Standoff at the Kremenchug oil refinery

Ukrtatnafta headquarters - From Taking a break from natural gas issues and a post I’ve been working on detailing some of the history of RosUkrEnergo… There is trouble now in Ukraine’s oil sector as a disagreement over leadership of Ukrtatnafta threatens to decrease the output of the country’s largest oil refinery. From the October 22nd issue of Kommersant (my translation):

The head of Ukraine’s largest producer of refined oil products, ZAO Ukrtatnafta, was replaced on Friday. With the help of a legal bailiff [executer of the law], the post of chairman of the board of the company was taken by Pavel Ocvharenko, who had been dismissed in 2004 [from that same position]. The Tatar shareholders [the “tat” of Ukrtatnafa] believe his appointment is a continuation of a conflict with NAK Naftogaz Ukrainy for the control of the Kremenchug oil refinery and are threatening to halt oil deliveries to the factory. Ovcharenko assured that he would take into account the interests of all sides and announced the necessity of an examination of the financial and production activities of the company.

In September of this year, following accusations of corruption, an investigation into Ukrtatnafta was launched by the state with the aim changing the firm’s leadership. The Ukrainian government has a 43% holding in Ukrtatnafta (through Naftogaz), the government of Tatarstan (a semi-autonomous region witin Russia) owns another 28.8%, and Russian-registered Tatneft has 8.6%. The ownership of the remaining shares — 18.3% — is currently being contested between Ukrainian and Tatar representatives. Ukrtatnafta owns the Kremenchug refinery — Ukraine’s largest, accounting for around a third of the country’s oil production — located in the central Poltava region.

The court-ordered ousting of former (Tartar-appointed) chairman Sergei Glushko was only accomplished after an armed confrontation on October 19th at the company’s offices between police and guards from Ukrtatnafta’s private security firm Buka.

Having taken back control of the company, Ovcharenko asserts the refinery’s net 2007 losses could reach about $80 million as a result of paying high prices for oil deliveries while selling the products at lower prices than their market worth. This corresponds to his message that the company’s management has failed since he left in 2004, and has instead dealt serious financial harm to the company.

In a further financial analysis of the company released by his office, Ovcharenko cites the nontransparent means that the refinery pursues to buy its oil supplies as the key factor in driving up the firm’s costs.

In May 2007 Ukrtatnafta reneged on its deal to buy oil directly from Tatneft, and instead there appeared numerous intermediary firms within the supply chain. In particular, according to information from the state customs agency, in the importing of Russian oil there is the firm OOO Taiz (Ukrtatnaft’s debt to this firm is greater than UAH 1.5 billion [$300 million]), a “receiver-giver” of MKChP Avto [unclear what that acronym stands for]. In July, this small firm was replaced with OOO Technoprogress (the debt to this company exceeds UAH 750 million [$15 million]). The purchase of oil through these intermediaries was done at prices $20-30 above the market value. In the past three years, Kremenchug’s entire market [of refined products] has been controlled by companies affiliated with Tatneft — Novoil, Tatnafta-Service and Ukrtatnafta-Center. Products [from Kremenchug] were sold to these firms at 25-30% below market prices.

Given these figures, it’s easy to see why the company would be hurting financially, and how possible inside connections between the intermediary firms and company management could account for the price differences.

Disputing the action, Tatneft has halted its supplies to the refinery, forcing the factory to scale back production and seek other options for crude delivery. If no other sources are found for a supply of oil, the refinery may have to cease production in about ten days.

Tatneft has asserted political motivations behind the move, and there are certainly geopolitical issues in play that complicate the economic rational. The continued question over the remaining ownership of the firm — enough to give either side (Ukrainian or Tartar) a majority and clear authority on appointing board leadership — adds a further element to this confrontation. For instance, Ukraine could have found out that an inopportune resolution on the issue may have been soon in coming, forcing the government to act now while ambiguity exists to insert its own loyal management. A shake up of the Ukrainian state leadership following the recent parliamentary elections also would have created a possible disruption in the political chain of command, leading to an action not fully coordinated within the government.

Ukraine obviously feels a sense of ownership towards the refinery since it is located on Ukrainian territory. At the same time, it relies on the cooperation of Tatarstan for its oil supplies and, therefore, livelihood. While a change in ownership may have been in order — along with a clean sweep of tainted intermediary firms (as in the gas trading scheme) — the intense alienation of the Tatar partners will only make future operations more difficult. Energy relations with Russia remain a sore spot for Ukraine; so long as it is economically feasible, it would do well to try to keep itself aligned with those relatively independent options that exist — including Tatarstan.

Postscript: As someone I was talking with tonight commented, this has much of the feel of “crooks versus crooks.” Indeed, the involvement of armed security forces tends to be a sign of competing power bases who are able to leverage support within local “strength” agencies, rather than those who have gone through more widely accepted channels. Regardless, it is an indication that clearly established procedures based upon rule-of-law ideals are not being followed in this issue…

One response to “Standoff at the Kremenchug oil refinery

  1. Pingback: Kremlin, Inc » Update on problems at Kremenchug

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