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UkrainianOilRefinerySectorReview

November 3, 2008
Viachaslau Herasimovich

Summary

Ukraine has six oil refineries with installed production capacities

three times exceeding internal demand for oil products. However
becauseofequipmentbeingseverelyoutdatedandoilsupplybeing
notguaranteedthecapacitiesareutilisedforlessthanonefifth.Due
toinsufficientamountofoil,Ukraineisforcedtoimportoilproducts
tocoveralmostahalfofitsinternaldemand.Atthesametimelocal
producersbecomelesspricecompetitivebecauseofunstableforeign
exchange rate and significant reserves of expensive oil product,
whichmayonlyincreaseforeignfuelpresenceonthemarket.

SectorDescription
TherearesixoilrefineriesplantsinUkraine.AllrefineriesaredatingfromtheSovietera;
generallyoperatewithobsolescentequipmentatlowrefiningmarginsandshortofEuropean
standardsforproductquality.Outofthosesixrefineries,threeareRussianowned;anotherone
is a UkrainianRussian joint venture; and only the two small refineries are Ukrainianowned
with majority stakes in private ownership through Pryvat Group and minority stakes in state
ownership.Seetable1.
Table1.OwnershipoftheUkrainianoilrefineries
Refinery

Shortdescription

OdessaRefinery

TherefineryisfullyownedbyRussianLUKOILcorporation.Therefinerywas
stoppedforreconstruction,inAugust2005.Thedistillationunitandvarious
otherfacilitieswererebuiltthefirststage.In2008therefinerycompletedthe
secondstageofmodernization.ItwasputbackinoperationinApril2008.
ModernizationoftheRefineryisprojectedtoincreaserefiningdepthfrom56%
to78%.

LINOSRefinery

LisichanskRefinery(Luganskoblast)isfullyownedbyclosecorporationLINIK,
whichisapartofRussianBritishholdingTNKBPinUkraine.

KhersonRefinery

TheKhersonOilRefineryistheoldestrefinerywhichwasbuiltin1938.Since
1999reconstructionandupgradingprojecthasbeenimplementingonthebasis
ofintergovernmentalagreementsbetweenUkraineandKazakhstan.Themain
foreignparticipantsareOJSCAllianceGroup(Russia)andstatecompany
Kazmunaigaz(Kazakhstan).Therefinerywasstoppedin2005becauseofthe
needforestimatedUSD0.5blnofinvestmentstoincreasequalityofrefining
products.

KremenchugRefinery

TherefineryisownedbyclosecorporationUkrtatnafta,createdin1994.Main
shareholdersareNaftogazUkrainyandRussianTatneft.

DrogobychRefinery

TherefineryisownedbyOJSCoilrefiningcomplexGalychyna25%sharesof
whichbelongstothestateandaround72%ofsharesiscontrolledbyPryvat
groupcompanies.

NadvirnaRefinery

TherefineryisownedbyOJSCNeftekhimikPrikarpatya.26%ofsharesbelong
totheStatepropertyfund,17.5%LiderEstateLtd,16.8%PryvatBankand
14.3%CoplandIndustriesS.A.(VirginIslands).

Source:Companiesinformation,CASEUkrainecompilation

Total yearly refining capacity of all the Ukrainian oil refineries exceeds 51 mln tons of
crude oil. However capacities differ much from one plant to another. Thus the three biggest
plantscontrolover80%ofrefiningcapacities.Seediagram1.

Diagram1.Sharreofrefinin
ngcapacitie
esoftheUkkrainianoilrefiningplaants

8%

% 6%
5%

Odessa
31%

LINOS
Kh
herson

36%

Krremenchug
14%

Drogobych
Nadvirna

Sourcce:Companiessinformation,,CASEUkraineecompilation
n.

RefinerieesinUkrain
neareutilizzedatlesstthan19perrcentoftheetotalcapacitiesin2008,
down
nfrom30%
%in2007,4
41%in2004
4and57%iin2000.Du
uring9mon
nthsof2008
8oilrefinerries
processed7.3m
mlntonesofcrudeoilw
whichis27.9
9%lessthan
ninJanuaryySeptembe
er2007.Outtof
allw
workingplan
ntsonlyOdessarefinery,whichissoneoflow
wpoweron
nceoperate
esonnominal
indiccatorsKrem
menchug,NaadvirnaandDrogobych
hrefineriesoperateso
onminimum
mrates.LIN
NOS
refineryprocesssedthegreaatestvolum
meofoilbytheresultsofthreequ
uarters.Wh
hilethelarggest
in Ukraine plan
nt Ukrtatnaafta sharp
ply reduced
d processingg since Novvember 200
07 which was
w
caused by raw
w materials supply terrmination by
b Russian "Tatneft" in connecttion with the
t
corporateconfliict.SeeDiaggram2.
Theoverrallutilizatio
onrate,akkeyindicato
orofefficiency,hasfalllendueto manyfacto
ors:
aginggequipmen
nt,temporaaryshutdow
wnsatsome
erefineries,,andthelackofUkrainianaccesssto
Casp
pianoil.How
weverthem
mainreasonofacrisissinthesecctoristhesshortageof crudeoilaand
absenceofmod
dernoilrefin
ningcapacittiesforoutp
putofproductsofimprovedstand
dards.
Diagram 2. Shaare of the Ukrainian oilrefiningg plants in total amo
ount of oil processed in
mber2008
JanuarySeptem
2
2%
5%

Odessa

19%
%

LIN
NOS

29%

Kheerson
Kreemenchug
45%

Dro
ogobych
Nad
dvirna

Sourcce:StateStatissticsCommittee.
Note:Khersonrefin
nerywasnotiinoperationd
duringtheperriod,Odessarrefinerywasin
noperationduringApril
Septeemberonly.

Fuelproductionandimport
Ukrainianrefineriesproductmixandproductqualityarealsoinadequate.Overall,they
produceinsufficientpetrol,diesel,andjetfuel,farbelowthelevelsofdemandinUkraine.At
thesametimetheyproduceexcessfueloil(mazut),atloworevennegativemargins.Onlyone
refinery(LINOS)iscapableofmeetingEuroIVqualitystandardsforoilproducts,butnonecan
meetEuroVstandards,implementationofwhichisexpectedtobeginby2009.
InJanuarySeptember,2008,incomparisonwiththesimilarperiodoflastyear,petrol
production in Ukraine decreased by 0.73mln tons, or by 22.3 %. Diesel fuel production
decreasedby0.9mlntons,orby27.4%,andmazutproductionby0.95mlntonsorby35.8%.
Seediagram3.
Diagram3.ProductmixofUkrainianoilrefineries
7000
6000
5000
4000
Petrol
3000

Diesel

2000

Mazut

1000
0
2005

2006

2007

2008(9
months)

9monthsof
2007

Source:MinistryofFuelandEnergy.

In the result of this sharp drop in production, the share of imported fuel in Ukraine
increased on the average by 20 % in 9 months 2008. During three quarters of this year the
share of imported petrol constituted 41.7%, which is 20.9% more than in 2007. Share of
importeddieselreached53%(20.3%more).
Ministryoffuelandenergypredictsfurtherincreaseoftheshareofimportfuelintotal
amountoffuelsoldonUkrainianmarketandin2009.Nextyeartheshareofimportedfuelis
expectedatthelevelof45%,theshareofimporteddieselatthelevelof52%.
AccordingtotheMinistryoffuelandenergy,demandonautomobilepetrolin2009is
expectedatlevelof5.6mlntons(5.5mlntonsin2008),ondieselfuelcorrespondingly6.7mln
tonsagainst6.6mlntons.Demandformazutin2009isexpectedtogrowfrom4mlntonsin
2008upto 4.2mlntonsin2009.Internalproductionisforecastedtocover3.9mlntons(3.1
mlntonsin2008),import0.3mlntons(0.9mlntonsin2008).
Ukraine depends heavily on importing Russian crude oil, which covers some three
quarters of Ukrainian demand at present. Russian oil deliveries to Ukraine have declined in
recentyears,downto9.8milliontonsin2007(lessthan5mln.tonsduring9monthsof2008),
causing refineries to operate far below capacity. See diagram 4. Nevertheless, Ukrainian
dependence on Russian oil has remained constant or even increased, largely due to the
cessationofKazakhoilexportstoUkraine.

Diagram4.OilssupplytoUkrainianRe
efineries00
00tons

1
16000
1
14000
1
12000
1
10000

Importedoil

8000

Ukrainianoil

6000
4000
2000
0
2006

2007

2008
8(9months)

Sourcce:MinistryoffFuelandEneergy.

Oil supp
ply to the Ukrainian oil refineryy plants was
w reduced
d by 29.7%
% in Januaary
September 200
08, compariing to the analogous period of 2007. At the same tiime supply of
Ukrainianoilwaasincreased
dby1.3%an
ndreached2.12mlnto
ons.
In the year
y
2007 deliveries
d
o oil to Ukrainian
of
U
reefineries waas reduced
d by 6.0 % in
comp
parisonwith2006,dow
wnto12.6 mln.tons. Atthesam
metimedeliiveriesofU
Ukrainianoilin
2007
7increasedby1.3%,in
ncompariso
onwith2006,to2.8mln
n.tons.
During9
9monthsoff2008Ukraainereduce
edoilimportby37.8%
%incomparisonwithtthe
correesponding period of 2007
2
down
n to 5.08 mln.
m tons. At
A the sam
me time in money terrms
delivverieshave increasedb
by11.4% toUSD3.9blnbecauseeofincreasseoftheavveragepriceeof
oilto
oUSD775p
pertonagainstUSD432
2.8for9mo
onthsof200
07.
Tocomp
pensateoil importreduction,imp
portofpetrolincreasedby102.6 %to1.7m
mln
tons,,andbythrreetimesin
nmoneyteermstoUSSD1.6blnaastheaveraagepricere
eachedtoU
USD
965.3
3 from USD
D645.7 in 2007.
2
Imporrt of diesel grew by 67 % to 2.37
7 mln tons, or in mon
ney
term
msby2.9tim
mestoUSD
D2.2blnforrthepriceo
ofUSD924.4perton.
It needss to be meentioned, th
hat while Ukraine
U
is supplied w
with crude oil by Russsia,
RussianFederattionpracticcallydoesn
notsellpetrroltoUkraiine.Highocctanelevel petroloriggins
from
mBelarus,Lithuaniaand
dRomania,andalsofromthecou
untriesofth
heMediterraneanregio
on.
Accordin
ng to the government
g
tal order off the Russian Federattion of Septtember, 19
9th,
2008
8fromthe October1sttherateo
oftheexpo
ortcustom dutiesonccrudeoilis loweredfro
om
USD4
495.9down
ntoUSD372dollarspeertoninsteaadofprevio
ouslyplanneedUSD485
5.8.
Forgaso
olineanddieeseltherattewasdecrreasedtoUSD263.1p
perton,for mazuttoU
USD
141.7
7perton.FForthefirstttimetheraateshaveb
beencalculaatednotonthebasiso
oftwomonths
monitoringofth
heoilpricess,butbased
dontheoilpricesfrom
mSeptembeer1sttillSep
ptember,17
7th
when
ntheaverageoilpricewasUSD97
7.3perbarrrel.

Prices
DuringJanuarySeptemberpricefordieselfuelwasrisenby27%uptoUAH6.45perlitre
whileinSeptemberthepricefallenby4.2%.Thepriceofpetrol76rosefromthebeginning
ofyearby13.4%whileinSeptemberitdecreasedby5.4%.WhileuntilthemiddleofJulyfuel
priceincreasewasconditionedbyrisingpriceofcrudeoil,afteroilpricepickedandwentdown,
rates of prices reduction on fuel did not correspond to rates of decrease of oil prices in the
worldwhichsinceJulyhavefallenmorethantwice.SeeDiagram5.
Diagram5.AveragebulkpricesonfuelinUkraineUAH/ton(leftscale)againstBrentoilprice
USD/barrel(rightsscale)1July20October2008
8000
145
7500
135
7000

125

6500

115

BrentOil
95

6000

105

92

5500

95

76

5000

85

4500

75

4000

65

02/07/2008

02/08/2008

02/09/2008

Diesel

02/10/2008

Source:UPECO,Bloomberg,CASEUkrainecalculation.
Note:A95,A92andA76correspondtopetrolofdifferentoctanelevel.

Among the main reasons for the slow fuel price reduction was inadequacy of dollar
exchangeratefixedbytheNationalBankandtherateontheinterbankmarket.
Theotherreasonisthelargestockofoilproductsaccumulatedbyfueltradersearlierat
thetimeofhigherprices.Thus,onthefirstofOctoberoilproductsremainswereatthelevelof
0.34mlntonsofpetroland0.41mlntonsofdiesel.Politicalriskshavealsobeenincludedinto
theprice.However,keepingthepricesup,nationalproducerslosetheircompetitiveadvantage
asforeignsuppliers(Lithuaniafirstofall)areabletoofferbetterqualityofpetrolcheaperby4
6%.Thisfactposestheriskofevenfasterincreaseoftheshareofforeignoilproductsonthe
Ukrainianmarket.