Ukrnafta proposes to cover tax arrears with natural gas extracted in 2006

Ukraine’s leading oil producer Ukrnafta (UNAF UK) proposes paying its tax debt with 2 bcm of natural gas, the company’s press service reported on March 26. Ukrnafta estimates the value of this gas at UAH 13.6 bln, based on prices set by the state regulator. Ukrnafta’s total debt for unpaid taxes amounted to UAH 10.2 bln, as of the beginning of 2016.

The “offered” 2 bcm of gas was extracted by Ukrnafta in 2006 and was pumped into Ukraine’s gas transportation system, the company said. Ukrnafta’s ownership rights to this gas have been confirmed by the rulings of economic courts. In particular, the High Economic Court ruled in May 2014 to take this amount of gas from Ukrtrasngaz (the Naftogaz subsidiary that operates the gas  system) and transfer it to Ukrnafta, the company said. State holding Naftogaz of Ukraine estimates its obligations to Ukrnafta at 10.1 bcm of natural gas that it confiscated in 2006-2011, setting its value at just UAH 3.75 bln (or UAH 370/tcm), based on its 2014 annual report.  

Alexander Paraschiy: The idea to settle Ukrnafta’s payment arrears to the state (in the form of taxes or dividends) with natural gas that Ukraine’s state companies took without payment is nothing new – Ukrnafta was exploiting this idea many years, with no success. The key reason for the failures is Ukrnafta’s minority shareholders cannot agree with state companies on the price of this confiscated gas. This time, Ukrnafta’s approach to pricing its gas looks disputable too. In particular, it’s not clear where the company took the price of UAH 13.6 bln for 2 bcm of natural gas (of about UAH 6800/tcm). Such a price was non-existent in May 2014 (it was UAH 4724/tcm) and does not exist today. Since the regulator does not set any gas prices, Naftogaz’s price for March 2016 is UAH 6,255/tcm. The only explanation for such a price is that Ukrnafta referred to the regulated price in May of 2015 (UAH 6,810/tcm), not May of 2014.

The attempts of Ukrnafta’s management and minority shareholders to demand from the state any compensation for the earlier confiscated natural gas looks logical. However, the method that Ukrnafta employed to reach this goal – increasing receivables that dried off liquidity and made the company incapable of paying taxes – looks questionable and dangerous for the company’s future.

Unfortunately, the difference in pricing of the disputed gas by state and Ukrnafta is huge, or several dozen billion hryvnias. For the state, it could be more efficient in the short term to bankrupt Ukrnafta than to recognize such large obligations. And now since Ukrnafta has huge tax arrears, the state has a strong reason to bankrupt it.