Narrative
Full Description
Project narrative
On June 22, 2018, PJSC Ukrgazvydobuvannia (or UkrGasVydobuvannya or UGV) — a wholly-owned subsidiary of Naftogaz, Ukraine’s wholly state-owned gas company — and Sichuan Honghua Petroleum Equipment Co., Ltd signed a $53.3 million deferred payment (supplier credit) agreement. Under the terms of the agreement, Ukrgazvydobuvannya agreed to purchase 15 sets of drill modernization equipment worth $53.3 million from Sichuan Honghua Petroleum Equipment Co., Ltd. The lender agreed to grant the borrower a payment deferral for 720 days (1.97 years) after the use of the equipment for drill modernization. The drill modernization equipment was intended to upgrade 15 drilling rigs, all of which were also purchased from Sichuan Honghua Petroleum Equipment Co., Ltd. and 13 of which were also financed via a 2018 deferred payment agreement with Honghua International (captured via Record ID#90160). The modernization equipment was delivered between June 2019 and August 2019. Honghua International Ukraine, a subsidiary of Sichuan Honghua Petroleum Equipment, had won the bid to upgrade the drills as of March 22, 2021. The modernization was required to take place by December 31, 2022. The modernized rigs were in full use as of March 2023. There are some indications that the loan from Sichuan Honghua Petroleum Equipment Co. to PJSC Ukrgazvydobuvannia financially underperformed vis-a-vis the original expectations of the lender. In July 2022, Naftogaz -- the parent company of PJSC Ukrgazvydobuvannia -- defaulted on its repayment obligations to Eurobond holders. Then, in March 2023, the Cabinet of Ministers of Ukraine sought authorization from the central bank (NBU) to allow PJSC Ukrgazvydobuvannia to make a $26.74 million repayment (via PJSC Ukrgasbank) to Honghua International Co., Ltd. In an application to NBU, approved by a government resolution of March 3, 2023, the Ukrainian Government noted that '[15] upgraded drilling rigs are being used in full as an important factor of successful achievement of the strategic objectives of Ukrgasvydobuvannya and increase production for higher energy independence of Ukraine' and 'a failure to pay the debt to Sichuan Honghua Petroleum Equipment Co. would create a real risk of the impossibility of restoring the drilling rigs.' It also noted that, because of hostilities with Russia, two drilling rigs suffered significant damage. In its application to NBU, the Cabinet of Ministers of Ukraine also noted that only the manufacturer (Sichuan Honghua Petroleum Equipment Co.) could restore the damaged rigs, so it was important to repay the outstanding debt to Sichuan Honghua Petroleum Equipment Co. It emphasized that '[t]he ignoring of these risks may lead to the halt of three-quarters of the drilling rigs as early as in the second half of 2023, considering that drilling rigs made by Sichuan Honghua Petroleum Equipment Co. may eventually lose serviceability due to the absence of original spares and service by the manufacturer.'
Staff comments
1. In November 2018, Ukrgazvydobuvannia Board Chairman Oleh Prokhorenko said that, as of 2016, the average age of drilling rigs of the company was 23, and the average age of drilling rigs in Russia was 10 years and in Belarus – nine years. He also said that ‘[f]inally, Ukraine has begun to invest in the development of its own gas production, its own drilling fleet and the exploration of its own resources. The arrival of these new drilling rigs is one of many concrete steps that will increase gas production in Ukraine.’ 2. The maturity period for the deferred payment agreement has been estimated as 6.58 years, insofar as the payments were to be made 720 days after the commissioning of each modernized drilling rig. The latest the modernization equipment could be used and upgrades completed was December 31, 2022 (i.e. 4 years, 7 months, and 13 days after the agreement signing). Then, after adding 720 days, a total maturity period comes to about 6.58 years. 3. In 2017, China Aerospace Science and Industry Corporation became the controlling shareholder of Honghua Group, the parent company of Sichuan Honghua Petroleum Equipment Co., Ltd. 4. (MENTIONED IN END OF PAGE 1 and BEGINNNING OF PAGE 2) for source ID 605963: "As part of the implementation of the above-mentioned tasks for the modernization of drilling equipment, JSC “Ukrgazvydobuvannya” concluded an agreement dated June 22, 2018 No. UGV9806/12-18 for a total amount of 53.3 million US dollars with one of the largest suppliers registered in China, namely Sichuan Honghua Petroleum Equipment Co., Ltd. In accordance with the terms of the said agreement, in June-August 2019, power equipment was supplied for the modernization of 15 drilling rigs. The terms of the agreement stipulated a postponement of the final payment, namely 720 calendar days after the completion of commissioning work after the modernization of each individual drilling rig. According to the payment schedule, JSC “Ukrgazvydobuvannya” must make payments under the said agreement in the amount of 26.74 million US dollars. The aforementioned modernized drilling rigs are currently in full use, which is an important factor in the successful achievement of the strategic goals of JSC “Ukrgazvydobuvannya” to increase production in order to increase Ukraine's energy independence." 5. Loan performance staff is not assuming any loan terms as they are not known. Loan performance staff will rely on imputed data for the loan payment table.