Despite expectations of boosted production in December, the Ukrtatnafta-owned Kremenchuk oil refinery is still facing problems in securing oil supplies, even as its efforts to buy domestic crude have forced two smaller Ukrainian refineries to shut down.
Both the Drogobych (Galichina) and Nadvornyansk (Neftekhimik Prikarpatiya) refineries in western Ukraine have ceased production for the month, apparently unable to buy any Ukrainian crude on the market. Ukrtatnafta, facing halted supplies from previous partner Tatneft stemming from a “management dispute,” bought what was available in Ukraine and routed it to its Kremenchuk refinery.
Both of these smaller refineries are linked to the powerful Ukrainian conglomerate Privat, which is believed to have engineered the move that installed Ukraine-friendly Pavel Ovcharenko atop Ukrtatnafta in October. This move, which forcibly removed the Tatneft-aligned Sergei Glushko, angered Tatarstan shareholders. In response, Tatneft shut off direct supplies to Kremenchuk and pressured other Russian oil firms from providing shipments. Ukrtatnafta dropped production well below capacity and turned to Ukraine’s relatively-small domestic crude market to make up the difference while searching for new sources of Russian crude.
According to Argus FSUE, quoting local traders, Ukrtatnafta was able to purchase nearly 170,000 tons of Ukrainian crude for December at about $103 per barrel. This is similar to volumes that were domestically purchased for November. Drogobych and Nadvonyansk together had been averaging about 140,000 tons a month (see chart), so the increased presence of Ukrtatnafta in the domestic market–buying more than their combined delivery–has forced them out of production. Western Ukraine is facing an increase of 10-20 kopeks (2-4 cents) per liter of gasoline due to the halting of the two refineries, at least in the short term until boosted exports from Belarus enter the market.
Tatneft has also been relatively successful in pressuring other Russian suppliers from making a deal with Ukrtatnafta. According to industry sources, last month Privat-controlled companies approached Lukoil and TNK-BP about supplying the Drogobych refinery, but both Russian companies refused over worries that the deliveries would be re-routed to Kremenchuk. Ukrtatnafta was able to purchase two deliveries from Rosneft through the trader Gunvor, to be sent via tanker through Odessa. However, stormy Black Sea weather delayed the first (82,000 ton) shipment, which pushed back the loading of the second (80,000 ton) shipment, leading to the delivery of only 132,000 tons of Russian crude for the month of November.
The refinery had been hoping to process 300,000 tons a month (and is predicting 360,000 tons for December), and this extra 30,000 tons of Russian crude to that was delayed from the November shipment may be incorporated in the prediction for boosted production. A source with Tatneft said the supplemental Russian crude deliveries were purchased at around $105 per barrel, pricing Ukrtatnafta’s supplies higher than the average for Urals-blend, which closed at $90.55 / barrel at the end of November.
Privat also moved to increase its control over the trading division of Ukrtatnafta that supplies the Ukrainian regions of Poltava, Cherkasy and Sumy with the firm’s refined oil products. The Privat-controlled company Vato bought an additional 25% of the trading firm’s shares, mainly from the insurance company Oniks (of which Vato owns a quarter), boosting its holding to 89%.
This appears to be a solidification of Privat within the supply chain, from the oil port services firm Sintez at Odessa to the Kremenchuk factory to the sales division. Upon re-taking control over the refinery, one of Ovcharenko’s main complaints centered on the use of Tatneft-aligned intermediaries on either side of Kremenchuk’s operations unnecessarily bumping up prices and decreasing margins for the refinery while simultaneously lining the pockets of management figures. It looks like Privat is either looking to end this relationship — or reinforce it with entities of its own choosing.
Of course, this won’t do the firm any good if it can’t secure the delivery of Russian crude. Privat seems to be willing to let its other two refinery assets — which are less technically advanced than Kremenchuk — dwindle while flexing its presence within Ukraine’s domestic oil market (it controls Ukrnafta, as well) in order to support its plans for Ukrtatnafta.
Tatneft crude, meanwhile, has been rerouted through alternative export channels to compensate for the cessation of deliveries to Kremenchuk. However, given the heavier nature of the crude produced in Tatarstan versus other Russian sources, this has affected the makeup of some Russian crude oil exports. As a result, a denser mix of crude has been flowing through the southern leg of the major Druzhba oil pipeline and at Black Sea ports that serve as destinations for Russian crude (i.e. Novorossiysk and Pivdenne). This denser mix could potentially lessen the attractiveness for traders of Urals-blend from these sources, and is likely producing pressure from other Russian oil exporters for Tatneft to resume its standard export regime to Kremenchuk. The refinery is more suited to dealing with the heavy blend, and Ural export density would then return to its previous, more attractive, level.
While a shareholders meeting for Ukrtatnafta is scheduled for Dec. 17th, it is unlikely to be held due to the continued boycott of Tatarstan-allied owners (accounting for about 40%). Not only is this protracted dispute affecting the performance of both sides — as well as the oil market around Ukraine and Russian in general — it also is a continued example of a lack of respect for the rule of law and the “raiders” culture of strong-armed business tactics. While the incoming Ukrainian government has questioned the previous privatization of of Ukrtatnafta (lending credence to the Ovcharenko’s placement atop the firm), the circumstances upon which the current management rose to power and the inability between the sides to reach any form of civil agreement or business cooperation cry for the involvement of an impartial and lawful intervention by Ukrainian state forces for the development of a mutually acceptable settlement.