Chronicles of the fuel crisis

Today, the second powerful and visible challenge for Yulia Tymoshenko's government turned out to be the "fuel crisis" — this is how the Ukrainian prime minister herself characterized the situation that arose on the domestic petroleum products market.

The first challenge for the government was related to the rise in prices for meat products, but it was the fuel crisis that became a serious test of strength for the government, which recently celebrated its first anniversary — 100 days.

By and large, any sowing campaign or harvest at the end of summer culminates in a fuel crisis. Such crises shook Ukraine in the 1990s, but 2005 was no exception to the rule either.

This situation is becoming an already traditional component of the Ukrainian fuel landscape. One can recall that Yanukovych's government also had its own fuel crisis during the sowing campaign, which forced it to sign a memorandum with oil traders that fixed a maximum retail price for gasoline.

This document ceased to be in effect on November 1, 2004, effectively after the first round of elections, however prices did not increase: apparently, the "responsibility" of the pre-election moment was felt. The new Ukrainian government, one way or another, proposed to maintain the corresponding prices in the first quarter of 2005 as well.

Incidentally, on February 16, a memorandum was also signed with oil traders on coordinating actions between the Cabinet of Ministers and Ukrainian oil companies on regulating the oil and petroleum products market. This document, according to Fuel and Energy Minister Plachkov, was fully consistent with the norms of market functioning of the economy.

However, unlike the practice of Yanukovych's government, there were no figures in the memorandum of the current Cabinet, and the document provided for the creation of a working group to assess the quality of petroleum products and cooperation between the government and oil traders in developing a network of gas stations.

In parallel with this, an agreement was signed between agricultural producers and Ukrainian oil refining companies. According to this arrangement, in February-May these companies were to provide farmers with 600 thousand tons of diesel fuel at a price of 2,400 hryvnias per ton.

The agreement was signed by CJSC "Ukrtatnafta" (Kremenchuk Refinery), "TNK-BP Ukraine" (LINOS), "Lukoil-Ukraine" (Odesa Refinery), "Kazakhoil-Ukraine" (Kherson Refinery), "NPK-Galychyna" (Drohobych Refinery), OJSC "Naftokhimik Prykarpattia" (Nadvirna Refinery) and NJSC "Naftogaz of Ukraine" (Shebelynka Gas Processing Plant).

On March 24, at a meeting at the Ministry of Fuel and Energy, it was announced that oil refiners intended to raise the price of diesel fuel to 2,800 hryvnias per ton. Later, the leadership of oil refining companies explained the increase in petroleum product prices by the sharp (by 54% since the beginning of the year!) rise in the cost of oil imported to Ukraine.

The price jump occurred against the backdrop of an increased tax burden on domestic oil producers, as well as the government's introduction of higher tariffs for the transportation of oil and petroleum products by rail.

Gas stations stopped dispensing fuel. The government resorted to administrative regulatory mechanisms.

On April 14, the Ministry of Economy issued an order according to which the maximum price levels for diesel fuel and gasoline were to be reduced by lowering the trade markup to 13%.

On April 21, Economy Minister Teriokhin stated that administrative methods of regulation are the only possible ones in a situation where the market is monopolized by several companies.

On April 22, Tymoshenko agreed with the head of the Russian oil company "Lukoil," Vagit Alekperov, on reducing prices for petroleum products supplied by the company to Ukraine. "Lukoil" agreed to set prices proposed by the Ministry of Economy of Ukraine at its 170 gas stations.

However, not everything was as smooth as it appeared on the surface. On April 19, the president of "TNK-British Petroleum Ukraine," Oleksandr Horodetskyi, reported that despite the fact that the Ministry of Economy's order of April 14 had not been communicated to potential executors either through the mass media or through individual addressed notifications, already the next day one of "TNK-British Petroleum" gas stations was fined for its non-compliance.

And on April 29, the executive vice president of this company, Tony Considine, held talks with Fuel and Energy Minister Ivan Plachkov and noted that the government had asked the company to adhere to the prices it had set. At the same time, he noted that he could not say exactly until what point the prices existing at that time would be maintained. Considine emphasized that this "would depend on relations in the industry and with the government."

Incidentally, on the same day, the chairman of the board of the national company "Naftogaz of Ukraine," Oleksii Ivchenko, made a public statement in which he spoke of the demand to return to state ownership the share packages of the two largest oil refineries — Lysychansk and Kremenchuk.

These plants are controlled respectively by the Russian company "TNK-British Petroleum" and Tatarstan (Russia). The statement was made in the context of a possible review of the results of privatization carried out during Kuchma's time.

In early May, the situation began to slip out of the government's control, and consequently the fuel crisis erupted, which is becoming a real test of market maturity for the government. It is also a serious challenge for the entire vertical of Ukrainian power in terms of the ability to resolve problems in a coordinated manner, and to do so in a way that does not publicly make it appear as though the right hand does not know what the left hand is doing.

Challenge

The test of strength consists in testing not only the government's ability to resolve complex energy problems, but also its capacity to withstand the progressive development of the situation with "clarifying relations." This is exactly what can be observed today in the intra-governmental alignments and in the disposition of forces.

Differences between members of the government — the "first," "second," or "third" forces" in the vertical of Ukrainian power, which one could once only guess about, are now effectively brought out into the open.

For example, First Vice Prime Minister Kinakh has already stated many times that he sees the causes of the gasoline crisis in the government's intensified pressure on the mechanisms of "manual management" of the petroleum products market and in ill-conceived decisions in the sphere of price policy.

At least part of the government is in solidarity with such a position, as is the Secretary of the National Security and Defense Council, Petro Poroshenko, who as early as May 17 indicated that he considered the situation on the petroleum products market to be a miscalculation by the Cabinet.

Such a statement was made after parliament established a zero rate of excise duty until the end of the budget year. A zero rate of import duty on high-octane gasoline and diesel fuel was also introduced.

The legislative changes approved by parliament are an attempt by the government to curb the rise in petroleum product prices by increasing competition between Russian companies that own Ukrainian oil refineries and importers of finished petroleum products.

President's position

A day later, President Yushchenko signed the adopted law. However, based on his public comments, he was not enthusiastic about the government's actions in the area of shaping pricing policy for fuel.

Assessing the government's steps taken over the past months, he stated that on the issue of pricing "the Ukrainian team did not act in the best way." He saw possibilities for resolving this problem through negotiations.

"...I would like to invite Russian entrepreneurs who work on supplying crude oil and petroleum products, invite the heads of oil refineries, particularly private plants, and we need to start the conversation from a clean slate," emphasized Viktor Yushchenko, noting that "both sides during this period made certain steps that damaged each other's reputation and the organization of a healthy market."

By signing the aforementioned law, the president also took his own steps toward settling the situation on the fuel market. In particular, a presidential instruction appeared to the Cabinet to resolve within a month the issue of creating a vertically integrated scheme for managing the state's corporate rights in the statutory funds of oil and oil refining companies, as well as a decree "On measures to stabilize the situation on the oil and petroleum products market."

In the latter document, all the dots over the "i" were effectively placed: after all, in its first point, the Cabinet's activity in ensuring the functioning of the energy carriers market and regulating prices by administrative methods was recognized as not corresponding to the tasks of building a market economy.

The government was warned about "the inadmissibility of such practice and personal responsibility for ensuring the further stable functioning of the aforementioned market."

Within a month, the government must approve a program for creating a state reserve of petroleum products, the formation of which must be completed by January 1, 2006. The Ministry of Economy was ordered within a week to cancel its acts that attempt to administer prices on the petroleum products market.

Parliamentarians' assessments

The legislative decisions on introducing zero duty on the import of high-octane fuel are assessed ambiguously both by energy experts and by politicians who themselves supported this law. In particular, most commentators agree that these measures can only be temporary in nature, since they are not capable of fully removing all the problems that arise in the fuel industry.

For example, the head of the UNP, Yurii Kostenko, pointing to the fuel dependence of the Ukrainian market on Russian companies, believes that "the energy crisis that most countries of the world have experienced is resolved not by reducing duties or importing light petroleum products, or even oil, but through systemic multi-level actions by governments to reduce the energy intensity of the economy, to diversify energy supply sources, and to develop those energy directions that the state itself possesses."

One of the representatives of the NPU, Yeremieiev, who is close, to put it mildly, to the oil refining sphere, noted that it is possible to stabilize petroleum product prices by reducing the excise duty on petroleum product refining. He also emphasizes that the Cabinet "artificially created a deficit," since today the fuel deficit is caused primarily by an "incorrectly adjusted price tag."

The head of the "Our Ukraine" faction, Mykola Martynenko, in turn, noted that the way out of the situation lies in finding compromises at the negotiating table. He emphasizes that "without dialogue with those who own oil and supply it to Ukraine," it is impossible to emerge from the crisis. Therefore, "the main negotiations on this matter need to be conducted with Russia, and in parallel, the issue of alternative suppliers must be resolved for the future."

According to Socialist deputy Rudkovskyi, "oil traders will never work at a loss to themselves, especially those oil traders who are not residents of Ukraine." "And administrative regulation in this way, without accounting for cost, will not lead to anything good. We see that everyone should already switch to bicycles."

Government's position

According to official data from the Ministry of Fuel and Energy, in March 2005, 1,934.1 thousand tons of oil were supplied to Ukraine's oil refineries, including:

228.6 thousand tons — from own extraction (11.8% of the total supply volume);

1,705.5 thousand tons — from the Russian Federation (88.2% respectively).

Incidentally, according to the same data, compared to March of last year, the volume of oil supply decreased by 320.2 thousand tons (i.e., by 14.2%).

Prime Minister Tymoshenko believes that the adoption of the law on liberalizing the import of petroleum products to Ukraine will allow abandoning the setting of maximum prices for them on the Ukrainian market starting from June 1 and transitioning to market pricing mechanisms.

She saw the causes of the gasoline crisis in a "cartel conspiracy" planned by certain business circles, and promised that the names of all its organizers would be made public in the near future. As early as May 14, she made a statement that "there is a deliberate cessation of oil supplies to Ukraine, although all contracts have been paid..."

"Russia is forcing us to find unconventional paths, since oil pumping was completely stopped to us for five days, although we have absolutely all the necessary agreements," Tymoshenko stated.

On May 15, the prime minister noted that the Ukrainian fuel crisis was caused by Russia's position, but despite this, the problem with the supply of Russian oil to Ukraine would not worsen relations between the two states.

However, according to her own words, "certain countries were not very satisfied with how the elections in Ukraine went and now over the past month have raised prices from Russia by 30%." In one interview, she stated that Russian oil traders and oil refiners want to discredit the new Ukrainian government.

Incidentally, the first Russian company to enter the Ukrainian oil refining market in 1995 was "Tatnafta." This group created the subsidiary company "Ukrtatnafta" (Kremenchuk Refinery).

After the 1999 presidential elections, the Russian "Lukoil" entered the Ukrainian market, creating the company "Lukoil-Ukraine" (Odesa Refinery); later TNK, "Kazakhoil," and the Russian "Alliance Group" appeared on it.

"We do not fight with monopolies — they fight with us. They are used to being able to set any prices, that the government will fix the situation, that money opens any doors," Tymoshenko once stated in May. According to her, overcoming the crisis situation in the future will be helped by the construction of the necessary infrastructure at the Kremenchuk Refinery, which "will allow obtaining oil from the Black Sea waters."

Another important measure, in her opinion, should be the construction of a "high-tech oil refinery near Odesa." But the main task lies in diversifying the sources of oil supply to Ukraine and creating real competitive conditions for oil refiners and all market participants.

Meanwhile, Plachkov stated that tax reductions allow filling the market with imported fuel, and allow producers to trade at prices set by the authorities.

The general public was informed that contracts have already been signed for the supply of high-octane light petroleum products in the amount of 70 thousand tons. So fuel, according to the prime minister, "is going, sailing, and even flying" to Ukraine.

Nevertheless, at present it remains somewhat unclear with what funds this is being done and who is buying the duty-free fuel.

The Antimonopoly Committee is also delving into the situation, which, judging by the speeches of its head Kostusiev, is conducting an investigation regarding a number of petroleum products market participants on suspicion of anticompetitive actions.

On May 18, he stated that an investigation is being conducted regarding such companies as "TNK-British Petroleum-Ukraine," "Litasco-Ukraine," "Lukoil-Ukraine," "Linox," as well as "Lukoil-Odesa Refinery," on the grounds of coordinated anticompetitive actions on the Ukrainian petroleum products market. But even here things are not progressing so smoothly, since, according to the head of the antimonopoly committee, his agency is being resisted.

Incidentally, as early as late February 2005, Plachkov indicated that with six companies present on the market, the possibility of their absolute collusion is excluded...

It is interesting that the practice of conducting antimonopoly investigations was also applied in 2002. The Antimonopoly Committee conducted a check of foreign companies' compliance with antimonopoly legislation on the petroleum products market, but at that time everything was "clean." In particular, the antimonopoly "research" of that time demonstrated that Russian companies controlled 30% of the market and maintained only 1,000 of the 5,000 gas stations operating in Ukraine at that time.

So, it seems that the oil situation will not end with a single "round table" or sporadic implementation of government measures related to attempts to diversify fuel supplies to Ukraine, re-privatize something, or build a new state oil refinery. If the government is one way or another already emerging from the current predicament, then chickens, as is known, are counted in the autumn. We must wait for the next harvest...

Yuliia Kyselova, analyst at UNCPD