Viktoriia Voitsitska dispelling myths about why “Yuzgaz B.V.” is not suitable as an investor to develop the field.
This is the last week for the Cabinet’s approval of “Yuzgaz B.V.” as a legitimate investor to implement the project in the Yuzivska acreage.
Otherwise, it is likely that the state’s consent will be deemed to be automatically obtained (the principle of “tacit consent”). In this case, it would be dangerous to remain silent. The Cabinet’s passivity is the worst case scenario.
It is advisable and rightful for the Cabinet to announce a new competition on transparent terms.
For those who live in the real not a fantasy world, it is clear that selection of “Yuzgaz B.V.” as the winning company is obviously a private project of “Nadra Yuzivska” company, which intends to create entirely preferential conditions for almost free gas production, without any real obligations to the state at the same time. So to say, in keeping with the best traditions of the corrupt schemes of Ukrainian oligarchy.
Now why “Yuzgaz B.V.” cannot be the investor. Dispelling the myths.
The results of the contest which chose the new investor for the Yuzivska gas field project are legitimate and transparent.
Unfortunately, this is not so. After the refusal of «Shell» to participate in the project, the Government had every reason to announce the holding of a new competition for the conclusion of a new Production Sharing Agreement under completely new terms.
After all, “Nadra Yuzivska” company, which acquired all the rights and duties of «Shell» under the Agreement, did not have sufficient financial and technical resources, either the experience of organizing activities needed to carry out the works under the Agreement, which is in fact a substantial change in the original terms, and therefore requires terminating the current agreement and concluding a new one.
That is, “Nadra Yuzivska” company has undertaken the commitment which it knew it wouldn’t be able to meet.
Despite this, “Nadra Yuzivska” company, having acquired 100% of the rights and responsibilities of an investor under this Agreement, without the financial and technical resources or the necessary experience, decides to hold its own competition to attract a new investor.
On July 15, 2016, “Nadra Yuzivska” company held a “private” competition, in the result of which Yuzgaz B.V. was unanimously declared the winner.
“Yuzgaz B.V.” has sufficient financial and technical resources for implementation of the project. The professionalism is backed by reliable and real partners.
As a proof of financial resources “Yuzgaz B. V.” provided the guarantee of its parent company Emerstone Energy SCSP. No documents that would confirm the financial viability of the Emerstone Energy SCSP parent company was provided.
In particular, no information about the last audit was provided, and the certified copies of the financial balance of the previous year were not provided either, though it was mandated by a regulation on competition approved by the Decree № 1298 of the Cabinet of Ministers from 30 November 2011.
As a confirmation of the technical resources, “Yuzgaz B.V.” company provided a memorandum of understanding with “Schlumberger” company. This memorandum does not contain any obligations for the implementation of technical works, or at least a list and schedule of potential technical works, and it is of a purely declarative character.
As evidence of experience in organizing activities necessary to perform the works under the agreement, “Yuzgaz B.V.” company provided a list of two persons, who are already working in the parent company, and of two others with whom the company has “an accession agreement” in the case of the company’s participating in the Production Sharing Agreement
At the same time, one of the two persons mentioned, namely Guido Michelotti, has already publicly denied any connection with “Yuzgaz B.V.” company or “Emerstone Energy SCSP”.
It is worth noting that “Yuzgaz B.V.” and “Emerstone Energy SCSP” were registered recently, in 2016, and have not provided information on their main activities, number of employees, work experience in the sphere of subsoil use, including the experience of exploration and/or extraction of fossil fuels with indication of subsoil areas, kinds and results of the works, technologies applied, production capacity, as mandated by the regulation on competition approved by the Decree of the Cabinet of Ministers.
On the basis of the above-mentioned it can be concluded that neither “Yuzgaz B.V.” nor the parent company Emerstone Energy SCSP possess sufficient financial and technical resources, as well as the experience of organizing activities needed to carry out the work stipulated by the Agreement.
“Yuzgaz B.V.” offered the most advantageous financial obligations.
Under the competition conducted by “Nadra Yuzivska”, “Yuzgaz B.V.” offered to invest in the development of the Yuzivska acreage $ 200 million (while the minimum obligations of an Investor fixed in the Agreement are $ 410 million). Who has seen the documentary guarantees of payment of these financial obligations?
There are also some interesting nuances worth mentioning, like the alleged “bonuses” in favor of the state. Thus, “Yuzgaz B.V.” has extraordinary ambitions and it is the only company that came up with an additional condition for these bonuses to be paid; this is achieving the level of production at the rate of 1 billion m3/year.
Moreover, the company has not provided any specific dates regarding the introduction of the initial investment obligations or social investments. It was only vaguely mentioned – “within 2016”.
“Yuzgaz B.V.” offered the greatest program of prospecting.
Who has even seen this program? At the same time, the company was not able to give an answer to the question about at which exactly wellsite works are planned to be carried out.
The Government should review and agree the terms of the Agreement regarding the initial commitments to the downside.
On August 4, 2016, “Nadra Yuzivska” sent a request to the Cabinet of Ministers to renegotiate the terms of Yuzivska Agreement regarding lowering the initial commitments – from the current 410 million dollars to 200 million dollars, and a request for consent to the transfer of rights and obligations of an Investor to “Yuzgaz B.V.”.
The competition whose results determined this company as the winner is exclusively a private initiative of “Nadra Yuzivska” and cannot entail any legal implications, thus it does not oblige the state represented by the Government to take any actions or decisions.
Reducing the initial obligations under the Agreement without holding a competition, and transferring the rights and duties of an Investor to “Yuzgaz B.V.” can lead to possible illegal actions of the Government. Illegal – since officials will exceed their authority and will potentially inflict large scale losses on the state. Substantial amending of the original terms of the Agreement requires termination of the existing agreement and conclusion of a new one.
“Yuzgaz B.V.” will honestly pay taxes to the budget.
Due to the casuistry of the Law on production sharing agreements, this particular Agreement has special conditions of taxation, according to which, for the production of gas under this Agreement the rental rate of 1.25% is applied, despite the fact that the same effective rate in the Tax Code is 29%.
Thus, the new investor will be able to take advantage of tax arbitrage by the expense of budget funds.
Unknown beneficiaries of the company should not be a subject of concern.
This is actually one of the biggest problems! To my question who the end-beneficiary is, I received a response that the investment fund (Luxembourg), which owns 100% of “Yuzgaz B.V.”, is considering! the possibility of disclosing the end-beneficiaries at the Government’s request after agreeing with the authorized representatives of the Government upon the main provisions of the draft assignment contract and draft amendments to the Agreement.
The long and unsuccessful history of shadow privatization of state assets by anonymous investors registered in Western jurisdictions should have taught us there can be no anonyms in Ukraine.
Authentic Western companies show they are interested in Ukrainian assets, and they do it openly («Shell», «Westinghouse», etc.). When it comes to anonymous offshore companies, these are actually Ukrainian heavyweights that promote development of corruption in the state and adversely affect the image of the entire industry. So it was with the Latvian “Boyko towers”, “Karpatygaz” Swedish investors, and agency business of Swiss “Rosukrenergo”.
Finally, I would also like to mention the 80 million dollars invested by «Shell».
According to the Ministry of Energy and Coal Mining, «Shell» has already invested about 80 million dollars, and according to the State Fiscal Service – around 75 million dollars.
Thus, the new investor will inherit the assets acquired due to «Shell» investments, and will be able to reduce its investment commitments by this amount of money.