The nation’s airlines, already operating on thin margins in a highly competitive environment, will likely take another hit next month when the price they pay for jet fuel at Ukraine’s airports increases by up to 15 percent.
This particular price increase will have had nothing to do with world crude oil prices, or the cost of transportation, storage or refining. It will have everything to do with the government’s approach to ensure that all the market players have equal rights and domestic producers will not only be surviving, but also become competitive with imports.
Unless Ukraine acts promptly to impose duties that will equalize the cost of imported and domestic petroleum products, the government will doom domestic refineries to unprofitability. That’s not just bad news for consumers and oil companies: Refineries that are shuttered or operating far below capacity contribute to market instability, increase unemployment, impair the creation of strategic petroleum reserves, and hobble retailers’ ability to provide high-quality fuel at stable market prices.
Unless Ukraine acts promptly to impose duties that will equalize the cost of imported and domestic petroleum products, the government will doom domestic refineries to unprofitability. That’s not just bad news for consumers and oil companies: Refineries that are shuttered or operating far below capacity contribute to market instability, increase unemployment, impair the creation of strategic petroleum reserves, and hobble retailers’ ability to provide high-quality fuel at stable market prices.
Plus, the adverse effect on budget revenues through taxation is staggering: In 2010, TNK-BP’s Lisichanskiy (LINIK) refinery alone paid Hr 3.5 billion in taxes at all levels. Reduced refinery operations result in decreased budget revenues.
An Interagency Commission on International Trade has been conducting an investigation into the need to support petroleum products since January. The decision of the commission will be crucial for the future of the refinery business in Ukraine, since it transmits the government willingness to have (or not to have) one of the core strategic industries operating for the country. It is in the hands of the commission to take actions regarding implementation of the measures and in particularly what these measures would be and how they may affect the business.
Three options are possible: If measures to protect Ukraine’s producers are not introduced, TNK-BP will maximize its customer-owned oil refining (otherwise known as tolling operations); if a decision is postponed or delayed, TNK-BP will increase its tolling operations until a final decision is made; or if the commission decides to impose import duties, we will increase production to reflect the level of duties imposed. If the duties meet WTO standards (5 percent of the price of gasoline, 2 percent of the price of diesel fuel), we will balance customer-owned processing and refining effective, so that we can achieve a profitable level of processing. If the duties eliminate the price advantage enjoyed by plants in the Customs Union, we will completely abandon tolling processing and switch to supply only the Ukrainian domestic market, operating the LINIK refinery at maximum capacity. The level of fees should be equal to the cost advantage of plants of the Customs Union, for example, the average cost advantage for 8 months of 2011 is $124 per ton.
The government needs to take decisive action now. Ukraine’s petroleum refining industry won’t be viable much longer without intervention.
Ukraine’s refineries have benefitted from foreign direct investment. Over the last decade we’ve invested $600 million in the LINIK refinery alone, yet production levels remain far below that required for self-sufficiency, and much of the refined petroleum Ukraine consumes each day is imported from other countries.
The impact of duties is staggering: In 2005, Ukraine dropped duties and Russian exporters benefitted: When duties were in force, imports accounted for just seven percent of all oil consumed in the country. By last month, imports had climbed to a whopping 70 percent!
Because our refineries cannot profitably process oil for domestic sale, we have turned to tolling operations. Of the 410,000 tons of oil that the LINIK refinery will process in September, only 40,000 tons will be owned by TNK-BP and destined for the Ukrainian market. Therefore, a relatively insignificant amount of aviation fuel to be produced next month will cover just 15 percent of the jet fuel required by our clients.
TNK-BP is making every effort to relieve the tension in the market caused by the paucity of aviation fuel. The shortages on both the domestic and international markets have resulted in higher costs for imported aviation fuel and we are compelled to pass them along.
Last year, TNK-BP in Ukraine posted a consolidated loss of $68 million. This is a clear statement for those who claim profitability of the refineries in Ukraine. We shifted to tolling as the one and only option, which keeps the refinery operating. Were we able to refine and sell our own petroleum products on a level competitive field, we would definitely supply the domestic market needs in all the fuels.
Many nations use quotas, duties and import licensing to control market access. Moreover, effective measures to protect Ukrainian petroleum product manufacturers will improve the investment climate, stimulate FDI and boost GDP, improving the trade balance and stability of the hryvnia.
Imports are strangling Ukraine’s refining industry. In 2004, Ukraine had the capacity to process 30 million tons of petroleum per year, and actually processed 22 million tons. In 2010, Ukrainian refineries processed only nine million tons.
Imports are strangling Ukraine’s refining industry. In 2004, Ukraine had the capacity to process 30 million tons of petroleum per year, and actually processed 22 million tons. In 2010, Ukrainian refineries processed only nine million tons. Ukrtatnafta posted a net loss of Hr 470 million. The Kherson and Odessa refineries operate only part-time. LINIK survives by processing oil for other companies. This is not the strong, healthy oil industry that the country needs, deserves, and could have.
Didier Casimiro is the president and CEO of TNK-BP Commerce LLC for Ukraine and Belarus. He can be reached at [email protected].
