While lawyers argued over who owned Poltava Petroleum Company, cash flow slowed to a trickle and additional investment in the oil company by JKX stopped. Now the British company sees better days ahead.
ny, cash flow slowed to a trickle and additional investment in the oil company by JKX stopped.
Today, the lawsuits have been decided. JKX subsidiary J.P. Kenny Exploration and Production Ltd. owns Poltava Petroleum Company. Poltava Petroleum General Director Timothy Kaunov said the April 2002 decision clears the way for JKX to invest between $15 million and $20 million in Ukraine by the end of 2004.
JKX has already allocated $7.5 million, borrowed from London’s Standard Bank this year, to drill three wells, overhaul two more wells and update equipment.
JKX claims to be the largest single British investor in Ukraine. Though Baltic Beverages Holding has invested more, BBH is a joint venture between Britain’s Scottish & Newcastle and Denmark’s Carlsberg Breweries.
According to Kaunov, the company invested $130 million in Poltava Petroleum between 1994 and 1998, exclusive of an $8 million loan from the European Bank for Reconstruction and Development. Kaunov said the investments stopped when the legal dispute with the State Property Fund arose.
“It would be difficult to say that the atmosphere the company was living in during recent years was favorable for investment,” Kaunov said. “To invest in a company that was about to be expropriated by the state would have been a step toward madness. The investments were minimal, just enough to keep the plant alive.”
“We can’t calculate how much money Poltava Petroleum would have received if there hadn’t been a legal battle, but it is surely tens of millions of dollars,” he said. “This is serious money.”
Kaunov said the protracted legal battle for control of Poltava Petroleum also affected the plant’s production plan and led to a significant decrease in the tax revenue that the government could have generated had the battle not taken place.
While J.P. Kenny and the SPF fought over who would own the company, Poltava Petroleum cut oil production by 80 percent, from 244,000 tons in 1996 to 50,000 tons in 2001. Gas production fell from 347 million cubic meters in 1997 to 221 million cubic meters in 2001.
The conflict between J.P. Kenny and the SPF began in 1998. Kenny, state‑owned Poltavagazprom and the State Property Fund established Poltava Petroleum as a joint limited liability venture in 1994. When Poltavagazprom was subsequently liquidated, its shares in Poltava Petroleum were assigned to Ukrgazvydobuvannya, a subsidiary of Naftogaz Ukrainy. The latter passed the shares to the SPF, giving the government a 51 percent interest in Poltava Petroleum.
J.P. Kenny, with 49 percent of the shares, refused to recognize Ukrgazvydobuvannya as Poltavagazprom’s lawful successor, claiming that Ukrgazvydobuvannya owed Poltava Petroleum $30 million. J.P. Kenny also declared that the share transfer from Naftogaz Ukrainy to the SPF was invalid because Naftogaz couldn’t transfer shares it didn’t possess. J.P. Kenny wanted to divide the disputed shares with the remaining founder, the State Property Fund – an action that would give the British investor full control over the company.
The SPF responded by attempting to expel J.P. Kenny from Poltava Petroleum and giving its shares to Naftogaztekhnologiya, a private company. With the aid of police, the SPF attempted to take over the plant’s office in Poltava after accusing J.P. Kenny of having failed to meet its investment commitments.
J.P. Kenny won the battle in April 2002 when the Kyiv Economic Court held that the SPF’s actions had been illegal. A previous decision of the Superior Arbitration Court to divide the 26 percent stake increased JKX’s stake to 66.2 percent.
The SPF, uninterested in keeping a minor stake, sold its shares to J.P. Kenny last May for Hr 5.1 million, giving the Britons sole control.
Kaunov said that a letter from British Prime Minister Tony Blair to President Leonid Kuchma expressing concern over how the British company had been treated was a turning point in the legal battles.
“If the president had ignored this concern, Ukraine wouldn’t have any reason to expect further investment from Britain,” he said.
Professional examination of the case by Ukrainian courts contributed to solution of the problem in favor of J.P. Kenny, Kaunov said.
“The courts supported a British company rather than the state, as they usually do. This demonstrates the effectiveness of the legal system. It was a significant message to foreign investors,” he said.
Once the legal situation was resolved, the company stepped up its oil and gas production: Poltava Petroleum completed drilling two wells, overhauled two others and increased oil production by 118 percent during June over the same month the year before. Gas production also increased in June, by 61 percent.
Poltava Petroleum produces half of the oil and 30 percent of the gas extracted by private companies in Ukraine.
The company produced its first oil in 1995. Since, it has drilled seven new wells and overhauled 10 more. It has also developed production infrastructure that includes 40 kilometers of pipeline and an oil‑loading terminal with a capacity of 1,400 tons per day.
Despite its progress, Poltava Petroleum is a small‑time player in the nation’s oil and gas industry, accounting for just 1.3 percent of the country’s oil and gas market. Its involvement in the domestic market is limited as well. It sells gas to Ukrainian consumers, but exports its oil to world markets through Poland.
Kaunov said that even though the company’s legal battle with the SPF is over, it remains vigilant.
“We cannot allow ourselves to be off guard. We know that Ukrainian laws are not perfect,” he said.
“As far as we know, J.P. Kenny is willing to attract a Ukrainian partner to make working with local authorities easier,” said Serhy Kuyun, executive director of Ukrainian Petroleum and Energy Consultants. “The recent merger of BP and TNK shows that even for the Western majors, it’s hard to work on former Soviet soil alone.”
“It’s hard to name a handful of successful foreign investors in Russia or Ukraine where the Western management acted without local partners,” Kuyun said.
