Ukrnafta shareholders threaten to sue Ukraine for $5bn

By bne IntelliNews January 21, 2015

bne IntelliNews -


Three shareholders of oil and gas company Ukrnafta that are believed to be controlled by Ukraine's powerful Privat group have threatened to sue the Ukrainian government for $5bn. Ukrnafta is Ukraine's biggest oil producer, refiner and retailer, operating the country's largest refinery at Kremenchuk, in the Poltava region.

The three Cypriot-registered firms allege in a letter to Ukraine's energy ministry, published by Zerkalo Nedeli weekly, that Ukraine has violated the European Energy Charter with regard to private investment in Ukrnafta in three respects: forcing Ukrnafta to sell its produced natural gas at a price below production costs for the 'needs of the population' during 2006-2014, not allowing the company to sell “surplus” gas in 2006-2007, and misappropriating Ukrnafta’s gas in 2006-2010.  The letter also alleges that government decisions to significantly hike royalty payments for oil and gas extraction in 2014 have breached the charter.

The investors calculate that Ukraine has caused them up to $5bn damages, and propose reaching an out of court settlement within the first three months of 2015, otherwise they will start international court action.

The Cypriot companies, Littop Enterprises, Dridgemont Ventures and Bordo Management, are reported to own around 8% of Ukrnafta stock. The Cypriot firms are believed to be controlled by the so-called Privat group, comprising the shareholders of Ukraine's largest bank, Privat bank, Ihor Kolomoisky and Hennady Bodolyubov. Altogether Privat group is believed to control around 42% of Ukrnafta.

The state owns 50% + 1 share in Ukrnafta via state-owned energy company Naftogaz. However, Ukraine's laws stipulate 60% quorum at shareholder meetings, which has allowed Privat group to block the holding of shareholder meetings at will and appoint management mostly loyal to the private shareholders.

With an eye to the situation at Ukrnafta, Ukraine's parliament changed laws on shareholder meetings on January 13, reducing the quorum requirement to 50%, thereby depriving Privat group of this leverage and potentially shifting control of the profitable company back to the state.

The move was always seen as likely to spark conflict with the Privat group, regarded as Ukraine's most powerful oligarchs. Ihor Kolomoisky was made governor of wealthy region of Dnipropetrovsk in February 2014, because of his early support for the new pro-European government brought to power by Ukraine's revolution in February 2014.

The plan to reduce the shareholder meeting quorum was already part of the parliamentary coalition agreement signed in late November - although one leading member of the coalition, Prime Minister Arseny Yatsenyuk's party People's Front, in fact failed to vote for the new law, allegedly because of lobbying by the Privat group.

“We view the letter as a pre-emptive move from shareholders who do not want to replace Ukrnafta’s top management,” writes Concorde Capital's Oleksandr Paraschiy in a research note, adding that, “the letter is certainly a reaction to the Ukrnafta law".

"At first glance, some of the claims in the letter look legitimate to us. But we do not believe they will go to international arbitration,” Paraschiy says.

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