On the strength of a public relations campaign, tangible achievements and a willingness to compromise, it looks increasingly likely that Ukraine will have Andriy Kobolyev around as CEO of state-owned Naftogaz for another year at least — either to praise as a courageous reformer or to kick around as an overpaid and underperforming fat-cat executive.
His fate now rests with Prime Minister Volodymyr Groysman, who has repeatedly and publicly blasted Kobolyev and the Naftogaz executive team for their multimillion-dollar compensation packages — including salaries and a round of $46 million bonuses — as undeserved. Groysman has noted that while the top Naftogaz leader rake in millions of dollars, they have failed at what they’re supposed to be doing: increasing Ukraine’s natural gas production from where it has been stuck for 28 years — at roughly 20 billion cubic meters yearly, 12 billion cubic meters below last year’s consumption.
But now it looks like a compromise is in the works in which the six-member independent supervisory board of Naftogaz has unanimously proposed to Groysman that Kobolyev be allowed to stay for a 50 percent base salary reduction (still at least $450,000 a year) and no bonuses unless approved by the government. He would have two main
tasks: unbundling the vast gas transmission network, meant to stimulate a competitive market that attracts foreign investment, and increasing gas production.
The offer was made on March 12, six days after Groysman said he wanted to start a search for a new Naftogaz CEO the day after Kobolyev’s contract expires on March 22.
In response to the supervisory board’s letter, Groysman sounded conciliatory. He said on March 14 that it contained “new conditions which are quite close to what I have requested. This is one of the first reasonable offers received by the government.”
In an interview with the Kyiv Post on March 14, Kobolyev said the decision is out of his hands. “The shareholder received the proposal. I don’t know what their decision will be. I have no interest in discussing salary. All the conditions they ask for, I accept,” Kobolyev said. “The discussion will happen between the supervisory board and shareholder. I am waiting and hoping they will reach a compromise.”
He has talked to Groysman about their differences, but said: “I can’t comment on our one-to-one discussions.”
If he stays as the Naftogaz CEO, Kobolyev said, he has a strategy for eliminating useless yet money-sucking intermediaries and increasing gas production to boost Naftogaz
revenues and help the nation become energy independent.
Dodgy intermediaries
Naftogaz loses a lot of money — billions of dollars — because of a legal requirement to sell gas at subsidized rates to households through a chain of 43 intermediary companies controlled or owned by exiled billionaire oligarch Dmytro Firtash and others linked to ex-President Viktor Yanukovych, overthrown by the EuroMaidan Revolution in 2014.
Firtash is in Austrian exile fighting extradition to the United States on corruption charges that he denies. But his business interests in Ukraine are remarkably unscathed, owing, some believe, to the 2014 “Vienna Agreement” — the name given after Petro Poroshenko and Vitali Klitschko flew to meet with Firtash in Austria and secure his support for their election, respectively, as president and Kyiv mayor in 2014. Poroshenko and Klitschko have denied that any such agreement took place.
Firtash’s role
In any case, Firtash owns about 70 percent of the nation’s “oblgazes,” or oblast gas distribution companies, which collectively owe Naftogaz $2.2 billion for unpaid supplies. Moreover, Firtash and others have a strong hand in selling subsidized gas to households through opaque arrangements that deprive Naftogaz of even more money. The widespread suspicion is that the gas earmarked for households is sold at a much higher market rate to business customers, but Naftogaz still doesn’t have legal access to the database of customers to prove its case.
The market price of gas is currently tumbling, Kobolyev said, making this an opportune time for the government to issue a decree to cancel the public service obligation to sell to households at subsidized rates and to eliminate monopolistic intermediaries and open the household gas supply market to competition.
“Based on current pricing, households will get lower prices than what is regulated,” Kobolyev told the Kyiv Post. “In order for us not to be robbed and not to lose our money on gas, now is the best time to remove the public service obligation (to sell subsidized gas to intermediaries) and then it can be done.”
Kobolyev refused to comment on whether Firtash should be allowed to own “oblgazes,” but said that eliminating schemes in which Firtash profited at the expense of Ukrainians is the major reason why Naftogaz was able to go from losing $8 billion in 2014 to becoming profitable and contributing 15 percent of tax revenue to the nation’s $40 annual billion budget. Firtash has always denied any wrongdoing.
“The fight with corruption was the major precondition” for success, Kobolyev said, along with diversifying sources of natural gas imports and taking Russia’s Gazprom to
Stockholm’s arbitration court, ending in a $2.1 billion net ruling in favor of Naftogaz.
“We would have never succeeded without removing corruption on major fronts: on gas imports, for example, on procurement. A huge amount of money was not lost but
accumulated mostly in the pockets of Mr. Firtash before 2014. The billions he made came from this company. Not only RosUrkEnergo (which Firtash owned). Those billions went there (to Firtash). Now those billions go to the state budget of Ukraine.”
And he suggested that Firtash has every reason to want a CEO at Naftogaz that is more receptive to his financial interests. “I definitely know that Mr. Firtash would like to go back in time when Naftogaz was loyal to his requests,” Kobolyev said.
Boosting production
Recovering the money lost to useless intermediaries is a necessary step to increasing gas production, but not the only one, he said. “We are prepared to discuss what prevents us from (increasing production),” Kobolyev said. “But do to this, we need access to two things: money, we are currently selling gas to intermediaries who keep most of the money to themselves; and secondly, we need licenses.”
With his job on the line, Kobolyev started complaining publicly that the Naftogaz gas production subsidiary, UkrGazVydobuvannya, doesn’t have access to state-issued exploratory licenses that are controlled primarily by 11 people, including oligarchs and those close to Poroshenko.
But Kobolyev told the Kyiv Post that Naftogaz was complaining all along, “even through the court system, without much success. Complaining doesn’t give you licenses.”
He cited the recent auctions of three exploration licenses — to billionaire oligarch Rinat Akhmetov, ex-Ecology Minister Mykola Zlochevsky (whose ministry issued licenses), and Naftogaz. But to attract major energy companies, Kobolyev said that the state must open up tracks of land at least 10 times larger than those recently auctioned through electronic tender.
“Western names, big names are looking for big pieces,” Kobolyev said. “If big pieces exist, there is a very important role that Naftogaz might play in this set-up. Any big
name, what they are afraid of is ineffective and problematic supply chains… Naftogaz has built a supply chain that is the most transparent and the least corrupt. We can offer them our supply chain. We will not drill ourselves, but we will be a platform in bringing others. Because of us, in hydrofracking, the price dropped three times the last several
years.”
In short, he said: “Give the big guys big licenses and see what happens.”
To sell or not to sell
Many Naftogaz critics argue that the state behemoth, with revenue of $10 billion equaling 8 percent of gross domestic product, is too large and needs to be broken up and sold off, piece by piece. Kobolyev disagrees.
“The value of the whole will be more than the value of the pieces,” Kobolyev said. The choice for the state is to either keep the company or “sell the whole thing.”
Kobolyev’s reputation
While his supporters hail him as brave and honest reformer, his critics point to a less savory past and his questionable current associations.
He is a veteran of Naftogaz, working there during its most corrupt period. From 2006 to 2007, he was director of the corporate finance and price policy department and from
2008 to 2010 he was an adviser to the chairman.
His top deputy, Sergei Pereloma, is deeply implicated in financial corruption scandals that he denies, allegedly involving the Odesa Portside Plant and robbing the state through the sale of uranium at inflated prices. He’s tied to ex-member of parliament Mykola Martynenko, a suspect in multimillion-dollar embezzlement from the state, accusations that he denies.
Kobolyev said he’s fine with Pereloma staying, but claims it’s not his decision. “We need a government decision” to change the executive board of Naftogaz, he said. Regarding accusations of corruption against Pereloma, Kobolyev said: “The allegations are in the court. The papers I saw didn’t convince me of anything he’s accused of.”
But “again, not my choice,” he said. “It is the decision that is not within my authority. Now that is the discussion that our supervisory board is having with the government, whether they could remove the executive board.”
Ukrnafta and UGV
A housecleaning is under way within Naftogaz and its subsidiaries. Mark Rollins, a British citizen, is being removed as CEO of Ukrnafta, the state oil-production company owned partly by billionaire oligarch Ihor Kolomoisky. For years, Kolomoisky and favored customers profited by the legal requirement of Ukrnafta to sell oil to them at subsidized rates that they then resold at market prices for hefty profits.
Kobolyev was mum on the reasons for Rollins’ departure just as he was equally mum on the reasons why Oleg Prokhorenko was let go as CEO of Ukrgazvydobuvannya, the state gas-production arm known as UGV. Kobolyev has said that Urgazvydobuvannya will be restructured and, regarding Ukrnafta, he has a plan to erase the Hr 30 billion ($1.1 billion) in tax debts to the state that is holding back the company’s ability to produce more oil.
