Kuchma's Oil and Gas Scheme

KIEV, Ukraine -- “Five years ago, my fellow journalists told me that the Ukrainian President “had his percentage from everything in Ukraine, including the sale of narcotics” Verification of these statements about the previous Government and Administration of Ukraine in terms of the sale of narcotics has yet to be confirmed. Recent exposure of corrupt practices in the regulation of the oil industry makes it easier to prove these statements.

The level of graft and corruption in the oil and gas market comes close to 100 USD million. The official profit of NAK Naftegaz Ukraine is equal to 1 million hryvnias, and the defacto profit has recently passed the 1 billion USD figure. The difference between these two figures is in the pockets of the elite of the former Presidential administration.

The same scheme of official and unofficial profits existed in the oil industry in Ukraine. Deceptive slogans about the establishment of the “Vertical Integration of Oil Companies” earned the former President of Ukraine, Leonid Kuchma, and the management of oil companies some serious money for their patronage. Under the project titled “VINK” interested parties were able to earn more than 20 million USD.

At the present moment, the Constitutional Court is examining the matter where the former President gave the order for the transfer of 43% of shares of Ykranafta [Kremenchyg] and 25% of shares of NPZ “Gapchina” [DRogobich] to HAK Naftegaz.

This decision by Kuchma was opposed by 52 deputies from the political fractions “Our Ukraine” and the Socialist Party of Ukraine. According to the authors of this presentation to the KC Constitutional Court the order of the ex-President was supposed to stabilize the petroleum market when it actually lined the pocket of large petroleum product manufacturers and the pockets of oligarchs and their clans.

The consequences of this order still influence the market for lubricants and do not allow it to work under normal conditions, which are destroying the Kremenchkomy NPZ.

The deputies strongly support the fact that the order by Kuchma “Measures to increase the effective management of trade” from the 16th of July 2004 [including the changes from the 14th of September 2004] is not constructive.

According to the views of Valentina Semniyk, the act of the former President was a closed privatization by taking shares from competing firms and creating a monopoly in the market.

According to section 5, paragraph 116 of the relevant legislation, the management of government assets cannot be given to other organizations even with the involvement of Cabinet Ministers and the President.

“Each branch of government has its own functions. The management of government assets – is the responsibility of Cabinet. Under Leonid Kuchma this principal was broken with the interests of business clans being involved in the process”, said Alexander Grudma.

The concrete see such example of this ‘management’ one only has to look at one of the most obvious examples – the establishment of the so called vertical integration oil company on the base of ZAO Ukrtatnafta”.

On the 16th of July, President Kuchma signed the decree “Of Actions of Effective Management of Oil Trade” and “Increased effectiveness of management of oil trade”. These decrees meant the handover of authorized capital funds to the businessman Ihor Kolomoisky the owner of Ukrneft, 43.054% of the shares of Ukrtatnafta and 25% of the shares of NPZ Galachinka.

From which from and through which the Dnipropetrovs’k businessman was able to convince the head of the Ukrainian government to give his company 2 Ukrainian NPZ is not understandable. It is obvious that the owner of “PrivatBank” wanted to create in Ukraine a company similar to the Oil companies in Russia. With no consideration to the fact that both Ukrnafta and Ukrtatnafta are both government owned companies.

So as to explain the matter in more simple terms, how Ihor Kolomoisky planned to actually earn the money to set up VINKa, we need to look at some basic figures. The total output of petroleum refining plans in Ukraine during 2004 was approximately 21.2 million tones. From this amount 87% of crude came from Russia, 3.4% from Kazakhstan, and 9.6% from Ukraine.

The link to realization of this idea is outlined below.

Raw materials were sold to NPZ, this was then sold onto companies which were selling the petroleum in wholesale amounts, such as AZS. The processing of raw crude would bring a profit of 5 to 7 USD per tonne. The processing plants and wholesalers would then earn an additional 10 USD profit on this figure. In line with this process, the retail sellers of the petroleum would earn no less than 5 USD profit on every tonne of diesel or petrol.

Several companies, including TNK, Lukoil and Alliance, who are owners of these petroleum processing plants along with AZS, are able to earn profits from each link to this chain.

In terms of Ukrtatnafta, the company earns a profit of 23 million USD during 2004 [information provided by the Agency Ukrainian News]. We estimate that the factory earns approximately 3.4 USD per tonne on the processing of petroleum.

The rest of the funds went to the ‘Western Oil Company” which is controlled by a representative of the management of HAK Naftogaz Ukraine. In August 2004, this company was involved in the supply to petroleum to enterprises and suppliers of oil by products.

In this manner the joining of both Ukrnafta and Ukrtatnafta brought Ihor Kolomoisky not just higher profits but a way to pay less tax. This method allowed a lowering of prices on hydrocarbon fluids to its own factories. It also lowered the level of VAT paid [less than the lowest price, the tax did not increase the price] and a range of other tax obligations. As none of the firms were interested in lowering the price on the finished product, the increase in profits also was a welcome benefit.

In any case, the plan by the owners of “Privatbank” was not legally realized. Even though Kuchma ordered the transfer of assets from fund of petroleum processing companies to “Ukrnafta”, the government shares in “Ukrtatnafta” and NPZ “Galichina” was reconsidered. Cabinet was ordered to give the shares to “Neftegaz Ukraine”.

According to one of the shareholders of NPZ Galchina, Ihor Eremeeva, this happened after previous manager of NAKa ‘went to see Kuchma’ and explained the profitability of such a scheme.

“The new agreement between the President and the head of NAKa had two objectives. The first was to allow Leonid Kuchma and his cronies to use the assets of Ukrtatnafa. The second was to cover up the administrative regulation of the market with a fig leaf, so as to influence the VINKa market”, said an analyst from IK Aton, Zharko Stefanovski.

To look at the matter more closely, we will examine what they were able to achieve, and what was not possible.

In the past year, it was unexpected that the whole market for supply of petroleum to Kremenchygski NPZ and its companies, would be from the “Western Oil Company”, advised a member of its management and a source close to Naftagaz. They were not the most active, but their profit according to analysts was more than 20 USD million

From the result of operations in the first nine months of 2004, the company accounted for 6.3% of the total market supply of petroleum and the profit matched the profit for the whole Keremchygski NPZ.

People in the industry have confirmed that the lion’s share of this profit did not only go to the oil trading companies but to the pockets of the top government members and officials. You should note that the force behind the creation of VINK and the role of Neftagaz was Kuchma. In this manner, the ex President made a choice between two, the independent Kolonoiskim and the faithful Boiko.

As we can see, the task of NPZ forming new trading companies and receiving from their high profits for Leonid Kuchma’s functions was quite easy.

The notion that VINKa would stabilize the market has not been realized. In particular, as described as a member of the committee at TNK Ukraine, Oleg Salmin, “one company has a hold on the market in principle, but we need more concrete measures”.

“Undoubtedly this opaque scheme needs to be removed. It can be done in the only possible legal way – that is to cancel the decision of previous government, which comes into contradiction with the Constitution.” - assured Alexsander Gudima.

As it is known, the complex measures for the support of prices for petroleum in the past year included pressure on petroleum traders from the previous Cabinet and State taxes administration and the role of Naftogaz [through the Western Oil Company and Shebelinksy GPZ]which controlled approximately 16% of the market.

“The decision to form VINK once and for all confused the situation, which on the market, as with Keremchygski NPZ – advised Ihor Eremeev. “Due to the attractiveness of the shares of the company, it attracted the attention of ‘Privatbank” and the management of “Naftegaz”. In fact, they both fought for this enterprise. The change in management led to some losses and came down to who basically stole more than the others involved in the process” added Ihor Eremeev.

He is an interested party, as Eremeev controls NPZ Galichina which is involved in the operation and formation of VINK.

"This factor influences the structure of the market in strong manner” added Eremeev; “if the company is badly organized in terms of large scale production it will destroy the petroleum products market in Ukraine. For this reason, we need to quickly make the decision about the future of our own manufacturing plant”.

“I am both a private investor and shareholder, one from NPZ and I believe that the company should be held in private hands. The owners are always concerned about the technology and are thinking about the expansion of the business. At the end of it all, the framework of the ownership is not the most important issue. This is what decision is made to end the war around your asset”, said a member of the Parliamentary Committee for TEK.

(He recently was part of a subjective scandal – well informed contacts have advised that this person was referring to the Minister for Justice, Roman Zvarich, when he mentioned the secret scheme which operates within the petroleum industry).

Along with this, other observers believe that Zvarich has been subject to intrigues about his own wife. Her company is involved in legal business of re –exporting petroleum, which was recently prohibited by the Prime Minister Tymoshenko after the scandal, was resurrected.

The wife of Zvarich confirms that she has had some dealings with ‘Nefterector” Eremeeva and advises that he is under the protection of the Prime Minister.

Of course, the thesis of privatizing a factory can be argued. But it is absolutely obvious that the government packet of shares in NPZ will be returned to the ownership of the Fund of State Property and to close all schemes associated with the previous regime. Yet the management of a factory where the government holds 43% of the shares should be undertaken by an experienced manner that has a good reputation.

“The only resolution to this difficult situation for the Cabinet Ministers is to change the rules of the game in terms of government factories and bring some order to them. This includes ZAO Ukrtatnafta and other large companies where the government has its share” advised Cemenuk.


Anonymous said…

You obviosly are a very confused man with a very shallow grasp of the oil and gas business.

The Krimenchuk refinery has been grossly mismanaged for years and it would of have been a welcome event if the company would have come under control of Ukranafta.

The decree signed by the honorable President Kuchma was not to give the refinery to Ihor Kolomosky but to give it to Ukranafta.

BTW Ukranafta is not a Goverment owned company but a compnay with alost 50% in private hands. Why should those private investors get the same treatment as the State owned 50%.

Take a t look at any of the business that Privatbank has managed and you will see great results not only for the owners but for the people, in the form of good paying jobs and a stable working envoirment.
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