THE NEVER-ENDING COLLAPSE THE STATE OF THE UKRAINIAN OIL SECTOR

Wojciech Konończuk WARSAW APRIL 2017

THE NEVER-ENDING COLLAPSE THE STATE OF THE UKRAINIAN OIL SECTOR

Wojciech Konończuk © Copyright by Ośrodek Studiów Wschodnich im. Marka Karpia / Centre for Eastern Studies

Content editor Adam Eberhardt

Editor Katarzyna Kazimierska

Co-operation Małgorzata Zarębska, Anna Łabuszewska

TRANSLATION Ilona Duchnowicz

CO-OPERATION Nicholas Furnival

Graphic design Para-buch

PHOTOGRAPH ON COVER Shutterstock

DTP GroupMedia

charts Wojciech Mańkowski

Publisher Ośrodek Studiów Wschodnich im. Marka Karpia Centre for Eastern Studies ul. Koszykowa 6a, Warsaw, Poland Phone + 48 /22/ 525 80 00 Fax: + 48 /22/ 525 80 40 osw.waw.pl

ISBN 978-83-65827-04-3 Contents

Theses /5 I. Fuel consumption on the Ukrainian market /8 II. The fall of the Ukrainian refineries /11 III. The future of the Ukrainian refining sector /17 IV. Oil extraction in Ukraine /22

1. The situation of Ukrnafta /23 2. The situation of UkrGasVydobuvannya /24

V. Fuel imports to Ukraine /26

1. The directions of fuel imports /27 1.1. Fuel supplies from Belarus /28 1.2. Fuel supplies from Russia /30 1.3. Fuel supplies from Lithuania and Poland /32 1.4. Other foreign suppliers /33 2. The costs of fuel imports /33

VI. The grey fuel economy /35

VII. The organisation of the fuel retail market /38

VIII. The significance of Ukraine as a transit country /40

IX. Conclusion: the state still has no strategy /43 • • • Theses annually. in panies required refineries for few years. past ian a and branch to key the that publicity one situation the oil (Ukrtransnafta) producing few lack state. Ukrainian of the weaknesses numerous the bare balance and Ukrainian ing tive try approximately The Petrol The the small the Ukraine producer, years out coming and the past governments privatisation current have nuclear years. oil refineries strategy there of brink and have of state of sector systemic section has is decade has in is by been

the the are has around The refining (Ukrnafta, diesel years. the the has smaller of sectors. the situation suffered supervision. is improved for economy. six the does bankruptcy, unable been issues to still million 22.5 supply mass of to reached market. became corruption developing existing concept accepted The Russian oil most its 8 million 10% not sector controlled a economic The media. consumption production linked state from painful to in UkrGasVydobuvannya) of over and The play outdated share produce de facto a the Another crude adopted refineries The has companies. record-low the of situation siphoning underinvestment, has the tonnes among tonnes Meanwhile, a this to Ukrainian the and been and by government major of situation the oil past remained

controlled fuel in petroleum capacity. fuels Privat section problem in long-lasting political to Ukrainian plunged in in the Europe, in two is is role the be sector off Poland). Ukraine 2016 (for unlikely level currently in Furthermore, Ukrainian Group processed. oil years, in a billions late of the in on comprehensive For by that which has sector significance is in the fuels and of the quantities a 1990s a the fuel a or have years which Ukrnafta, What downturn around similar has good failed to comparison: deep has economy Ukrainian the of in transporting in oligarchs. improve the is ruling sector dollars As fallen failing operation, remained the not oil case a all once crisis has subsequent to key a consequence level million 2.5 processing Ukrainian the and result, than been develop Ukraine’s study class. led are and in analysis by was state-owned from significantly and for energy refining Although at over this this the the over rarely modernised for years. unresolved the using a companies Ukrainian which the This it powerful company an strategic gas, figure the over combat Ukrain quality reveals 40% energy tonnes largest output sale indus of led effec given com only Only past coal lays this the the oil in in to of is - - - - -

5 PRACEOSW REPORT OSW 09/2012 04/2017 6 PRACEOSW REPORT OSW 09/2012 04/2017 • • • • The representatives fuel fuel. presence of low-quality the is customers the economy. to thus sumption but Ukraine ation market fecting Russia still ies ing the 2016. position, to chansk, engaged Ukrainian The Fuel quence The lations given refineries ever, tor’s tive high revolution. Maidan the continuedsector’s after has degradation fuel the the but illegal the Ukrainian

profitability management

situation government binding, supplies. in comprehensive fraud relies because the Despite adversely the present Ukrainian total would and the likely this of (which is in controlled main winning huge The the was fuel the are on situation refineries heavily this Lithuania. only fuel has

market the of backwardness practically in a scale only subject situation revolution problems imports under costs has are massive which affects its sale the of caused lifted worsened emergence of market. European half on its this a of profitability. by

the development in fuel of positive is share are 10% this real fuel to were Belarusian the Russia’s and the still customs the state-owned kind of in scale of an ownership need sector of unlikely While patrons phenomenon a the the supplies the Ukrainian investments of Ukrainian extensive eliminating their high. linked 2013/2014. decade and of of state influence illegal and to sector Ukrainian Ukrainian the trade Rosneft) has duty be As the ineffectiveness

The crisis are illegal are of fuels to to competitive from built ago, a fuel changed dispute oil have share this

the influx along corruption still fuel be result, on the trade The on companies from condition. required, is have in its imports modernised from are other fuel previous size fuel

sector essential remained missing, petrol difficult fuel country total of with present of balance (Odessa), it located the to exports to imported gained sector. scratch. foreign prices) countries, may import consumption a rely since of the level market and are since very government

and This to and the has factors be unresolved—an level fact so and important next One an determine in diesel petroleum in they this in while Furthermore, a

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7 PRACEOSW REPORT OSW 09/2012 04/2017 8 PRACEOSW REPORT OSW 09/2012 04/2017 fall initial an level previous after asimilar to tion returned consumption 5.3 million at total reaching dependence, the was rol the Ukraine’s energy balance in 2015 in balance Ukraine’s 1. energy Chart domesticpolicy.foreign and 2 1 Over Data: The troleum tors 2015 (GUS) Office for 2015. Statistical Central the from data are these of Poland, case the In Data I. When a count years; troleum id=245165726 and Fuel consumpt Fuel crude case oil (December 2016) (December 2035 to of Ukraine Strategy Energy Draft 1 level only which ; petrol the nuclear energy–27.9% for for sector diesel

the quoting http://mpe.kmu.gov.ua/minugol/control/uk/publish/article?art_id=245165746&cat_ products with comparison, from past products 8.1 million of 2015. oil tonnes differences form and around Russian and fell gas, in

natural few According 2013 that Ukrainian Ukraine diesel the in by fuel in play in years, the as million 5.5–6 Ukraine tonnes core 2008 to (approximately gas in gas. supply energy much oil a to statistics demand Poland lesser is imports the of the consumption Throughout less i coal –20.8% in the balance million 2.2 on U on the draft consumption usually as to 2016. significant role this concerning 58% Ukraine Ukrainian for have Energy tonnes, 10%) has figure in these in While reached been remained between the the this Strategy in fell natural gas–36.6% is the products petrol is than 2016. level country’s twenty-five energy not diesel period, one oil –9.4% by approximately oil 10–11 million the sector, at biomass –4.3% so 27% hydro energy–0.8% kra solar/wind energy–0.4% of the of of As consumption a Ukraine data much oil level the the sector. shown began while gas, in energy it consumption published i key is two of 2007–2016, n years coal necessary a 10–11% to i diesel to political This in issues an market an tonnes 2 2035, key . 24%), fall balance and the of over by level is fuels, oil Ukraine’s the at chart to in and nuclear the because annually. and a the take issue consump share remained Ukraine’s fell fast Ukrainian (9.4% because i.e. past below, into petrol from of rate, as pet sec few pe in pe ac in is It ------

petrol er scale larus) The – – – 3 A Data: tonnes) (million Ukraine in consumption LPG and oil Petrol, diesel 2. Chart above are: of which C. 0 1 2 3 4 5 6 7 8 – – – fall fuel gazeta.zn.ua/energy_market/osennie-cyplyata-toplivnogo-rynka-_.html application and Ministry into economy. 2014),since grey the and sumption has significantly increased over the past few the past years. over increased significantly has sumption the fact that car owners are shifting from petrol to LP from petrol shifting are owners car that fact the of loss C the economic activity; undermined significantly has which economic crisis the have a 10% share in total fuel consumption in Ukraine; in consumption fuel total in have a10% share rapid State Statistics Service of Ukraine of Ukraine Service Statistics State [million tonnes] 3 Куюн, 2007 . that the all were price). As account (over data an demand decrease large Осенние for unable effect of 2008 the from This Energy Ukrtatnafta’s different which used to to used which Donbas the in of outbreak war the and rimea was past the of „цыплята” for results in to and 2009 brought agencies the two petrol LPG supply methods Coal increasing output in years grew, 2010 Mining, топливного researching demand drivers about the of petrol (it the calculation, the necessary has by the 2011 popularity price existing shifting visible not a State the рынка, number revealed fuel of 2012 Statistics the quantities, in LPG Zerkalo Nedeli Zerkalo suppliers diesel

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11 PRACEOSW REPORT OSW 09/2012 04/2017 12 PRACEOSW REPORT OSW 09/2012 04/2017 moshenko crisis the Russian arrival products. of petroleum duty on imports customs the cided lift to tempt being A Ukraine. to impededaccess for fuels imported successfully tariffs sure the processed with eries, lians), In 43%. to shrank state ian entities The was One Boholyubov). Henadiy Kolomoyskyi and taken actions justed the major 1999–2000, early situation. business decision the consequence but the was Drohobych withheld over to to Odessa in of was intensification change companies. also processing introduce 1990s. shortage the 21–22 million accompanied the and by far resulted was the shareholding As (LUKoil) Ukrainian so-called Russians President by This took below a export and used of the result, of regulated heavy not This, the place from crude Nadvirna, main the and of as tonnes by only gained fuel of privatisation capital Russian the Viktor in a Tatar in the companies’ part a Lysychansk structure base oil producers, dispute turn, allowed crisis. May parliament, fuel fact of supplies. control of oil. (Privat were for Yushchenko oil oil 2005 on the prices, caused that In It annually, between supplies creating supplies rose output. the was of privatised market of the (TNK). i.e. Group Ukraine’s In which three following wanting diesel to the refinery provoked Ukrainian 2003–2004, 55.7%, which the a to At controlled about reaching Ukrainian The prices. company more the led oil the at government value to most the had years thus while domestic and to same who by ‘stabilise refineries: The refineries supplies same the been petrol of the Ukrainian resolved important by named oil the was that two time, all highest the market, government’s traditionally share time. market the led responsible of smallest the shortages. oligarchs to high controlled Kherson Ukrtatnafta. the three the by the prices’, They level of refineries refineries Yulia with Ukrain to customs problem Russian market trans be refin since were Ihor (Al The en the de Ty ad for at by ------Map.

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29 PRACEOSW REPORT OSW 09/2012 04/2017 30 PRACEOSW REPORT OSW 09/2012 04/2017 part circle, creased of several a In 1.2. crude There Data: 10. Chart imported tonnes Odessa–Brody oil. supplies oil route Belarus. to of crude alternative may becomepipeline an sian Minister There 2016. 2015 force October March in between and was that Ukraine to exports Russia. from of fuel 10 20 30 40 50 60 0 medium-size the Viktor the Russia’s Nefterynok.info Nefterynok.info [%] prices Fuel suppliesFuel from Russia of fuels. is was participation oil first in of times the recently, also The share of fuels imported from Belarus in the Ukrainian market (%) market Ukrainian the in Belarus from imported of fuels The share Arseniy petroleum Yanukovych’s particular diesel supplies a 2013 Finally, market on years position discussion large less the oil supplier, oil remaining petrol Yatsenyuk after pipeline Ukrainian potential had this petrol to from of products Serhiy was Belarusian people been Ukraine in supplies. option presidency, with Russia. temporarily Ukraine and at in Kurchenko’s taken whether market 2014 in linked a around Belarusian-Ukrainian was then share Ukraine, lifted Imports In diesel refineries over in rejected 2015, this the to rising it spring of 25% the harmed government was by around southern increase including of Russian firms import over ‘the Russian significantly, reasonable – 2016 initiated from officially by LPG family’, the 2015 (for 10% duties companies resulted Moscow’s section non-Russian past million 1.2 diesel members example, of co-operation diesel to i.e. because five on unofficially ban oil of his by from years. fuels, embargo significantly sold the oil imports tonnes the in VETEK) inner of sources. supplies the fuel Druzhba 1.75 million then 2016 Russia At the as business fact the of imports because regards on of risk which Prime diesel time Rus that was fuel and The in oil of - - Russia for reached market. oil diesel Ukrainian 50% to on the may increase fuel of Russian share plies been Ukraine. running grow Russia ing As sian interests in Ukraine. Ukraine. in interests sian lobbyist of Rus important who reputed an is be to politician a Ukrainian Medvedchuk, controlled by Viktor AG mostlikely is Partners Trading press, International Ukrainian the from more, information to according Further it amoney to Switzerland. sell to mule from then and structure infra transport over control strategic of the take to Russia allowed fact in Kyiv government in war, the why,It unclear is aRussian-Ukrainian during 2016. March in signed finally was 2015cember AG, De in and Partners Trading Switzerland’s to International pipeline sold company. the Russian 2015, the to Transneft pipeline August oil In uct prod of the ownership the transferring time same at the Rivne, in a court by cancelled 2015. Unexpectedly, decision was the March in nomic Court SupremeEco the Ukrainian by by a decision passed confirmed was this and Treasury, Ukrainian the to pipeline of this ownership the transferred court However, aUkrainian 2011, in PrykarpatZapadTrans. named pany border, by acom managed is which Ukrainian-Hungarian the with border of 1,433 a length lion and tonnes rection product oil pipeline, with an annual transport capacity of 3.5 capacity transport annual an with pipeline, product oil rection monopoly. Samara–Weststate-owned Di the was asset The mostimportant Russian the pipeline) oil but Transneft, to Druzhba of the section Ukrainian the with (unlike not to Ukraine transferred was Ukraine from running pipelines product oil of the ownership the USSR, collapse of the the After T a he product oil pipeline from R pipeline he productoil Russian million 1.2 result, by used further is thus rail. almost from Furthermore, also to Russian had LPG This supply a as the Ukrainian Anti-Trust Committee approved this deal and it and deal approved Anti-Trust this Committee Ukrainian the Russia tonnes major a 0.8 million a means in 16% consequence producers 150,000 – Ukraine. to LPG of share it that, Ukraine diesel costs supplier tonnes, in if For 180,000 tonnes US$20–25 less returned total oil the of in and Russian the ussia to present km, connecting the Russian-Ukrainian Russian-Ukrainian the connecting km, June fuel which the reactivation 0.1 million to sales. 2016. Ukrainian the and level ensured per of Ukrainian The Since Belarusian of tonne diesel tonnes share supplies of a market. that the 54% when oil of of market time, product (Euro share Russian is producers, petrol. compared In maintained, this 2016, 5) in in oil monthly Fuels 2016, fuels route the supplies pipeline to this mil from sales sup may sell has the ------to is

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31 PRACEOSW REPORT OSW 09/2012 04/2017 32 PRACEOSW REPORT OSW 09/2012 04/2017 Over market. Ukrainian suppliers the to foreign fuel top three Medvedchuk Viktor ko and including– a the petrol a uania nections the ment 24 The 1.3. a tended publicised The ofeffectiveness exports. were rything ism’ Unexpectedly, which accused rol worth increased Poland 10.7%. to increased oil of diesel that while imports, of almost P. natural strong regular petrol zn.ua/energy_market/gaz-so-vkusom-shokolada-_.html market

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33 PRACEOSW REPORT OSW 09/2012 04/2017 34 PRACEOSW REPORT OSW 09/2012 04/2017 Chart 13. Chart deficit. Ukraine’s worsens which trade countries, other from fuels import sequence mum Data: The Data: financial were The value of fuel imports to Ukraine (US$ billion) Ukraine to imports The of value fuel 12. Chart prices. oil of falling effect US$3.3. respectively, an and billion was which 2015 and 10 12 15 4 6 8 0 2 3 6 9 0 share State Statistics Service of Ukraine Service Statistics State Service Tax State Ukraine’s [US$ billion] at level 2009 2009 billion, US$2.8 Import of fuels to Ukraine as a % of total imports a%of total as Ukraine to of fuels Import 2016 expenses value of of of the fuels 12.3% 2010 2010 (after deep in in total crisis natural 2014 to in on 2011 2011 2012 they Ukrainian foreign of gas). finally the 2012 2012 Ukrainian petroleum While had imports fall already back in 2013 2013 2009 the rose refining products to moved 8.7% from 2014 2014 industry costs up in 6% fell 2016. to in to of US$8.8 billion. 2015 2015 2009 to US$3.85 billion imported Thus is the one a need 2016 2016 maxi fuels [%] con In to - - import its One fuel. cheap competitors who were selling their match to inability their was Ukrainian Livela, scale lishment ment Illegal sector. fuel Ukrainian ofpresent situation the ment cost-effectiveness istered cisely, without of Ukraine. family’) viewed exclusive 25 It which out has US$500 million. illegal When for years. market many oil ed took mated VI. Дмитрий is the thousands ska Pravda ska operation). taking connections power impossible of of representatives decided grey fuel Viktor fuel it losses have a the and T imports), as was this excise subsidiary

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system The of 114 million country T into has 55 million of Russia 2010. the and he s he up BPS-2 oil territory Druzhba This Oblast), Pipeline is one operation , oil company to including has are connected terminating transporting However, capacity (the volume 100,000 tonnes)

pipelines pipeline, ig of refineries, been accompanied , Europe’s tonnes tonnes n connecting with areas and in pipeline, System transporting ifi in Ukrtransnafta. the in Ukraine. was of with transport at 2012. an Ukraine’s cance o cance on operation close 14.5 million of at 1990s. and the (BPS) oil longest reduced annual and entry Russian Russian the with Russia beginning from to on by the A with then Druzhba However, in Sumy oil key via from 51 compressor exit a oldest, oil capacity 2001 running since Pivdennyi by transport ports the from oil also tonnes, element Brody f U running its transport Its around 56 million and the used Belarusian of Ukrainian the developed has oil system. the to kra Russia 2017, Russian Luhansk) of in pipelines thus adjusted late not to of northern 76 million capacity 20 million terminal to western be this systems; it i transported stations. to 1960s, avoid This decided the ne as atrans as ne tonnes began transported the the and section border strategy to to ports is have terminal dependence transport of and Ukraine, Belarusian although Ukraine’s the receive near tonnes. transporting tonnes its to (borders 36 million The fell a to Lysychansk in eastern develop operator was oil total Odessa transport Slovakia Kherson annually significantly tankers from in As within capacity the where its newest Primorsk length with on borders’ a borders its tonnes, signifi launch result, Russia is tran Azer (with own car the two and and and i the via ca EU oil t of of - - - - -

controlled by Privat. refinery Kremenchuk the to ment’s LUKoil’s Lazorko ment had the porting ery ment of decades. Kyiv 2016, At managed ever, the of resulted In Russia’s Data: 15. Chart 60 40 20 50 30 10 2004–2008, 0 the this present, Brody–Odessa past (owned 2000 Ukrtransnafta, Ministry of Energy and Coal Mining Coal and of Energy Ministry Ukrtransnafta, a has finally the for of Ukrainian monopoly route concession, Russian policy 2001 the in five refinery caused, had Oil transit via Ukrainian territory (million tonnes) (million territory Ukrainian via transit Oil This volume combating by a Druzhba by the for state-owned 2002 reduction Oleksandr years, no Russia was involving Privat). diversifying project visible oil transported 2003 refining for in in oil an to was it Odessa competition the is pipeline transported example, 2004 transported Slovakia, effect the of Control policy was Lazorko, informally bypassing oil oil company 2005 industry, only discontinued in oil pipeline of transit (reversal); reached to 2006 order the of the supplies operational the develop up for Ukrtransnafta the around 2007 same discontinuation transit Czech UkrTransNafta, via in to entrusted to Ihor former operation a particular—to several 2008 ensure Ukraine record-low this from the factors due Kolomoyskyi’s Republic, 15 million countries 2009 main was pipeline other director to million to supplies 2010 being by sector intended which has oil Privat over than level Hungary 2011 of pipeline as in in tonnes system tonnes corruption. economically of Russian and a oil fact of led 70% Russian of 2012 Group. the firm result at crude exports 13.8 million to become preventing in of of over in Drohobych 2013 over and in the oil oil 2009–2014 was Ukraine oil of This sources. oil the 2014 fifteen The Bosnia. annually the annually. degradation the [million tonnes] to supplies non-viable. via an oil company the 2015 manage past govern tonnes. instru the Odessa sector. trans years. refin How Over West 2016 two via use In to ------

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