated date of completion of its inspection is June 19, 2015. It’s clear that in a two-day term the Commission could by no means examine the state of affairs.

So - this is a move done for show?

Absolutely. But I’m not a company shareholder and have no effect on their decision. They proposed that the inspection to be held by the audit commission, and we, the board, are required to ensure it is done. However, it is now clear that it will be difficult for the commission to remain objective. After all, Naftogaz Ukraine in the person of its chairman of the board has already assessed the management of Ukrnafta, so the audit commission, which is represented mostly by the Naftogaz of Ukraine employees, is simply obliged to “support” their chairman. I don’t rule out that they also have some pre-signed “order to vote.”

The question is this - why has our performance been recognized as unsatisfactory if none of our plans and projects have been reviewed or approved? The paradox is that at first we were not allowed to do what we can and want to do, and then we are also blamed for what has not been done.

But the key point is that the conclusion on the top management’s unsatisfactory performance made by Naftogaz Ukrainy was based on one thing – the non-payment of dividends.

In this connection, the manipulation by the members of the supervisory board of Naftogaz Ukrainy is worth noting: reviewing the report of the board of the company for 2014, they claimed that the management’s performance was unsatisfactory in 2015, because, in their opinion, Ukrnafta had not paid dividends to Naftogaz Ukrainy for the period of 2011- 2013. In fact, this “non-payment of dividends” has nothing to do with the company’s performance in 2014.

In fact, Naftogaz Ukrainy in the person of its senior officials probably decided to rule out any deal with the management of Ukrnafta, which had tried to bring Naftogaz to account for violations of basic business principles: the inviolability of property rights, freedom of contract, strict liability for causing damage.

There is a clear reason why Ukrnafta has not paid dividends to its shareholders. We don’t deny that we must pay dividends. But an obstacle to the payment is Naftogaz itself. On August 29, 2014 the Supreme Economic Court of Ukraine issued a ruling stating that Naftogaz must return two billion cubic meters of natural gas to Ukrnafta. The decision is final and today it can no longer be subject to appeal.

Moreover, guided by the counter-claims, the company conducted an operation on offset of obligations to pay dividends to the obligations to compensate for damage caused by unlawful actions of Naftogaz Ukrainy. The company believes that the obligation to pay dividends is thus fulfilled.

Does Naftogaz owe only two billion cubic meters of gas to Ukrnafta?

No, Naftogaz owes a total of ten billion cubic meters. But so far there has only been a court ruling on two billion cubic meters of natural gas. This case was heard in courts for more than three years: Ukrnafta has all the necessary documents regarding that gas: on production, transportation, depositing. The value of these two billion depends on the calculation methods and varies from UAH 9 to 14 billion.

When we received the ruling of the Supreme Economic Court, we expected that Naftogaz would adhere to the principle of the rule of law and comply with the court’s decision, [that is] to return the gas or to pay the money. Accordingly, we expected and hoped to receive the money in 2015.

But it will soon have been a year since the ruling of the Supreme Economic Court, while Naftogaz has been continuing to refuse to comply with it. The situation is quite unclear. It’s like a vicious circle: Naftogaz refuses to fulfill a court ruling, which is unthinkable, while we can’t pay the dividends. But we are being criticized for it, and we are being told that we perform poorly!

It’s impossible to understand the logic of such actions and also how the state company refuses to comply with a decision of the Supreme Court. How is Ukraine supposed to attract any foreign investors if basic norms are not complied with? Investors will never come to the country where they can’t protect their investment, and where there is lawlessness.

The second important point is the right to property. Ukrnafta has proven ownership of two billion cubic meters of gas. The question is why we can’t get our property back.

Among the values of any European state is to respect the fundamental principles of the rule of law and property rights.

Peter, I still want to clarify the point with the debts for gas. Some experts and MPs claim that Ukrnafta supposedly sends gas to the Dniproazot company instead of returning it to Naftogaz.

The gas debt of Naftogaz has already become a historical debt. It has its roots back in 2006. Since then, Naftogaz has been refusing to calculate settlements with Ukrnafta at a fair price. This is the first thing.

Secondly, indeed, we’ve had a contract with Dniproazot for the last four years. We rent a part of their capacity for the production of ammonia. The gas has been used in the framework of these agreements. But it is a transparent and accessible contract, which everyone knows about.

Thus, we compare these four years and the payments from 2006 to 2013. It was during these years that the Naftogaz debt has been massing. Interestingly, Naftogaz does not deny that it owes Ukrnafta ten billion cubic meters of gas. This is present in their statements, certified by international auditors. The only problem is the price difference. They want to have a very understated price, of course. We want another price, a market price, and we explain why this price is right.

Ahead of the meeting of the supervisory board, one of the Internet resources published a scan copy of a document, signed by one of the heads of departments of the State Fiscal Service, stating that Ukrnafta has tax debts, and therefore it is necessary to dismiss the chairman of the company’s board. Can you clarify whether there are any tax debts?

As the head of the company I want to stress that we comply with the law and do not deny the necessity of paying taxes. For example, only in 2014 the company paid over UAH 6 billion. In the second half of last year and earlier this year a debt on some taxes really did form. But let's look at this soberly. Tax legislation has changed in the middle of the year. Tax rates have been suddenly raised considerably. Of course, the board could not possibly foresee changes in legislation while planning future expenses.

It's like changing the rules in the middle of a football game. Hence, there came the main problems with liquidity. Naturally, we had problems with the payment of some taxes. We appealed to the fiscal services to allow the payment of taxes in installments. But we only received formal replies. Moreover, the company has already proved in court that the Fiscal Service has been wrongfully idle, refusing to consider the company’s appeals.

Now I am compelled to remind you of the existing debt of Naftogaz. If this debt was paid to us, we wouldn’t have to propose installments. We would have paid both taxes and dividends.

I have a general impression that someone is deliberately trying to cause damage to the company. Characteristically, the information spin took place right ahead of the meeting of the supervisory board. Why wouldn’t the Fiscal Service directly ask the Board of Ukrnafta about the situation? Personally, I am always ready for a meeting and for an open dialogue. The company is ready to consider and propose on its part the various options of repayment of the tax debt, including the giving the state ownership of part of the gas, which remains unreturned by Naftogaz Ukrainy despite the court decision.

But this case is not even the most glaring one. What about that disinformation about the presence of a thousand soldiers of the "Dnipro-1” battalion in the building of Ukrnafta? This rumor was spun in the media ahead of the meeting of the Supervisory Board. And there was not a slightest flush of shame for lying.

Hardly anyone would argue with the fact that the current leadership of Naftogaz lacks the political will to reach a civilized resolution of the conflict between the shareholders of Ukrnafta. Doesn’t it tempt you to think that a banal attack has been launched on your company?

I find it difficult to talk about the motives of shareholders. When I came to the position of Chairman of the Board, I decided not to interfere in politics and try to be objective. I think that our main shareholder [Naftogaz – UNIAN] is only interested in the short term prospects and control over the cash flows. Unfortunately, they do not see the future, the long-term prospects.

Perhaps the relevant ministry and Naftogaz have a great plan for Ukrnafta, but the way they’ve been implementing their decisions negatively affects the image of Ukraine and the investment climate.

If you want an independent management team - then it give a chance to do its job.

There is a trend today of inviting foreigners to responsible government posts. You were one of the first foreigners invited to a large state company. And now, you have come under fire from the government. What went wrong, globally?

Foreign managers are being invited in many places today, and that's not bad. I believe that this way, modern knowledge and management skills are being attracted. But it can be only effective when the invited managers are allowed to apply their skills in practice. But the main thing is to want the changes. Meanwhile, it often happens that only a trivial change of officials takes place, disguised in a nice pretext. If a foreigner becomes head of the company, one shouldn’t expect that everything will magically change.

In my own experience, I’ve seen two prime ministers, four ministers of energy and two chairmen of Naftogaz Ukrainy come and go since my arrival as head of Ukrnafta. Every time we held a detailed presentation of our plans to most of these officials. But we’ve not been given the “green light” for the implementation of our plans, although there have also been no significant objections. A decision at the highest governmental level was also postponed because of the political situation. It was either the parliamentary or presidential elections, and then they would talk about the need to wait until the stabilization of the political situation after the Revolution of Dignity.

Under the guidance of a team of international consultants, we have developed a plan for the restructuring of Ukrnafta. We planned the company's IPO. Finally, a production plan for five years was prepared, aiming to stabilize and later increase oil and gas production. We could cover the growth of investment in conditions of a heavy tax burden with the profit from the IPO.

Moreover, in 2011-2012, an effective management team was formed under my leadership. It included experts from the United States, Britain, Kazakhstan, and Russia. We were ready for the heavy and hard work, but!... This opportunity was not taken; the officials refused to make drastic decisions, so necessary for the company; company management mechanism at the level of the Supervisory Board failed severely; and the company’s development has stalled as a result. The team eventually disbanded as foreign specialists are used to working to get the result, which in this case was hopelessly blocked by the bureaucratic system.

However, I'm sure that Ukrnafta has a very strong potential that could be realized if we were given the “green light” for the implementation of our plans.

Nikolai Babich

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