Naftogaz: From Loser to Winner

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What happens if you try to avoid tough decisions? If you do it for a while, the problems mount and evolve into a real disaster. The next question is whether you can get out of the situation. Naftogaz, the national oil and gas company of Ukraine, proves that it can be done.

Naftogaz group is arguably the best showcase of Ukraine’s recovery. In 2009-2014 the company turned into the major burden for the economy due to bad deal with Russian gas company, Gazprom, and heavily regulated gas prices. According to the company’s consolidated financial statements, Naftogaz lost almost 23 billion hryvnas ($2.8B) in 2009 and over 12 billion hryvnas ($1.5B) in 2010. Between 2009 and 2012, the government provided $6B in subsidies to the company to keep it afloat.

The new company management cut supplies from Russia, engaged into a legal battle with Gazprom and increased prices for business consumers. So far, this strategy works well. For January-September 2018, the net profit of Naftogaz group was almost 17 billion hryvnas.

Although numerous experts claimed that 2009 gas supply contract was a total disadvantage for Ukraine and should be canceled, it was the hostile activity by Russia in 2014 that triggered change. A new CEO was appointed in March same year. Within 6 months, Naftogaz launched natural gas supplies from Europe through Slovakia and gradually increased its volume. This helped stop buying gas from Gazprom in 2015. Ukraine filed a complaint against Russian company in the Arbitration Institute at Stockholm Chamber of Commerce.

The arbitration ruling in 2017 was in favor of Naftogaz thanks to the quality work of the company’s legal team. Naftogaz proved the supply contract had numerous infringements and thus avoided over $80B claimed by Gazprom. Naftogaz had to pay $2B only for gas supplies in 2014. The second victory came in 2018, when the same arbitration ruled that Gazprom should pay $4.6B for not fulfilling its transit contract obligations. The total debt of Gazprom to Naftogaz is $2.6B and it continues to grow due to the interest on late payments as Russians refuse to pay. Naftogaz will use this to freeze Gazprom assets in Europe. Both legal victories have strategic importance for Naftogaz and Ukraine in general.

Naftogaz is the top taxpayer in Ukraine. The company paid over 136 billion hryvnas in taxes and other payments to the state budget. This by far exceeds the total amount of state subsidies to low-income households, which totals 55 billion hryvnas in 2018. Share of Naftogaz in budget revenues of Ukraine is near 15%.

Previously, Naftogaz used to be a shady company with obscure practices. The new management transferred its procurement operations to ProZorro auction and tender service. In 2018, Naftogaz announced that transparent purchases via ProZorro helped the company save estimated 15.5 billion hryvnas in two years.

The person behind the Naftogaz success is its CEO, Andriy Kobolyev. A graduate in international economic relations, he worked for international companies including AYA Capital and PricewaterhouseCoopers. Mr. Kobolyev also worked for Naftogaz in the corporate finance and price policy department before 2010. So, when he was appointed CEO it was his comeback to the state company from the private sector.

Reforms by Naftogaz and its CEO are heavily criticized by the public and political opposition. They are blamed for high tariffs although does not set consumer prices: this is done by the government authority. Naftogaz cannot even sell gas directly to households and supplies it to heat generating companies, mostly owned by the oligarchs, who do not like the changes. Against all odds, Naftogaz keeps pushing its agenda of energy independence and efficiency.