Naftogaz 9M Profit up 15% on Transit

Ukrainian state Naftogaz posted a net profit of hryvnia 27.1 bn ($972mn) for the first nine months of 2017, up 15% on the same period of 2016, thanks to higher gas transit and gas production.

Upstream gas made a net profit of hryvnia 27.8 bn, compared with hryvnia 10.4bn for the nine months of 2016, it said December 20, but hanging over the company are some substantial arbitration risks.

Gas transmission and distribution for the nine months of 2017 contributed hryvnia 25.2bn, 37% more than in 2016, partly due to increased gas transit volumes  and the devaluation of Ukrainian hryvnia against US dollar. But it lost money on storage: it has capacity to store 31bn m³, but with declining gas demand and no bookings from its legacy booker Gazprom, it is looking to European companies to book instead.

It lost hryvnia 8.1bn from gas trade and supply, including losses from gas sales under public service obligations (PSO) of hryvnia 10.9bn. Gas sales to other customers beyond PSO (public service obligations) contributed hryvnia 0.1bn profit, excluding the elimination of inter-segment profits from gas sales to other segments of hryvnia 2.7bn.

(Source: Naftogaz)

Legally the state must compensate the company for losses arising from PSO sales, less any income obtained in the course of fulfilling such obligations plus adequate margin. The level of margin should be calculated following the relevant resolution by the cabinet of ministers of Ukraine. As at the date of these consolidated financial statements such resolution has not been adopted and so no money has been received last year or this.

Arbitration risks

Still hanging over the company are the two arbitration cases it is pursuing against Russian exporter Gazprom: Naftogaz is trying to bring the take-or-pay purchase contract and the transit contract into line with European Union law, while Gazprom argues that they must be left as they are. Decisions are expected in the next few months and have the potential to materially affect Naftogaz' finances – and hence the government's. 

The gas sales arbitration was initiated by both Naftogaz and Gazprom, the latter seeking payment of unpaid invoices in an amount of about $4.5bn for gas delivered from November 2013 to May 2014, while Naftogaz claimed a retroactive revision of the price, resulting in a claim for payment by Gazprom to Naftogaz of more than $12bn as compensation for previous overpayments. Gazprom has subsequently updated its payment claims, which as at 30 May 2017 stood at $3bn including interest, or $2.2bn excluding interest.

In addition, Gazprom has later added a claim for payment of gas which Gazprom did not deliver, but which Naftogaz allegedly nevertheless was obliged to pay for, which at May 30, 2017 stood at about $44.1bn including interest ($34.5bn excluding interest). Naftogaz has subsequently updated its claim for overpayments to about $18.0bn including interest or $14.1bn excluding interest as at that date.

Naftogaz initiated the Gas Transit Arbitration on October 13, 2014 and as of September 2017, its monetary claim stands at about $12.4bn including interest (up to $10.6bn excluding interest). Gazprom has submitted a counterclaim for the much smaller sum of $7mn including interest ($5.3mn excluding interest) to cover some intra-day balancing gas, but has reserved the right to make additional counterclaims, Naftogaz said.