A row between the State Property Fund and Britain's largest investor in Ukraine flared up this week as the state privatization agency pressed for control of a British-Ukrainian oil joint venture.
The dispute erupted when the SPF attempted to introduce a new shareholder in the Poltava Petroleum Company (PPC), a seven-year-old oil and gas joint venture between Britain's JP Kenny Exploration and Production Ltd. (49 percent), the SPF (25 percent) and Poltavagazprom (26 percent).
JP Kenny is the wholly owned subsidiary in Ukraine of British oil company JKX Oil & Gas Plc.
The SPF wants to replace Poltavagazprom, a regional subsidiary of the now-defunct state gas company Ukrgazprom, with Ukrgazvydobuvannya, a daughter company of state oil and gas holding company Naftogaz Ukrainy.
According to SPF deputy head Serhy Hlushko, the creation of Naftogaz Ukrainy in 1998 effectively transformed Ukrgazprom into Ukrgazvydobuvannya, making the latter the legal successor to Ukrgazprom in the joint venture.
But Britain's JKX, the joint venture's largest single shareholder and provider of the vast majority of its capital, strongly opposes the change.
According to Paul Davies, JKX's chief executive, Ukrgazvydobuvannya's parent company Naftogaz Ukrainy is PPC's largest debtor, owing the joint venture around $30 million for oil and gas supplies.
Davies said his company is merely resisting the SPF's attempts to make PPC's largest debtor a stockholder in the joint venture.
'If I told our shareholders that we just made [Naftogaz Ukrainy] our partner, they would think it unusual,' he said.
Davies said PPC has repeatedly tried to recover the debt owed by Naftogaz Ukrainy, but to no avail.
The SPF's Hlushko said PPC only had verbal agreements, not signed contracts, with its consumers and in any case Ukrgazvydobuvannya, as a subsidiary of Naftogaz, should be considered responsible for its parent company's debts.
But the root cause of the dispute centers around control of the joint venture's board.
The SPF is irked by JKX's right to block decisions by its Ukrainian partners, which together hold a majority stake under Ukrainian law.
According to Hlushko, JKX inserted a provision in the joint venture's founding agreement that stipulates that managerial decisions can only be taken if 75 percent of the shareholders approve them.
The SPF wants to change the 1993 founding agreement to bring it into line with current Ukrainian law, which stipulates a majority shareholding to be 51 percent, Hlushko said.
'We are fighting for our legal right to have the majority vote in the company,' he said.
Davies, however, insists that Ukraine should honor the joint venture's founding agreement. He said his company has pumped some $100 million into PPC, making it Britain's largest single investor in Ukraine, while its Ukrainian partners have together contributed only around $3 million.
'The founding documents were signed by all parties at the time of agreement,' he said. 'That was the deal.'
But there are also other facets to the dispute. In particular, the SPF claims JKX is making handsome profits by selling supplies of equipment and chemicals to PPC at inflated prices.
'They buy a chair, for example, for $10 and sell it to the PPC for $20,' Hlushko alleged.
The Ukrainian partners in the joint venture are also unhappy that Croatian workers, who are more highly paid than their Ukrainian counterparts, operate the joint venture's oil drilling rig, which is rented from a Croatian company. JKX dismissed the SPF's allegations.
JKX does source most of its supplies abroad but charges a low markup of 5 percent to simply to cover the costs, Davis said. He said PPC' finances are regularly audited by international accounting firm Ernst & Young, and financial abuses such as those alleged by the SPF would quickly come to light.
He also said the use of Croatian workers in operating the joint venture's drilling rig was stipulated in JKX's rent agreement with the Croatian company that owns the equipment.
This is not the first dispute between JKX and its Ukrainian partners. In 1998, Ukrgazprom accused the British company of failing to live up to its investment commitments and misusing capital earmarked for the joint venture. In response, JKX accused state-run consumers of the joint venture's products of failing to pay for oil and gas supplies.
