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Kiev and Privat struggle for Ukrnafta

Ukraine's biggest crude and second biggest gas producer is in popular demand from the government and financial company Privat Group

Kiev’s fight for control of Ukraine’s biggest crude and second biggest gas producer Ukrnafta has attracted media attention this summer. The state-run enterprise Naftogaz Ukrainy owns 50% + one share of Ukrnafta, but the company was until recently controlled by Ukraine’s most powerful financial and industrial company, Privat Group, led by the colourful oligarch Igor Kolomoisky, which owned 42%. Ukrnafta’s success has relied on Privat’s other assets and interests.

Ukrnafta’s shareholders met on 22 July to appoint a new chairman of the board, the former BG executive Mark Rollins. He replaces the Belgian Peter Vanhecke, formerly a corporate lawyer, who was appointed in February 2011 but whose contract ended early. He was close to Kolomoisky.

Privat has managed to build what amounts to an integrated oil empire: alongside Ukrnafta, Privat controls the country’s biggest and only working refinery, at Kremenchug; it also has two smaller refineries in western Ukraine that are idle; and it controls a transshipment facility in Odessa, the country’s biggest. It also controls the country’s biggest retail fuel network.

Until 2015 Privat also controlled the state-owned crude pipeline operator Ukrtransnafta, which it used in order to gain advantage over competing refineries. Its tariffs and supply routes help explain how Kremenchug appeared to be the only refinery doing business.

The formation of the virtual empire, owned by dozens of independent companies, would have happened regardless of who governed Ukraine. Even in 2010-2013 – which were very tough times economically – Privat kept going without reference to the former president Viktor Yanukovich and his close circle of partners and family.

From time to time schemes surfaced in the media but the government’s campaign against Privat’s positions at Ukrnafta got nowhere. At some level Privat beneficiaries always managed to find a common language with officialdom no matter who was the acting president or prime minister.

The government’s campaign of 2014-2015 against Privat appears to have been more successful. At least it resulted in a reshuffle of top management at Ukrtransnafta, the pipeline network operator. The Ukrnafta shareholders meeting may prove a turning point.

The key indicators to look out for are whether Ukrnafta will at last adhere to its production plans, which have the approval of its majority holder, Naftogaz Ukrainy and whether it will sell the crude it produces at a fair market price, rather than cheaply, which means it pays less taxes. A good start would be if it paid its tax debt, which is about hryvnia 1.7bn ($77m) for 2014 and up to hryvnia 2bn for 1Q 2015 alone.

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