Favorov left Naftogaz. Many facts need to be explained

“Time puts everything in its place.” This phrase was running through my head a year and a half ago, when I had a dispute with Andriy Kobolev, the head of Naftogaz, about Favorov, the head of Naftogaz’s Integrated Gas Business (production, trade, supply of natural gas).

Today Favorov left Naftogaz.

Turn over the page and forget? Or draw proper conclusions for the future?

I will point out right away that it is NOT a question about personal relations and NOT about a personal conflict as someone wants to present it.

This is a question of what is important for all of us: energy security, economic growth, filling the state budget, corruption, gas prices, management of state-owned companies.

Many of my friends and people who support what I do with our team think that Favorov is a great fellow. But beyond personalities, we have facts that need to be explained.


To understand what we are talking about; it is enough to look at the graph with data on gas production.

I draw your attention to the fact that I had my dispute with Kobolev about Favorov at the end of 2018. And in 2019, we already see a two-decades’ (!) record drop in production.


And this is not just an “internal problem” of Naftogaz.


Given the scale of Naftogaz, this directly affects the reduction of industrial production in Ukraine, the deterioration of the trade balance, the reduction of state budget revenues.

This had a significant negative impact on energy independence, in particular on the negotiations on the continuation of transit in 2019.

Not to mention that this removes the possibility of a significant reduction in gas prices in a market way (from the level of import parity to the level of export parity).

For those who have heard and believe the justification that production is falling because new licenses are not issued, I would like to point out that the 20/20 Program does not apply to production on already issued licenses (permits). That is, even without new licenses, there should have been growth, not a decline in production, which is confirmed by reputable independent experts.


So maybe it makes sense to clarify things?


I will add about some other results of Naftogaz’s work in the areas headed by Favorov, and about which I had a dispute with Kobolev.

The market share in the competitive segment of gas supply to commercial consumers is approaching zero. A normal system that would allow Naftogaz to develop the market and at the same time make money has not been created. Instead, it was decided to sell gas on the “exchange”. But in Ukraine there is no proper regulation of such “exchanges” (i.e. in a normal country they could not even be called exchanges). And so far, just private companies in an opaque way make money by selling gas to Naftogaz.


Opportunities for profitable development were not used in related segments, for example, electricity supplies (even to Naftogaz Group companies).

Daydreams about supplies of American gas, which was supposed to save Ukraine in case of the termination of transit.  Moreover, the highest officials of the country were dragged into this.

Brilliant” campaigns like “Prepaid gas stock”. Simultaneously there was cooperation with Firtash’s structures.

It remains only to look at the financial results of “Integrated Gas” in the reporting of Naftogaz for 2019. Our analysis shows that if we count correctly, we will see record losses.

I wonder if Oleksiy Honcharuk and Timofey Milovanov paid attention to all this, at least when they analyzed the reasons for the decline in industrial production and non-fulfillment of plans for the state budget.

Maybe you are reading this right now and think I am “settling scores” or “attacking.” No, on the contrary, all I wanted and want as regards this situation is an objective analysis with conclusions.

Yes, I personally had questions from the start about Favorov, which I asked, and which, unfortunately, I still have not receive an answer that would remove these concerns.

Maybe I’m wrong, but for me all this does not indicate a personal conflict, but the existence of a systemic problem.

By the way, your opinion on this is of interest, as well as the professional point of view of journalists and editors (Andriy Samofalov, Dmitry Ryasnoy, Sergei Golovnev, Ivan Verstyuk, Sonya Koshkina, Mykhailo Tkach, Boris Davidenko, Denys Bihus).


Let me reiterate these problematic issues so that there is no suspicion of secretive intriguing:


1. Favorov’s appointment immediately raised doubts in as regards his competence – he did not have adequate experience in gas production and its supply for the needs of the population, i.e. the main areas of the work of “Integrated Gas”. At the same time, the very logic of creating “Integrated Gas” was to comprehensively address at the state level the problems of increasing production and development of the gas supply market for the needs of the population; in particular, to ensure that the inflow of money from the sale of extracted gas to the population was sufficient to increase production. At the same time, Favorov’s appointment contradicted Naftogaz’s code of ethics – he had a “conflict of interest” in the gas trade segment, as he remained the owner of a company that competed with Naftogaz and was a counterparty to Naftogaz Group companies (i.e. controlled by Naftogaz). In such a situation, was Favorov’s appointment not a mistake?


2. According to a legal expert, this was in fact preceded by a possible violation of the law, in fact a criminal offense. This happened when Favorov received significant responsibilities in Naftogaz, a huge “boss’s” office, secretary, corporate e-mail, etc. Favorov was introduced to the Naftogaz Group as the head of a specific area, and yet he had not been formally appointed by Naftogaz (which was later used to avoid liability).  


Here is the conclusion of a legal expert: https://bit.ly/3dO8jKj  

This opinion was annexed to the lawyer’s letter. Read it, there are many interesting things written there: https://bit.ly/2UxXd4t and most importantly here https://bit.ly/2xAFT61


These documents are about very serious things that cannot be simply ignored. How are the facts elaborated in these documents to be explained?


3. When I asked Favorov at an internal meeting why his private company was making millions of dollars as an intermediary between two Naftogaz companies, despite the fact that he was already a de facto chief within Naftogaz, which is responsible for gas trade, instead of specific answers, I received general phrases. I told Kobolev that he would make a huge mistake if he appointed Favorov. Kobolev said that he would not change his decision, and if I was worried about my reputation, I should turn to “compliance” (the internal service, which in particular checks “conflict of interest”). This appeal did not change anything, as did a subsequent appeal to the Supervisory Board. Instead of acknowledging the obvious, it was decided to conduct a “forensic” audit with the involvement of an international company. However, later it turned out that this was not exactly a forensic audit, as there was no lawyer who knew Ukrainian law and could therefore say whether there were violations. It also later emerged that the auditors relied on assurances from the management.

And the management “missed” important details (for example, that Favorov’s company was a competitor of Naftogaz in terms of gas purchases on international markets). Therefore, even though the auditors formally established that Favorov remained the owner of this company (ERU), when he was first informally and then formally a boss in Naftogaz, the auditors seemed not to find any violations by Favorov. And in public communication Naftogaz decided not to focus at all on the exposed conflict of interests of Favorov. Was it a violation or not? If so, who has been held to account?


4. Subsequently the Naftogaz board agreed with Favorov’s position and fired a person (in my opinion, on contrived grounds) who reported his conflict of interest on the “hot line.” It looked like revenge – so that people would be afraid to oppose their bosses. Is this the right act that does not contradict at least ethical norms?


5. When the daily data clearly showed that production was declining, Favorov told everyone through official Naftogaz channels, based on an irrelevant comparison with the previous year, that production was increasing. Is this not manipulation?


6. Even many international publications reported that Favorov had told his “former” ERU partner in detail about a proposal by an American businessman to supply gas to Naftogaz. That is, Favorov goes to the United States at the expense of Naftogaz, where Naftogaz is made a commercial offer, which is obviously a commercial secret, but he calmly shares this information with one of Naftogaz’s main competitors. Isn’t this a violation to be held accountable for?


7. When the performance indicators in the areas headed by Favorov began to show negative results, the relevant information simply stopped being published. How to square this with the declared openness of Naftogaz?


Given all the above, it is hard for me to just “turn the page” and forget everything before answers are received and conclusions drawn.


I sincerely hope that this necessary not only for me…