Experts: Ukraine Can Expect a Fuel Shortage and Explosive Growth in Gasoline Prices

Translated by Ollie Richardson


Ukrainian energy experts discussed the current state of the major branch of economy – oil processing – and came to a sad conclusion. Firstly, five of the seven Ukrainian plants capable of making fuel are today closed, and in the near future their work is unlikely to be resumed. Secondly, the remaining two oil refineries are controlled by the greedy and unpredictable oligarch Igor Kolomoisky, who recently demanded from the authorities to sharply limit the import of ready-made oil products from Russia and Belarus. Thirdly, by the autumn Ukraine can expect a new jump in the prices of gasoline and diesel fuel, which is already too expensive for the majority of Ukrainians. The correspondent of the Federal News Agency (FAN) listened to the sad forecasts of fuel experts.

First of all the analysts stated — from seven of the once successful oil refineries in Ukraine, only two plants are in operation today. And restoring the “dead” refineries is either impossible or excessively expensive. The Rosnafta plant in Lisichansk, according to Ukrainian analysts, not only “became outdated morally and technologically”, but it’s also only 20 kilometers from the frontline in Donbass. That’s why the Ukrainian authorities don’t even think about rebuilding it.

The factories of the Privat group in the cities of Drogobych and Nadvirna are frankly old, their oil refining capacity is at less than 45%. Modernising them needs at least 700-800 million dollars.

Even more sad is the situation with the “Kontinium” refinery in Kherson and “Derzhava” in Odessa — modernising each of them requires no less than one billion dollars (which in today’s Ukraine couldn’t be simply found), and also 3-5 years of laborious work.

Thus, the experts noted that the main reason for the closure of the majority of Ukrainian oil refineries is the cancellation in 2016 of the agreement on the operation of oil pipelines to Europe signed with Russia. But today’s Ukraine prefers not to speak about it, preferring to simply “not notice” this topic.

As a reminder, in February, 2016, the oil pipeline sections passing across the territory of Ukraine were sold by Russian “Transneft” to the Swiss company “International Trading Partners AG”. And the Russian Federation’s exit from the agreement cemented Kiev’s loss of the possibility of transiting Russian oil products to the EU, as well as hundreds of millions of dollars from this transit.

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It is worth remembering that, like in the gas transportation sphere, Ukraine inherited from the USSR a rich fortune in the form of oil “threads” to Europe. The system of main oil pipelines included three large enterprises in the South, the Southeast and the Northwest of Ukraine. The total length of Ukrainian pipelines was 4700 km, and their capacity — 114 million tons per year. The “Friendship” oil pipeline, which in the USSR was the “shock construction of the century”, became the most known “dead” object.

Until 2000, the volume of oil being pumped along the Ukrainian pipelines was still 65 million tons per year, about 53 million tons of which were delivered to the European Union. However, after the coup d’etat in 2014 the volume of oil transit started sharply falling (in 2016 it was only seven million tons). Today, according to analysts, these pipelines actually turned into scrap metal, bringing Kiev some losses.

As the experts admit, today only the Kremenchug oil refinery and the Shebelinsky gas power plant – owned by the oligarch Kolomoisky – work at their own pace. However, in Ukraine it is known that it is possible to expect any surprises from Kolomoisky, and trusting him is impossible. So, in 2014 the oligarch, on his own whim, pumped out technological oil from the pipeline providing the Kremenchug and Lisichansk oil refineries in order to make fuel for the UAF. As a result, two huge enterprises remained on “starvation rations” for a long time, the majority of their capacity simply went out of order.

The result is natural — according to the “A-95” consulting group, in 2017 imported gasoline and diesel fuel delivered from the Russian Federation and Belarus accounted for more than 60% of the Ukrainian market.

The experts, who remember very well how relatively recently Ukraine almost completely met its own fuel demands, today say that, allegedly, “the situation has improved”. The Kremenchug oil refinery and Shebelinsky gas power plant for the first time in four years were able to claim 21% of the local market of oil products. Whatever one may say — it’s a great achievement.

“The situation in Ukrainian oil processing is frankly deplorable, and it needs to be corrected as soon as possible,” considers the head of the Ukrainian Oil & Gas Association (UOGA) Dmitry Kulik. “The question is how exactly to do it. Modernising the processing industry is a very expensive and long process, but the Ukrainian authorities should look at some steps forward. One billion dollars need to be invested in the Kherson and Odessa oil refineries in 3-5 years — this means that this process should have already begun”.

Today there isn’t a deficit in gasoline and diesel fuel in the Ukrainian market, but only because the country diversified its deliveries from neighbouring countries, stated the expert.

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However, according to Dmitry Kulik, a deficit in fuel in the Ukrainian market can nevertheless soon arise — in the event Kiev approves the initiative of Igor Kolomoisky’s “Ukrtatnafta” company. At the end of March the oligarch urged officials to limit the import to Ukraine of fuel from the Russian Federation and Belarus. Among Kolomoisky’s arguments — supporting local producers, caring about consumers, protecting national interests, and, of course, “decreasing dependence on the aggressor country”.

Kolomoisky suggested to introduce from May 1st a quota whereby 30% of the Ukrainian market is fuel from neighbouring countries. According to the proposal of the oligarch, it is necessary to impose a special tax on imported gasoline and diesel fuel that is over this quota – 29.3% for gasoline, and 30.7% for diesel fuel.

The initiative of the owner of “Ukrtatnafta” aroused indignation in the Ukrainian Oil & Gas Association. They are sure that, in the event that the authorities will surrender to Kolomoisky, soon the Ukrainian market of oil products will be monopolised.

“What the leadership of ‘Ukrtatnafta’ offers the authorities is simply monopolisation of the market, which will allow to correct only one player’s situation,” specifies Dmitry Kulik. “At the same time, the ‘protecting measures’ of oligarchs can create even by the autumn a fuel deficit for approximately 30% of the market in Ukraine. And because of this the price of a liter of gasoline can jump by at least five hryvnia. It will have the most sad consequences for both the economy of the State and for the standard of living of its citizens”.

At the same time, the largest suppliers of fuel in the structure of the Ukrainian Oil & Gas Association state that the decline in oil refining in Ukraine is caused not by the domination of import, but by the absence of investments in the modernisation of oil refineries.

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“The authorities of the country actually didn’t invest a kopek in the industry since the collapse of the USSR, but at the same time they exploited it in all ways imaginable,” said the head of the “A95” consulting group Sergey Kuyun. “At first this led to a lag in quality, and subsequently — to unprofitable conditions in the production of Ukraine’s own fuel. As a result we have a very sad situation — Ukraine buys most of its ready-made fuel from abroad, and the remaining capacity is in the hands of an unpredictable person with a shady reputation (Kolomoisky)”.

“In addition, today the Ukrainian State practically doesn’t control the fuel market of the country,” said Dmitry Kulik. “Just in 2017 a body was created that is designed to control the quality of fuel in Ukraine. But even if so far it doesn’t really function — apparently, it’s ‘in its formation stage’. A huge part of the fuel market of the country is in the shadow sector, which has created several simultaneous schemes of withdrawing large volumes of fuel from taxes. The State only has to bring order to this sphere”.

“But the problem is that the authorities aren’t in a hurry to be engaged in this at all,” summarised the analyst.

Of course, it is possible to buy fuel for Ukrainian oil refineries on the world market — which, however, strongly hits the budget of the State and ordinary Ukrainians. But because of the inefficiency of production and outdated technologies — even with rather low prices of oil — Ukrainian plants are uncompetitive. The involvement of Russian investors and providing the country with a consistent supply of oil from Russia was the only way of keeping them support afloat and to allow further development. However, as experts note, “the economic interests of Ukraine were never a priority for the Ukrainian authorities”. That’s why so far it isn’t necessary to dream of serious improvement in the situation with the processing industry of Ukraine. In this regard, in the autumn Ukraine can expect a deficit of fuel and an explosive increase in prices for gasoline, which is fraught with social shocks, predict most energy experts.

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