Private Joint Stock Company (PJSC) Ukrnafta, which is part of the state holding company Naftogaz of Ukraine, is going to become the owner of a 51% stake in Alliance Holding, owned by the international corporation Shell, by the end of this year. If the deal is closed (and the Antimonopoly Committee of Ukraine, AMC, still has to give its consent for this), Ukrnafta will add to its assets 118 operating gas stations (gas stations), which have been known in Ukraine under the Shell brand since 2006.

Ukrainian Energy has examined the details of the deal, its implications for the market, and what changes it may bring to Ukrnafta's business.

Calculations and expectations

Shell gas stations are represented in 20 regions of Ukraine, the largest number of which - 34 - is in Kyiv and the region. The decision to acquire them was agreed with the supervisory board of Ukrnafta after advisors from Rothschild & Co conducted a financial assessment of the transaction and assets, and lawyers Sayenko Kharenko and auditors KPMG provided positive conclusions.

“The acquisition of a business that has been led for 15 years by a reputable international group that has invested more than $460 million in development will provide the company with an expansion of its network of gas stations and market share, which is in line with its development strategy until 2028,” reads a message posted on his Facebook page by the head of Ukrnafta Serhiy Koretsky.

Among the advantages of the upcoming deal, he also pointed out the opportunity to “strengthen positions… to reliably meet the needs of society and the Security and Defense Forces of Ukraine in fuel and energy resources.”

The deal will allow Ukrnafta to increase the total number of its own gas stations to 665, and strengthen its presence in the capital region.

The head of the Naftogaz Group, Oleksiy Chernyshov, believes that Ukrnafta’s ability to scale its business indicates that “the state holding has not only adapted to the conditions of war, but is also becoming stronger.” “We remain flexible and are not afraid to make decisions that will allow the state to earn. This will ultimately create additional financial revenues for the Naftogaz Group and contribute to increasing contributions to the state budget,” he noted.

Serhiy Koretsky indicated that the profit that Alliance Holding will receive in the future will go to the state budget through the distribution of dividends.

The current political situation is conducive to the Antimonopoly Committee giving its consent to the conclusion of an agreement that will allow Ukrnafta to become the majority owner of “a network of filling stations, which is among the TOP-10 networks in Ukraine in terms of sales volumes and the number of gas stations, located in favorable areas with intensive traffic” (quote from the Ukrnafta message).

In addition to Ukrnafta with a 51% stake, the other shareholder of Alliance Holding LLC with a 49% stake is currently the State Property Fund of Ukraine, which this summer began preparing its block of shares for sale at auction.

The current deal with Shell will cost the state-owned company $30-50 million. This estimate is given by Oleksandr Sirenko, an analyst at NaftoRynok. Serhiy Kuyun from Consulting Company A-95, in a comment to Ukrainian Energy, gave figures in a similar range - $40-50 million. “I estimate the cost of one station at $0.8-1.0 million. Accordingly, the entire Shell network, which consists of 132 gas stations, may cost $105-132 million. But 7 of them are in the occupied territories, 7 are currently not working, but can be put into operation. In addition, any buyer will have to invest in rebranding,” the expert explained.

Ukrnafta does not disclose the value of the deal with Shell, but indicates that during the negotiations the price was reduced by 25% from the first price offered by the seller.

In order to settle accounts with the international corporation, Ukrnafta is going to obtain a bank loan and rebrand all 118 gas stations within a year. In addition, the state-owned company promises to retain all personnel (1,550 employees) and fulfill the terms of existing contracts concluded without its participation under the previous owner.

Consequences and prospects

In 2006, the Shell brand became the first international brand on the Ukrainian retail market of automotive fuel. The agreement on the sale of the gas station network to Ukrnafta showed that a large Western corporation is getting rid of assets and completely stopping investments in Ukraine. “I am very sorry that Shell is leaving Ukrainian retail. A real investor, a vertically integrated oil and gas company is leaving. They were, in fact, the last one we had. This is a really bad signal,” Oleksandr Sirenko noted in an interview with Ukrainska Energetika. He also considers it inappropriate to sign a deal “even for several tens of millions of dollars” during a war, which involves foreign exchange payments between a Ukrainian counterparty and an international company, because “the money will disappear abroad.”

Signs that Shell was losing interest in doing business in Ukraine appeared in 2014, after Russia's annexation of Crimea and the armed conflict involving separatists in Donbas. "It was obvious that they were beginning to suffer. Everyone was hesitating whether to make a decision to withdraw from Ukraine or not. And then, in the end, they decided to sell. They could not cope with the challenges of the war, when their competitors not only survived, but also increased their profits and began to invest in new businesses. Shell's behavior looks unsportsmanlike," says Oleksandr Sirenko.

A source for Ukrainska Energetyka calls the example of Vitaliy Antonov, owner of OKKO Group, very indicative in this context. The basis of his group is fuel sales through its own network of gas stations, operating under the OKKO brand. And now it has expanded into the renewable energy sector, agricultural production and is planning to build a $1.5 billion GORO Mountain Resort in the Carpathians.

Experts' opinions differ on the consequences for consumers. Oleksandr Sirenko sees a disadvantage in the fact that the recognizable international Shell brand is disappearing from the Ukrainian market, and with it - international practices, regulations and standards, which local networks barely reach, "because they are expensive." "This is, for example, safety equipment," the expert said.

And Serhiy Kuyun pointed to a conclusion that at first glance may seem paradoxical: despite the fact that Ukrnafta's presence in the fuel market is growing, its agreement with Shell could lead to increased competition. Shell filling stations, he recalls, sold fuel at the highest prices on the Ukrainian market, while losing to competitors in marketing, which is crucial in the fight for customers.

Ukrnafta has made a different bet: the company is pursuing a rather aggressive pricing policy, reducing prices, and is increasing marketing and service programs. “With the expansion of coverage, this influence will grow, in particular in the economy segment of the market as the most mass. This is absolutely not typical of our state-owned companies,” said Serhiy Kuyun.

New green opportunities

The modern state energy policy in Ukraine is built on the strategic vision that the country should become the energy hub of Europe. The potential of Ukrnafta is associated not only with fuel retail, but also with the production and processing of hydrocarbons. Therefore, it has the opportunity to become a powerful player. “If the war ends, it will be able to rebuild the Kremenchuk Oil Refinery and become the largest supplier of fuel on the Ukrainian market,” added Serhiy Kuyun. According to the expert, Ukrnafta will focus on import parity with the world market in pricing, and not on cheap Russian or Belarusian products, as was the case before. Therefore, the profitability of oil refining will “rapidly increase,” and with it the company’s profits.

On the other hand, Ukrnafta’s traditional business, related to fossil fuels, is under increasing pressure from modern climate policy, which involves the transition to renewable energy sources and the latest technologies to reduce carbon emissions. This requires significant funds. Strengthening market positions in Ukraine, which Ukrnafta is striving for, will allow it to attract profitable loans from international financial institutions and direct them to decarbonization projects.

Ukrnafta has already taken the first steps towards a green transformation. By engaging experts from the Energy Security Project, which is implemented with the support of the United States Agency for International Development (USAID), the company has begun implementing environmental, social, and governance (ESG) principles into its business processes. This collaboration involves calculating greenhouse gas emissions, identifying potential opportunities to reduce the impact of the company’s activities on the environment, and preparing sustainability reporting according to international standards.

Ukrnafta’s next step should be to develop a green transition strategy and implement decarbonization projects.

Old political risks

The radical transformation taking place in Ukrnafta after the nationalization of Ihor Kolomoisky’s stake for the war period has already brought positive changes. The achievements of state management in the company were noted by Ukrainian President Volodymyr Zelensky in his speech, presenting the “Resilience Plan” to parliament this week.

The head of state drew attention to the “historically largest financial, very significant results” and the “constant payment” of dividends and taxes to the state budget. Thus, in his words, “In 2013-2014, Ukrnafta paid 78 billion hryvnias in taxes alone, and now has a net profit of 43 billion. It constantly pays dividends to the budget. And this is during the war.”

But we should not forget about the risks characteristic of state-owned companies without proper corporate governance according to the standards of the OECD - the Organization for Economic Cooperation and Development.

These risks are associated with the possibility of the use of resources by the ruling elites for personal needs. Serhiy Kuyun in this context pointed to Naftogaz of Ukraine and the Polish energy corporation Orlen, which “have repeatedly turned into an instrument of political influence.”

Svitlana Dolinchuk, specially for "Ukrainian Energy"