A number of proposals to settle the company’s tax debt are on the agenda of the Ukrnafta’s General Shareholder Meeting scheduled for 28 March 2019. The proposals have been submitted in line with the instruction of Prime Minister Groysman to resolve the company’s tax debt issue.
Clearing Ukrnafta’s assets of tax debts is necessary in order to maintain and enhance its oil and gas production. Because of the tax debt and consequent limitations on the company’s operation, Ukrnafta now has little capacity to raise capital and invest in production. The inability of one of Ukraine’s major oil and gas producers to finance its activities negatively affects the country’s energy security.
Shareholders of Ukrnafta will discuss a proposal according to which Naftogaz would buy nearly 4 bcm of gas from Ukrnafta under sale and purchase agreements. As those agreements are to be concluded between related parties (Naftogaz is Ukrnafta’s majority shareholder), the deal must be based on a market price confirmed by an independent appraiser – KPMG Ukraine.
According to the agreements, Naftogaz will buy gas from Ukrnafta only if the government compensates Naftogaz for public service obligations (PSO) as stipulated in the Ukrainian law “On natural gas market”.
Ukrnafta shall use the received funds exclusively to eliminate its tax debt, including fines and penalties. Ukrnafta pays its current taxes on time. However, the tax debt that has been accumulated in prior periods continues to accrue interest of nearly 30% p.a. in fines and penalties. This situation has resulted in a surge in the company’s total debt, hampering its operations and restricting investments in production.
Implementation of the proposed agreements can unblock Ukrnafta’s development to facilitate Ukraine’s energy independence while the PSO compensation paid to Naftogaz under the agreements will immediately return to the state budget in full.
The suggested solution shall not affect the on-going investigation of damage caused to Ukrnafta by its previous management in 2015.
Naftogaz and Ukrnafta continue to elaborate options for the division of Ukrnafta’s assets between the majority shareholder (Naftogaz) and minority shareholders. To this end, Naftogaz has provided the government with amendments to the legal framework that would enable effective handover of production assets that are of interest to Naftogaz. The proposed agreements are a practical step in this process.
NJSC Naftogaz of Ukraine