Is oil and gas sponsorship under threat?

Recently shares of Ukrnafta were sold on the Ukrainian stock exchange at 374 hryvnias. The nominal value of one share of this company is 25 kopeks. Clearly, the capitalization of the company has risen, which points to its efficient performance. Today, however, the success of such a company should be based not only on its financial power but also its social capital gained over the last years. The Day spoke about this with Viktor POLUBINSKY, assistant to the chairman of the board.

Today every company has to be based on its social capital. What can you say about Ukrnafta?

Over the last three or four years Ukrnafta has shown rising fiscal effectiveness. Payments to the budget were increasing in a geometric progression. Last year taxes and duties paid by the company accounted for about 4.8 billion hryvnias. In Sumy oblast, for example, the budget received 1.34 billion hryvnias, and in Chernihiv — almost half a billion.”

Do you mean mandatory payments envisaged by relevant laws?

Exactly. The payments are levied around the oblast area and then assigned to the state budget, from which part of the payments return to the oblast as transfers according to the budget plan. These include rent for the extraction of hydrocarbons, geological exploration tax that must be paid back to the company, but it was not for about five years (last year we paid 150 million but did not get anything back). Another category of taxes includes those that remain in oblast budgets and do not go to Kyiv. These are income tax, tax on exploiting underground resources, etc. For instance, last year we paid nearly 1.35 billion to budgets of all levels in Sumy oblast, of which over 70 million remained in the oblast, and the local authorities spent them at their discretion on the region’s needs. Chernihiv oblast received about 32 million directly from us. In addition, every year the company makes financial infusions into the regions for their social and economic development.”

Are these in addition to the taxes defined by the law?

Yes, they are. They are paid according to the estimates and programs drafted in the oblasts. These are no mandatory payments. They are not mentioned in any Ukrainian legislative act. But one decree of the Cabinet of Ministers allows for such payments. So, this is good will on the part of the company. For example, our company uses the roads that are part of the budget of local communities. Of course, the roads need maintenance — there is no way to avoid this. Last year alone the company spent 52.2 million on the social and economic development of all the oblasts in which it operates: Sumy, Kharkiv, Poltava, Chernihiv, Lviv, Ivano-Frankivsk, and Chernivtsi. In the last three years this sum has doubled. Just like before, it was distributed proportionally to the production of hydrocarbons in these oblasts. If Sumy oblast gives more than half of all extracted oil, it received nearly half of this money — 20 million hryvnias. In comparison, we have only one small unit in one district in Chernivtsi oblast, so it got two million.”

Do oblast and raion administrations take part in establishing these sums?

“Earlier, the funding objects were usually defined, but the company could not trace where the funds went. Last year the Control and Audit Administration forbade us to make further payments without providing a report on the use of funds. Now the money is paid with an indication of the end use and certainly, at the discretion of local authorities.

“Unfortunately, oblast administrations sometimes abuse Ukrnafta’s aspirations to participate in the social and economic development of the regions. The deputy head of the Chernihiv Oblast Administration recently appeared on TV and demanded 25 million from us, while last year the company’s contribution to the social and economic development of this region was 5.52 million. He threatened that otherwise we will not be given land for geological exploration and drilling wells. Last year this oblast received a total of 495 million hryvnias from Ukrnafta, including 32 million directly to the local budget. The officials do not even know how they will spend the coveted 25 million because the program that they sent us envisages only 21.3 million, which is four times more than a year ago.”

Can Ukrnafta handle such demands?

Unfortunately, the situation has changed and we cannot be such generous sponsors of the regions as we once were. The fees for exploiting underground resources that we pay to the budget have risen by nearly 25 percent, reaching 1,090 hryvnias per ton of extracted oil. In 2001 it was only 17.34 hryvnias, so the fee has risen by 63 times. Our financial experts have assessed that, compared with 2006, the company’s expenses will increase by 657 million hryvnias. The law also decrees that the company has to sell the entire volume of extracted gas (apart from technical needs) to Naftohaz Ukrainy National Corporation for the further sale to the population at the clearly defined price of 318.78 hryvnias. This never happened before. Until now every extraction company was allowed to sell about 20 to 25 percent of its products at commercial prices to cover the difference between the consumer price and the real cost value, as well as to pay for pumping the gas into trunk pipelines, storing it, and pumping it out of the pipeline.

“Our experts estimate that the company’s revenues will therefore drop by 533 million hryvnias. The company will lose 1.2 billion hryvnias because of escalating financial obligations.”

So even making compulsory budget payments are at risk?

“Exactly. That is why there is no question of increasing additional non-obligatory payments. The decision is made collectively by the board, but in analyzing the trends, I can come to the conclusion that even last year’s volumes are now at serious risk.”

We are talking about the social responsibility of your company in the whole state, but it too has obligations to its own employees, it needs to support its own social capital, i.e., employees, on a high level. What will happen in these conditions?

Of course, this also poses risks that are extremely painful for the company. We concluded a branch agreement with the trade union and we must stick to it. In particular, it provides for an annual 25-percent salary increase. Last year there were no complaints about this. Salaries were increased twice — by 15 and 10 percent. This year it is hard to forecast the same rate, although inflation is making life more and more expensive. If the mentioned sums were not deducted, we would not have to solve such questions. The company is also implementing a program to improve employees’ living conditions. This will also be harder to put into practice. We believe that under such conditions it is unacceptable to spend the money made by the team on additional non-obligatory expenses.”

Do you have any ideas of what to do?

“First, we need to admit that the present financial situation is objective. The regional authorities must understand this and stop giving us ultimatums because the company pays all mandatory taxes and duties in full. It is much more effective to follow a path of reasonable compromise and dialogue.”

What should this path consist of?

“The state should lessen the financial burden. The easiest way to do this is to amend the cabinet’s decree on decreasing the basic oil price and the corrective coefficient (depending on the auction oil price) and thus to cut down the rent de facto. Incidentally, Yurii Boiko, Minister of Fuel and Energy, who supports such an approach, has sent a letter to the Cabinet of Ministers. It should be heeded. On the other hand, everyone understands that it is necessary to provide continuous production and that it is impossible not to fix the roads used by our technical transport. We must unravel this knot. Neither state social capital nor our company’s corresponding indices should suffer.”