State-owned oil and gas company Naftogaz underwent an amazing change of image in less than three years – from a symbol of corruption to standard-bearer of reform. But behind-the-scenes battles over the changes at the company burst into view on Sept. 19 with the resignation of the last remaining independent members of the company’s supervisory board.
Pressures that have been building at state oil and gas company Naftogaz Ukraine for five months burst to the surface on Sept. 19, when the two remaining independent members of the company’s supervisory board resigned.
The resignation threatens to halt the Western-backed effort to reform the unprofitable — until recently — state-run monopoly into an independent and effective company.
It also questions the country leadership’s commitment to reforms over political games: The government’s been accused of avoiding unpopular moves like raising gas tariffs to market prices ahead of presidential and parliamentary elections in 2019.
Moreover, the nation’s energy sector led by Naftogaz remains highly monopolized, opaque and unwelcoming to investors needed to boost the nation’s production of oil and gas. Additionally, a looming financial threat faces the nation if it does not find a way to improve its gas-transit pipelines after Russia. Upon completion of the Nord Stream 2 pipeline by Ukraine, seeks to bypass Ukraine altogether in transporting gas to Europe.
Bye-bye board
Board chairman Paul Warwick and independent board member Marcus Richards, in near-identical letters of resignation, wrote that political meddling in the company by the government had again become the norm.
Paul Warwick, the chairman of Naftogaz’s supervisory board, announced his resignation on Sept. 19, the same day as Richards. (liubenko_ivan)
It leaves the board with only one member, ex-Energy Minister Volodymyr Demchyshyn, whose appointment to the board was backed by President Petro Poroshenko.
The five-member supervisory board, consisting of two government representatives and three independent members, was formed on April 21, 2016, under the auspices of the European Bank for Reconstruction and Development to carry out a program of corporate governance reform at Naftogaz.
The program, developed in line with Organization for Economic Cooperation and Development principles of corporate governance for state-owned enterprises, covered relations with shareholders and stakeholders, transparency and information disclosure requirements, and management structure.
But it didn’t take long for resistance to the proposed changes to build. In April, only a year after the supervisory board was formed, its chairman Yulia Kovaliv had enough.
Announcing her decision to quit, Kovaliv, who had been one of the government’s two representatives on the board along with Demchyshyn, said: “Naftogaz must become a market-oriented company with a transparent management mechanism that is free from political influence.”
Although she gave no clear reason for her decision to quit, the statement by Kovaliv implied that the government had again been trying to meddle in the running of Naftogaz.
Ready to resign
The independent board members almost resigned in April, too. Back then, parliament passed legislative amendments that required independent members of the state companies’ supervisory boards disclose their assets in very detailed declarations.
The new rules could violate confidentiality clauses in the foreign board members’ contracts and foreign legislation, and discourage independent foreigners from participating in supervisory boards.
Marcus T. Richards, head of the ethics and auditing committees at Naftogaz, and an independent member of its supervisory board, quit on Sept. 19. (liubenko_ivan)
The second blow to the Naftogaz supervisory board came with the appointment of Ihor Prokopiv as deputy energy minister in April. Just weeks before that, Naftogaz fired Prokopiv as head of its subsidiary Ukrtransgaz on suspicion of financial violations and fraud.
His appointment to a position that de facto put him in control of Naftogaz, which fired him, was a frustrating signal for the board.
EBRD took notice. In April, Reuters reported that the bank sent a letter to Poroshenko and his ally, Prime Minister Volodymyr Groysman, warning that the board of Naftogaz was ready to resign. If it happened, the letter read, it would “shatter the international confidence in your government’s commitment to reform and restructure Naftogaz and other state-owned enterprises.”
But the independent members of Naftogaz’s supervisory board opted to stay on – only to resign five months later.
Warwick, who took over the chairmanship of the supervisory board after Kovaliv’s departure, said in his letter of resignation that in April he had warned the government that the independent board members’ involvement “was contingent on material progress.”
No progress
The first signal that no such progress was being made came in early September, when the first of the three independent members of the supervisory board announced his resignation.
Charles Proctor, informing the board on Sept. 5 of his decision to resign with effect from Sept. 30, said that despite repeated assurances from officials, there was still no government support for reform at the company.
Charles Proctor, an independent member of Naftogaz’s supervisory board, announced his resignation on Sept. 5, effective on Sept. 30 (liubenko_ivan)
Then, just two weeks after Proctor announced his resignation, the other two independent board members, Warwick and Richards, threw in the towel as well, saying no significant progress had been made on reforms over the past five months. They laid the blame with the government.
“Not one of the actions that are under the government’s control have been carried out. On the contrary, the level of political meddling in Naftogaz’s work continues to grow and has become, unfortunately, an obvious norm,” their letters of resignation read.
Reacting to the decision of Warwick and Richards to quit, the EBRD said in a statement that it regretted that the two officials felt they had no choice but to resign.
“The second stage of Naftogaz transformation is long overdue,” EBRD said in a statement. “Good governance has enabled the company to return to profitability and eliminate significant opportunities for corruption. Now is the time to consolidate and move along the reform path.”
Move forward?
Meanwhile, Groysman, speaking at a cabinet meeting on Sept. 20, promised that reform at Naftogaz would not be stalled. “I guarantee that the reforms will be continued and sped up,” he said, quoted in a report by Reuters.
With Demchyshyn now the sole remaining member of the supervisory board, the United States and United Kingdom in statements from their embassies said a new, professional and independent board should be appointed quickly.
“The fact remains Naftogaz is being hindered in realizing its potential as a profitable strategic asset,” the British Embassy said in its statement, the Reuters report reads. “It is important that future supervisory board members are independent and transparently appointed, that the Ukrainian government actively supports the reform process and that Naftogaz is allowed to move forward.”
A gas pumping station in Poltava Oblast that belongs to state-owned gas producer UkrGazVydobuvannya, a subsidiary of state oil and gas firm Naftogaz, is shown on May 3. (Kostyantyn Chernichkin)
However, Naftogaz’s chairman of the board, Andriy Kobolev, speaking at a press conference in Kyiv on Sept. 20 in the wake of Warwick and Richards’ resignations, said he was against “a hasty election of a new board,” news website LIGA.net reported. He warned that the crisis could deprive the company of resources from the EBRD and the World Bank and, most likely, other donors.
But Kobolev, also seen as a key reformer at Naftogaz since his appointment in the wake of the 2014 EuroMaidan Revolution that drove President Viktor Yanukovych from power on Feb. 22, 2014, added that he has no plans to quit.
“I’m going to continue to fulfill my duties,” Kobolev said. “We still have several unfinished important things to do … At a minimum, we will finish these.”
