НАК „НАФТОГАЗ УКРАЇНИ“. Річний звіт англійською (2017 рік) - 10

CORPORATE GOVERNANCE

ANNUAL REPORT 2017

149

148

established at the level of gross 
UAH 6 328 000 annually for 
independent directors and 75% 
of that amount for government 
appointees. Supervisory board 
members are also entitled 
to additional remuneration 
amounting to 20% of total 
remuneration for performance 
of the function of the 
chairperson of the supervisory 
board and 10% of the 
remuneration for participation 
as the member of a committee 
of the supervisory board, as 
well as to compensation of 
their expenses incurred during 
performance of board member 
functions.

In total, during 2017 the 
company incurred approx. 
UAH 25.5 million in expenses 
for the operations of the 
supervisory board. This 
amount includes UAH 20.3 
million in service fees accrued, 
and UAH 5.3 million in 
compensation of expenses 
incurred by board members 
during performance of their 
duties, as well as D&O insurance 
which covers liability of these 
officers after their appointment.

APPOINTMENTS WITHIN THE 
SUPERVISORY BOARD 
 

Following the termination of 
authorities of the chairperson 
of the supervisory board Kovaliv 
Yulia Ihorivna, during the 
extraordinary supervisory board 
meeting held on 18 April 2017 
the board members elected:

•  Warwick Paul Cyril as the

chairman of the supervisory 
board;

•  Demchyshyn Volodymyr

Vasylyovych as the deputy 
chairman of the supervisory 
board.

In February 2017, the 
committee on health, 
environmental and industrial 
safety was established and 
chaired by Warwick Paul Cyril. 
All of the board members were 
appointed to the composition 
of this committee. 
 
Following the formation 
of the new board, at the 
first meeting which was 
held on 22 December 2017 
Spottiswoode Clare Mary Joan 
was elected as the chairperson 
of the supervisory board. All 
members of the supervisory 
board supported the motion 
that Demchyshyn Volodymyr 
Vasylyovych should continue to 
hold the position of the deputy 
chairman of the supervisory 
board.

The new composition of 
the board’s committees was 
elected at the meeting held on 
23 January 2018. The current 
composition of the committees 
is as follows: 
·  Audit and risks 

committee

80

: Lescoeur 

Bruno, Jean, Gaston as 
the chairperson of the 
committee, Spottiswoode 
Clare Mary Joan and 
Kudrytskyi Volodymyr 
Dmytrovych as the members 
of the committee;

·  Ethics and unbundling 

committee

81

: Spottiswoode 

Clare Mary Joan as 
the chairperson of the 
committee, Hochstein 
Amos, Kudrytskyi 
Volodymyr Dmytrovych and 
Demchyshyn Volodymyr 
Vasylyovych as the members 
of the committee;

·  Nomination and 

remuneration committee: 

80 

Previously the audit committee, renamed at the 
meeting held on 23 January 2018

81 

Previously the ethics committee, renamed at 
the meeting, held on 23 January 2018

Hochstein Amos as 

the chairperson of the 

committee, Lescoeur Bruno, 

Jean, Gaston and Popyk Sergii 

Dmytrovych as the members 

of the committee;

·  Committee on health, 

safety, environment and 

reserves

82

: Haysom Steven 

John as the chairperson of 

the committee, Hochstein 

Amos, Demchyshyn 

Volodymyr Vasylyovych and 

Popyk Sergii Dmytrovych 

as the members of the 

committee.

PROCEEDINGS OF THE BOARD 

AND ITS COMMITTEES

In 2017, the supervisory board 

held 22 meetings, including 14 

extraordinary meetings at the 

request of the executive board, 

including 1 meeting held via 

absentee voting.

The majority of the board 

members accumulated twice 

as much time dedicated to the 

work of the board compared 

to time commitment required 

by the Rules of Procedure 

of the supervisory board. 

In addition, supervisory 

board members contributed 

additional time to individual 

committee obligations outside 

the formal meeting periods as 

well as ongoing work for the 

development of the company’s 

revised strategy, planning and 

performance management 

framework on an individual or 

collective basis.

In addition to this, during the 

reporting year, the members 

of the supervisory board 

participated in a number of 

working groups established 

under the auspices of the 

government that deal 

82 

Previously the committee on health, 
environmental and industrial safety, renamed 
at the meeting held on 23 January 2018

with matters pertaining to 
completion of corporate 
governance reform and the 
unbundling of the natural gas 
transmission business.

Following extension of the 
responsibilities of certain 
committees and their renaming, 
the new composition of the 
supervisory board approved 
regulations on all of the board’s 

committees in their new 

versions in February 2018. 

There have been no instances of 

systematic absence at board or 

committee meetings during the 

reporting year.

Attendance of the 

supervisory board 

meetings in 2017 

(regular, extraordinary 

and by absentee voting)

Supervisory 

board

4

Audit and risks 

committee

Ethics and 

unbundling 

committee

Nomination 

and 

remuneration 

committee

Committee on 

health, safety, 

environment and 

reserves

5

Kovaliv Yulia Ihorivna

8/11

4/5

2/3

2/3

1/1

Warwick Paul Cyril

21/21

9/9

7/7

8/8

2/2

Richards Marcus Trevor

19/21 
(with partial presence 
during meetings on 
13–16 March 2017 
and 3–6 April 2017) 

7/9

7/7

8/8

2/2

Proctor Charles Richard 
Faraday

21/21

9/9

7/7

8/8

2/2

Demchyshyn Volodymyr 
Vasylyovych

21/22

9/9

7/7

7/8

2/2

Spottiswoode Clare Mary 
Joan

1/1

–

–

–

–

Lescoeur Bruno, Jean, 
Gaston

1/1

–

–

–

–

Hochstein Amos

1/1

–

–

–

–

Haysom Steven John

1/1

–

–

–

–

Popyk Sergii Dmytrovych

1/1

–

–

–

–

Kudrytskyi Volodymyr 
Dmytrovych

1/1

–

–

–

–

Conflict of interest

During the meeting of the 
nomination and remuneration 
committee of the supervisory 
board held on 5–6 September 
2017, the agenda item on 
the update of the current 

83 

Total number of meetings includes 1 supervisory 
board meeting as of 29 September 2017 that 
was not valid due to absence of quorum as well 
as 1 supervisory board meeting convened on 
29 September 2017 and held via absentee voting

84 

Total number of meetings excludes the first 
supervisory board meeting held on 13-16 Febru-
ary 2017 that resolved to establish the committee 
on occupational health, environmental and 
industrial safety

status of selection process for 

positions of the chief operating 

officer (COO) and chief 

transformation officer (CTO) 

of the company was notified 

as conflicted by the chairman 

of the committee, Warwick 

Paul Cyril, due to his personal 

acquaintance with one of the 

proposed candidates.

Board priorities

The priorities of the supervisory 

board in 2017 were to continue 

working on the projects related 

to setting up the strategy 

and implementation of the 
system of internal control of 
the company, ensure progress 
in the corporate governance 
reform of the company, and 
monitor the internal audit 
procedures across Naftogaz 
group, as well as to collaborate 
with the executive board 
and key subsidiaries of the 
group in drafting financial and 
investment plans for 2017.

The board focused on: 
(i) agreement of the mission 
and corporate objectives for the 
company; (ii) implementation 

CORPORATE GOVERNANCE

ANNUAL REPORT 2017

151

150

of the Corporate Governance 
Action Plan (the CGAP) to 
bring corporate governance 
and the relationship with 
the shareholder in line with 
accepted OECD guidelines for 
state-owned enterprises; and 
(iii) approval and monitoring of 
implementation of the internal 
audit plan for 2017.

Other issues reviewed by the 
supervisory board included 
liquidity of the companies 
across Naftogaz group and TSO 
unbundling.

In June 2017, the board 
granted prior approval for 
the draft corporate strategy 
of Naftogaz group for its 
submission to approval by the 
company’s general meeting. 
The supervisory board currently 
considers the strategy in very 
detail in order to update and 
revise as necessary following 
some significant events that 
took place at the end of 2017 
and in the first quarter of 2018.

The supervisory board and 
the executive board focused 
on the development of the 
optimal operational model of 
the company and Naftogaz 
group, and on implementation 
of the CGAP adopted by the 
government in 2015. By the 
end of 2017, the actions that 
were required by the CGAP on 
the part of the company and 
the board in particular were 
completed.

During the reporting year, 
the board approved the Code 
of Corporate Ethics and the 
Anti-Corruption Program of 
the company. In addition to 
this, the board appointed an 
anticorruption officer for the 

company within the compliance 
office.

As part of the CGAP 
implementation process as 
regards the system of internal 
control of the company and 
Naftogaz group, in 2017 the 
supervisory board adopted a 
number of policies, regulations 
and programs developed in 
cooperation with external 
professional advisors: 
•  Naftogaz group Investment

Policy;

•  Naftogaz group Policy on the

System of Internal Control;

•  Naftogaz group Compliance

Program;

•  Naftogaz group Risk

Management Program;

•  Risk Management

Methodology of Naftogaz 
group;

•  Rules on Risk Management

Interaction within Naftogaz 
group;

•  Quality Assurance and

Improvement Program of the 
Internal Audit Department of 
Naftogaz group;

•  Internal Audit Department

Regulation;

•  Code of Ethics of Internal

Audit Department of 
Naftogaz group, and;

•  Health, Safety, Security and

Environment Policy.

Moreover, the board approved 
initiating the procurement of a 
whistleblowing line outsourcing 
service and forensic services. 

During 2017, the board granted 
prior approval to resolutions 
of the executive board on 
amendments to the charters of 
key subsidiaries, and this work 

will continue in 2018 aiming 
at aligning the charters of key 
subsidiaries of the group and 
the Charter of the company 
with new legal requirements.

In 2017, the supervisory board 
passed 106 resolutions on 
matters within its competence 
including 21 resolutions related 
to transfer of issues to agendas 
of next meetings, and 85 
resolutions on substance.

SHAREHOLDER AND EXTERNAL 

COMMUNICATION

In 2017, the supervisory 
board maintained regular 
liaison with the government 
by holding joint meetings 
with the Prime Minister 
of Ukraine, the Vice Prime 
Minister of Ukraine and 
other representatives of 
the shareholder. The board 
was actively engaged in 
the operation of working 
groups established under 
the government with the 
purpose of finalizing the work 
on CGAP implementation and 
addressing issues pertaining 
to TSO unbundling.

Additionally, the board 
regularly met with 
representatives of 
international financial 
organizations as the 
company’s lenders, and took 
an active part in cooperation 
with professional external 
advisors engaged by the 
company to develop a 
strategy for Naftogaz group, 
implement a system of 
internal controls, and prepare 
the group for the unbundling 
of the gas transmission system 
operator.

Competence and proceedings of supervisory board committees 

AUDIT AND RISKS COMMITTEE 

    Key functions of the 

committee 

The restated version of the 
Regulations on the Audit 
and Risks Committee of the 
supervisory board was approved 
by resolution of the supervisory 
board in February 2018. In 
particular, it was supplemented 
with the following key tasks and 
functions of the committee:
1)  monitoring of the integrity of 

financial information of the 
company;

2)  reviewing at least annually the 

efficiency of the company’s 
internal control and risk 
management systems;

3)  studying issues that may 

be deemed as the reason 
for dismissal of the external 
auditor;

4)  controlling the independence 

and objectivity of the external 
auditor in line with the 
Handbook of International 
Quality Control, Auditing, 
Review, Other Assurance, and 
Related Services;

5)  establishing and applying an 

official definition of a policy, 
types of services that are not 
subject to audit, and which 
are excluded or permitted 
after the committee’s review 
or permissible without the 
recommendation of the 
committee; 

6)  reviewing the efficiency of 

external audit processes 
and responsiveness of the 
management to written 
recommendations;

7)  making recommendations to 

the supervisory board on the 
terms of labour agreements 

which are being concluded 

with the internal audit staff;

8)  preparing the draft budget of 

the supervisory board; 

9)  submitting the annual plan 

of risk-oriented internal 

audits for approval by the 

supervisory board;

10) ensuring sufficient and 

adequate resources for the 

effective performance of the 

internal audit;

11) providing recommendations 

on the selection, 

appointment, reappointment 

and dismissal of the head of 

the budgeting unit.

The Regulations governing the 

committee’s activity also provide 

for reporting to the supervisory 

board not less than once per six 

months.

    Key results in 2017 

In 2017, much of the work of 

this committee focused on 

the results of internal audits, 

in particular of Ukrtransgaz, 

Ukrgazvydobuvannya and 

Ukrtransnafta, as well as on 

the search for opportunities to 

ensure the internal auditing of 

Ukrnafta. The members of the 

committee reviewed the current 

status of audits held by internal 

audit with a focus on the audits 

of procurement activities in the 

companies of Naftogaz group, 

including “red flag” purchases 

identified by the external 

auditor during audit of financial 

statements for 2016, on a regular 

basis.

During 2017, members of the 

committee held discussions 

with representatives of the 

independent auditor on the 

key figures of the consolidated 

financial statements and 
qualifications expressed in the 
independent auditor’s report, 
as well as on the financial 
management of Naftogaz 
group. In particular, the treasury 
arrangements and debt portfolio 
of Naftogaz group were reviewed, 
including matters pertaining 
to non-compliance of business 
companies in which the company 
is the sole shareholder (founder, 
participant) with Naftogaz 
group treasury policies, cash and 
liquidity management in Naftogaz 
group. The members of the 
committee stressed the necessity 
of the centralized management of 
the Naftogaz group loan portfolio 
and of further work to reduce the 
overall cost of debt to Naftogaz 
group given its financial position 
and general market conditions.

Another important aspect of the 
committee’s activities covered the 
review of the key risks identified 
by the risk management office 
in the course of an initial risk 
assessment of Naftogaz group. 
In the view of the committee, 
further risk assessment should 
take into account financial, 
operational, HSE, reputational and 
other non-financial risks.

ETHICS

 

AND

 

UNBUNDLING

 

COMMITTEE

 

    Key functions of the 

committee 

The restated version of the 
Regulations on the Ethics and 
Unbundling Committee of the 
supervisory board was approved 
by resolution of the supervisory 
board in February 2018. In 
particular, it was supplemented 
with the following key tasks and 
functions of the committee:

CORPORATE GOVERNANCE

ANNUAL REPORT 2017

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152

1)  providing recommendations 

and proposals regarding 
processes pertaining to or 
associated with unbundling 
of the gas transmission 
system operator, which are 
taking place both inside and 
outside of Naftogaz group 
to ensure their compliance 
with the Law of Ukraine “On 
the Natural Gas Market”, 
the Third Energy Package, 
and taking into account 
the legitimate interests of 
Naftogaz group; 

2)  consideration of issues 

pertaining to or associated 
with unbundling of the 
gas transmission system 
operator, in particular, 
internal restructuring and 
intended transactions 
involving assets, systems, 
contracts, licenses and staff 
within Naftogaz group, good 
corporate governance and 
conflict of interest issues 
of the newly established 
gas transmission system 
operator, GTS partner 
engagement;

3)  monitoring of the operating 

environment and best 
international practices 
(general and sector-specific) 
in terms of unbundling, 
engagement with various 
stakeholders to assess 
the adequacy of current 
company’s policies in this 
area;

4)  elaborating and drafting 

decisions and conclusions, 
proposals, recommendations, 
policies, strategies, rules 
of procedure, procedures, 
other documents related to 
unbundling, and submitting 
them for supervisory board’s 
approval.

The Regulations on committee 
activity provide for reporting to 
the supervisory board not less 
than once a year.

    Key results in 2017 

In 2017, this committee focused 
on the review and subsequent 
endorsement of the draft Code 
of Corporate Ethics developed 
by the compliance office in 
cooperation with external 
consultants.

The committee also commented 
on and recommended approval 
of the draft Anti-Corruption 
Program, as well as the plan for 
its rollout, including introduction 
of the whistleblowing line, 
assessment of corruption risks, and 
implementation of mechanisms 
for control of identified risks.

The committee reviewed, among 
other things, conflicts of interests 
and leakage of information.

NOMINATION AND 

REMUNERATION COMMITTEE

    Key functions of the 

committee 

The restated version of the 
Regulations on the Nomination 
and Remuneration Committee 
of the supervisory board was 
approved by resolution of the 
supervisory board in February 
2018. In particular, it was 
supplemented with the following 
key tasks and functions of the 
committee:
1)  development of succession 

plans for the company’s 
supervisory board, executive 
board and other executives;

2)  development and periodic 

review of the company’s 
policy on nomination and 
remuneration;

3)  determining and ensuring 

selection procedures, 
nomination of candidates 
and recommendation for 
approval by the general 

meeting or the supervisory 

board (as defined by the 

Charter) of candidates for 

vacancies in the supervisory 

board, the executive board or 

other officers of the company 

nominated and dismissed by 

the supervisory board;

4)  submitting proposals to 

the supervisory board 

concerning individual 

remuneration for members 

of the executive board, 

ensuring their compatibility 

with the remuneration 

policy adopted by the 

company and compliance 

with the assessment of the 

performance of the member 

of the executive board who is 

individually remunerated;

5)  forming proposals regarding 

key performance indicator 

criteria and the organization 

of procedures for their 

periodical assessment for the 

chief executive officer and 

members of the executive 

board, the corporate secretary, 

the risk management officer, 

the chief audit executive, the 

chief compliance officer, and 

the anticorruption officer;

6)  periodic assessment of the 

structure, size, composition 

and performance of the 

executive board and provision 

of recommendations for any 

changes;

7)  periodic assessment of the 

chief executive officer and 

members of the executive 

board for conformity with 

qualification requirements 

and relevant reporting to the 

supervisory board;

8)  advising the supervisory 

board on the composition of 

its committees and periodic 

rotation of committee 

members;

9)  ensuring training programs 

for members of the 

supervisory board and the 

executive board as required 

for their efficient performance 
in the corporate governance 
framework implemented by 
the company;

10) approving the nomination of 

the company’s executives at 
their appointment;  

11) controlling the level and 

structure of remuneration 
of the company’s executives 
along with provision of 
recommendations to the 
executive board on these 
issues.

The Regulations governing the 
committee also provide for 
reporting to the supervisory 
board not less than once a year.

    Key results in 2017 

In 2017, this committee focused 
its work on developing the 
Remuneration and Succession 
Planning Policy, in particular, 
current remuneration principles 
in Naftogaz group and potential 
improvements or replacement 
with more effective mechanisms, 
as well as completion of actions 
envisaged by CGAP concerning 
the adoption of new policies and 
procedures on related matters.

During 2017, the committee 
provided recommendations to 
the supervisory board regarding 
the nomination of candidates 
to be appointed as members of 
the company’s executive board 
by the shareholder, including 
recommendations regarding 
CEOs of business companies in 
which the company is the sole 
shareholder (founder, participant). 
Committee members supported 
the executive board in the 
selection process for positions of 
the chief operation officer and the 
chief transformation officer of the 
company, as well as the president 
of Ukrtransgaz.

In addition, committee 
members endorsed an increase 
of staffing for internal audit, risk 
management and compliance 
functions that commenced work 
in early 2017.

COMMITTEE ON HEALTH, 

SAFETY, ENVIRONMENT 

AND RESERVES 

The committee on health, 
environmental and industrial 
safety has been established by 
the decision adopted at the 
supervisory board meeting 
held in February 2017. At the 
meeting held in January 2018, 
it was renamed the committee 
on health, safety, environment 
and reserves. The committee is 
the permanent consulting and 
advisory body of the supervisory 
board accountable to it with 
the key task to examine, 
prepare for consideration and 
advise the supervisory board 
on issues pertaining to health, 
safety, environment (HSE), 
evaluation and management 
of hydrocarbon resources 
and reserves (Reserves). The 
supervisory board resolved 
on the establishment of this 
committee to ensure addressing 
matters pertaining to health and 
industrial safety at the highest 
level which is normal practice for 
leading international oil and gas 
companies.

The Regulations on the 
Committee on Health, 
Safety, Environment and 
Reserves of the supervisory 
board were adopted at the 
supervisory board meeting 
held in September 2017, and 
restated by resolution of the 
supervisory board in February 
2018.

    Key functions of the 

committee 

The Regulations on the 
Committee on Health, Safety, 
Environment and Reserves of 
the supervisory board define the 
following key functions of this 
committee:
1)  controlling HSE and Reserves 

strategy, plans and related 
risk assessment in the context 
of the overall business 
strategy of the company, and 
the integration of HSE and 
Reserves into a major business 
processes;

2)  controlling the evaluation of 

major and recurring failures 
within the company in 
terms of HSE and Reserves 
governance and performance, 
and its influence on general 
economic activities;

3)  creating favourable 

conditions for investments 
to increase the production of 
hydrocarbons; 

4)  reviewing the rating and 

position of the company with 
respect to international best 
practice for HSE and Reserves, 
and legal requirements on 
these issues.

The Regulations on the 
Committee also provide for 
reporting to the supervisory 
board not less than once a year.

    Key results in 2017 

Following commencement 
of its operations in 2017, this 
committee paid specific attention 
to the circumstances and reasons 
of accidents, and health and 
industrial safety system across 
Naftogaz group, as well as 
considering possible ways to 
improve safety at workplace.

CORPORATE GOVERNANCE

ANNUAL REPORT 2017

155

154

Andriy Kobolyev

Chief executive officer (chairman of the executive board) since 25 March 2014

Andriy began his career at the international audit and consulting group 

PriceWaterhouseCoopers (PwC), where he specialized in strategic 

management and corporate transformation. From 2002 to 2010 he worked at 

Naftogaz, rising from a chief specialist to adviser to the chairman. Some time 

later, Andriy co-founded AYA Capital investment banking group where he 

focused on debt and equity capital raising, debt restructuring and corporate 

reorganizations of large enterprises and holdings. Andriy holds a master’s 

degree in international economic relations with honors from the Institute of 

International Relations at Taras Shevchenko National University of Kyiv.

Sergiy Pereloma

First deputy chairman since August 2014 

Sergiy has more than 15 years experience in the oil and gas industry 

and manages divisions responsible for transit and supply of natural 

gas, customs clearance, gas sales and gas balancing. He has extensive 

experience in finance, banking and insurance sectors. Sergiy graduated 

from the Institute of International Relations at Taras Shevchenko National 

University of Kyiv.

Sergiy Konovets

Chief financial officer (deputy chairman) since April 2014 

Sergiy is responsible for financial and economic management in Naftogaz. 

Sergiy has more than 20 years of professional experience in strategy 

development, business development, finance and audit with international 

companies. He worked as audit partner for leading audit companies Deloitte 

and EY. Before his appointment to Naftogaz, Sergiy worked at international 

consultancy Boston Consulting Group. He also worked in a business 

development and strategic planning function at international agriculture 

holding Bunge located in Switzerland. Sergiy holds an MBA degree from the 

International Institute for Management Development (IMD) in Lausanne, 

Switzerland.

Yuriy Kolbushkin

Member of the executive board since February 1999 

Yuriy has worked at Naftogaz since the company was founded. He is 

responsible for taxation, pricing policy, budgeting and economic relations. 

Before moving to oil and gas industry, he worked for 15 years in the Ministry 

of Finance of Ukraine. Yuriy graduated from the Kyiv Institute of National 

Economy, holds a doctoral degree in economics and is a member (academic) 

of the Ukrainian Academy for Oil and Gas.

EXECUTIVE BOARD STRUCTURE 

AND REMUNERATION

Oleg Prokhorenko 

Member of the executive board since 24 May 2017 

Chairman of executive board at Ukrgazvydobuvannya PJSC since June 2015

Prior to his appointment to UGV, Prokhorenko worked for 8 years at a 

worldwide consulting firm McKinsey in Ukraine and in other countries  

where he advised clients on strategic management issues. 

He has experience of cooperation with the largest private companies and 

governmental institutions in oil and gas production, power generation, 

extraction of metals and mineral resources, as well as with the public 

sector in strategic planning, operational improvements, and reorganization 

of companies. Oleg holds an MA degree in Public Administration and 

Public Policy from John F. Kennedy School of Government in the USA and 

a BA degree (with honours) in Economics and Public Administration from 

Dartmouth College.

Mykola Havrylenko 

Member of the executive board since 24 May 2017 

Chief executive officer at Ukrtransnafta PJSC since November 2015

Prior to his appointment to Ukrtransnafta, Previously, Mykola Havrylenko 

headed private oil and gas companies VIK OIL LTD and GAZNGO LTD.

Havrylenko holds a degree from Tugan-Baranovsky Donetsk State University 

of Economics and Trade. He also completed a master’s degree in oil and 

gas pipelines and storage facilities at Ivano-Frankivsk National Technical 

University.

Remuneration of the management 

During 2017, the management consisted of 6 executive board members and 9 directors (4 executive 

board members and 6 directors in 2016). Compensation to the management, which is part of other 

operating expense, included salary and additional current bonuses and made up UAH 214 million 

(UAH 87 million in 2016).  

   Remuneration paid to Naftogaz board members in 2017

Members 01.01.2017–31.12.2017

Remuneration including unified social tax as board member, UAH million

Andriy Kobolyev

47.1

Oleg Prokhorenko*

24.0 

Sergiy Pereloma

17.0 

Sergiy Konovets

15.2

Yuriy Kolbushkin

14.0

Mykola Havrylenko* 

10.4

Total

127.7

* Oleg Prokhorenko and Mykola Havrylenko took up their appointments as Naftogaz board members in May 2017.  
  No remuneration for performance of their duties in this board was paid by the company.

CORPORATE GOVERNANCE

ANNUAL REPORT 2017

157

156

Yuriy Vitrenko 

Сhief commercial officer of 

Naftogaz Group

Yaroslav Teklyuk  

Director for legal  

affairs 

Oleg Didenko

Director for corporate  

debt workout,  

gas distribution systems  

and retail gas supply

Vitaliy Shcherbenko 

Director for administrative 

activity and energy  

efficiency

Margarita Korotkova

Personnel management 

and social policy director 

Orest Logunov

Сhief procurement  

officer

Bruce Owen  

Dingeman 

Director exploration 

and production 

 

Aliona  

Osmolovska 

Head of corporate 

communications

Other Top Executives

RISK MANAGEMENT AT  

NAFTOGAZ GROUP

Within the framework of 

corporate governance reform 

and the introduction of internal 

controls at Naftogaz group, an 

independent risk management 

office of Naftogaz group was 

established. It began work in 

November 2016.

The main goals of the service are 

the development of an efficient, 

comprehensive risk management 

system and the coordination of 

the risk management process 

at Naftogaz group to secure the 

group's operations and help to 

achieve its strategic goals.

The priority tasks of the office 

in 2017 were the development 

of risk management regulatory 

documents and tools, as 

well as the initial group risk 

assessment. For this purpose, risk 

management best practices were 

applied, including the provisions 

of the international standards 

(ISO/IEC 31010:2009 Risk 

management – Risk assessment 

methods, ISO 31000:2009 Risk 

management – Principles 

and guidelines). International 

consultants and experts 

participated in the process.

In 2017, Naftogaz group 

carried out a comprehensive 

risk assessment based on 

developed tools. The outcome 

of this work was the creation 

of the first Naftogaz group 

risks register which is a single 

document containing detailed 

information on identified risks, 

their correlation and levels of 

impact, control mechanisms and 

processing measures. The data of 

the register ranks risks in order to 

address the most significant. The 

register is continuously revised 

and updated in order to contain 

up-to-date information on the 

risks.

The risks register which 

was created based on the 

results of the initial risks 
assessment

 

in 2017 includes 

276 risks and has the 

following structure: 

   Naftogaz group risk structure and their assessment

RISK ASSESSMENT FOR THE GROUP:

1-4 LOW

5-14 MEDIUM

15-25 SIGNIFICANT

4

REPUTATIONAL 

8

ENVIRONMENTAL, HEALTH 

AND SAFETY 

12

LEGAL

13

REGULATORY 

35

FINANCIAL

127

OPERATIONAL

77

STRATEGIC

5

10

15

20

25

CORPORATE GOVERNANCE

ANNUAL REPORT 2017

159

158

Environmental, health and safety risks 

Within its operational activities 

for the extraction, transmission 

and storage of gas and oil, 

Naftogaz group companies face 

the risk of serious accidents that 

may result in harm to people's 

health and the environment, 

loss of production facilities, 

and suspension of operating 

activities. The situation is 

complicated by the presence of 

outdated production equipment 

in the group’s drilling fleet. 

In order to mitigate this risk, 

Naftogaz group companies are 

actively introducing modern 

methods of exploitation, 

diagnostics, and modernization 

of existing production facilities, 

using the world's best practices 

in this area together with their 

own personnel training and 

adhering to the requirements 

of national and international 

regulatory documents and 

standards. These measures are 

also among the elements for 

managing the risk of low quality 

of geological data as described 

below.

Operational risks

LOW QUALITY OF GEOLOGICAL  

DATA 

The low quality of geological 

data used by Naftogaz group 

companies for gas and oil 

extraction results in the growth 

of uncertainty regarding the level 

of hydrocarbons at development 

and extraction plots. This in turn 

results in increases in drilling 

expenses and decreases in the 

volumes of oil and gas extraction, 

which directly impacts the 

achievement of one of the key 

Naftogaz group strategic goals – 

maintaining and expanding 

survey and extraction possibilities.

Improvement of geological 

survey quality is achieved through 

continuous cooperation between 

Naftogaz group companies and 

Ukrainian scientific and technical 

institutes, and engagement of 

international experts in service of 

oil and gas fields.

FAILURE TO OBTAIN THE  

REQUIRED PERMITS FOR FIELD  

DEVELOPMENT 

Naftogaz group companies 

(specifically Ukrgazvydobuvannya 

and Ukrnafta) must deal with 

the actions of local councils 

and the State Service for 

Geology and Mineral Resources 

(Derzhgeonadra) which hinder 

the issuance or extension of 

permits for field development 

and subsequent gas and oil 

extraction. Specifically, in 2017, 

Poltava Oblast Council blocked 

the issuance of new licenses 

for the development of fields 

to Ukrgazvydobuvannya, while 

Derzhgeonadra, based on 

court resolutions, annulled the 

company's 3 special permits 

for the development of the oil 

and gas bearing areas in Poltava 

oblast.

Such obstacles pose a threat 

to the group's fulfillment of 

the Ukrgazvydobuvannya 

20/20 strategy.

Additional information on 

Naftogaz group company 

activities regarding this risk 

is provided in sections "Local 

Communities Development" 

and "The European Natural Gas 

Market" of this report.

INEFFECTIVE UNBUNDLING OF 

NATURAL GAS TRANSMISSION 

ACTIVITIES 

The process of separation of 

the natural gas transmission 

activities (activities of the gas 

transmission system operator 

or GTS) from its extraction 

and supply was initiated in 

2014 in accordance with 

the requirements of the EU 

Third Energy Package. This is 

one of the most important 

preconditions of Ukrainian 

natural gas market liberalization 

and its further integration into 

the EU natural gas market.

Ineffective unbundling may result 

in a number of problems in the 

transit and internal transmission 

systems including the operation 

of the underground gas and 

buffer gas storage facilities. This 

could cause the company΄s 

financial losses, threaten the 

natural gas market reform and 

may harm Ukraine's efforts to 

maintain its transit status after 

2019.

Along with regulatory and 

legal initiatives in order to 

minimize the risk, the company 

engages international experts 

to help in ensuring an efficient 

unbundling process. This 

would also allow engaging 

a reliable and professional 

Western partner to the GTS 

management, which would also 

grant the market participants 

indiscriminate access to the 

GTS and enhance the level of 

reliability of the Ukrainian GTS in 

the eyes of the European energy 

community. 

PROCUREMENT DELAY/FAILURE 

RISKS  

The relevant Ukrainian 

legislation provides for 

carrying out procedures for 

the procurement of goods 

and services through the 

electronic public procurement 

system ProZorro. At the same 

time, the said system and the 

Law of Ukraine "On Public 

Procurement" do not prevent 

dishonest suppliers from 

participating. As a result, there 

are high risks of collusion 

among tender participants 

and dangers of refusal to 

sign contracts or their non-

fulfillment or supply of goods 

of inappropriate quality. This 

may result in re-tendering 

or delays in the supply and 

production process and may 

have material consequences 

for Naftogaz group operations.

To minimize this risk, the 

company implements the 

mechanism of prompt 

and timely acceptance of 

proposals for consideration, 

determination of the winner 

based on the results of the 

tender, and conclusion of the 

contract. The subdivisions that 

initiate the procurement also 

carry out a detailed analysis 

of the market and potential 

participants.

The group holds regular 

open meetings with potential 

suppliers to inform them about 

its needs and details of the 

procurement process.

Regulation

LENGTHY PROCESS OF APPROVAL  

OF THE FINANCIAL PLAN 

The relevant Ukrainian 

legislation provides that the 

company agrees its financial 

plan with executive authorities, 

which results in significant 

delays in its adoption and 

increases the risk of its non-

fulfillment. The absence of an 

approved financial plan makes 

it impossible to implement 

investment programs in full, 

which may challenge both 

the successful performance of 

current technical servicing work 

and the planned growth of 

Naftogaz group.

EXTENSION OF VALIDITY OF 

PROVISIONS ON IMPOSING SPECIAL 

OBLIGATIONS ON UNFAVORABLE 

TERMS FOR THE COMPANY 

On 22 March 2017, the 

Ukrainian Government 

extended the validity of 

provisions on imposing PSO 

regulations on the company 

until June 2018. The company 

is obliged to supply gas at 

regulated prices directly to 

heat producers and regional 

suppliers to satisfy needs 

of households. Failure to 

implement the subsidy 

monetization system, opaque 

regional intermediaries and 

the lack of a compensation 

mechanism for the company 

results in the accumulation of 

bad debts for supplied natural 

gas.

As of 31 December 2017, 

the total debt of DHCs to 

Naftogaz was UAH 30.6 billion, 

and that of the regional 

suppliers was UAH 14.2 billion. 

This level of debt significantly 

affects the company's 

liquidity, especially during 

the summer period, when the 

gas is purchased for the next 

heating season.

This situation also creates 

difficulties in negotiations 

with the IMF, EBRD, European 

Commission, World Bank, etc., for 

financing and attracting cheap 

loans.

In order to minimize the 

impact of this risk and enhance 

the efficiency of Ukraine’s 

gas market, the company 

communicates the negative 

consequences of the current 

PSO system and discusses 

possible amendments to the 

effective legislation with the 

government and IFOs on a 

regular basis. 

Additional information on the 

PSO impact on the group's 

operations is provided in the 

section "Liberalization of the 

segment of gas supply to 

household consumers, PSO 

and the subsidies system".

CORPORATE GOVERNANCE

160

Strategic

LAUNCH OF TURKISH STREAM 

AND NORD STREAM 2 

The main strategic risk for 

Naftogaz group today is 

the implementation of 

bypass gas pipeline projects 

outside the territory of 

Ukraine that are expected to 

be launched in 2019:

1.  Under Turkish Stream gas 

pipeline construction contract, 

signed on 10 October 2016 

between the governments of 

Russia and Turkey, the expected 

capacity is 31.5 bcm/year.

2.  Under Nord Stream 2 gas 

pipeline construction contract 

signed in 2015, the expected 

capacity is 55 bcm/year.

The implementation of these 

bypass gas pipelines projects 

would result in the loss of a 

significant portion of income of 

Naftogaz group starting from 

2019.

Exposure to risk also relates to 

correct unbundling (described in 

detail in Risk No. 4 above).

Additional information on the 

company's actions regarding 

this risk is provided in the 

section "The European Natural 

Gas Market".

Legal

VAT GAZPROM'S CLAIM UNDER 

THE GAS PURCHASE CONTRACT 

(TAKE-OR-PAY) IN THE ARBITRATION 

INSTITUTE OF THE STOCKHOLM 

CHAMBER OF COMMERCE 

During 2017, one of the 

key risks for Naftogaz was 

Gazprom's claim under the 

contract for the purchase 

of gas (take-or-pay) in the 

Arbitration Institute of the 

Stockholm Chamber of 

Commerce for the total 

amount of USD 56 billion.

For the purpose of defense of 

its position in this litigation, 

Naftogaz engaged qualified 

and experienced legal 

advisors.

The Arbitration Court fully 

rejected Gazprom's claim for 

USD 56 billion in accordance 

with the take-or-pay rule for 

2009–2017.

Financial

LIQUIDITY RISK 

Naftogaz group operating 

activities are of a seasonal 

nature that provides for 

receiving the main revenue 

from the natural gas sale 

and transmission during 

the heating season. Over 

the summer period, sales 

volumes are significantly 

less and the group incurs 

significant expenses related 

to the financing of the 

natural gas injection into 

the underground storage 

facilities for the next heating 

season.

The increase of debts by 

the DHCs and regional 

gas suppliers to Naftogaz 

and the necessity to pay 

dividends to the state budget 

during the summer period 

pose significant threats to 

Naftogaz group liquidity for 

the summer period.

Taking into account the 

strategic importance of timely 

preparation for the heating 

season, the company attracts 

loans on national and foreign 

financial markets. At the same 

time, an important factor for 

the conclusion of agreements 

with Naftogaz international 

financial partners is the 

fulfillment of the corporate 

governance plan, correct 

unbundling and the 

settlement of the PSO issue.

OUR RESPONSIBILITY

OUR RESPONSIBILITY

ANNUAL REPORT 2017

163

162

HUMAN RESOURCES

The personnel of Naftogaz group – quantitative and qualitative profile 

As of 31 December 2017, the 

enterprises that belong to 

Naftogaz group employed 

71 881 employees (-3.9% 

compared to 2016), including 

8 103 managers (11%), 

12 626 professionals and specialists 

(18%), 459 technical staff (0.5%); 

50 693 qualified and other workers 

(70.5%).

The gender structure of group 

enterprises is dominated by men, 

which is related to the specifics 

of operations: 55 939 men (78%) 

and 15 942 women (22%), which 

complies with international 

practices according to BCG.

Of the total number of managers, 

professionals and specialists 

(20 729 persons), 20 447 persons 

or 99% have complete higher 

education, incomplete higher 

education or basic higher 

education. 

Key results and achievements in HR management in 

2017: 

•

  since 1 July 2017, a Grade Basic Payment System has been 

introduced in Naftogaz;

•

  increase in average monthly wage to UAH 13 374 (+ 24.5% 

compared to 2016);

•

  since February 2017 a system of voluntary health insurance 

has been introduced;

•

  the company’s internal communications system and 

reforming of the pay system of Naftogaz of Ukraine NJSC 

projects were awarded a prize in a special nomination 

Reforming the State as an Employer at the All-Ukrainian 

Competition Prize HR Brand Ukraine 2017.

In difficult conditions, only a team 

of professionals can guarantee 

the security of energy supply and 

create a high-quality new market. 

We managed to rally specialists 

who seek constant growth and 

share our corporate values. With 

such human potential, we are 

confidently building a great 

European company.

  Naftogaz group personnel structure, 2017

78%

12 626

50 693

22%

GENDER STRUCTURE

PERSONNEL CATEGORIES

EMPLOYEES 

TOTAL     

71 881

   Qualified and other workers
  Professionals and specialists
  Managers
   Technical staff

  Men
   Women

459

8 103

218 persons hold a PhD, 

including 53 women. In 

addition, 23 persons have a 

degree (13 associate professors, 

7 senior scientists, 3 professors). 

The average age of the 

employees is 42.2 years. 

8 142 persons (11%) of 

employees are under the age 

of 30; 42 590 persons (59%) 

are from 30 to 50 years old; 19 

237 people (27%) are more than 

50 years old; and 1 912 persons 

(3%) are pension age.

Almost 90% of the staff 

works in three companies: 

Ukrnafta (22 952 persons), 

Ukrgazvydobuvannya (20 876 

persons) and Ukrtransgaz 

(19 583 persons), including 61% 

of employees employed in gas 

and oil production, and 27.5% in 

gas transportation. 

Personnel turnover in 2017 

was as low as 

3.2%

In 2017, 10 252 employees left 

the companies of the group, 

of which 2 303 employees 

quitted voluntarily, 22 

employees were dismissed for 

violating labor discipline, 797 

employees were dismissed 

due to reorganization 

and redundancy, and 

7 130 employees quitted 

because of other reasons. The 

main reasons for termination 

of employment contracts were: 

the desire of the employee, 

the termination of the contract 

term, the agreement of the 

parties including according to 

voluntary separation program, 

relocation and outflow of 

skilled personnel abroad, 

retirement by age, and transfer 

to another enterprise.

To reduce the personnel 

turnover at Naftogaz group 

companies, measures 

are taken to ensure 

productive employment 

and rational and efficient 

use of work time, staff 

optimization, improvement 

of working conditions, 

development of new forms 

of labor organization, and the 

formation and maintenance 

of a favorable moral and 

psychological environment.

  By activity

74 765

71 881

15 542

15 383

25 788

24 794

33 435

31 704

Total

Production 

Transportation 

Other 

  2016    

  2017 

   The average monthly wage at Naftogaz group companies 

compared to the average wage in Ukrainian industry,  

2014-2017, UAH

6 597

3 988

7 388

4 789

10 091

5 902

13 374

7 631

2014

2015

2016

2017

  Naftogaz group companies
  Ukrainian industry

21

%

21

%

34

%

34

%

45

%

44

%

Ukrgazvydobuvannya 

Ukrnafta 

Zakordonnaftogaz

Ukrnafta 

Ukrtransnafta 

Ukrtransgaz 

Ukrspetstransgaz