A well-developed mineral and raw-material base is one of the main components of our country’s economy. This especially applies to hydrocarbon raw materials, which are a good indicator of the state’s energy security. In this respect, foreign investors are very interested in Ukraine. They are preparing to invest in the survey, experimental boring, and commercial extraction of hydrocarbons. But national, including state-run, companies are also ready to work in this sector, as well they should. Among them is the Nadra Ukrainy national joint-stock company, now in the process of being reorganized, according to an announcement of the Ministry of Nature Conservation in late 2006. The president of Nadra Ukrainy, Eduard Stavytsky, talks to The Day about the company’s ongoing reorganization and prospects for Ukrainian geological surveys.
What is going on at Nadra Ukrainy?
“To start with, this company was created in order to earn money by producing oil and gas and to carry out geological surveys and experimental boring. This could have essentially relieved the state of having to make heavy investments in this sector. Surveys require investments, while extraction produces revenues. But the company failed to achieve this goal. Since 2001, when Nadra Ukrainy was founded, it has been working unstably, in fits and starts, and accumulating losses, which reached about 10 million hryvnias by the end of 2005. To be fair, the losses fell to six million last year. But this does not change the heart of the matter. Last November the company’s reelected supervisory board analyzed the financial and economic results and found them unsatisfactory. We decided to inspect all our subsidiaries and the research institute. The situation needed to be radically changed, and reforms had to be carried out.”
What is going to be reorganized, and are there any improvements yet?
“We have mapped out a clear-cut strategy of reorganization and development. We plan to tighten control over the units and improve the company’s manageability. This will allow us to centralize financial flows and reappraise the authorized capital, which is extremely important for implementing the original idea of payback and profitability by means of our own extraction of oil, gas condensate, and gas. The reorganization will allow us to get rid of loss-making businesses, which will be auctioned off, as well as to revise the conditions of joint venture contacts and restore economic justice. Not to carry out this reorganization means to accept the lack of prospects. Today we have an enormous desire to put things in order at last.”
Do you think a state-run facility can be streamlined to the extent that it will begin generating profits?
“Our goal is to establish a classical specialized vertically-integrated closed-cycle company. In other words, oil and gas deposits will be prospected for, surveyed, and exploited in order to strengthen the state’s economic and energy security. From now on, raw hydrocarbons will be prospected at a faster pace. This will enable us to increase the production of oil and gas and to develop the mineral and raw- material base, thus minimizing Ukraine’s imports of very scarce energy resources. This is a strategic goal that in turn sets an economic goal: the company should be cost-effective. Ideally, we would like to have a company with an extremely optimized managerial structure, highly-skilled personnel, and up-to-date programming and advisory centers. It is supposed to provide a full gamut of geophysical services both when oil and gas deposits are being prospected and when oil and gas wells are being built, tested, and put into operation. Naturally, a company like this will be dictating favorable financial conditions. The patterns of leasing out wells and distributing profits and products will no longer be inflicting losses on the company and will save us from crushing conditions.”
What do you mean by “crushing?”
“One of our serious problems is dishonest investors. Until now, work has been slow in 75 percent of agreements to form joint ventures, and licensing programs and financial liabilities have not been fulfilled. As a result, the company lost over 40 out of the 110 most promising licenses - a quarter of them in 2006. It takes at least 30 million hryvnias to survey a small area and bore just one hole. There are two or three boreholes in each of the now lost areas. As a result, during the years of the company’s existence, geological surveying of mineral resources has inflicted UAH 3 billion’s worth of losses on the state, excluding the profits we might have derived from extracting raw hydrocarbons.
“When the company was launched six years ago, it was supposed to produce 23 billion cubic meters of gas and 3 million tons of oil. But in reality, the company’s facilities produced just half a billion cu. m. of gas, and 110,000 tons of oil and condensate by the end of 2006. In other words, the company lost 80 percent of potential output and profits. New approaches to financial and economic discipline will force the company to revise its licensing programs and establish control over the fulfillment of joint venture contracts.”
What is the first thing that you are going to do to radically change the situation?
“If necessary, the revamped company will go to court to break contractual obligations with dishonest investors. Speaking in financial terms, all contracts on leasing the company’s possessions, including oil wells, which are part of the authorized capital, will be re-signed. The company will definitely take into account its own interests when it comes to distributing products and profits. Its stake is supposed to be at least 50 percent. The products will be charged to the account of the company’s facilities (expeditions) rather than that of joint ventures. Sales will also be made by the company. This is part of the 2007 state budget law. This in turn will put an end to the misuse of joint venture contract funds.”
What about the Sakhalin oil and gas deposit?
“This deposit has been prospected and surveyed for more than 20 years by Poltavanaftohazheolohiia, one of the oldest enterprises in this sector with a powerful research and personnel potential. They have now entered the final stage of geological surveying, which will result in a geological and economic report on the reserves of raw hydrocarbons. According to the Law of Ukraine “On Oil and Gas,” a deposit can only be commercially exploited after the prospected reserves of raw hydrocarbons have been confirmed by the State Commission on Reserves. To this end, the Cabinet of Ministers resolved to extend the period for using the Sakhalin oil and gas deposit, redirecting permission to Nadra Ukrainy. We have set a goal to protect the reserves and begin commercial production within a year.”
But the companies that jointly invested in this project claim that, after spending huge amounts of money, they were left without a license because of a whim on your company’s part.
“Let’s look at what ‘huge’ amounts of money they are talking about. In 2000, when the state stopped funding geological surveys but demanded that the preparation of a geological report on the deposit be speeded up, Poltavanaftohazheolohiia made use of non-governmental funds. It concluded a joint investment contract with Devon Ltd. in 2000. Under the joint venture program, Devon pledged to invest about UAH 100 million in the Sakhalin deposit over a three-year period (2001-03) and bore six holes. But this program fizzled out. Devon managed to fund one well, instead of six, and only de-mothball another two that were previously bored at the state’s expense. The total investments of this private company in the Sakhalin deposit barely reached UAH 37.9 million over six years. In other words, they would only invest an annual UAH 6.3 million instead of 33 million. “Moreover, in our opinion and in the view of auditing companies, investment was effected at the expense of funds earned as a result of selling the products that were extracted at this deposit. So this seems to be a case of reinvestment. Devon’s failure to meet its boring-linked investment commitments was one of the reasons why they were unable to submit the geological report on time to the State Reserves Committee expert examination. So I don’t think it is correct to talk about the millions spent by investors. Our task is to make joint ventures effective, first of all, for the Ukrainian state.”
