Monthly Archives: December 2007

Ukraine’s new government outlines hydrocarbon license examination plans

Ukraine's new government looks to changes at the Fuel and Energy ministryIn one of the earliest ministerial-level strategies to be unveiled, Ukraine’s newly-formed coalition between the Bloc of Yulia Tymoshenko (BYuT) and the Our Ukraine – People’s Self-Defense (NU-NS) parties outlined its plans for the country’s oil and gas sphere.

Besides preparing to take oil transport monopoly Ukrtransnafta public, the government hopes to sign a long-term contract for gas purchase from Central Asia. Currently, Ukraine’s national energy firm Naftogaz no longer buys gas directly from Central Asian countries, instead relying on the gas intermediary RosUkrEnergo. This maligned trader coordinates the purchase of the gas and its transport through Russia, as well as its resale to Ukraine. Breaking back into direct negotiations with Central Asia (despite relying on the region for about 3/4 of its gas imports, Ukraine lost this position a few years ago) may help Naftogaz in its own talks with Gazprom on Russian gas supplies.

Also discussed in the strategy (which I’m attempting to obtain a complete copy of) are plans to re-examine the results of oil and gas producers to determine if they are adhering to their license agreements, specifically in regards to their upstream investment plans. Those firms that are not pumping in an adequate amount of investment or producing the necessary volumes will be stripped of their license, which will be then be given to other companies who promise closer adherence with the government regulations.

BYuT deputy Mikhail Volynets, who previously suggested a re-examination of Regal’s licenses, is quoted as suggesting that these moves are expected to boost production 5-7% by 2009. From Korrespondent (my translation):

“We can’t increase the volume of production of oil and gas in the country when companies holding the production licenses don’t invest enough in deposits [fields]. The majority of them received licenses for further resale. We plan to return to the government the licenses and transfer them to companies which will fulfill the investment conditions and conduct the extraction of oil and gas.”

One analyst suggests that this will bring about a similar situation to Russia in 2004, when a crackdown via stricter government enforcement resulted in a consolidation (and contraction) of operating oil and gas producers in Russia from about 300 to around 40. Large firms were able to scoop up the licenses for the fields operated by under-resourced smaller companies unable to follow the clauses of the licenses — or unable to pay the necessary bribes.

Ukrainian license holders, however, have apparently threatened to protest any such action with law suits, with one directer of a smaller producer warning that this plan will result in the survival of companies only with “political influence and financial resources.” While ideally, the producers would be financially successful enough to have the necessary financial means, the director may also be referring to money for extra-legal protection from a loss of license. There are also questions of the legality of this plan, which is based on how explicit the investment conditions were stipulated and how confidently their fulfillment can be estimated.

The outgoing government has already made it difficult for many oil and gas producers, forcing them to sell their output to a pre-ordained buyer for a capped price. While these are attempts to keep domestic energy prices low, it has also resulted in decreased capital available for investment, leading to this current attempt at essentially government-mandated investment. However, the plan doesn’t seem nearly as viable as commercially regulated investment, i.e. firms injecting money into their projects because they expect it to earn them more in the future. A combination of tightened finances and an unclear political / economic horizon has instead led many firms to concentrate on the short term.

BYuT representative Volynets (second from bottom) has an extensive background in the coal industry and is an accomplished labor rights organizer — a feat, considering some of the conditions present in Eastern Ukraine. Given his high level on the party list and these recent comments, it would seem that he may be a favorite to succeed Yuri Boyko as Minister of Fuel and Energy when the new Cabinet of Ministers is sworn in. However, he may also be a candidate for the Ministry of Labor and Social Policy, leaving the door open for someone else from the ruling coalition — so long, of course, as the two parties can cooperate enough to actually form a functioning government…

Russneft FAS ruling delayed a week, while decision by tax courts will come in “early 2008″

Still awaiting the fate of Russian oil company Russneft -- From russneft.ruDespite the expectation that by November 30th, Russia’s Federal Anti-monopoly Service (FAS) would rule on the applications of Oleg Deripaska’s Basic Element and Swiss-based trading firm Glencore to buy the assets of Russneft, the agency decided to postpone the decision until the next week. Citing a change in methodology which adjusted the time-frame alloted for such applications, this delay also gave the FAS a chance to observe the results of this weekend’s parliamentary election in Russia before making a ruling.

It also would have given the FAS a chance to see how a Moscow arbitration court ruled claims from the Federal Tax Service (FNS) on the seizure of Russneft stock due to tax arrears, but the court also decided to delay a decision. One case is postponed to February 6th with another pushed back to January 23rd. The muddled affair involves numerous defendants associated with various Russneft subsidiaries.

The State Property Management Agency is also involved in order to ensure that the agency will be properly represented in the resolution. However, the property agency’s representative failed to show up for a meeting on December 2nd, leading to the court’s decision to postpone a ruling. Instead, the court is pushing the parties involved to come to a peaceful settlement in these interim two months, though this was presumably already tried in early stages of the case.

The court may be hoping that the FAS’ decision on the sale of the shares along with the country’s “new” political situation following the elections will facilitate a settlement. Typically, the absence of a 3rd party representative has not been enough of a reason for such a delay, suggesting that this is the desire of influential forces.

Ukrtatnafta apparently secures future crude deliveries, predicting upped production at Kremenchuk

Ukrtatnafta is planning on bumping up Kremenchuk's refinery closeer to pre-dispute volumes According to an Ukrtatnafta press release, the oil products company is predicting a 20% increase in production at the Kremenchuk refinery for December, bringing the monthly total to 360,000 tons. However, this is still below the plant’s typical monthly average of between 500,000 and 600,000 tons, before the current “management dispute” led to a cessation of crude supplies from Tatneft.

The company’s plan has several refining assets that had been shut-down brought back on-line to account for the increased production figures.

Given the company’s confidence in its ability to boost the production rate, it would suggest that Ukrtatnafta has succeeded in securing future crude supplies, at least for this next month. It had been surviving at a limited production rate through deliveries of Russian crude via Odessa and supplies purchased on Ukraine’s domestic oil market.

These crude supplies are more expensive than what it had been getting from Tatneft via pipeline originating at the oil fields in Tatarstan. One Tatneft executive was quoted as saying that Ukrtatnafta was now paying about $105 per barrel but this may not be a reliable source, as Tatneft has an interest in making the affairs of Ukrtatnafta look as badly out of order as possible.

However, the plant’s output of refined products does reflect a higher base price. From Reuters:

Analysts said also on Thursday that prices for Kremenchug’s refined products had also risen — $1,095 for a tonne of diesel from $1,059, 92 octane petrol rose to $1,139 per tonne from $1,109 and “super” 95 octane rose to $1,168 from $1,129.

Kremenchuk (Kremenchug is the transliteration in Russian) produces around a third of Ukraine’s refined oil products and represents a vital economic asset as well. Bringing the production figures back up to pre-disruption numbers may also help slow rising gasoline prices in Ukraine, which have now hit the psychological mark of $1 / liter. However, the driving factor for gasoline’s price increase has been spiking prices in the world oil market, rather than problems at Kremenchuk–Ukraine still has one of the cheapest rates for gasoline in Europe.