Kremenchuk expects lowered production through Q1

Ukrtatnafta's refinery at Kremenchug - From ukrtatnafta.comUkrtatnafta reported expectations of processing nearly 1 million tons of oil in the first quarter of 2008, about 2/3 of production levels the refinery was running at before direct crude supplies from Tatneft were shut off in October of 2007. The firm plans to buy 510,000 tons of oil on Ukraine’s domestic market and 360,000 of imported oil, presumably from Russia. It will also add 60,000 tons of vacuum gas oil.

The 2007 results for Ukrtatnafta, also announced, had production levels down 10% to 5.6 million tons. The company blames this decline on “lessened supplies of imported oil,” but stresses new gains in the efficiency of the plant’s refining process that helped offset this drop. The company’s release also praised Pavel Ovcharenko’s leadership:

“[He] quickly carried out the restoration of [Ukrtatnafta’s] financial health…break[ing] a chain of unprofitable months. Such rapid movement depended on timely and effective leadership decision, including the cancellation of intermediaries in the sphere of the sale of oil products and a switch to direct contracts with company-owners in the filling-station family and with large industrial enterprises.”

Meanwhile, a source within the company has suggested that Ukrtatnafta’s financial situation — perhaps not as rosy as implied by the press release — could be strengthened by bumping up wholesale prices of gasoline. The retail price (presumably at the pumps of Ukrtatnafta’s expansive gas station network) would remain the same, though. This would squeeze profits out of the filling station division in order to provide the refinery with more cash for oil purchases. However, money seems less a problem than finding a consistant crude supplier.

So far, Tatneft — Ukrtatnafta’s disgruntled minority owner and principal oil supplier — appears to be doing well in limiting supplies of Russian oil following the halting of its own pipeline crude deliveries in response to Ovcharenko’s ascension, which replaced Tatneft-friendly Sergei Glushko. Glushko’s hearings on possible criminal corruption charges are presumably continuing in Kyiv, but I have not been able to get much information regarding them.

While domestic supplies have helped pick up the slack caused by Tatneft’s actions, this has left two smaller Ukrainian refineries without crude to process. These two refineries are linked to the Ukrainian business conglomerate Privat, which allegedly orchastrated Ovcharenko’s leadership move at Ukrtatnafta and is the major player in Ukraine’s oil market. Privat is now looking elsewhere for crude supplies, but has been stymied in picking up Russian crude due to pressure from Tatneft on its fellow Russian producers and oil traders.

Tatneft had earlier threatened Rixo International over its role in providing the Kremenchuk refinery with crude supplies (Tatneft apparently saw Rixo as an easier target to approach than the Putin-connected trader Gunvor). I contacted Rixo today to try to get an update and response from them, but was told everything was “p and c” (private and confidential) and would not even confirm receiving a communication from Tatneft.

Meanwhile, Ukrtatnafta has moved its company representation headquarters in Kyiv, just blocks away from the major national governmental buildings. A fitting metaphor, due to the alleged relationship between the forces behind the recent management shift and Ukraine’s new Yulia Tymoshenko-led government.

Privat in Ukraine's oil sphere Update (1/16/04): The two smaller refineries left without a crude source, Galichina and Neftekhimik Prikarpatia, have sent a letter to Ukraine’s President, Prime Minister, and the head of Naftogaz asking for a decision on the future use of the Odessa-Brody (OB) oil pipeline. The pipeline is currently sending Russian oil south to Odessa, but was instead meant to ship oil tankered into the Black Sea port north, with a future extension bringing the supplies into the heart of Europe or the North Sea. This would alleviate congestion in the Bosphorus while providing a potential non-Russian route for Caspian oil. The two refineries also hope to tap into the flow of Caspian, with expectations of processing at least 5 million tons of crude from the pipeline per year, if it is reversed.

Kazakhstan’s President recently floated the idea of building a canal from the Caspian to the Black seas. Opening this shipping lane — rather than having to rely on pipelines running through the south Caucasus — could potentially ensure more reliable shipments for the OB pipeline. The previous Yanukovich-led government had cited questions about sufficient supply in its decision to direct the flow southward. While the government has allegedly received about $20 million in profits from the current use of the pipeline by TNK-BP, proponents of switching to shipping Caspian oil northwards assert that more money is available. Regardless of the (relatively far-fetched) canal, Ukraine has apparently been assured of greater volumes of pipeline-fed Caspian oil should the government decide on switching the direction of the flow.

Privat, which controls the Galichina and Neftekhimik Prikarpatia refineries, also has a large presence in the Odessa oil port, particularly with the services company Sintez. As such, it may view increased oil tanker shipments into Odessa as a further source of profit, beyond the refining work at its two plants enabled by the flows of Caspian crude.

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