Graham Stack in Kyiv
August 6, 2012
Ukrainian national energy company Naftogaz Ukrainy claims an appraisal provided by oilfield services giant Halliburton justifies the $400m price tag that it paid for an offshore rig in 2011. But a bne
investigation finds the Halliburton appraisal is less than meets the eye, as the US firm subcontracted the rig appraisal work to a one-man band from Alabama.
In 2011, Ukraine's national energy company Naftogaz purchased an offshore drilling rig for just under $400m from a UK intermediary company, which previously had acquired the same rig for just $248.5m from Norway's offshore operator Seadrill. The discrepancy between the prices prompted widespread accusations of corruption on a grand scale, which coming just as Ukraine's election campaign for parliamentary elections set for October 28 got underway could be a key factor in determining the outcome.
In a fightback against the allegations, Naftogaz and energy minister officials are now claiming that a valuation of the rig performed by Halliburton confirms the $400m price tag, exonerating them from suspicion.
According to the Halliburton letter summarizing the preliminary appraisal results, seen by bne
, the estimated value of the rig, outfitting and engineering work, and transport needed to move it from Singapore to the Black Sea almost exactly matches the sum of $400m paid by Naftogaz at the controversial procurement tender held in March 2011. The winner of the tender was a UK company called Highway Investment Processing, the beneficiaries and representatives of which have never been revealed. The bank account to which the funds were transferred was with Latvian bank Trasta Komercbanka.
Naftogaz management and energy ministry officials are now brandishing the Halliburton appraisal letter as proof that the acquisition of the rig was above board. "The procedure of purchasing the drilling platform, its servicing and technological processes are all subject to an independent audit from Halliburton," Naftogaz deputy board chairman Vadim Chuprun declared.
Ukraine's energy ministry claimed: "We believe further insinuations about the purchase of the drilling rigs are an instrument of competition for the development of the Black Sea shelf aimed at reducing Ukraine's energy security."
Sweet home Alabama
The Halliburton letter subsequently produced by Naftogaz is written in poor English and contains orthographical and factual errors, but Halliburton confirmed to bne
it was authentic.
The letter may not, however, fulfill the expectations placed on it by Naftogaz. It states that Halliburton in fact subcontracted rig appraisal work to a company called Marine Surveyors Incorporated, which deployed a team led by a certain Captain Michael Barrie. According to bne
enquiries, the Halliburton letter is misleading in that there is no such company as Marine Surveyors Incorporated – the company Halliburton hired is Captain Michael Barrie's own set-up: M. H. Barrie & Associates Marine Surveyors, Inc. According to Barrie, he travelled alone to a Turkish Black Sea port for the rig appraisal job, not with any team.
According to bne
enquiries, Captain Barrie's marine surveyor company is a small local affair based in the US southern port town of Mobile, Alabama, operating since 1994, with Barrie taking on some partners in 1998. Barrie operates from a four-room suite in a dockside office block, with total staff numbering under 10. According to his website, Captain Barrie offers "marine and terminal expertise" with "local knowledge of port operations." M. H. Barrie & Associates Marine Surveyors' role is to assess vessel and cargo condition mostly for insurance purposes and damage claims.
Barrie's website does not mention any expertise in offshore energy. Barrie told bne
that over the last two years he had indeed taken on some work with jack-up rigs and said that his website is seven years old and needs updating. Barrie acknowledged that his is a "small company" and that this was the first job he had done for Halliburton. Barrie said that Halliburton had refused him permission to comment to bne
on any aspects of the appraisal, but indicated he was unacquainted with the appraisal letter's contents.
Halliburton is the world's second largest oilfield services company, with a market capitalization of $30bn and workforce of over 60,000, headed in the 1990s by the former US vice president Dick Cheney. The Halliburton press service intended to get back to bne
with answers on the appraisal of the "West Juno" rig (now renamed "Petro Godovanets"), but failed to do so within a two week deadline.
While the reasons for Barrie's hiring by Halliburton are unclear, the import of the appraisal letter so feted by Ukrainian officials is equally unclear: the bulk of the difference between the $248.5m sale price to Norway's Seadrill paid by the UK intermediary, and the $400m purchase price paid by Naftogaz to the UK intermediary, is explained in two lines, both of which refer to data supplied by Naftogaz itself. Thus, according to the letter, "based on the activities information provided by Naftogaz (sic) upgrades to the West Juno rig is (sic) estimated at $57,940,000."
Secondly, "based on the work volume before rig dry tow requested by Naftogaz, auxiliary costs for engineering work such as cut and reinstall the legs, personnel and engineering is (sic) estimated at $71,380,000." This item refers to work done on the rig necessary to move it through the Bosporus into the Black Sea. Notably, the Halliburton letter dated November 2011 was actually written before the engineering work was implemented in the winter 2011-2012, with Barrie visiting in April 2012.
Naftogaz did not respond to bne
queries about the extent to which the Halliburton appraisal was based on data supplied by Naftogaz itself.
Interestingly, the original contract signed in March 2011 between Naftogaz and UK intermediary Highway Investment, as seen by bne
, specified Singapore as place of delivery, not the Black Sea. Thus the price items connected to transit via the Bosporus – $71,280,000 – and also shipping costs of $15m were not included in the original deal between Naftogaz and Highway Investment of March 2011. The place of delivery was shifted from Singapore to the Turkish Black Sea port of Giresun in amendments to the contract made in September 2011, seen by bne
. The changes apparently at a stroke of the pen brought over $86m extra expense for Highway Investment, but without any change in the price paid by Naftogaz.
September 2011 was also the month Halliburton signed a framework agreement with Naftogaz on construction, operating and maintaining of oil and gas wells, including an option for servicing the West Juno/Petro Godovanets rig. This agreement sealed what had been a meteoric rise for Halliburton in Ukraine in 2011, with prior agreements in the course of the year signed on confidentiality and cooperation, and Halliburton opening a swanky new office in the prestigious heart of Kyiv. The November 2011 Halliburton appraisal letter thus finishes on a high note: "Halliburton appreciates this opportunity to submit this preliminary report and looks forward to being Naftogaz business partner in developing oil and gas assets in Ukraine."
Analysts surmise that Halliburton has now supplanted Schlumberger as Naftogaz's service partner of choice: as early as 2006, Schlumberger, the world's largest oilfield services company and Halliburton's traditional rival, signed a strategic cooperation agreement with Naftogaz, and as late as December 2010 Schlumberger won a Naftogaz tender for work on the Subbotinskoe offshore field. Schlumberger told bne
, "we cannot confirm their [the previous agreements'] continuing validity."
History is being rewritten not only in Ukraine with respect to the 2011 Naftogaz rig deals. The revenues from the sale of the West Juno rig to Naftogaz went through Highway Investment's account at Latvia's Trasta Komercbanka – a bank that appears to have links to Naftogaz Ukraine. Not the least of such links would be the fact that largest shareholder and chairman of the bank's council, Igor Buimisters, listed on his website biography that he is consultant to the supervisory boards of "Neftgas Ukraine" and also of a Naftogaz joint venture with Poland's PGNiG called Devon. Neftgas Ukraine is a russified version of Naftogaz Ukrainy.
But Trasta has now removed the reference to the Ukrainian companies from Buimisters' bio. Following the deletion, the bank demanded that bne
retract its previous statements linking Buimisters to Naftogaz.
The bank also now claims in hindsight that the reference to "Neftgas Ukraine" never in fact referred to Naftogaz Ukrainy, but to an unspecified privately held company. Despite bne
requests, the bank has not supplied the address or registration details of the "real" Neftgas Ukraine. Nor does the Interfax Spark database contain details of any such company. The bank is also silent on Buimisters' involvement with the undisputed Naftogaz joint venture Devon. But the website bio has generously retained reference to Buimisters' "doctorate" from Kennedy Western University – an unaccredited US distance-learning college that closed in 2009 after being named in a US government investigation into "diploma mills."
The bank's apparent nervousness comes at a time when Latvian law enforcement agencies are finally making moves to investigate the 2011 Naftogaz tenders and the subsequent passage of money through Latvia. bne
has obtained confirmation from the economic crime department of the Latvian state police that an investigation is ongoing, following transfer of materials earlier this year from the state prosecutor's anti-money laundering office.
Sad end to tenders
While there appears no end in sight to the controversy over the 2011 Naftogaz Black Sea tenders, in Ukraine an end has been made to the law on compulsory tenders for state companies, which has provided so much help to journalists and so much hindrance to bureaucrats. Without the law, the 2011 Naftogaz spending spree – which totalled roughly $1bn for two jack-up rigs and support vessels – would never have come to public attention.
President Viktor Yanukovych, under whose watch the Naftogaz tenders took place in 2011, signed into law August 1 amendments to the procedure for state procurement, freeing state-owned companies such as Naftogaz from holding such mandatory procurement tenders – and thus effectively eliminating any form of public control over vast swathes of the state sector. The government argues that compulsory tenders slow the procurement process and impede state companies' international competitiveness.
According to Oleksiy Shalaisky, founder of the Nashi Groshi website that monitors state tenders for signs of corruption – and who first flagged up the Naftogaz Black Sea tenders in 2011 – this will decimate the number of state tenders held. "State-owned companies account for around UAH300bn ($37bn) of a total UAH500bn ($62bn) state procurement orders," Shalaisky tells bne
. "These will now be excluded from having to hold tenders, and we calculate that the level of minimum kickback will rise to 10%, meaning at least an extra UAH30bn ($3.7bn) will be stolen."
According to Shalaisky, the Nashi Groshi website in little over a year's work achieved the cancellation of 25 tenders, resulting in over $700m being be returned to the exchequer. "All of these tenders were cancelled exclusively due to pressure from the media. There were no legal faults found in the tender procedure, but following media pressure, the tender winners themselves stepped back from the deals."
The media pressure was heightened by independent critical TV station TVi, which runs a feature "Tender News" focusing on corruption suspicions, including the Naftogaz Black Sea tenders. In mid-July, authorities seemed to fire a warning shot across the bows of TVi, launching a criminal case against its CEO on tax evasion charges. The charges were officially declared dropped on August 2 – a day after the changes to the tender laws.
Following the elimination of mandatory tenders, Shalaisky now expects a further surge in corruption: "The most corrupt deals were put on hold pending the recent amendments to the law."