Naftogaz releases its 2016 annual report

Naftogaz earned UAH 22.5 billion of net profits, paid UAH 74 billion in taxes

Naftogaz, Ukraine's largest state-owned oil and gas holding, has published today its 2016 annual report prepared according to GRI guidelines. It includes consolidated financial statements audited by Deloitte. The full version of the report is available in English and Ukrainian on Naftogaz website.

Profitable Naftogaz is the largest source of the state budget revenues

Introducing the report, CEO Andriy Kobolyev said: “Naftogaz has become profitable for the first time in the past five years, requiring no support from the state budget for the first time in the past decade. Our group is the largest taxpayer in Ukraine: we paid UAH 74 billion to the state budget (10% of its revenues), in contrast to 2014 when Naftogaz accounted for nearly 25% of the state budget expenditures. We ensure not only reliable gas supply to Ukrainian households but also its sufficiency for all other consumer categories, even in extremely difficult circumstances. These are the major results of three years of our team’s work.”

The group’s financial result changed dramatically from net consolidated loss of UAH 88.4 billion (USD 5.6 billion) in 2014 to net consolidated profit of UAH 22.5 billion (USD 0.9 billion) in 2016. The gas transmission and distribution segment generated the major share – over UAH 26 billion – of the last year’s profit. Other profitable segments included gas production (UAH 15.3 billion), oil refining (UAH 1.7 billion) and oil transportation (UAH 1.6 billion). The following segments generated loss in 2016: oil and condensate production (UAH -6.8 billion), gas trading (UAH -3.5 billion) and gas storage (UAH -1.6 billion). Provisions for litigations, part of forex loss and other unallocated expenses of the group amounted to UAH 11.9 billion.

Cost reduction, transparent procurement and systemic fight against corruption

Among other accomplishments of the group, Naftogaz CEO mentioned diversification of suppliers, effective stock management and cooperation with international financial organizations, which enabled the management to optimize key expenses of the group. The average interest rate for the group fell by 1.4% from 13.5% in 2015 to 12.1% in 2016, which enabled Naftogaz to save nearly UAH 1 billion.

The number of European suppliers that sold gas to Naftogaz increased from 10 to 15 in 2016.

Transparency and a systemic struggle against corruption are not just attractive catchphrases; they have become key elements of our corporate culture, which, among other things, has made us the biggest user of Ukraine’s corruption beating ProZorro. Since its official launch in 2016, the enterprises of Naftogaz group held 13 thousand open bidding procedures in it and saved UAH 8.4 billion (9% of the expected cost).

Recovered growth in gas production

In 2016, Naftogaz also managed to stop a years-long decline in Ukrgazvydobuvannya’s gas production and is expecting its first significant increase in 2017.

Defending Ukraine’s interests in the Stockholm arbitration

In 2016, Naftogaz management contributed much effort to the participation in the arbitration cases being considered by the Arbitration Institute of the Stockholm Chamber of Commerce starting from 2014. In late May 2017, the arbitrators rendered a separate award in one of the cases between Naftogaz and Gazprom regarding the gas supply contract of 2009.

The tribunal completely rejected Gazprom’s “take-or-pay” claim of more than USD 44 billion. The arbitrators also satisfied Naftogaz claim to make the gas price market-reflective, switching from 100% reference to petrochemical price to 100% reference to gas market price.

Another award, which regards gas transit contract with Gazprom and where Naftogaz is principal claimant demanding nearly USD 12 billion, is expected within several months.

Naftogaz corporate governance reform

In 2016, the first independent supervisory board of Naftogaz was established in accordance with the OECD corporate governance for state-owned enterprises. The company introduced or significantly enhanced its internal audit, compliance and financial control functions.

Unified standards for reporting, procurement, prevention of corruption, HR management and HSE are being introduced at all enterprises of the group. These standards are in line with best international practices.

The annual report contains further details on important developments in the group, it's operating environment and Naftogaz financial performance.

Naftogaz website also offers the group’s consolidated financial statements for 2016 audited by the independent auditor in both English and Ukrainian.

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