Ukrainian Oligarch Kolomoisky’s Diminishing Influence in the Oil Market
6 June, 2018

Editor’s Note: This story is part of a cooperation project between Hromadske International and UkraineWorld,

Four years ago, Ihor Kolomoisky and his business partners were in full control of the Ukrainian oil market. This included mining, oil transportation and refinement, as well as owning the largest network of gas stations. But his influence has been decreasing and could become even smaller if Kolomoisky & Co have the misfortune of losing Ukrnafta, Ukraine's' largest oil producer.  

Photo credit: Vladyslav Musienko/UNIAN

On April 26, the London Court of International Arbitration took the side of state-owned Naftogaz in Ukrnafta’s case regarding the joint stock agreement made in 2010 between Naftogaz and Kolomoisky’s companies. Its key provisions were declared non-enforceable and those that conflict with the mandatory rules of corporate law of Ukraine. This means that the minority shareholders headed by Kolomoisky will lose their right to appoint the Ukrnafta leadership. Curiously enough, the arbitration was actually initiated by the private owners of the company in June 2015.

The Biggest Player

Before 2015, the so-called Privat Group – led by businessman Ihor Kolomoisky – was probably the largest player in the Ukrainian oil industry. Taking full advantage of Ukrnafta’s loyal management, they grabbed key state assets and controlled several important links in the system.

Kolomoisky and Privat Group’s sphere of influence included, first of all, the aforementioned Ukrnafta, which last year extracted 1.3 million tons of oil of the total 1.4 million produced by the country. The 50% + 1 share of the company is owned by Naftogaz. The second largest group of shareholders is the Privat Group itself with about 42% of Ukrnafta shares.

Photo credit: Ukrnafta

But apart from this, after the joint stock agreement was signed in 2010, Privat Group was also in control of Ukrnafta’s board of directors. Minority shareholders eventually got the right to appoint new chairperson and board members. In early 2011, Peter Vanhek, a Belgian national, became the head of Ukrnafta who, along with the board of directors, made decisions detrimental to the state.

It was not until 2015 that the company’s management was finally changed, at least partially. For this to become possible, changes were made to the Ukrainian legislation. Thus, in March 2015, the Ukrainian parliament adopted a new law, according to which the quorum for holding general shareholders' meeting in Ukraine was reduced from 60% to 50% + 1 share. Naftogaz now had the de-jure right to convene a general meeting and initiate changes.

In July the same year, British national Mark Rolins became the new board chairman, being a figure that both public and private shareholders were satisfied with. Yet, over the past 2.5 years, the company has not developed at all – its oil and gas condensate production has been gradually decreasing.

The London Arbitration decision is also likely to lead to further staff changes and progress in oil production and financial matters. At the moment, Ukrnafta owes 12 billion hryvnias (approximately $458.8 million) in taxes to the state. It also has dozens of contracts with little-known oil consumers, the money for which has not been paid yet.

What Else Did Privat Group Lose?

Ukrnafta is not the only lost asset for Kolomoisky and his partners. Their first loss was actually Ukrtransnafta, a company wholly owned by the state.

Ukrtransnafta is in charge of the trunk pipelines that unite key points of the Ukrainian oil industry: from deposits and marine terminals to oil refineries and border posts.

Between 2009 and 2015, the head of Ukrtransnafta was Oleksandr Lazorko, a man believed to be a Kolomoisky ally. It was during his leadership that Privat Group received preferential conditions for transportation and storage of oil. Eventually, in 2015, Lazorko was fired and soon added to an international wanted list.

With the loss of the oil pipeline system, Privat Group became much less effective. Now, let’s look closely at the Privat Group itself and its composition.

The Private Petroleum Business of Privat Group

Privat Group owns three oil refineries. Two of them – Petrochemicals Prykarpattya and NPK-Halychyna (both in western Ukraine) – have obsolete equipment and have stood defunct for years. Their capacities are used as tanks for oil and petroleum products. Notably, state company Ukrtransnafta used to pay quite a lot of money to use these refineries.

The third refinery – Ukrtatnafta (Kremenchug oil refinery) – was obtained after a rigid confrontation with Russia’s Tetneft. Ukrtatnafta is the largest Ukrainian producer of gasoline and diesel fuel.

Photo credit: Ukrnafta

Along with the Privat Group, the company is co-led by Kharkiv businessman Alexander Yaroslavsky and, again, the state-owned Naftogaz, which owns 43.5% of the business. Most of Ukrtatnafta’s shares are distributed among numerous firms, mainly with foreign jurisdictions. In late April, they revealed that 36.7% of their shares are owned by six Cypriot companies.

On top of that, Ihor Kolomoisky and his partners also owned a group of enterprises for handling oil and liquefied natural gas, located in the Odesa Commercial Sea Port. Part of them remained in the pledge of PrivatBank following its nationalization in December 2016, while the oil terminal Sinthez Oil is now operated by Azerbaijani state-owned oil company SOCAR.  

Why Should We Care?

Privat Group still controls about 15% of retail sales of gasoline and diesel fuel. It also owns about 1,000 popular petrol stations including Avias, Sentosa, and ANP. In some Ukrainian regions, their share exceeds 40%. This allowed Kolomoisky & Co to create artificial panic in some regional light petroleum markets, just by closing their own petrol stations for a few days.  

Until recently, more than 500 Ukrnafta petrol stations belonged to this system. But since 2015, the company has tried to manage its stations independently. Although Ukrnafta is still indicated as a petrol partner on the Avias’ website.

The role of Ihor Kolomoisky and his business partners in the Ukrainian oil system is much smaller than it was 3-4 years ago. And it will decrease further if Naftogaz decides to make changes to the management of Ukrnafta once again. But judging from Privat Group’s craft and resources, it looks like they will manage to prevent this for some time at least.

/By Artem Ilyin

/Translated and adapted by Anna Kyslytska,