August 22, 2012
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Home / Issue Archive / 2009 / October #10 / Greasing the Pipeline Wheels. Diversification or Diversion?

№ 10 (October 2009)

Greasing the Pipeline Wheels. Diversification or Diversion?

Reverse or averse – is this a question? The magazine has mulled the similar question last year. However, little has changed since then. One of most ambitious Ukraine’s energy projects, which should have improved energy security while brushing up international image of the country, turned out to be just another chronic headache.

By Alexander Serafimovich

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   Secretariat of the President of Ukraine says that transportation of Caspian crude to Ukraine’s Kremenchug Refinery via Odessa proves that Odessa–Brody oil pipeline could be used in originally intended direction. This much was said on 14 October’s media briefing by Bogdan Sokolovsky, Presidential Envoy on international issues of energy supply security. Ukrainian refinery did receive first Caspian crude, just as was agreed on the meeting of Ukrainian and Azerbaijan Presidents earlier.

   Bogdan reminded that in the agreement reached during the Presidential meeting in early 2008 Azerbaijan guarantees for Ukraine a tentative quote of 5 million tons per year. The Presidential Envoy regretfully noted that Odessa–Brody – the main route, on which Ukraine and its partners banked when building the pipeline – so far failed to materialize: last year’s decision of Ukrainian government blocked switching the pipeline’s crude flow from reverse (towards Odessa) to averse (towards Brody) direction. According to Cabinet ministers, this was due to the absence of Caspian crude supplies and inability of Ukrainian refineries to process such crude. “The fact of shipping Caspian crude from Odessa to Kremenchug Refinery invalidates these two points. There is oil. And if it goes to Kremenchug, there is profitability,” said Bogdan Sokolovsky. The Presidential Envoy expressed conviction that several Ukrainian facilities are ready to process the Caspian volumes. “This is the real diversification,” he added.

   However, Bogdan Sokolovsky failed to mention entirely the aftermath of this “shipment”. Ukraine’s most advanced oil processing facility, LUKOIL-owned Odessa Refinery, had to stop due to the shortage of crude. The information was circulated on 2 October by LUKOIL’s press-secretary Dmitriy Dolgov: “Oil products output has been terminated. The plant is stopping.” LUKOIL’s Odessa Refinery is stopping production because of changed shipment route for Russian crude. Currently Odessa Refinery runs in recirculating mode (pre-shut down mode). This reluctant solution was triggered by the decision of Ukraine’s oil transportation company Ukrtransnafta, which from 1 October stopped pumping crude by the route Lisichansk–Kremenchug–Odessa Refinery.

   Other routes, suggested by Ukrtransnafta, boost the price of crude stock, say LUKOIL’s experts, thus shifting Odessa Refinery profitability into the red, according to the press-office of the company. That is, offered by Ukrainian company route Belarus border–Brody–Odessa puts an extra $5.7 per ton to the transportation cost. Also, this October Russian oil transportation company Transneft has no technical capability to guarantee oil supplies to Odessa Refinery by other routes.

   If the refinery doesn’t get some crude supplies on economically viable terms and considering Transneft’s technical abilities, the refinery might be forced to start staff cuts. This would also significantly reduce budget contribution of the facility. In addition, the situation could lead to shortage of high quality fuel on Ukrainian market, resulting in price hikes and bootleg oil products.

   However, Ukrtransnafta encourages LUKOIL to come back to the meeting room and to find joint mutually beneficial solution to the issue of oil supplies to the Odessa Refinery, says press-office of Ukraine’s oil and gas monopoly Naftogaz Ukrainy with reference to Valentin Franchuk, deputy head of the company. The text goes on to say that because Ukrtransnafta received bookings from Ukrtatnafta-owned Kremenchug Refinery (largest in Ukraine) for transportation light tanker oil from Odessa to the refinery which has long been experiencing supply disruptions, the former, following the national interests, offered Russian oil company LUKOIL to change the route of oil shipments to its Odessa Refinery. For two months, Ukrtransnafta management was negotiating with LUKOIL the changes to the route of Russian oil supplies. However, the four routes offered by the Russian company weren’t good enough. Notably, the offered route options envisaged both lower pumping tariffs and shorter delivery terms due to reduction of the length of the route. Regretfully, LUKOIL shunned the positive approach and commitment to the negotiations, choosing instead a compelling stand; the company continues to present ultimatum-like requests on preservation of previous oil supply route.

   LUKOIL plans to initiate legal action to solve the issue of oil supplies to its Odessa Refinery, said LUKOIL’s head Vagit Alekperov on 14 October. LUKOIL’s head also informed that the company is yet to calculate the damages from Odessa Refinery downtime from 1 October, and that the talks on resuming oil supplies to the facility continue.

   “We think Ukrtransnafta moved too hasty in switching oil flows from Odessa to Kremenchug Refinery, and this fouled up the operation of Odessa facility. Regretfully the actions weren’t coordinated with LUKOIL, which is the controller of crude supply to all our facilities,” Alekperov said.

   Head of LUKOIL noted that Transneft also was unprepared to change the route and expressed regret that Transneft has no alternatives to the current route of oil supply.

   “Consequently we’re now engaged in the negotiations. I hope that within the nearest month we’ll coordinate our actions and the facility will return to running on stable load. I hope that our Ukrainian partners will be able to guarantee oil supplies to our refinery,” he said.

   “We’re now calculating the damage occurred from shutting down the plant. The calculation hasn’t been completed because we do not know how long the refinery will stay idling. As for today, the units are shut down. The sooner we put the facility online the less damages we incur. In any case, of course, we will file a lawsuit against our Ukrainian colleagues,” added the head of LUKOIL.
There is information that during the second week of October LUKOIL’s representatives were called to the Ministry of Fuel and Energy of Ukraine. The sides also discuss a possibility of LUKOIL delegation being received by Yulia Timoshenko, the Prime Minister of Ukraine. At the same time, LUKOIL found support in the Secretariat of the President of Ukraine, which advised the Council of Ministers of Ukraine to “bury the hatchet” used against the Russian oil company.

   Meanwhile Ukrtransnafta informs that it started implementing the projects on alternative oil supplies (from the Caspian region) to the domestic refineries, as set out in “The Program on Diversification of Oil Supplies to Ukraine till 2015”.
In this particular case, change of the route for the crude bound for Odessa Refinery is linked to the start of shipments of Azeri oil to Kremenchug Refinery. The total volume of the contract is 160,000 tons; currently the oil is being unloaded at the Odessa port and will be supplied to the refinery via Odessa–Kremenchug pipeline.

   Kremenchug Refinery is the only facility in Ukraine which can get oil via alternative (marine) route. This is the true cause of LUKOIL’s refusal to change the parameters of oil supply via Prydniprivsky pipeline system, alleges Aleksandr Lazorko, head of Ukrtransnafta, in his media communiqué.

   “I am certain that the true cause of the Russian companies’ actions is in blocking at any cost marine shipments of Caspian crude to Kremenchug Refinery while using the Odessa Refinery as a smoke-screen, and thus continuing the two-year oil blockade of the facility,” said Lazorko.

   Ukrtransnafta in its statement says that on receiving booking from Tatneft-owned Kremenchug Refinery, it followed the national interests and offered LUKOIL to change the route of oil supplies to its Odessa Refinery. Notably, the offered route options envisaged both lower pumping tariffs and shorter delivery terms due to reduction of the length of the route. On the contrary, Ukrtransnafta holds the new route of oil supply for LUKOIL-Odessa Refinery economically profitable rather than lossmaking, stresses Lazorko.
There are more complaints against the Ukrainian authorities, still. The conflict situation around Ukrtatnafta (a JV running the Kremenchug Refinery, Poltava region) prompted Bashkortostan-based Tatneft, a shareholder in the company, to increase its claim for damages to $5 billion, said deputy general director of Tatneft Nail Maganov.

   “I think that the claim will grow to at least $5 billion. These are the losses estimated by our experts,” says Nail Maganov. In particular, the sum covers loss of current assets and loss of control over the refinery, notes the top manager.
Maganov sees as positive the dynamics of the international court case initiated by Tatneft on damage compensation from Ukrainian authorities. “Everything is according to the law”, stressed the deputy general director. According to Maganov, after Ukrtatnafta has been a subject to the corporate raid, Ukraine de-facto has now “four idle refineries, dormant Ukrtransnafta system, stagnant railways and groundlessly high prices for oil products”; and the country is yet to compensate the damages of the legal shareholders of Ukrtatnafta.

   Currently Ukrtatnafta also embarked on the oil search quest. In early September the company has already announced that it negotiated supplies of import crude.

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