Ukrnafta returns to profits in 2017
Thursday, May 10, 2018
Ukraine’s biggest oil producer, Ukrnafta, returned to the black in 2017 after two years of losses, posting a net profit of 444 million hyrvnias (US$16.8 million).

The company suffered a further decline in production, however, which it blamed on authorities’ failure to extend six of its field licences early last year.

In a statement last week, Ukrnafta reported an adjusted EBITDA of 5.55 billion hryvnias (US$210 million) for 2017, up 87.2% year on year. It also managed to narrow its operating loss to 68 million hryvnias (US$2.6 million), compared with 14.7 billion hryvnias (US$560 million) in 2016.

Revenues climbed by 19.2% to 26.9 billion hryvnias (US$1 billion), driven by a growth in Ukrnafta’s oil sales price to US$51.8 per barrel, up from US$40.5 a year earlier.

On the other hand, company oil and condensate production fell 9.2% on the year, landing at 1.38 million tonnes (27,800 bpd), while gas output slumped 14.8% to just above 1.1 bcm.

“Ukrnafta managed to stabilise and even grow production in the first half of the year with minimal investments,” CEO Mark Rollins said, commenting on the results. “The company restored profitability in 2017; however, the bottom line could have been much better had it not been for the missed volumes and revenues following unlawful actions by the regulator who blocked renewal of our licences.”

Ukraine’s State Geological Service (SGS) began blocking the renewal of Ukrnafta’s production licences in 2016, allegedly over unpaid tax debts. Early last year, it failed to extend the company’s licences for five fields in the northeastern Sumy region and one more in the western Lviv region, forcing Ukrnafta to shut down production. Ukrnafta was able to gradually restore operations at these sites over the second half of the year, after a Ukrainian court ruled that SGS’s actions had been unlawful.

According to Ukrnafta, the loss of output at these fields totalled 92,000 tonnes of liquids and 76 mcm over the year, equating to around 1.4 billion hryvnias (US$53 million) in lost revenues. In July until the end of October, the company’s daily rate of production was down 20% as a result of the disruptions.

Ukrnafta was saddled with 11.85 billion hryvnias (US$450 million) of overdue tax debt at the end of last year, most of which piled up in 2014 and 2015, following Kyiv’s decision to increase rental tax on oil and gas production dramatically. These hikes were later reversed in 2016, and lowered even further this year. Ukrnafta has pledged to settle 1.2 billion hryvnias (US$45 million) of debt in 2018, with a view to clearing the entire sum over a three to five-year period.

“We have made a number of proposals to the government during 2017 and 2018 to reschedule the debt but received no response to date,” the group said. “We will continue to pay down the debt at a pace which allows us to pay current taxes and invest in essential capital expenditures required to sustain and increase production.”

Ukrnafta scored a crucial victory over SGS in April, when an appeals court in Ukraine ordered the agency to renew 11 of Ukrnafta’s other production licences that were due to expire in the first half of this year. The firm filed a separate lawsuit against SGS in February, demanding the extension of 15 more licences set to end in late 2018.

The company has another bone to pick with the government, complaining last week that its revenues would have been higher in 2017 were it not for its obligation to sell oil and gas condensate at state-run auctions at regulated prices.

“Last year, the majority of the state-run oil auctions failed, which had a negative impact on the stability of the company’s cash flow,” it said.
State-owned energy group Naftogaz controls 50% plus one share of Ukrnafta, while its remaining equity is held by Ukrainian businessmen Igor Kolomoysky, Gennadiy Bogolyubov and other private investors.

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