Category Archives: Ukrtatnafta

Tymoshenko moves against Ukrtatnafta

Tymoshenko and Naftogaz are reaching for a score with Ukrtatnafta - From / Getty

Even as the government of Ukrainian Prime Minister Yulia Tymoshenko is working to shake up the country’s electricity sphere, she is also attempting to reassert control over the country’s largest oil refinery. However, this move is deepening a rift between her and the financial group Privat, a relationship she is depending on for support in her electricity moves.

A March 18th ruling by Ukraine’s Supreme Court nullified a series of lower court decisions concerning the status of an 18% piece of the downstream oil company Ukrtatnafta. Dispute over the ownership of these shares erupted into a forceful seizure of the company’s Kremenchug refinery in October 2007.

Tatarstan believes the 18% should be under its control, which would give it a majority. Lower court decisions have supported this interpretation.

The latest Supreme Court ruling, however, annulled Tatarstan’s claim to the shares, putting them back into play. Tymoshenko seized the opportunity to assert that the shares are rightfully under Ukrainian government control (likely by Naftogaz), giving her side a majority stake. She announced the government’s plans to insert new leadership, replacing the management put in place by the seizure alleged to have been orchestrated by Privat.

Korsan, a Privat-affiliated company that owns just over 1% of Ukrtatnafta, joined Tatarstan in objecting to the ruling and the moves by Tymoshenko. This puts Privat and Tatarstan into an uneasy partnership with the aim of prolonging the status quo at Ukrtatnafta.

Tatarstan had earlier halted crude shipments to the refinery in protest of the seizure, and recently opened an international arbitration case over the raid. Tatneft, Tatarstan’s government-owned oil firm and a partner in Ukrtatnafta, alleges that it never received payment for crude in the refinery at the time of the seizure and is now seeking hundreds of millions of dollars.

Naftogaz had earlier this month tried to call an Ukrtatnafta shareholders meeting with the aim of replacing the company’s leadership. Ukrtatnafta contested the legality of the proposed meeting, however, and it did not take place.

The fate of Ukrtatnafta is still in dispute...A further meeting attempt by Naftogaz on March 14th at Kremenchug was supported Ukrtatnafta’s shareholders register–in the hands of the Privat-controlled Ukrneftegaz–showing the state energy firm with a 62% holding in the company. Naftogaz and Tymoshenko assert that the meeting was successfully opened on company property, with proceedings immediately transfered to a new meeting to be held on March 18th at Naftogaz’s premises in Kyiv. However, the legality of this meeting was disputed by the regional shareholders and securities government commission.

Nonetheless, Naftogaz proceeded as a legitimate meeting had taken place. The March 18th meeting was further delayed to March 28th (tomorrow), likely giving the government time to secure a favorable ruling from the Supreme Court on the disputed shares. With that decision in hand, it appears poised to attempt to insert its own management team.

Tymoshenko allegedly discussed the fate of Ukrtatnafta with Putin during her visit to Moscow last month. She also apparently recently held a closed-door meeting with President Viktor Yushchenko to discuss the situation, possibly to clear her strategy for resolving the conflict with him. The Supreme Court ruling may be an attempt to insert a semblance of the rule of law into the dispute, giving her enough justification to proceed with her version of a resolution.

Perhaps she is aiming for a compromise: ceding control of the disputed shares to Ukraine in exchange for removing Privat–the alleged instigators of the corporate raid–from the picture. If this is the case, expect a decrease in the protests lodged by Tatarstan, especially if they receive a favorable ruling on the arbitration case.

(Tatneft has learned to survive without its direct oil shipments to Kremenchug, instead boosting its Novorossiysk deliveries and exports to central Europe via the Druzhba pipeline. It is also increasing its own local refinery production. Given this mixed output, Tatarstan may be willing to simply subsist on earnings from its current Ukrtatnafta share and not push for a further development.)

However, the effect of these moves with Ukrtatnafta may lead to consequences in Ukraine’s electricity sphere because there is an overlap of key players in both dramas.

As I wrote on Tuesday, Privat and the Electricity Company of Ukraine (EKU) have partnered up in an attempt to change the leadership of the power generating company Dniproenergo. Tymoshenko’s privatization plan for the firm–and three other major generators–relies on the same interpretation of the company’s disputed shareholding used by the attempted raiders.

It is unclear exactly how Ukrneftegaz, the shareholder registrar for both Dniproenergo and Ukrtatnafta, will behave as these conflicts deepen. Privat and Naftogaz already have a strained relationship over Ukrnafta, the majority state-owned oil company effectively controlled by Privat due to its 42% stake. The outcome of these disputes will go a long way in predicting how their future relationship will turn out.

I’ll try to follow tomorrow’s meeting and update accordingly.


Note: Igor Kolomoisky, a key owner of Privat, recently suggested (English) he was interested in buying out the interests of both Dmitry Firtash and Ivan Fursin from the maligned gas intermediary RosUkrEnergo. Such a move would add a further nuanced wrinkle to Privat’s relationship to the Ukrainian government.

Update (3/28/08): A Gazprom source told Kommersant that Kolomoisky’s overtures toward RUE are “childish and not serious.”  Konstantin Chuychenko, a member of Gazprom’s board and an executive at RUE pointed out that Gazprom has a right of first refusal should Firtash and Fursin decide sell their stakes.  The source said that in this event, Gazprom would go ahead and buy the shares. However, Kolomoisky maneuvered past a similar clause in picking up a significant stake in the 1+1 TV station through a court case decided last year, suggesting he has experience in this type of operation.


Privat making moves in Ukraine’s oil sphere

Note: I started writing this on Monday but my computer crashed on Tuesday and I have been struggling to get it working again since then. I’ll follow up this post with one covering the further developments (including the reappearance of some figures from the past — Igor Makarov and Itera along with scandal-ridden Igor Bakai) in the on-going gas negotiations.


Much attention is still focused on Ukraine’s evolving “gas war” with Gazprom (Igor Didenko walked out of negotiations over Naftogaz’s debt to UkrGazEnergo, though follow-up meetings showed progress; Yulia Tymoshenko reiterated her pledge to remove middlemen even as her counter-point Raisa Bohatyryovna is in Moscow to pass along Yushchenko’s promise of stability; gangster Semyon Mogilevich’s arrest fueled speculation on imminent shakeups, while Dimitry Firtash once again denied any connection between the two within the gas sphere), despite calls by Naftogaz to de-politicize the ongoing and oft-contentious negotiations.

Honoring Naftogaz’s request (kind of), I’ll turn to some recent developments in Ukraine’s oil sphere.

Privat in Ukraine's oil sphereLate December 2007, Igor Kolomoisky, one of the major owners of the Privat Group, bought a 12.6% stake in British firm JKX Oil & Gas. The deal, valued at over $150 million based on stock price, makes Kolomoisky the second largest shareholder in the company behind only Alexander Zhukov. JKX’s presence in Ukraine is an 80% holding in the country’s largest private oil producer Poltava Petroleum Company (PPC). With production levels of about 800 tons of oil and 1 million cubic meters of natural gas per day, PPC trails only Ukrnafta (50%+1 owned by Naftogaz, 42% owned by Privat) in output for Ukraine.

Following the sale, Kolomoisky’s Privat partner Gennadiy Bogolyubov announced the possibility that the powerful financial group would divest from its 42% holding in Ukrnafta. Besides facing a 25% increase in oil extraction rental rates that severely limits profitability, firms with significant state ownership are also obliged to sell natural gas production to Naftogaz at the fixed rate of $53 per thousand cubic meters–well below market value. This provision, Decree 31 from the previous Yanukovich-led government, already forced out independent producer Cardinal Resources and appears to be pushing Privat into the private sector.

However, some analysts consider Privat’s statements on selling out of Ukrnafta as only a threat, as the group attempts to wrangle a better tax situation within the hydrocarbon sector from a government seen to be sympathetic to Kolomoisky. Indeed, Naftogaz today announced the possibility of raising the price for domestic (non-industrial) consumers at the end of the current heating season, recognizing the detrimental effect the depressed rate has on Ukrainian gas production sphere (which is tasked to supply the regulated market). It is unclear if these moves are related, but reform of the tax and fee structure surrounding Ukrainian hydrocarbon extraction is a key step in boosting domestic production figures, insuring adequate upkeep and attracting foreign investment.

Naftogaz and Privat are also apparently sparring over Ukrnafta’s profit allocations for 2006, with the government calling for 50% of the $480 million net profit to be distributed as dividends. The minority shareholders (including Privat), on the other hand, felt that number was too high and that more should be re-invested into production capabilities. The shareholders were set to vote on the issue in May 2007, but it was tabled until a shareholders meeting last week. However, neither Privat nor state representatives attended the meeting, leading to the absence of a quorum. The new leadership of Naftogaz apparently has to reach an agreement (.doc) on the fate of the profits, and the issue has been pushed back to a later (undetermined) meeting.

Meanwhile, Privat is making moves concerning its refineries, as well. Given Kremenchuk’s supply issues, the two smaller Privat-controlled refineries in Western Ukraine (Galichina and Neftekhimik Prikarpatia) have been forced to shut down production and undergo modernization repairs. Recently, however, the management of the refineries sent a letter to the government asking about the possibility of reversing the Odessa-Brody pipeline and sending Caspian crude north. Some would then be exported into Europe while the two refineries committed to processing 5 million tons per year. Responding to the letter, Fuel and Energy Minister Yuri Prodan instructed Ukrtransnafta to study the possibility of reversing the flow and including the two refineries in planned shipments.

Refining Caspian crude, which is a higher quality than Ukrainian or Russian varieties, would prevent Privat from having to invest in long-delayed upgrades to the Galichina and Neftekhimik Prikarpatia refineries. Newly-enacted government regulations on the quality of diesel fuel for Ukraine would have likely forced the refineries to close for repairs anyway, regardless of the availability of supply. Tapping into Caspian crude, however, would allow them to reopen without the costly improvements.

Ukraine’s President Yushchenko met with his Azeri counterpart Ilham Aliyev in Davos last week to discuss energy issues. A couple days later in a meeting with Prodan, Azerbaijan’s ambassador to Ukraine said they are willing to provide 5 million tons of Azeri crude per year should the pipeline reverse direction. However, there was talk of sending the crude (via the Druzhba pipeline) to a Czech refinery, or even building a new Azeri-sponsored plant within Ukraine.

TNK-BP has been coordinating the shipment of Russian crude southward through the line and managed to increase volumes in 2007 by 160% to 9 million tons for the year. Much of this increase was due to an agreement between Russia’s pipeline operator Transneft and Ukraine’s Ukrtransnafta to lower tariffs on Russian crude so long as the total volume exceeded 9 million tons for the year. However, this provision expired on December 31st and Transneft promptly increased tariff levels by 38 percent. While TNK-BP is working on reaching a similar deal, in all likelihood this year’s volumes will be down significantly due to the less attractive economic situation.

This should open the door for Ukraine to push through its reversal plans, presuming it can get all the players on board. The 5 million tons requested by the Privat-controlled refineries is considered to be overly ambitious for their production capabilities, and was likely meant to try to dissuade the construction of a new refinery (leading to more domestic competition) to handle the crude. While Prodan asked Ukrtansnafta to examine the scenario, it is unclear how strongly he would lobby for Privat’s interests. Privat, while perhaps not playing a central role through its refineries, would be key due to its strong position at the Odessa oil port. Of course, this is even assuming that the government decides (and manages to) actually reverse the pipeline.

Privat and Ukrtatnafta In the meantime, despite the closing of its two Western Ukraine refineries, Privat maintains a strong position within Ukraine’s refined products sphere due to its alleged control over Ukrtatnafta and the Kremenchuk refinery. Indeed, the halting of production at Galichina and Neftekhimik Prikarpatia–predicted due to the change in fuel regulations–has been suggested as an impetus for Privat to take control of Kremenchug, thus ensuring a market for its domestically produced crude (via Ukrnafta) and a continued presence in the refined products sphere. While Pavel Ovcharenko ascended to the top of the company pledging to remove shadowy middlemen from Ukrtatnafta’s supply chain and resurrect the firm’s financial status, nearly all of the refinery’s products are apparently sold via Privat-controlled Optima Oil or even Ukrnafta itself.

Ukraine’s vice prime minister Alexander Turchinov has stated that the Cabinet of Ministers will work to resolve the issue for the benefit of all parties (though he is also quoted as saying “for the benefit of Tatneft”), which is at least a welcome change from the silence the conflict had been generating from the government before. There is no word on exactly how this will happen, and Tatneft and Naftogaz (the two major shareholders fighting for control, despite Privat apparently pulling the strings) didn’t respond to my requests for a comment. However, Ukrtatnafta is apparently on a list of firms drawn up by PM Yulia Tymoshenko’s office for privatization (working on confirming this), and the government may attempt to structure any future sale in a manner that would create some form of resolution.

Even as Turchinov stressed the possibility of ending the conflict, though, Yuri Prodan ensured that an underlying source of tension–also involving Privat–will continue. The Privat-controlled financial company Ukrneftegaz is in charge of managing the shareholder registers for energy firms that have significant Ukrainian state ownership–including Ukrtatnafta. Tatneft accused Ukrneftegaz of manipulating the list for Ukraine’s benefit, leading to the eventual management dispute. Ukrneftegaz has also been accused of lobbying for the interests of Privat in energy deals and using its powers to dictate shareholder meetings. Prodan recently defended Ukrneftegaz’s performance, and said the state plans on continuing to use the financial company’s services.

Given these examples, it is clear that Privat–that is, Kolomoisky and Bogolyubov–are major players in Ukraine’s energy sphere, particularly within the oil market. While the rise to power of Industrial Union of Donbass-connected officials within Yulia Tymoshenko’s government may somewhat temper this involvement (IUD is a rival business conglomerate from Donetsk), Privat is still seen to be close to various factions within the ruling coalition. While Privat recently failed at its attempt to block Rinat Akhmetov’s deal with Dneproenergo, most observers are expecting the business group to use its political connections to launch another attempt at halting the transaction and increasing its presence within Ukraine’s energy market.

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.

Tymoshenko’s government begins work in Ukraine as Yanokovich leads rival “shadow cabinet”

The parliament chamber in Ukraine - From itar-tass.comLast Tuesday saw Yulia Tymoshenko elected as new Prime Minister of Ukraine after several failed Rada (parliament) votes. Eventually resorting to an individual hand-raising / oral -confirmation voting procedure, however, ensured that she passed with the required majority — barely. Only one vote carried her into the new post, which paved the way for the new Bloc of Yulia Tymoshenko (BYuT) and Our Ukraine – People’s Self Defense (NUNS) coalition government. However, her slim majority has left her with less political capital than her impressive parliamentary election results (gaining over 8 percentage points between elections) would have otherwise suggested.

Recognizing this, the Party of Regions has resolved to occupy its new role as opposition with relish, and has already formed its own “shadow cabinet” in response to the government just formed by Tymoshenko and her allies.

The opposition Minister of Economics Irina Akimova told Ekonomicheskie Izvestia that the Party of Regions sees the oppositional cabinet of ministers as a springboard for criticizing the actions of Yulia Tymoshenko’s government in parliament: “Also, participants in the oppositional cabinet will acquire certain skills, if they don’t already have them, in order to follow the work of this or that ministry. When the power changes, they will come with prepared presentations about what their ministries need to contribute into the strategy of the country.”

Ousted PM Viktor Yanukovich has taken on the role of “shadow” Prime Minister, while former Fuel and Energy Minister Yuri Boyko has reclaimed that role in this Party of Regions-organized endeavor.

His counterpart in the real government — the one that occupies the ministry buildings and official government offices rather than the Zoyarny movie theater — is Yuri Prodan, a NUNS representative with a history in the Fuel and Energy Ministry and a former deputy in the President-controlled National Security and Defense Council (NSDC).

Oleg Dubina, a veteran of the Dnipropetrovsk industrial sector, has been named as the new chairman of Naftogaz. He has already been holding talks with Uzbek representatives about the possibility of arranging direct sales of natural gas from the Central Asian country to Ukraine, which currently relies on RosUkrEnergo (RUE) for its gas import needs. Dubina is connected to the powerful Industrial Union of Donbas (IUD), which has a history of direct sales of Uzbek gas, so this relationship may help establish something on a larger scale. However, Uzbekistan is reportedly seeking a price of $180 per thousand cubic meters from Gazprom, and any counter offer from Naftogaz would have to be higher. Adding in transport costs would put the Ukraine border price closer to $220, higher than the $179.50 agreed upon with RUE.

Naftogaz is facing an increased tax burden for next year — up from 26% to 30% — along with a government regulation freezing the residential consumer price of gas at current levels. The sale price of domestically produced gas, another opportunity for Naftogaz to potentially turn a profit, is expected to remain at the same depressed level as well. While industrial prices are expected to rise 30%, much of the sales to this sector are controlled by UkrGaz-Energo, a joint venture between Naftogaz and RUE, which dilutes any profits coming to the embattled state energy firm.

In another move by the new government within Ukraine’s energy sector, the Ministry of Finance has called for a 25% increase in the rental rates (up to about $400 per ton) applied to domestic oil production next year. This largely affects Ukrnafta (not to be confused the Ukrtatnafta), the majority state-owned oil production company that accounted for about 95% of Ukrainian oil production last year. However, while 50%+1 of the shares are controlled by the government, the Privat Group owns over 40% of the shares, and therefore effectively guides the actions of the company. This ownership structure made the announcement of the tariff increase more surprising, given that Privat is seen to be connected to the current government and supported NUNS in the last election (Igor Palitsa, a former Ukrnafta chairman, is on the NUNS list).

According to NUNS deputy Viktor Topolov, the current price for oil is about $580 per ton, and the cost of extraction is about $175. Adding the $396 proposed tariff negates all but a few dollars in profits, hardly enough for any re-investment or development — and well below the $300 average world profits on a ton of oil. Typical oil production rental prices (in Europe and Russia, for example) are determined as a percentage of world oil prices (usually around 12-15%), which would come out to closer to $100 per ton.

Viktor Pinzenik, a BYuT deputy, is Ukraine’s new finance minister, and this surprising tariff increase (the previous government had assured Ukrnafta it would keep the charge the same) may be an early fissure between the BYuT and NUNS coalition. However, Privat has also spearheaded a court procedure relating to a recent Dniproenergo deal in what appears to be an attempt to gain more control over the regional energy firm. (A key decision was made by the same court that was central in the move that brought about the “management dispute” at the Kremenchuk refinery.) Analysts for this article cite alleged closeness between Privat and Tymoshenko as a possible reason behind this latest move, contradicting the assertions that Privat is now moving closer to the NUNS sphere.

According to the director of the International Institute of Privatization, Property and Investment, Alexander Rybchenko, Privat holds an edge in the unfolding case due to the current political situation:

“The Privat Group once again, as with NZF [nickel and ironworks factory], benefited from the coming to power of Yulia Tymoshenko. Therefore, now the political protection is on the side of the group, but if president Viktor Yushchenko or the new secretary of the NSDC Raisa Bogatyryova [see below] does not change the situation, Privat will have an advantage in the form of government support.”

It is unclear at this point just which factions will emerge more powerful withing the new government, and how exactly major business players will utilize the new structure.

As referenced above, Yushchenko unexpectedly named Raisa Bogatyryova, the second deputy on the rival Party of Regions (POR) parliament list, as secretary of the powerful NSDC on Monday. POR-head Yanukovich has stated that no party member will serve high-level positions in the BYuT -NUNS government and meetings between POR members in the past two days have apparently been contentious regarding whether or not she should accept the offer. As of the evening of the 25th, however, it appears that she accepted the invitation and will become the new NSDC secretary. It remains to be seen whether she will be cut from the POR list now, as she apparently made the decision against the wishes of most high-ranking members.

The announcement also caught off-guard members of the new coalition government, who apparently only learned of the offer through the press. According to Taras Stetskiv, a NUNS deputy:

“At a minimum, we are surprised. Never in the civilized world has the opposition — a political opponent — been given such a key post like the position of secretary of the NSDC.”

Apparently, such a move had been in the works since immediately after Tymoshenko was elected PM, with Boris Kolesnikov being the first POR name suggested. The choice of Bogatyryova, a professor from Donetsk with a background in medicine, apparently only happened on the 24th. This appears to be an attempt by Yushchenko to balance Tymoshenko’s ascent into the top of Ukraine’s government by promoting a key figure in her (and his, not to be forgotten) opposition party. Some POR deputies — before Yanukovich’s statements on remaining strictly in the opposition surfaced — praised the choice as an example of pragmatic bipartisanship. Tymoshenko has diplomatically stated that she will agree to work with all high-level presidential appointees in the government. Bogatyryova’s potential impact will likely affect coordination efforts between the president and parliament, but losing her POR position would alter the relationship.

Meanwhile, Yushchenko is planning a visit to Moscow to meet with Putin in the near future, and the topic of gas negotiations is likely to come up — regardless of what actions Tymoshenko may take in the meantime. The “specter” of Dimitry Medvedev — current Gazprom chairman and favorite to win Russia’s March presidential elections — will likely temper such talks. While Medvedev has been open to the idea of restructuring the gas supply scheme, outspoken Russian political analyst Stanislav Belkovsky suggests that Medvedev will champion for RosUkrEnergo, pointing out that he attended law school with Konstantin Chuychenko, one of RUE’s current executive directors.

Tymoshenko’s government has finished a re-worked 2008 budget that incorporates increases in social spending as well as the newly-finalized $179.50 price for natural gas. The budget must still pass POR approval, and the window for enacting it before Jan. 1st is rapidly closing. Nevertheless, it appears that Tymoshenko is willing to live with the current gas price — or at least, fully prepare for its likely existence — rather than attempt a last-minute negotiating blitz. Not only would this move have cost her political capital even as she is working on getting the budget passed, but it also would have worried gas consumers in Europe who remember the drop in downstream gas pressure caused by the contentious negotiations around January 1st of 2006.

All in all, it has been a busy and interesting start for Ukraine’s new government. Passing the budget will be a key first step, as will establishing the new centers of power and important relationships. With any luck, this government will be productive for Ukraine in general, and not resort to the bickering and deadlocks that have marked some of the country’s recent political incarnations.

Ukrtatnafta supply issues reverberate across Ukraine’s oil sphere

Monthly crude supplies to the six oil refineries in Ukraine - From iezvestia.comDespite 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.

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.

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

Kremenchuk refinery - From 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.