Graham Stack in Kyiv -

A Norwegian firm has revealed its subsidiary Standard Drilling directly sold an offshore drilling platform to Naftogaz in 2011 for $220m, contradicting claims by the Ukrainian state-owned oil and gas company that it acquired the rig for $400m from Latvia's Riga Shipyard via an open tender. The discrepancy will revive allegations of corruption at Naftogaz.

In a presentation recently uploaded to its website, the Norwegian financial company Ferncliff lists the buyers of all the rigs divested by Ferncliff subsidiaries, including Standard Drilling. Until now, only one buyer for a Ferncliff rigs had remained undisclosed - that of Standard Drilling's B319 rig. Standard Drilling said in September 2011 it had been sold to an "undisclosed buyer incorporated in the UK". Now parent company Ferncliff has revealed that the rig was sold while still under construction to Naftogaz for $220m, after having ordered it from leading Singapore producer Keppel Fels in December 2010 for $179m.

The CEO of both Ferncliff and Standard Drilling, Martin Nes, declined to comment to bne. The disclosure may indicate that Ferncliff now regards the mystery UK buyer to have been an agent of Naftogaz.

Naftogaz held a tender for the procurement of a drilling rig in October 2011, in which it acquired the same B319 rig for $400m from Riga Shipyard. Naftogaz had declined to respond to bne enquiries about the discrepancy within three days of asking, citing the need for extensive security checks before it could release information pertaining to the tender.

Smoke and mirrors

Ferncliff's declared payment of $220m from Naftogaz for the rig clashes sharply with Naftogaz's payment of $400m for the same rig to Riga Shipyard, and is likely to revive allegations of widespread corruption in procurement at the state company.

Riga Shipyard, owned by Ukraine-born Vassily Melnik, had no prior experience of building or repairing offshore rigs, but Naftogaz touted the company's victory in the tender of October 2011 as a triumph for transparency. "Journalists had every chance to observe the entire process of the tender and to personally convince themselves in the transparency of the decisions taken at all stages," Naftogaz CEO Evgen Bakulin announced at the signing ceremony for the sale on November 2, 2011.

The transparency feted by Bakulin derived from the victory of a genuine foreign shipbuilding company in the tender, rather than an anonymous offshore shell company as is so often the case. Riga Shipyard owner Melnik personally attended the signing ceremony, accompanied by Latvia's current economy minister, Daniels Pavluts. "The decision taken to attend the ceremonious signing of agreement (took) into account that this is one of the biggest tenders Latvian companies have ever won abroad, with significant positive impact for the Latvian economy," Pavluts tells bne.

According to unofficial minutes of Riga Shipyard's shareholder meeting held in May, Melnik acknowledged that Riga Shipyard had itself sourced the B319 rig from a broker, for $393.3m. "We didn't build this rig. We bought the rig from a broker that was trading this platform, already existing. Our work was only engineering work... and the reconstruction in Turkey when the platform legs were assembled - this was a unique task, which no one performed before us. And for this work we received €5m. I consider this a very good result - primarily because we gained great experience in engineering," he told the shareholder meeting.

But according to bne sources, the Latvian shipyard played no role in the engineering work performed in Giresun, Turkey in the fall of 2012, when the rigs' legs were reinstalled after transiting under the bridges of the Bosphorus. Rather, the work was performed by the Singapore rig manufacturers Keppel Fels and its subsidiary Caspian Shipyard, two local Turkish companies, and a rig crew supplied by Naftogaz offshore unit Chornomornaftogaz, according to site manager Salih Fidan.

Nor did the tender victory have the stimulating effect hoped for by Latvia's economy ministry. According to Melnik, the Latvian company booked around $7m in profit on the $400m transaction. But to the chagrin of Riga Shipyard's minority shareholders, the monster transaction stayed off the company books, making it impossible to verify Melnik's words. The rig deal was implemented through a special-purpose UK subsidiary, Northsale Logistics. Riga Shipyard sold the subsidiary five days before the end of 2012, which, according to Latvian legislation, absolves it from mandatory consolidation on the parent company accounts. "We believe the transaction with the drilling rig was largely a fiction," leading minority shareholder in Riga Shipyard, Linards Baumanis, tells bne.

According to bne sources, the authoritative Lloyds's List lists Chornomornaftogaz as taking possession of the rig immediately on completion in Singapore.

Tragedy then farce

Naftogaz's purchase of the controversial drilling rig in October 2011 from Standard Drilling repeated an equally controversial tender in March 2011 for an offshore rig, as a result of which Naftogaz acquired an identical Keppel Fells rig, B312, also for $400m - but this time from a shadowy UK vehicle, Highway Investment Processing.

The B312 rig had been previously owned for a brief time by Norwegian offshore driller Seadrill, which ">disclosed its sale for $248.5m in April 2011 to an "undisclosed buyer incorporated in the UK." In an interview with bne in 2012, Seadrill's then chief financial officer Esa Ikaheimonen, acknowledged that Seadrill had sold its rig to the UK company Highway Investment Processing.

Ikaheimonen and Seadrill's vice president, Jan Olav Osthus, told bne that Seadrill had had no contact with Ukrainian state officials or state company executives during sale talks. But according to bne enquiries, a team of rig engineers from Chornomornaftogaz - Naftogaz's offshore drilling unit - headed by chief rig engineer Vladimir Perminov inspected Seadrill's rig at its drilling location in Myanmar in March 2011, before the deal with Highway Investment was closed. Perminov posted photos of the visit on his social network page.

Following an outcry when details about the tender leaked out in the press, Naftogaz ordered an audit by oil service giant Halliburton of the total cost of the ex-Seadrill rig, to justify the price tag of $400m. According to the audit, as seen by bne, beside the original purchase price of $248.5m for the rig, the $400m included the total cost of the operation to remove and then reassemble the rig's legs for Bosphorus transit was $71m, with another $21m paid for a helicopter, $16.4m for winterization, $15m for dry tow and $16m for an electric line unit. None of these expenses was foreseen in the original tender and contract, as seen by bne, where point of delivery of the rig was specified as Singapore.

Highway to the underground

While Naftogaz countered corruption allegations regarding the first tender by flourishing the Halliburton audit, bne enquiries indicate that Highway Investment itself functioned as part of a Ukrainian money-laundering platform, or "conversion centre" - meaning effectively that "Highway Investment" was simply the name of a bank account where dubious funds landed.

bne tracked down a payment made to Highway Investment entirely unrelated to the massive $400m drilling rig deal. This was a payment of €270,000 in November 2010 made to Highway Investment by a unit of regional plant Zhitomir Cardboard Plant, Skherzo, to purchase an offset printing press from Germany. But no delivery ever took place, and the payment was flagged up by Ukraine's Ministry of Economy as a violation of foreign currency regulations, with an ensuing court case. According to documents seen by bne, obscure Lugansk businessman Pavlo Dvulichanskii held power of attorney for Highway Investment Processing. Tellingly. Dvulichanskii features as owner and director of another company receiving payments from Zhitomir Cardboard Plant (ZKK), Lugansk company PP Oriens.

According to court proceedings, Lugansk tax police regard Dvulichanskii's PP Oriens as "a member of a single financial-industrial group that was created for the provision of tax minimisation services, for the conversion of funds (into cash), and for the creation of VAT credits to reduce VAT payments - ie. a money-laundering platform or "conversion centre" that receives wired funds from clients under fictive contracts and returns them as "black" cash. The symmetrical dubious payments by ZKK to two companies where Dvulichanskii features as director, Oriens and Highway Investment, indicates that Highway Investment was part of the same "single financial-industrial group" as Oriens, busted by diligent Lugansk tax police.

"It does appear that Highway Investment Processing may be a part of a Ukrainian conversion scheme, because it has a director with a Ukrainian background linked to confirmed Ukrainian conversion centers, and because it received payment but did not deliver the goods ordered," says Valery Fedichin, lawyer at Kyiv firm OMP.

Independent paper Ukrainskaya Pravda later investigated another Lugansk company, Lugpromstroisantekhmontazh, named by tax police as being part of the same "single financial-industrial group." Lugpromstroisantekhmontazh also received suspicious payments from the Zhitomir plant ZKK. The newspaper traced payments made to the company by numerous politically connected firms - including those linked to President Viktor Yanukovych's 129-hectare estate at Mezhgirya near Kyiv.

The Latvian bank - Trasta Komercbanka - where Highway Investment banked has been previously linked in court cases to funds flowing from suspected money-laundering platforms in Ukraine. The bank is also linked via business partners to Ukrainian gas oligarch Dmytro Firtash, who is regarded as a patron of Ukraine's energy minster at the time of the controversial tenders, Yury Boiko.

The bank denies any connection to money-laundering. In December 2012, Latvian police announced they had opened a money-laundering investigation in connection with the Highway Investment rig acquisition.

In November 2012, Naftogaz ordered two semi-submersible rigs from Singapore's Keppel Fels for a total of $1.226bn. However, following a change in energy minister from Yury Boiko to Eduard Stavitsky, in December 2012 the deal was cancelled. In June 2013, media quoted Stavitsky saying that a new tender for the semi-submersible rigs would be held in the autumn.