Honghua International provides $140 million supplier credit -- via deferred payment arrangement -- to Ukrgazvydobuvannia for acquisition of 13 drilling rigs

On June 22, 2018, PJSC Ukrgazvydobuvannia (or UkrGasVydobuvannya or UGV) — a wholly-owned subsidiary of Naftogaz, Ukraine’s wholly state-owned gas company — and Honghua International Co., Ltd. signed a $140 million deferred payment (supplier credit) agreement. Under the terms of the agreement, Ukrgazvydobuvannya agreed to purchase 13 drilling rigs (with a carrying capacity between 180 and 450 tons) worth $140 million from Sichuan Honghua Petroleum Equipment Co., Ltd. The lender (Honghua International Co., Ltd) agreed to grant the borrower a five-year payment deferral. The borrower also agreed to purchase a credit insurance policy from Sinosure. In November 2018, two new drilling rigs (with a carrying capacity of 450 tons) from Sichuan Honghua Petroleum Equipment Co., Ltd. arrived in Odesa seaport. It was originally envisaged that, under the terms of the deferred payment agreement, 13 additional drilling rigs would to be delivered between June 2019 and August 2019. All of these rigs were ultimately delivered. However, the timing of delivery is unknown. The rigs were in full use as of March 2023. There are some indications that the loan from Honghua International Co., Ltd. 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 Honghua International Co., Ltd. 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.'

Additional details

1. Honghua International Co., Ltd is a subsidiary of China Aerospace Science and Industry Corporation. 2. 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.’ 3. Some sources suggest that the June 2018 supplier's credit was worth $53.3 million and the lender offered a 2-year (720 day) payment deferral rather than a 5-year payment deferral. These issues warrant further investigation.

Number of official sources

10

Number of total sources

24