The oil products market must change
The consequences of Viktor Yanukovych's Cabinet's work on the oil products market will have to be dealt with for a long time. The main thing is not to make new mistakes in the process that would widen the gaps left by the previous government.
The fuel market is a key segment of Ukraine's energy sector, which consumes, according to various estimates, 16-18 million tonnes of fuel and lubricants (petrol, diesel, mazut) per year. In monetary terms, this volume exceeds $5 billion per year. Recall that the country's annual budget is $20 billion.
And if one imagines that oil products are included in the prices of virtually all consumer goods, being the main part of the costs of transporting them, then the importance of the fuel market becomes obvious even to those who are not directly interested in this sphere.
First, about how the country's fuel and lubricants market is structured in general and how it differs from the global one.
Fuel in Ukraine is refined by six oil refineries owned by international and Russian oil companies, as well as local business.
The largest oil refinery - JSC "Ukrtatnafta" (Kremenchuk) - is 57% owned by Tatar shareholders, including the government of the Republic of Tatarstan and the company "Tatneft". The 43% of shares held by the State Property Fund have been formally transferred to the management of NJSC "Naftogaz Ukrainy".
The owner of the Lysychansk refinery is the Russian-British company TNK-BP. The Odesa refinery ("LUKOIL") and the Kherson refinery ("Alliance") have Russian owners. A group of companies owned by MP Ihor Yeremeyev is a shareholder of the Drohobych oil refinery "Halychyna". And the Nadvirna refinery "Naftokhimik Prykarpattia" is controlled by the "Privat" group, that is, essentially owned by Viktor Pinchuk's main competitor, Ihor Kolomoisky.
Ukraine imports oil but exports oil products.
According to the Ministry of Fuel and Energy, supplies of raw materials to Ukraine's refining enterprises in 2004 amounted to almost 24 million tonnes. At the same time, Russian hydrocarbons accounted for 87% of the total volume, Kazakh - 3.4%, Ukrainian - 9.6%.
Now Russia has reduced the volume of raw materials it refines by 2%, while Kazakhstan - by 29.1%. Supplies of Ukrainian oil grew by 6.3% - to 2.3 million tonnes. At the same time, the volumes of hydrocarbon refining, which differ from supply volumes, last year remained at the 2003 level - 21.2 million tonnes.
Recently, the country has seen a transformation of the oil products market structure from a three-tier to a two-tier one. Back in the mid-1990s, oil was supplied and refined at refineries (on tolling terms) by large wholesalers, then the resulting fuel was sold to small wholesalers, and after that it reached retail.
Now hydrocarbons are pumped to refineries by their owners - oil companies, which sell fuel either through their own retail or through franchise filling station networks that still belong to small owners.
In the future, the market structure will change toward the European one and acquire an increasingly oligopolistic model. Thus, in all developed countries of the world, from 50 to 80% of the fuel market is occupied by a pool of several largest vertically integrated oil companies - Shell, BP, Chevron/Texaco, Total/Elf/Fina, Exxon/Mobil, ENI Agip.
In addition, part of the market is usually controlled by local oil companies - for example, Aral in Germany, MOL in Hungary, Naftapol in Poland. After some time, a similar market structure will undoubtedly await Ukraine as well.
How is the oligopolistic oil market regulated? Through the state reserve of hydrocarbons.
In the US, for example, fuel prices on the exchange jump depending on how much or how little fuel is in the federal reserve. That is, if the volume of oil product reserves has decreased, it means that the state cannot use economic levers (through market intervention) to urgently extinguish speculative growth. Immediately fuel prices on exchanges begin to rise. And no one is bothered by the fact that the state generally reckons with exchange traders, being forced to maintain a reserve of the necessary quantity of fuel.
However, even such a sophisticated regulatory model cannot guarantee low prices. When a collapse occurs on world markets and hydrocarbon prices increase, the cost of fuel rises both in the US and in EU countries. Last year alone, Europe experienced a real oil shock provoked by the global rise in prices for "black gold". In Great Britain and Germany, this ended in queues at filling stations.
What, in fact, happened on the fuel market in Ukraine last year? What specifically was done to combat the global oil crisis? A primitive and rather boorish scheme.
During the next objective rise in fuel prices, oil traders were seated at a round table in the Cabinet of Ministers and told approximately the following - prices will have to be lowered, since elections are coming soon and voters are dissatisfied.
Otherwise, guaranteed "mask shows" at refineries and in offices, an export ban, increased railway tariffs and, in general, as they like to say in Kazan, "shikir golova" [a headache]. To which oil companies, of course, replied the following - fine, but.... This "but" was different for different companies.
For example, two western Ukrainian and one southern refinery, as the smallest, most outdated and therefore economically disadvantaged, began to increasingly evade taxes. Large eastern Ukrainian plants raised the selling price for owners of franchise filling stations, and the state forced the latter to sell the product at a fixed, low cost.
All this led to a deterioration in the quality of oil products, because the simple owner of a filling station, squeezed on one side by the Cabinet of Ministers and on the other by the oil company, has only two ways to optimize prices - to "dilute" or to "shortchange". As a result, everyone suffered.
The consumer was forced to buy cheap but low-quality fuel, which simply ruined car engines. Oil companies worsened relations with filling station owners. And the budget fell short of money.
This entire vicious circle could be broken by only one method - to allow petrol prices to fully reflect the costs objectively borne by oil companies. The remaining methods are nothing more than an attempt to hide from enemies by drinking wood alcohol until one loses one's sight.
There are objective conditions for the market's operation. These conditions presuppose that oil flows where it is paid for (and any oil, whether Russian or Kazakh). And if someone tries to reduce the volume of earned funds, or, worse, reduce it to nothing through state regulation, then from this situation any corporation in the world sees only two ways out - to curtail its projects in the country or to find a way around it.
There is no need to say what the curtailment of projects will lead to - in popular language this is called an "oil blockade", the horror of which Ukraine already experienced in the winter of 1999. Moreover, it does not matter who introduces this blockade - Kazakhstan, Russia or Saudi Arabia. If Ukraine does not buy raw materials at world prices, another one and a half hundred countries - importers of hydrocarbons - will buy it.
Here, however, another factor comes into force. Most Ukrainian refineries, thank God, have been sold to raw material producers. (By the way, three of them - Lysychansk, Odesa and Kherson - were sold precisely during Viktor Yushchenko's premiership). And these producers themselves are not interested in abandoning the enterprise they have already acquired - after all, the investments made need to be recouped. This is the only reason why refiners last year preferred to find a way around it instead of redirecting flows of "black gold" to more liquid European markets.
However, the ugly scheme of the oil market's functioning, devised by the "specialists" of the previous Cabinet, could not exist for long. If Ukraine wishes to integrate into the EU, it will simply have to change the rules of the game. And, having changed them, invite Western oil companies to invest money in Ukrainian refining.
By the way, there will be those willing. Thus, the head of Shell's representative office, Leslie Lastovetsky, has repeatedly stated to the author of the article that if state policy on the oil products market changes, his corporation will consider the possibility of operating in Ukraine. TNK-BP also has plans to open filling stations under the BP brand and begin producing European-quality fuel.
So how does the policy of the new Cabinet differ from the actions of the previous one?
As Minister of Economy Serhiy Teriokhin told the author of the article, regulation of the oil products market will now be carried out on the principles of liberalism.
"In all sectors of the economy, except monopoly markets (primarily natural gas), there will be a fully liberal market policy. Including in the oil products and grain markets, a liberal policy will also be pursued. We will resolve regulatory issues through the reserve system. That is, conduct commodity interventions on the oil market," said Teriokhin.
"Without the principle of liberalization of market relations, which Serhiy Teriokhin speaks of, it will simply be impossible for Ukraine to integrate into the European Union. This will be one of the key conditions," agrees with the minister analyst of the "Aton" company Zharko Stefanovski.
But this is theory. In practice, certain actions of the new Cabinet suggest that officials are still finding it difficult to fully understand the schematics of how the market works.
Thus, Serhiy Teriokhin, answering a question from an "Interfax-Ukraine" correspondent about how fuel prices would behave in February, stated verbatim the following: "I am excited by the rhetoric that prices need to be raised because of global dynamics. We will come out with a legislative initiative that I proposed last year. We will propose such a mixed system of excise taxation that will work in the following way - you raise the price by one kopiyka, and your tax obligation rises by two. And if you reduce it by one kopiyka, then it decreases by two. From the point of view of the mixed system, that is how the tax will be taken," said Teriokhin.
If this is about an instrument of economic pressure, then two questions arise here.
First, even today some oil traders successfully apply mechanisms for completely avoiding excise tax payment. Moreover, this practice will spread under the proposed amendments.
Second, the very approach of pressuring oil companies is essentially an attempt to step on the same rake as before. One should not pressure oil companies and refineries, not threaten them with excise taxes and not try to negotiate with them. Instead, one should create free, understandable and transparent rules of the game, the same for all without exception. Stable, long-term and market rules. And after that, demand their implementation.
First Vice Prime Minister Anatoliy Kinakh assessed the state of the market no less contradictorily. On the one hand, he confirmed that during the previous Cabinet's work the price spiral was artificially compressed. And economic mechanisms cannot withstand manual price management. On the other hand, Anatoliy Kyrylovych stated that prices must be not only stable but also competitive for those who need it - for the agro-industrial complex, the housing and utilities sector, and the needs of the population.
Again, if Ukraine is creating a European market model, there can be no question of artificially lowered prices being created for anyone. Moreover, agricultural producers, with whom officials are so proud of their memorandum, mainly buy fuel at filling stations.
It was precisely this trend that was noted by the "Ahroperspektyva" agency, which conducted a comprehensive study of the agricultural market. Discounted fuel was mainly bought by firms belonging to the agrarian lobby of regional state administrations and the Verkhovna Rada.
Thus, one can note four main principles on which Ukraine's oil products market should be built if the new authorities want to develop it according to a civilized scenario:
Principle one. Complete elimination of tax benefits at all Ukrainian refineries. Creation of such a legislative base and such rules of the game under which all oil companies find themselves in equal conditions and none of them can evade payment of VAT on oil, excise tax, or any other tax.
The Ukrainian government should clearly track the payment of VAT on imported oil. These revenues can make a worthy contribution to the budget.
If the new composition of the Cabinet pays worthy attention to oil refining issues and excludes beneficiary companies from the supply chain, Ukrainian VAT on oil can become a significant source of income for the state without exerting pressure on the cost of fuel. The most important thing in this point is to ensure equal conditions for all.
Oil traders are like children: as soon as at least one refinery starts to be cunning, the rest will rush with monkey-like dexterity to repeat after it the next trick of evading the fiscal burden. But if everyone without exception is forced to pay taxes and not a kopiyka is forgiven to anyone individually, the budget can be replenished by such amounts that all hypothetical losses from price growth will seem simply ridiculous.
At the same time, one should abandon the practice of changing fiscal policy on the oil market. The longer the same taxes remain in effect, the better. Business loves stability. Especially Western business.
Principle two. European liberalization of the market. Introduction of a legislative ban on administrative regulation of fuel prices as a non-market and economically dangerous measure that does not correspond to European practice. Forget about raids, blackmail and attempts at deals with regard to oil companies.
Reduce the number of bodies controlling the activities of oil companies from fourteen to two. Abandon all attempts to license oil business activity. Apply Article 206 of the Criminal Code of Ukraine "Obstruction of lawful economic activity" against any officials attempting to stop export-import operations with oil and oil products.
Allow the oil products market to be regulated by only two bodies - the Antimonopoly Committee of Ukraine and environmental control. Reduce all economic functions of market regulation to constant monitoring for the presence of anti-competitive conspiracies.
Principle three. Encourage the production of environmentally clean fuel meeting European standards by introducing significant tax preferences for those who produce it. Introduce a firm protectionist customs policy for Ukrainian fuel compared to imported fuel for the period of technical re-equipment of refineries. Upon completion of the plants' reconstruction, legislatively permit the production and sale of fuel meeting EU norms. Formalize all proposed measures in the form of a state program.
Principle four. Create a fuel reserve and a market system for intervention of cheap fuel at crisis moments for the market. Launch the operation of a full-fledged oil exchange.
And, finally, the last thing. Of course, integration into the EU is a noble goal for which one can go to great lengths. Including making the oil products market truly liberal.
Oleh Havrysh, for UP