Unlike natural gas and nuclear fuel, Ukraine doesn’t heavily rely on Russia for gasoline supplies. Thus, and luckily for Ukraine, its warring northeastern neighbor won’t be able to apply economic pressure in this field.
As the relationship between the two former Soviet republics remains tense, following Russia’s annexation of Crimea and its heavy military presence in the east, southwest in Transnistria and northwest in Belarus, economic factors have become a weapon in theongoing war. Not in this case, however.
“The share of Russian oil products (on the Ukrainian market) in 2013 reached approximately 15 percent. That is why cancellation of direct supplies will not have any serious consequences,” says Sergiy Kuyun, director of A-95 consulting group.
Ukraine purchased two million tons of diesel fuel and 60,000 tons of gasoline from Russia in 2013. But if Russia puts pressure on Belarus, whose share on the Ukrainian fuel market may be up to 40 percent, Ukrainian consumers may experience troubles.
“Even in this case, the situation will not be hopeless – we have seaports and can receive supplies from Europe by rail,” Kuyun adds.
Lithuania, Poland and Romania are other key suppliers on the local market.
Ukraine consumes 10 million tons of oil products annually, while Poland, with a similar country size and comparable type of economy, consumes 24 million tons. Ukraine imports 75 percent of the oil products it consumes, producing the remainder locally – mostly by state-controlled Kremenchuk Oil Refinery and Shebelynka Gas Refinery.
Domestic oil refining is in a miserable state, emphasizes Yuriy Korolchuk, an analyst at the Institute of Energy Strategies. He uses the word “scrap” to describe the majority of the country’s gasoline producing capacities. For the last decade, owners have invested almost nothing in modernization rendering the facilities uncompetitive, agrees Kuyun of A-95.
Existing side by side Ukraine’s very competitive fuel market are a substantial amount of low quality oil products. It remains a major problem, lga Dorozhovets, press officer for the OKKO gasoline station chain, told the Kyiv Post. After the collapse of the Soviet Union the quality of oil refining was the same for Ukraine, Belarus and Lithuania. In contrast to Ukraine, Belarusian and Lithuanian companies managed to achieve the quality benchmark set by leading European producers, Dorozhovets adds.
GazUkraina, a subsidiary of wanted businessman Serhiy Kurchenko’s VETEK energy and finance conglomerate, exited the oil products market after the Interior Ministry launched 11 criminal investigations into his company’s activity that allegedly cost Ukraine at least $1 billion in losses.
Analysts estimate GazUkraina’s share on the gasoline market between 10 and 20 percent. “There has been some vacuum on the supply side after such a big player left the market… However, in March it has already adapted to new conditions,” comments Kuyun.
According to Interior Minister Arsen Avakov, four companies within VETEK imported oil products worth $2.7 billion with the aim of exporting the processed gasoline. They are Zovnitransgaz, Gasoline, Gasoline-Forwarding and Armada-Plyus. However, the companies never exported the gasoline, and instead sold it on the domestic market. No customs duties or taxes were paid.
Moreover, according to media reports, Kurchenko’s activity caused Ukraine a very substantial loss of imported oil products.
Since the market remains highly dependent on imports, currency exchange rate volatility puts additional pressure on prices. Since the beginning of the year, prices for oil products rose by almost 30 percent, due to the hryvnia’s devaluation.
Fuel prices are an essential component of market pricing in almost all sectors of the economy. If they rise, so will transportation costs, making products delivered to stores more expensive, triggering inflation.
The Institute of Energy Strategies’ Korolchuk does not expect prices to go down soon unless Ukraine receives a significant aid package from the West. If that happens and the hryvnia appreciates slightly, the price for the popular A-95 gasoline could decrease from $1.2 per liter to $1.14.
Foreign investors say they won’t leave the Ukrainian oil products market despite the crisis situation.
The State Oil Company of Azerbaijan Republic, which has a chain of gasoline stations in Ukraine, plans to open new ones, said Maryna Ergemlidze, the company’s press secretary in Kyiv. Also, even Russian oil companies Lukoil, Rosneft and TNK-BP have not said anything about quitting Ukraine, even though there is talk about nationalization of their assets if the conflict turns into a full-scale war.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
