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Petrosakh press release

 

 

14 December 2018

 

To the shareholders of Urals Energy Public Company Limited:

 

Dear UEPCL shareholders,

 

I, on behalf of JSC Petrosakh as its President, would like to address a number of misleading accusations made by the UEPCL Board of Directors (the "Board") in various RNS announcements issued on and after 10 October 2018 concerning JSC Petrosakh and its management.

 

First of all, I would like to remind you that in 2017, JSC Petrosakh replaced Urals Energy LLC (UEPCL RNS №1319D of 24 April 2017) as the Russia-incorporated management company for all of the Group's operations, as a result of which daily operations were streamlined, adherence to relevant Russian legislation was fulfilled and certain tax advantages were achieved.

 

I, as the General Director of Urals Energy LLC, became the President of JSC Petrosakh with all the responsibilities and duties permitted and prescribed by the existing legislation of the Russian Federation and Articles of Association of JSC Petrosakh.

 

As you know, from its inception in the early 1990s, JSC Petrosakh has been one of a few independent oil producers on Sakhalin Island, and operates the sole oil refinery, which produces oil products mostly for local consumption. Historically, JSC Petrosakh also exported products via its own sea terminal, which has been underutilized and presently needs to be overhauled for further possible use.

 

Previously, JSC Petrosakh would produce a steady revenue stream. However, due to mismanagement, legacy issues and a lack of attention from the Board of UEPCL, JSC Petrosakh has been besieged by underperformance, constant drilling problems, lack of strict financial controls and absence of a strategic vision for its future development. Since 2017, my team and I have spent substantial time and effort to cleanse JSC Petrosakh from past legacies and maladministration, by replacing key personnel, strengthening financial and daily reporting control, and attracting new professionals. We also are in the process of finalizing a long-term strategy for JSC Petrosakh, which among other things, includes strengthening its position on the island by taking control over certain elements of the supply chain, specifically – delivery of value-added products to customers on the island, as well as mainland.

 

Since my appointment as General Director of Urals Energy LLC, and subsequently as President of JSC Petrosakh, I have spent considerable time on Sakhalin, establishing direct contact with local authorities and business leaders, seeking new assets and ensuring changes in the company. As a result, JSC Petrosakh has acquired the South Dagi deposit, which increases its reserve base and fits into its long-term strategy. Unfortunately, none of the present members of the Board of UEPCL have participated in any of these efforts, preferring instead to stay in London to “strategize”.

 

I also structured a deal with the Kholmsk Seaport – one of the largest ports on Sakhalin – with all year direct route to mainland Russia ("Port"). Initially, the Board supported making investments in the Port to ensure additional cashflows to JSC Petrosakh (UEPCL RNS 8504W of 6 August, 2018), however, subsequently my assertive stance in ensuring JSC Petrosakh’s influence over the Port’s board of directors was met with unwarranted and startling resistance from the Board of UEPCL.

 

Since a bankruptcy application was filed in relation to the Port by its creditor and there were several other ongoing legal proceedings initiated by the Port's creditors, our first effort was to have these actions ceased and operations restored, with the aim of allowing the Port to return to normal operations. JSC Petrosakh also had to ensure that our 23% shareholding gave us meaningful influence over the Port's management and that our strategy for the Port received support from the majority of shareholders of the Port.  Finally, considering other hostile stakeholders in the Port our actions had to be swift if we were to secure our investment in the Port. The Port's financial situation is publicly available information and UEPCL individual Directors were informed about it and never objected prior to 10 October 2018. Therefore, the Board’s about-face regarding the issue of active participation in the Port's affairs is illogical and unjustified.

 

I would also like to address the bizarre statements made by the Board of UEPCL regarding certain loans made by JSC Petrosakh. On behalf of JSC Petrosakh I would like to explicitly state that the mentioned loans made to various parties in the course of business are in full compliance with Russian legislation and corporate procedures implemented by the UEPCL Board in the Articles of Association of JSC Petrosakh. All loans have been well documented and have strict terms attached to them, which we are fully prepared to enforce if and when necessary. Also, none of the loans were a secret to the Board of UEPCL.

 

I resent the fact that the Board rushed to judgement and even wasted company funds to hire an independent auditor to prepare a report. I believe this report can hardly be considered as a complete and unbiased undertaking due to work on it being suspended by the Board.

 

Finally, I believe that the financial health of JSC Petrosakh has been negatively dramatized by the Board for reasons unknown to me. I firmly believe that if well managed, Urals Energy Group can and should be profitable, and we are committed to maximizing shareholder value for UEPCL.

 

The Board makes lots of promises. I ask you to judge our actions.

 

Sergey Kononov

President of JSC Petrosakh