State-Owned Enterprise Reform in the Hydrocarbons Sector in Ukraine State-Owned Enterprise Reform in the Hydrocarbons Sector in Ukraine Please cite this publication as: OECD (2019), State-Owned Enterprise Reform in the Hydrocarbons Sector in Ukraine. This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the OECD or of the governments of its member countries or those of the European Union. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. © OECD 2019 FOREWORD │ 3 Foreword This report is developed in the context of the Project on state-owned enterprise reform in the Ukrainian hydrocarbons sector carried out as part of the OECD-Ukraine Action Plan for the implementation of the Memorandum of Understanding between the Government of Ukraine and the OECD. The project supports the government of Ukraine in its efforts to reform corporate governance in the national hydrocarbon sector. The project was launched in January 2018 with the aim of completing the following results by March 2019: Identification of priority areas for analysis and initial evaluation of progress made and challenges encountered in the implementation of corporate governance reforms in the Ukrainian hydrocarbon sector, with “Naftogaz of Ukraine” (Naftogaz) – the national oil and gas company – as a case study; Comprehensive assessment of the Ukrainian hydrocarbon sector progress in implementing corporate governance reforms in line with the OECD Guidelines on Corporate Governance of State-Owned Enterprises, and issuance of further recommendations; and, Dissemination of findings amongst OECD bodies and Ukrainian government institutions involved in SOE reform. The report is based on information volunteered by the Ukrainian authorities, including in response to a questionnaire sent in March 2018, during discussions held with Ukrainian governmental and non-governmental representatives during meetings and over 30 interviews held in Kyiv in February, May and September 2018, as well as independent research undertaken by the OECD Secretariat. Final recommendations were discussed and endorsed by the Government and Naftogaz in Paris in November 2018, at the biannual meeting of the OECD Working Party on State-Ownership and Privatisation Practices (WP SOPP). The project is implemented with the financial support of the Norwegian Government. It is carried out in close co-operation with public institutions and key stakeholders from Ukraine, including the Cabinet of Ministers, Ministry of Economic Development and Trade, Ministry of Energy and Coal Industry, State Property Fund of Ukraine, the Presidential Administration, the Energy Parliamentary Committee, Naftogaz, Naftogaz subsidiaries and supervisory board of the newly established Main Gas Pipelines of Ukraine. Civil society, academia, private sector, business organisations, and national corporate governance institutes including the Ukrainian Corporate Governance Academy have also contributed to the OECD's assessment. Other international organisations and partners involved in corporate governance reforms in Ukraine, including the European Bank for Reconstruction and Development (EBRD) and the United States Department of State have provided input. The project was further informed by a taskforce of national SOE policy makers and practitioners belonging to the WP SOPP and its network. STATE-OWNED ENTERPRISE REFORM IN THE UKRAINIAN HYDROCARBONS SECTOR © OECD 2019 TABLE OF CONTENTS │ 5 Table of contents Foreword ................................................................................................................................................ 3 Acknowledgements ................................................................................................................................ 7 Acronyms and Abbreviations ............................................................................................................... 9 Key findings ......................................................................................................................................... 11 Chapter 1. Energy sector and SOE landscape .................................................................................. 14 Background and context .................................................................................................................... 14 Size, sectorial distribution of SOEs in Ukraine ................................................................................. 20 Hydrocarbon sector and energy sector reform in Ukraine ................................................................. 36 Notes .................................................................................................................................................. 45 Chapter 2. Naftogaz as a case study ................................................................................................... 49 Introduction to Naftogaz .................................................................................................................... 49 Governance of Naftogaz .................................................................................................................... 60 The State as owner of Naftogaz ......................................................................................................... 72 Notes .................................................................................................................................................. 80 Chapter 3. Conclusions and Recommendations ............................................................................... 85 Conclusions ........................................................................................................................................ 85 1. Recommendations addressed to the state as owner and shareholder of Naftogaz ......................... 91 2. Recommendations on governance of the Naftogaz Group .......................................................... 102 Notes ................................................................................................................................................ 106 References .......................................................................................................................................... 109 Annex A. Specific Responsibilities of Naftogaz Supervisory Board as outlined in the Company Charter ............................................................................................................................................... 119 Annex B. Specific responsibilities of Naftogaz Executive Board as outlined in the Company Charter ............................................................................................................................................... 122 Annex C. OECD Recommendations with a focus on prevention and prosecution of corruption in SOEs in Ukraine ................................................................................................................................ 123 Tables Table 1.1. Size of the SOE Sector ......................................................................................................... 20 Table 1.2. State ownership in Ukraine: institutional framework ........................................................... 24 Table 1.3. SOEs in the hydrocarbons sector .......................................................................................... 27 Table 1.4. Institutions involved in energy policy, ownership and regulation ........................................ 32 Table 2.1. 2017 Naftogaz Consolidated Group key figures: profit and losses, in million UAH ........... 53 STATE-OWNED ENTERPRISE REFORM IN THE UKRAINIAN HYDROCARBONS SECTOR © OECD 2019 6 │ TABLE OF CONTENTS Table 2.2. Performance of Naftogaz business segments ....................................................................... 55 Table 2.3. 2017 Financial position: consolidated financial statement, in million UAH ........................ 58 Table 2.4. Current Naftogaz Supervisory Board Composition and Committees .................................. 66 Table 2.5. Responsibilities of boards of directors of Naftogaz ............................................................. 67 Figures Figure 1.1. Naftogaz and its subsidiaries operating in the oil and gas supply chain ............................. 28 Figure 1.2. Oil and Gas exploration state-owned companies fall under the ownership of the licencing body the SGSS........................................................................................................................................ 30 Figure 1.3. Control and ownership in the downstream natural gas supply chain, in the so called “last mile” ....................................................................................................................................................... 31 Figure 1.4. Ukraine's energy supply (2016) .......................................................................................... 36 Figure 1.5. Natural gas production in Ukraine, in billion cubic meters (bcm) ...................................... 37 Figure 1.6. Current gas supply chain between Naftogaz, intermediaries involved in the so-called “last- mile” to end consumer ..................................................................................................................