Graham Stack in Kyiv -

With Ukraine struggling desperately to free itself from a crippling dependence on imports of Russian gas, the fate of the country's largest gas producer still hangs in the balance between the state and the oligarchs.

Ukrgazvydobuvannya (UGV), a gas producing subsidiary of state gas holding company Naftogaz, tells bne that a controversial tie-up with a Swedish-listed company called Misen Energy will go ahead, despite widespread concerns over corruption linked to it.

bne has revealed that notorious Ukrainian oligarch Dmytro Firtash, who is fighting extradition to the US on bribery and corruption charges, is co-owner of the Swedish company. Firtash and associated placemen also had huge influence over the state company Naftogaz at the time of the signing of the UGV joint activity agreement with Misen, thus potentially skewing the benefit of the agreement massively in favour of the private sector partner. A joint activity agreement is basically a joint venture but without any formation of a separate legal entity, which great reduces accountability, say critics.

With Russia having cut off gas supplies to Ukraine over a pricing dispute, and Ukraine fighting for energy independence from Russia, the fate of Ukraine's domestic gas production is a matter of key strategic significance for the embattled nation. “I would like to point out that we were surprised to learn the facts about the shareholders of [Misen subsidiary] Karpatygaz and Misen Energy contained in your materials,” a UGV spokesperson tells bne, while asking bne to keep it posted on further such discoveries.

Even so, the firm says it will press on with operations under the agreement. “These data are insufficient for taking any decisions,” the spokesman says. “Currently, we have no reasons to break off the joint activity with Karpatygaz.”

A source close to UGV tells bne that the state company is worried about possible legal action by Misen in Swedish courts – Stockholm is home to one of the world's main arbitration courts – should it decide to revoke the agreement. “This was why [the people behind the scheme] decided to use a Swedish company as head structure,” argues the source, who preferred to remain anonymous.

Trading in Misen shares on Sweden's alternative First North exchange was suspended on June 26 in connection with the reports about the company's shareholders and undisclosed information. Trading resumed on July 1, and Misen issued a press release saying that: “like any listed company, [it] has no means to establish ownership structures behind the shareholders.”

The peace may be short lived. According to scanned documents posted on the internet (see below), Ukrainian law enforcement officials are investigating a large number of private Ukrainian gas operators that partner the state-owned UGV in these controversial joint activity agreements, including Misen subsidiary Karpatygaz, in connection with charges of large-scale embezzlement by former Naftogaz officials.

Status quo ante

UGV dominates Ukraine's gas production with 71% of national proven reserves. However it is crippled due to a law requiring state-owned gas producers to sell their gas to households and utilities at far below the market price. The 2011 joint activity agreement between UGV and Misen's Ukrainian subsidiary of Karpatygaz was billed as one that would attract private capital to the sector, allowing the state company to sell gas at market prices, thus expanding production.

The agreement gives Karpatygaz a 50% share in the profits from around three-quarters of Ukraine's state-owned gas reserves, in exchange for it supplying and financing equipment and engineering services. The agreement runs to 2031. Other such joint activity agreements between UGV and private sector operators have seen profits siphoned off by the operators via transfer pricing when marketing gas, as well as the inflated pricing of equipment supplies, according to Ukrainian state auditors.

UGV's continuation of the joint activity agreement suggests that it has returned to the way things were before there was a change in energy minister in December 2012, when a Firtash ally, Yury Boiko, was replaced by an associate of the family of the ousted president Viktor Yanukovych called Eduard Stavitsky. Starting from January 2013, gas extracted by the joint activity agreement with Misen/Karpatygaz was barred from Ukraine's gas market in an apparent bid by the Yanukovych family to get cut in on the lucrative deal. Karpatygaz and Misen ran into financial difficulties in 2013 as a result.

As bne has reported, aside from Firtash's links both to Misen and to top Naftogaz officials, Misen shareholders also have direct links to former and current Naftogaz officials, such as former first deputy CEO Oleksiy Tamrazov. Cyprus company Norchamo Ltd, which holds a 30% stake in Misen, in 2011 established the Ukrainian company NK Magistral, registered at the address of Tamrazov's firm Zapadnaya Neftegazovaya Kompaniya. Tamrazov was fired from UGV in March 2013 and denies to bne any link to Norchamo.

Another top Naftogaz official connected to Norchamo Ltd remains formally on the board of Naftogaz: the 27-year-old Oleksandr Katsuba, deputy chairman of Naftogaz, has been on sick leave since March 2014 – in Ukraine it is illegal to fire an official on sick leave, thus he retains his post despite being a member of the old, discredited crew. Katsuba is sole owner of Cyprus company Navartis, which until 2011 was owner of Ukrainian gas operator Tekhprojekt. In 2010, Norchamo Ltd took a 40% stake in Tekhprojekt.

According to journalist Sevgil Musaeva, Katsuba celebrated his wedding in grand style on July 11-12 despite being on sick leave, flying his wedding party to Paris for a two-day bash at one of France's most famous palaces, the Parisian Chateau de Chantilly. And after the honeymoon, Katsuba is planning his comeback at Naftogaz, according to Musaeva.

Oligarch war

Apart from holding on to the controversial joint activity agreement with Karpaty/Misen, other UGV plans for the future are arousing controversy. Ihor Vitrenko, adviser to head of Naftogaz Andriy Kobolev, announced plans to float 15% of UGV on the Ukrainian Exchange – Ukraine's moribund stock exchange.

In an interview with internet portal Liga-biznes, Vitrenko valued UGV at $12bn, and said around $1.5bn worth of shares could be floated on the domestic stock exchnage. Given Ukrainian Exchange's notorious lack of transparency and liquidity, critics were quick to claim that the plan was an attempt to spin off the stake to Firtash's group through the backdoor.

Vitrenko, one of the main architects of an ambitious reform programme at Naftogaz, was promptly the target of a vicious prime time media attack by TV channel 1+1, owned by Firtash's bitter rival in Ukraine's energy sector, Ihor Kolomoisky. Kolomoisky is co-owner of Privatbank and Ukrnafta – respectively the largest bank and oil concern in the country – and since March the governor of Dnipropetrovsk, where his business is based.

Kolomoisky's journalists produced documents they claimed showed that Vitrenko was a Kremlin agent in Naftogaz. They pointed out that he was son of fiercely pro-Russian politician Natalia Vitrenko, and allegedly part of the old Firtash-linked team of managers at Naftogaz. Firtash's TV channel Inter answered Kolomoisky with equally vitriolic accusations, calling Komoloisky the “banker of the Yanukovych family.”

Vitrenko in fact has strongly distanced himself publicly from his mother's views and political career, and has a respectable international investment banking background. Experts see his current role as the mastermind of much-needed reforms at Naftogaz as a result of his close ties with the "new broom" CEO at Naftogaz, Andrij Kolobev.

While the departure of Yanukovych has given new life to the UGV–Misen tie-up, Firtash's overall position in Ukraine has inevitably weakened following his arrest in Vienna in March on bribery charges at the request of the FBI. Kolomoisky, with major energy interests and unbounded appetite, is the oligarch who would gain most from a weakened Firtash, and many see an escalation of the conflict as inevitable. “A fight between Kolomoisky and Firtash and [Firtash's partner] Liovochkin was to be expected already as early as the first days of the Maidan [protests],” says commentator Vitaly Portnikov. “We are now living in an oligarchic state.”