Privately-owned hydrocarbon production company slams Ukraine’s government, arguing energy policies run contrary to investor interests
Cadrinal Resources, a privatelyowned hydrocarbon production company active in Ukraine, has publicly slammed Ukraine’s government, arguing its energy policies run contrary to the interests of both investors and attempts to diversify energy dependency away from Moscow.
Robert Bensh, chairman and chief executive officer at Cardinal Resources, an independent, foreign-based gas and oil exploration and production company that has been working in Ukraine since 1995, issued strong criticism of a government decree in an interview released on Aug. 13 by the US-Ukraine Business Council.
He also appealed to the US government to take measures against the government of Ukraine if it doesn’t revoke the decree, which forces companies with joint production-sharing agreements to sell their gas supplies to the government of Ukraine at far below market prices. The current rules are not only bad for business, but have adverse consequences on the country’s efforts to gain energy independence, contradict Ukrainian laws, and hurt the country’s bid to join the WTO, Bensh argued.
The decree, adopted by the government in January of this year, has eaten away at Cardinal’s revenues and other privately-owned hydrocarbon companies operating in Ukraine.
The controversial rules were intended to boost supplies of gas on the domestic market in order to keep prices low for cash-strapped citizens, but they contradict the country’s laws governing foreign direct investment, as well as global norms, according to Bensh.
In the interview, Bensh said the decree “effectively confiscates” the natural gas produced by its subsidiary, Carpatsky Petroleum, a US corporation, thereby harming Cardinal and preventing other Western companies from entering joint production with state-owned gas companies. UK-registered Cardinal raised about $20 million through an IPO on the London Stock Exchange in 2005. It was one of the first listings on a major foreign market by a company whose operations are based in Ukraine, but the company’s stock has suffered due to production-right difficulties in Ukraine.
The decree, part of the Budget Law drafted by Finance Minister Mykola Azarov, was approved by Prime Minister Viktor Yanukovych and passed in January 2007.
According to the decree, companies that hold joint agreements with national gas companies in Ukraine are obligated to sell gas to the state-owned oil and gas company Naftogaz Ukrainy at a fixed government rate of around $1.50 mcf (1,000 cubic feet) – far below the current market rate of $4.80 mcf. According to Bensh, the rate is even below the company’s production costs.
“Ideally, we would like to see the Yanukovych government voluntarily withdraw this law, which is contrary to the long-term interests of Ukraine and its people,” Bensh said. However, Bensh added that given the government’s lack of action thus far, he doubts any changes will be brought about without intervention.
Cardinal, a major stake in which is owned by Syrian-born Ukrainian tycoon Youssef Hares, has concluded that “much stronger action” must be taken by those concerned about the issue, Bensh said.
He also said that this is a problem faced by every company involved in a joint production agreement with Ukraine’s state gas companies.
Bensh said that his company normally sells its gas to industrial end-users in Ukraine at market prices. To avoid selling gas at “uneconomic” prices, Cardinal had been injecting its gas into storage facilities.
However, Cardinal recently learned that Ukrgazvydobuvanya, the state-owned gas production giant, has been selling its gas without the company’s knowledge or permission.
In Ukraine, the price for gas is established by the National Energy Price Regulation Authority.
Bensh said that Cardinal has taken several measures to initiate a resolution to the gas sales problem, including meeting with Energy Minister Yuriy Boyko twice and writing letters to Yanukovych and other top officials. But none of their efforts have produced any results.
US Ambassador William Taylor also got involved, sending a letter to Energy Minister Boyko in March 2007 asking for a resolution, to which Boyko never responded.
As a result, Cardinal has applied to the US government to issue a formal demarche to the government of Ukraine.
In April of this year, Europa Oil and Gas Holdings, another private hydrocarbon company operating in Ukraine, won a court case confirming the company’s right to sell gas at market prices. However, the government continues to ignore the ruling.
Ukraine currently relies on imports from Russia and Central Asia to fill the majority of its gas needs. Most domestic production is controlled by state-owned companies. While privately-owned companies produce only a small amount of Ukraine’s gas needs, their operations are potentially very lucrative and are viewed as a way of raising investment to boost domestic production and, in turn, reduce dependence on imports.
