Kremenchuk expects lowered production through Q1

Ukrtatnafta 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.

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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Update on Privat’s role in the Ukrtatnafta affair as Glushko dismissal hearings begin

Hearings on the dismissal of former Ukrtatnafta head Sergei Glushko began yesterday in Kyiv, but I am still working on trying to gain access to them. In the meantime, the Ukrainian news magazine Kommentarii (Comments) ran an article in this week’s edition attempting to shed some light on the recent supplementary oil shipments routed to the refinery. The article alleges that Gennadiy Timchenko, a former KGB colleague of Russian President Vladimir Putin, is connected to the crude shipments, and is doing so in collusion with the Ukrainian firm Privat. From Kommentarii (my translation):

According to Kommentarii’s source, the supply chain of oil to Ukrtatnafta appears as follows: Rosneft — Gunvor — Rixo (a Turkish company, trading in mazut [low quality fuel oil] for thermal power plants). The key element in the chain is the transfer at the Odessa oil harbor of oil into railroad tankers to Kremenchuk for Ukrtatnafta. [see below]

According to Russian experts, the conductor of this operation is none other than the former colleague and friend of President Putin, Gennadiy Timchenko — 50% owner of the Swiss firm Gunvor. Through the firm are sent the majority of exports for Rosneft and Gazprom (its oil exports). As a result of the bankruptcy of Yukos, the assets of this company [Yukos] were obtained by Rosneft, and its exports–by Guvnor.

The article details the connection between Putin and Timchenko as beginning during a shared stint in the KGB’s foreign intelligence division, and reinforced through belonging to the same judo gym in St. Petersburg. Timchenko entered the oil trade in 1988 with the firm Kineks which grew to reach turnover of around $2 billion a couple years later. He later moved on to form Gunvor in 1997 with a Swedish partner Torborn Tornquist. In 2001, the firm moved its headquarters to a swanky banking district in Geneva, and business began to take off.

By 2006, Gunvor was exporting 60 million tons of oil and petroleum products, worth about $30 billion. That figure is expected to jump to $43 billion for 2007. According to Russian press, the growth of Gunvor’s oil trading activities corresponds to Putin’s ascension to power, as the firm was able draw upon its political connections to win beneficial contracts with state energy giants.

The Kommentarii article goes on to identify three possible reasons why the Russian government (via Putin’s links to Timchenko’s Gunvor) would help out Ukratatnafta — or at least, not prevent this assistance — despite harsh condemnations of the corporate raid:

• This is an attempt by the federal government to lower the influence of Tatarstan President Mintimer Shaymievym.
• This represents a desire by Putin to further entrench his agents within Ukraine’s energy sphere; similar to the introduction of Yurii Boyko and Igor Voronin in the RosUkrEnergo scheme, this would allegedly put a key Ukrainian energy asset at the whims of a close Kremlin ally.
• This is the result of cooperation between the Kremlin and the powerful Privat Group (led by Igor Kolomoisky), which has been lobbying for increased control in Ukraine’s oil market.

Here is a translation of the deeper explanation given for the involvement of Privat, which apparently stems from its efforts to entrench its recently-acquired holding Sintez Oil into the transferring and services sector at the Odessa oil port. (I am including the entire section — again, my translation — to try to give a fuller explanation of this theory.)

Implementing deliveries by tanker is practically impossible without interested partners who possess the necessary infrastructure and are interested in the conflict at the Kremenchuk refinery. Privat, whose representatives openly declared the firm’s participation in the conflict, is such a partner for the Kremlin. It shouldn’t be forgotten that this group controls the above-mentioned Odessa oil port.

The possibility of the collection of barter tariff payments (rather than monetary) for the services of port trans-shipment and loading of oil is one of the most attractive sides of the operation of the oil terminal at the port. Sintez Oil, the Cypriot International Petroleum Company [unclear…] and [Sintez’s partner] OAO Eximnefteproduct sell the whole spectrum of transit services: trans-shipment of cisterns [tankers] and their steam cleaning, use of the reservoir park for the loading of tankers, direct transfer of oil, along with services for the cleaning ballast water from the tankers.

The cost of this port service is high, since the market for the supply of large quantities of oil by pipeline and railway to Ukraine is extremely monopolized. It is dominated by two or three players. Control of the port would allow favored investors to enter into this market, escaping the risk of investing into refineries.

Only those that invest money into factories earn money on the import of oil in Ukraine. The circle of such investors is primarily narrow. At the same time, control of the port gives a peculiar free pass into the entrance of this club: who would argue about the importance of transit?

By receiving oil in payment for transit services, the managers of the oil port were able to avoid threats from major players in the market and enter into reprocessing at the Odessa refinery and into Ukrtatnafta, which are connected to the port by pipelines. From recent times, thanks to the new Zhulin-Nadrovnaya bridge, among these clients has appeared the Nadrovnyanskiy refinery of the group Privat.

Thanks to the inclusion of Nadrovornaya into the pipeline network, the firm received the opportunity to take from the Russian exports “natural payment” for the transit not in Odessa itself but, for example, in Brody or Mozyr. In fact, the scheme “transit in place of delivery” allows Privat to economize on the purchase of expensive imported oil.

Earlier, this economy allowed the former co-owners of Sintez Oil, Alexander Zhukov and Andrei Derkach to play a noticeable role in the Ukrainian oil products market. Their attempts to create an oil empire on the basis of control over the deliveries to the Kherson refinery and over the system of sales by Ukrnaftoprodukt came to an end in complete failure. Experts called the causes of the failure the weak connection with the owners of the Kherson and Odessa refineries.

Neither Lukoil nor the Bazhaev brothers from Alians [who controlled the refineries] trusted Zhukov or Derkach. It is unlikely that Privat will repeat the mistakes of its predecessors. After all, in the group [Privat] are two of its own smaller refineries, and not long ago Ukrtatnafta entered the orbit of the firm.

In sum, control over the last [presumably meaning Ukrtatnafta], along with control over the port, would allow Sintez to create a fully vertically integrated oil complex, which includes all technical chains “from the tanker and well to the filling station.” Over such a business stake in the large oil game that is now flaring up between Moscow and Kyiv, the Dnepropetrovsk-based Privat is fully capable of becoming the victor.

Apparently Privat is lobbying the Kremlin to allow these supplemental deliveries in order to cement both the role of Sinitez in the oil services sphere, as well as its newly-acquired influence over Ukrtatnafta. This combination would apparently bump up Privat’s stake in the regional oil market significantly. Where Moscow benefits — besides gaining a business partner (trustworthy or not) — is unclear.

Kommentarii’s source (backed up here) also says that 80,000 tons of crude from Rosneft was scheduled to be shipped from Novorossisk to Odessa aboard the SeaBravery tanker, but the shipment was delayed by last weekend’s storm. At the press time of the magazine (November 15th, or so), the ship had yet to leave port. By this point, it is still unclear if it has left yet. The prevention of further shipments from Novorossisk due to the storm’s aftermath may throw a wrench into Privat’s plans (if, indeed, this is all part of its grand plan), as it would presumably be forced to look beyond its sphere of influence for additional shipments to feed the Kremenchuk refinery. Undoubtedly, however, the group will develop a new scheme…

I’m still working on wrapping my head around these ideas, and am looking into some of the players. If anyone has further insight, feel free to add your own comments or send me an email.