Completed Commercial AidData Chinese Aid

Sichuan Honghua Petroleum Equipment provides $53.3 million supplier credit -- via deferred payment arrangement -- to Ukrgazvydobuvannia for acquisition of 15 sets of drill modernization equipment

$53.3M USD

Funder	Sichuan Honghua Petroleum Equipment Co., Ltd.
Recipient Organization	PJSC UkrGasVydobuvannya
Country	Ukraine
Start Date	Jun 22, 2018
End Date	Jan 16, 2033
Duration	5,322 days
Number of Grantees	1
Roles	Recipient
Data Source	AidData Chinese Aid
Grant ID	`108274`

Grant Description

Sichuan Honghua Petroleum Equipment provides $53.3 million supplier credit -- via deferred payment arrangement -- to Ukrgazvydobuvannia for acquisition of 15 sets of drill modernization equipment 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

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.
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.
(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.

📚 Sources & References

Ukraine's Naftogaz
China's CNPC discuss prospects for cooperation
Ukraine's Naftogaz gets Chinese backing for $1 bln in loans and investment
China's Sinosure provides Ukraine's gas monopoly with $1bn insurance coverage
China's Sinosure could provide Naftogaz with $1 bln insurance coverage
GAS; Naftogaz
CNPC discuss cooperation in mining and technology application
Sinosure надає Нафтогазу страхове покриття на $1 млрд
Ukrgasvydobuvannya proceeds to the next stage of РЕС competition - commercial negotiations with Romanian and Chinese companies
Sinosure provides Naftogaz with USD 1 billion insurance coverage
TWO NEW CHINESE DRILLING RIGS FOR UKRGAZVYDOBUVANNIA ARRIVE IN UKRAINE
Partner of Choice: Annual Report 2020, ПАРТНЕР, ЯКОГО ОБИРАЮТЬ: РІЧНИЙ ЗВІТ 2020
UGV has established a new company – Naftogaz Drilling
NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
China's Sinosure could provide Naftogaz with $1 bln insurance coverage
China gives Naftogaz $1 billion guarantee on debt financing, investment
Naftogaz Reaches Agreement With Chinese Sinosure On Providing Insurance Quota For USD 1 Billion
China may force default on Ukraine state grain firm
UkrGasVydobuvannya began drilling many times quicker
Honghua will modernize the UGV Uralmash 4E drilling rig for UAH 36 million
Honghua Group Limited Annual Report 2018
Honghua Group Limited Annual Report 2017
Ukrainian govt asks National Bank to let Ukrgasvydobuvannya transfer $26.7 mln abroad in payment for Chinese equipment
The Government asks the NBU permission for UGV to pay $27.4 million for Chinese Sichuan Honghua drilling rigs
ANNOUNCEMENT OF INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2022
CONCERN on granting permission to carry out currency transactions
State and State Govt Debt Loan applications and disbursements are still being received and processed as the projects continue to evolve. Ongoing monitoring and evaluation are in place to ensure project continuity.