You're reading: Naftogaz cries foul as Cabinet replaces Kobolyev with Vitrenko

Yuriy Vitrenko, acting energy minister since December, was appointed as the new CEO of state-owned oil and gas company Naftogaz on April 28, according to Ukraine’s Cabinet of Ministers.

Vitrenko’s appointment came with the ouster of Andriy Kobolyev, a day after Naftogaz reported financial losses of $685 million in 2020. The government signed a one-year contract with Vitrenko, who was a top executive of Naftogaz from 2014-2020 before he and Kobolyev had a falling out.

The cabinet, in its statement, said it will also search for new members of the Naftogaz supervisory board, calling its work, along with that of the management team headed by Kobolyev, “unsatisfactory.”

The statement went on: “Yurii Vitrenko has many years of successful experience in the energy sector and in 2018 held the position of executive director of Naftogaz of Ukraine. The new head of the company is tasked with systematically increasing Ukrainian gas production, as well as assisting in the formation of a full and fair gas market in Ukraine. Deputy Minister of Energy Yurii Boyko has been appointed as Acting Minister of Energy.”

The decision of the Cabinet of Ministers to dismiss Kobolyev is a “legal manipulation,” according to the statement that the current management of Naftogaz published on Facebook on April 28.

To be able to fire Kobolyev directly without the consent of the Naftogaz supervisory board members, the Cabinet of Ministers dismissed the supervisory board for two days. This move is “an insult to the basic principles of corporate governance of state enterprises,” Naftogaz said.

According to the statement, such actions demonstrate to all the state enterprises that work in the interests of the budget and the people of Ukraine — not in the interests of individual political forces — will be punished. “It is a clear signal to investors… that the state-owned enterprises in Ukraine are unpredictable and that their operations may change depending on the political situation.”

Kobolyev answered his successor on social media on April 29 disputing the government’s decision and saying it was made against corporate governance reforms in Ukraine.

“In 2014, Ukraine firmly decided that it’s the state and Ukrainians who should make money on state ownership — not politicians close to the cash flows. Yesterday’s single government decision sends all this to the trash,” Kobolyev said.

Read more: Naftogaz loses $684 million in 2020, blames pandemic, regulation, debtors

The losses of Naftogaz in 2020 were a massive drop compared to 2019 when the company made $93 million in net profit, and the first time since 2015 that Naftogaz has had negative financial results. Yet, the company still paid $5 billion in taxes to the state budget in 2020, making it the largest contributor, with 17% of revenue.

Vitrenko defends his appointment

In remarks to Interfax-Ukraine news agency, Vitrenko said that the government, as a shareholder, not only has the right but also must react to the ineffective work of the management of Naftogaz. “The government should be an active owner, respectively, the Cabinet of Ministers has the right and responsibility to respond to problems in the company. He noted that, at the end of 2020, Naftogaz submitted a financial plan for 2020 projecting a profit. “When you submit a financial plan and promise something, and then instead of the planned Hr 11 billion of profit (nearly $400 million), you receive an Hr 19 billion ($684 million) loss, this leads to the fact that your owner reacts. Moreover, the profit of Naftogaz is dividends, which receives the state, and the budget counted on them, but now it will not get it.”

Additionally, Vitrenko said, the losses came despite the national budget compensating Naftogaz Hr 32 billion ($1.15 billion) for public service obligations.

Vitrenko also said that similar companies in neighboring countries, Poland and Romania, were profitable in 2020.

“It is correct to compare with these companies, and not with purely commercial Western ones, since Naftogaz uses free fixed assets that it receives from the state. It did not pay for the vast majority of its production licenses, did not buy fixed assets, it was given storage wells equipped, surface infrastructure, all of this in the overwhelming majority of cases was created by the predecessors of Naftogaz as a separate company, it was just that everything was included in the statutory fund,” Vitrenko said.

He said that in addition to financial results, operating results were also unsatisfactory, which was indicated at the government meeting: in 2021, Ukrgazvydobuvannia reduced sales of marketable gas and production of gross gas, liquid hydrocarbons, while private companies increased production.

He also said the decision was made in full compliance with the law since the general meeting is the supreme agency of the company, which can make any decisions. “The Cabinet of Ministers had all the legal grounds, rights, and opportunities to make decisions and, accordingly, to dismiss the head of the board,” he said.

Kobolyev blames government policies, COVID-19 for losses

Kobolyev blamed the COVID-19 pandemic for the losses. He said the COVID-19 crisis hurt gas consumption and the ability of consumers to pay for it, reducing the demand. He also blamed the government policy on gas prices. Ukraine has forced gas sales at $0.25 per kilowatt, about 30% below the market prices.

Analysts Ash, Chow respond

Timothy Ash, a London-based analyst, commented by email: “This has more to do with the personal beef between Kobolyev and Vitrenko than anything else. With Vitrenko moving to head the energy ministry, the question was always how long Kobolyev would last at Naftogaz.

“One reformer replaced by another. Also, I think we will see a new strategic direction for the company resulting. It will be interesting to see whether we see Kobolyev launching a counter-response. Both are heavyweights in the domestic energy business and have their own political supporters. I guess the big loss posted by Naftogaz for 2020 was the final trigger for the removal of Kobolyev. I am not sure anyone would be that surprised by this move.”

Edward Chow, a veteran energy analyst based in Washington, D.C., called the Kobolyev-Vitrenko switch “a rather peculiar way of dismissing the head of a major state company,” but noted the systemic problems that have existed since Ukraine became an independent nation in 1991.

“What is evident for energy in Ukraine is that there has not been a politically agreed vision of what a reformed sector should look like. What are the respective roles of competition, market pricing, independent regulation, private investors, and state enterprises?” Chow wrote in an emailed response to Kyiv Post questions. “The temptation remains for political leaders to manually control the sector instead of building a modern energy market.”

He noted that Ukraine could end up having five energy ministers in less than two years, not a signal of stability to investors.

“By its very nature, the energy sector requires stable, predictable, and attractive conditions for long-term investments. In this way, it is different from IT, retail, consumer goods, etc. It may take three to five years to execute a large-scale energy project and five to 10 years to begin reaping a return on capital,” Chow said. “The transformation of the energy sector can only succeed with coherent policy, structural reform, and competent governance. In a democracy, energy strategy must also be explained to the public and gain the support of the people’s elected representatives in parliament.

“After 30 years of delayed transition, implementing energy reform has become critical for Ukraine as the useful life of legacy infrastructure comes to an end, in order to join the global movement toward green energy and to integrate economically with Europe, Ukraine’s largest trading partner,” Chow wrote. “Sustaining reform is more important than an individual agenda. Unless the government articulates its plan in this regard, the latest personnel changes only add to market uncertainty and impede urgently needed investments in the energy sector.”

Naftogaz’s history of corruption

As Radio Free Europe/Radio Liberty wrote, “Naftogaz, one of the country’s largest companies by revenue, has long been the object of corrupt schemes by officials and oligarchs. The situation began to change after the 2014 upheaval that swept pro-Kremlin President Viktor Yanukovych from power. Ukraine’s Western backers tied financial aid to the country to concrete steps to clean up state companies such as Naftogaz, including calling for the creation of an independent supervisory board that would guard the company from political or oligarchic pressure.”

Read some of the Kyiv Post’s previous interviews with Andriy Kobolyev and Yuriy Vitrenko:

Jan. 11, 2021 – Yuriy Vitrenko’s days as acting energy minister are running out

Jan. 1, 2020 – Andriy Kobolyev talks about gas agreements with Gazprom

Dec. 22, 2020 – Yuriy Vitrenko becomes acting Ukrainian energy minister amid wider shake-up

May 13, 2020 – Vitrenko: Naftogaz will suffer losses as oligarchs ‘feel much more comfortable’

March 15, 2019 – Naftogaz CEO Andriy Kobolyev outlines plan if he stays another year

Feb. 12, 2019 – Kobolyev says Naftogaz’s achievements under attack