Ukraine Oil Update

WASHINGTON, DC -- Ukraine's presidency and government are moving on three fronts to alleviate the country's overdependence on Russian oil supplies and Russian-owned refining capacities. Kyiv is set participate in launching the Odessa-Brody oil transport project; build Ukrainian-controlled, modern refining capacities for Caspian (non-Russian) oil; and, for the first time, to discuss practical issues of importing oil from Iraq.

On August 8, the European Union's Kyiv mission announced a long-awaited step to support the Ukrainian government's intention to use the Odessa-Brody oil pipeline in the northward direction and extend it to Plock, Poland. A consortium of Swedish/Finnish, German, and Greek consulting companies has won a tender and signed the contract for a EU-funded, $2 million feasibility study on that project. The consultants, working with the Polish-Ukrainian "Sarmatia" company, are to present their results within 15 months. They are mandated to work out the legal, technical, financial, and ecological conditions for profitable use of the Odessa-Brody pipeline and its 500-kilometer extension to the Plock oil-refining center.

The project is included in the EU's INOGATE (International Oil and Gas Transport to Europe) program, as part of a Black Sea-Ukraine-EU energy corridor, which is also supported by the Ukrainian government's Eurasian Oil Transport Corridor (EOTC). The state companies UkrTransNafta and PERN of Poland established the Sarmatia joint venture in 2004 to use the Odessa-Brody pipeline northward and extend it to Plock. Sarmatia envisaged a four-year construction work at a cost of some $500 million, which it was unable to raise in the absence of guaranteed oil supplies. Meanwhile, Russian oil companies have been "reverse-using" the pipeline in the southward direction, for Russian oil to reach non-European markets, frustrating Ukraine's and the EU's original intentions to bring Caspian oil northward to EU markets.

On August 5, President Viktor Yushchenko signed instructions to the government regarding preparations for building an oil refinery with a processing capacity of at least 8 million tons annually, in the port of Pyvdenny near Odessa, using the maritime terminal there to bring in Caspian oil. The government is to prepare and announce a tender for construction of the refinery. The investors would be expected to: guarantee supply of crude oil, ensure "supply diversification" -- i.e., non-Russian oil -- and observe EU quality standards for refined products, ensure a processing depth of at least 90%, and build a network of filling stations to be supplied from this refinery. Thus, the project seems intended to create a vertically integrated company. Prime Minister Yulia Tymoshenko has all along advocated such a project, which should be state-controlled in her view.

Also on August 5, Crimea Prime Minister Anatoly Matvienko announced his government's intention to build a refinery inland from the port of Feodosia. The project, for "Caspian oil owners," would use the existing, now-underutilized maritime oil-loading terminal near Feodosia. Matvienko envisages a processing capacity 2 million tons annually, fully meeting the requirements of Crimea and nearby Kherson oblast. For ecological reasons dictated mainly by the mass tourism in Crimea, Matvienko opposes the Kyiv government's earlier ideas about a larger refinery in Crimea.

Ukraine's six existing refineries have traditionally been used well below their total processing capacity of 51 million tons annually. The six refineries processed 21 million tons of oil in 2004, out of 24 million tons of oil delivered to them that year. Eighty-seven percent of those deliveries came from Russia, 9.6% from Ukrainian domestic extraction, and 3.3% from Kazakhstan -- a stark picture of dependence on Russia. Moreover, Russian companies control at least two-thirds of the existing processing capacities.

The government seeks to reduce that dependence by means of a large, Ukrainian-controlled, modern refinery that would process non-Russian oil. Some Ukrainian experts suggest that building new refining capacities is unnecessary, given the underutilization of existing ones. These experts -- such as Naftohaz Ukrainy's former chief Yuri Boyko -- recommend that the government achieve its goal of influencing price-formation on the market by modernizing the Ukrainian-controlled Kremenchug refinery at an estimated cost of $200 million, and using it to full capacity, covering a 30% share of Ukraine's market, instead of spending an estimated $1 billion on building a new refinery.

Ukraine's Fuel and Energy Ministry and Naftohaz Ukrainy are scheduled to discuss with Iraqi and Turkish officials this month the possibility of transporting Iraqi oil to Ukraine via Turkey. The proposal from Kyiv envisages rehabilitating the old pipeline from Kirkuk in northern Iraq to the Turkish border, extending the pipeline to Turkey's port of Trabzon on the Black Sea, building an export terminal there, and shipping the oil by tanker to Pyvdenny. Once there, Iraqi oil can be refined locally -- namely, "in a refinery for non-Russian oil" -- or fed into an extended Odessa-Brody-Plock pipeline. Kyiv's Iraqi and Turkish interlocutors seek assurances from Ukraine's European partners that the Iraqi oil will find lucrative markets in the European Union.

Source: Eurasia Daily Monitor

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