Government set to fix the oil market

The Yanukovych government has mentioned for the first time the need to create a national oil company. On September 11 Premier Yanukovych stated that the government needs a powerful tool to control the fuel market, with the new company expected serve this purpose. It will be recalled that last year a similar idea was put forward by then Premier Anatoly Kinakh. However, after an expert taskforce that included representatives of Ukraine’s major oil traders was created, the government managed to control the price situation without creating the new structure, since an amicable agreement was reached with the major market players. Obviously, the current government is less diplomatic. This time around the government and oil traders are on opposite sides of the hydrocarbon barricade.

Meanwhile, Russian oil companies attribute the fuel price hikes that reached 30% percent in some regions during the past two weeks to higher oil prices on the world market. Ukrainian oil refineries, which have been long controlled by Russian capital, were forced to mark up prices initially for diesel fuel and later for high-octane gasoline. According to the latest government information, on September 11 prices started to come down as a result of mass gasoline imports. According to the Ministry of the Economy, higher imports could bring prices down to their pre-crisis level as soon as late this month. However, yet another crisis on Ukraine’s strategic market has cast doubt on the government forecasts.

Economy Minister Valery Khoroshkovsky held an urgent meeting with oil traders immediately after the first diesel fuel price surge in August. It was announced after the negotiations that should the price exceed UAH 1,700 per ton the government would allow preferential fuel imports, as a result of which Ukrainian oil refineries would lose money. Obviously, things were not quite that simple. It is rumored in circles of Russian oil traders that Ukraine’s fuel sector is poorly coordinated by Ukraine’s Ministry of the Economy. Perhaps because of all these circumstances Premier Yanukovych decided to give a new push to the idea to create a vertically integrated national oil company.

According to him, the new structure will process all oil extracted on Ukrainian territory. To all appearances, he is talking of merging government assets in Ukrtatnafta and Ukrnafta. Both companies have repeatedly announced their plans to build their own networks of filling stations. On the face of it, the prospects look good for this. Russian companies would never agree to increase the price of fuel produced by Ukrainian oil refineries if the government dictated price stability on the market by controlling an extensive network of filling stations.

It is noteworthy that this idea has influential opponents in both Ukraine and Russia. It is no surprise that the present owners of privatized oil refineries see nothing positive in the appearance of a new competitor that will operate without regard to world price trends. Negotiations on the possibility of back-pumping oil via the Odesa-Brody pipeline are graphic evidence of the potent Russian lobby. The owners of Ukrainian capital invested in Ukrtatnafta and Ukrnafta are also likely to oppose the creation of the new national company, since this will inevitably lead to the government’s increased influence on the commodity and cash flows of these firms. Moreover, some political and financial groups have openly stated their intent to take part in the privatization of the government stake in the Kremenchuk Oil Refinery (Ukrtatnafta). Now it seems that privatization tenders will be postponed until better times.

On September 11 Premier Yanukovych pointed to the complications caused by the confrontation of private capital sources working on the Ukrainian market as the major obstacle for the vertically integrated state company. The results of the government’s negotiations with the investors of this capital could have a decisive impact on the future careers of certain ministers and the premier himself. After all, this is not only about dividing the market. The oil business has always been among the major political donors. If the running financial schemes are changed, this might displease even those political forces that presently support the premier and his government.