British launch a courtroom offensive

The Financial Times quoted on March 27 representatives of Britain’s JKX Oil and Gas as saying they had taken a court action over attempts to “expropriate” its assets in Ukraine. The point is in the conflict between JP Kenny Exploration & Production, a JKX subsidiary, and the State Property Fund (SPF) over the Poltava Gas and Oil Company.

Exactly ten days after SPF chairman Oleksandr Bondar had rejoiced publicly that Ukraine unlike Russia had not yet involved the law-enforcement bodies in conflicts concerning privatization (he obviously had in mind the developments concerning the Zaporizhzhia Aluminum Combine), “unknown masked men” attacked for the second time the office of the Poltava Gas and Oil Company and its facilities. According to information agencies, the interventionists acted in compliance with instructions from State Property Fund bureaucrats.

One must admit this agency seems to have had a formal reason for this kind of actions. On March 21 the Poltava City Council reregistered the Poltava Gas and Oil Company (Poltavanaftohaz or PGOC) Ukrainian-British Joint Venture as a limited-liability company, which entailed registration of its reworded founding documents and the opening of new bank accounts. As newly-appointed PGOC General Manager Oleksandr Somov told The Day, re-registration became possible after the Supreme Arbitration Court of Ukraine ruled on March 19 to lift the ban on changes in the company’s list of founders. The essence of these innovations is that the State Property Fund decided on March 14 at the PGOC founders’ meeting without any British representatives to strike Kenny Exploration & Production Ltd., which holds 49% of the authorized capital, off the list of founders, dismiss all company executives, and appoint new ones, including Mr. Somov, who had previously chaired the board of directors of the Plast Co.

Mr. Somov says the fired PGOC General Manager Tymofiy Kaunov continues to carry out administrative and economic functions, making use of an invalid seal and founding documents, so his actions amount to a crime under Articles 191, 193, and 148-3 of the Criminal Code of Ukraine (willful appropriation of an official title; withholding documents, stamps, seals; and breaking the procedure of entrepreneurship). As a result, the company’s new management has no access to business documentation and is unable to ensure trouble-free work of the enterprise. In this connection, Mr. Somov says, the PGOC central office has now been transferred to a different street, while the Naftahaztekhnolohiya Research and Production Center, which had received the 49% of PGOC’s authorized capital earlier belonging to JPK, has contributed its own share of UAH 8.3 million to the authorized capital.

It will be recalled that Poltava Gas and Oil Company was founded in 1994, with an authorized capital of $3.6 million, by the company owner JP Kenny-JKX Oil & Gas holding a 49% interest, Poltavahazprom (26%), and Poltavanaftohaztekhnolohiya (25%) on behalf of the SPF. Later, by a Cabinet of Ministers decision, the 26% belonging to the reorganized Poltavahazprom was transferred to the authorized capital of the Naftohaz Ukrayiny National Joint Stock Company whose management, in its turn, transferred it to the State Property Fund of Ukraine. The British founder of PGOC does not recognize this procedure of legal succession and suggests that the 26% be divided between the British and Ukrainian founders, after which the nonresident will obtain full-fledged control of PGOC.

It seems to be the latter factor that forced the usually peaceful SPF to resort to actions balancing, so to speak, on a blade’s edge against the British nonresidents. Did the SPF have any convincing legal grounds to strip the foreign investor of its share in the joint venture’s stock? Mr. Kaunov denies SPF Deputy Chairman Serhiy Hlushko’s accusations of withholding information about the company’s financial and economic performance and says that “PGOC reports monthly to its founders.” PGOC’s former financial controller Yevhen Palenka has also refuted SPF accusations of tax-evasion by the Poltava Oil and Gas Company, saying that Ukraine’s tax authorities have today no complaints about PGOC. According to Mr. Palenka, the company is keeping its books in line with the requirements of Ukrainian law and thus denies Mr. Hlushko’s accusations of double bookkeeping. The SPF has justified its decision by “the failure of the British side to carry out in good faith its duties as a company founder.” However, court litigation over this accusation could easily level the two sides’ chances. Naturally, the SPF can play with the data that in 2000 PGOC produced 85,980 tons of oil and 256.436 million cubic meters of gas, down 16% and 18.3% respectively from the 1999 figures. However, as Mr. Kaunov announced, the extraction of oil and gas in 2000 exceeded targets by 28% and 7% respectively. The company’s before-taxes financial result (profit) reached $7.5 million in 2000 under international accounting standards.

On the other hand, the court might also find that the SPF not only unilaterally struck JPK off the list of founders but also handed its stake over to a private Ukrainian group, Naftohaztekhnolohiya, which, according to The Financial Times, is “owned by two offshore companies registered in Austria and Cyprus.” The author of the FT article quotes JKX CEO Paul Davis as saying that this expropriation is in essence highly illegal. He says about the increased share of his company, “This is an issue of JKS’s investment and also part of a wider plan of stabilization in the Ukrainian energy market.”

Reliable Ukrainian sources allege that financial threads run from the offshore firms to the far from obscure Brinkford Company, once actively involved in Ukrainian nuclear energy financial flows and now patronizing Plast, whose shares belong to Naftohaztekhnolohiya.

Incidentally, Naftohaz Ukrayiny is laying claim to the Novomykolayiv and Rudenko gas fields, now being used by PGOC, and asserts that “as early as 2001, we could extract here an additional 300 million cu. m. of natural gas and then bring additional annual production up to 1.5 billion cu. m.” As Company Director Bohdan Krupsky told The Day, PGCO’s exploitation reserve is now 14 wells, of which only four were built by the company and the others at the expense of the Ukrainian state budget. Meanwhile, the accusations against PGOC leveled by SPF Deputy Chairmen Serhiy Hlushko, Dmytro Parfenenko, and Mykhailo Chechetov, suddenly supported by Dzerkalo tyzhnia which gave the British a positively assessment last year, sound tough and uncompromising. They seem to be showing the absence of desire to seek “peaceful means” to settle the conflict. Tellingly, the calls to protect state interests are giving way to not-so-polite expressions and even comparison of PGCO and its investor with “street chiselers” out to “cheat the client.”

But what is perhaps the worst in this situation is that the transfer of JP Kenny’s share in PGOC to Naftohaztekhnolohiya for the exclusive purpose of “supporting state interests” rouses doubts in everybody except perhaps Mr. Somov. Word has spread that this transfer was lobbied by People’s Deputies Mykola Martynenko, Valery Pustovoitenko, and Mykhailo Kovalko, the latter also being chairman of the Naftohaz Ukrayiny Supervisory Board. But there is, of course, no official confirmation to this because lobbying has not yet assumed legal status here. Still, as Oleksandr Riabchenko, chairman of the Verkhovna Rada Special Control Commission for Privatization, says, “It will be known very soon who will be really running the company — you can’t hide something like this.” In his opinion, the SPF “could do very well without expelling the investor altogether,” because “the English were losing in any case” the fight for the 26% interest. Mr. Riabchenko also thinks the British will manage “to have the shareholders’ meeting decision (to strike them off the list of founders — Ed.) overruled by a court,” for otherwise Ukraine is sure to come under international pressure. (According to the Financial Times, the company said that along with the European Bank for Reconstruction and Development, it was working to solve its conflict with the State Property Fund of Ukraine). Yet, SPF First Deputy Chairman Mykhailo Chechetov also did not rule out in an interview with The Day that the British would manage to have the court restore their lost positions at the enterprise. Thus, Mr. Riabchenko concludes, the SPF should not have acted so abruptly in this situation, but he thinks emotions ran too high.