Government and Oil Traders Ready to Draw Swords
The crisis in the relationship between the government and Ukraine’s leading oil companies has reached the boiling point. Oil traders openly accuse the Cabinet of Ministers of violating the memorandum on cooperation. The cabinet in turn blames the major market players for hiking fuel prices. To all appearances, neither side is going to return to the negotiating table. The last session of the expert commission a month ago resulted only in an exchange of claims.
The conflict has been triggered by the introduction of mandatory state registration of petroleum products export contracts, which was initiated by Vice Premier Vitaly Haiduk. Seemingly, the idea was to prevent the possible fuel shortages in the heat of the harvest as a result of excessive fuel exports. Notably, diesel prices on foreign markets are almost one and a half times higher than those dictated by the Cabinet of Ministers. It will be recalled that in September the government reached an agreement with the owners of Ukraine’s oil refineries, whereby diesel prices for agricultural producers could not exceed UAH 1,700 per ton. The registration of contracts follows a very specific mechanism, which, according to the procedure approved by the Ministry of the Economy, can take a week to complete. This in fact means a barrier for the numerous cisterns with diesel waiting in line on the border.
Oil companies have appealed to the president to cancel the mandatory registration of export contracts, since they threaten to undermine the stability of the fuel market. The petition bears the signatures of top managers of TNK-Ukraine, Lukoil-Ukraine, Kazakhoil-Ukraine, and Ukrtatnafta. According to Petro Miroshnykov, president of Alliance-Ukraine Company that holds the controlling interest in the Kherson Oil Refinery, the current limitations are causing losses. As he put it, processing fuel export applications in fact takes as long as two weeks and not one. And exporters are expected to cite the contract amount in the application. Meanwhile, owing to price fluctuations on foreign markets, prices can change sharply in a matter of weeks, which makes such exports pointless and unprofitable. Mr. Miroshnykov also stated that some partners have already cancelled contracts, citing undue delays in deliveries. “Our reservoirs can hold an amount of fuel produced in three days. If the situation doesn’t change, we will be forced to suspend production,” Miroshnykov said. In his view, the limitations in place are without any logic, since Ukraine’s refineries produce ten times more diesel than Ukraine can consume. Moreover, the government did not consult fuel market participants before introducing the mandatory registration of export contracts, which is in itself a violation of the previously achieved arrangements.
Vice Premier Vitaly Haiduk believes that the oil companies were the first to violate the memorandum on cooperation. In particular, according to the government, owners of oil refineries artificially limited diesel supplies to agricultural producers for UAH 1,700 per ton and redirected most of the fuel for export. As a result, the cabinet decided it had been absolved of its obligations to coordinate with market participants its decisions on government regulation. It is noteworthy that the memorandum was signed by former Premier Anatoly Kinakh. The Cabinet of Ministers in its new makeup treated this document without much enthusiasm. Economy Minister Valery Khoroshovsky, unlike his predecessor Oleksandr Shlapak, did not call monthly sessions of the expert council created to coordinate the stand of the government with that of the fuel market participants. It appears that the consequences of such neglect are developing into an open conflict.
Meanwhile, it seems that the Economy Minister found himself on the opposite side of the hydrocarbon barricade from Vitaly Haiduk. Thus, Valery Khoroshovsky suggested that mandatory registration of contracts for the export of diesel and other petroleum products be cancelled and that this instrument of control be kept in place only for oil exports. His proposal has found support from Fuel and Energy Ministry Serhiy Yermilov. In his view, obstacles in the way of fuel exports should be lifted before December 1. However, such statements were obviously a result of the oil traders pulling some strings. Thus far, the government stand on the issue remains unclear. On October 29 Vice Premier Vitaly Haiduk stated that he sees no need to change the existing system of registering export contracts. Moreover, according to him, neither the Fuel and Energy Ministry nor the Ministry of the Economy submitted their proposals regarding this issue to the Cabinet of Ministers. According to Mr. Haiduk, unless such proposals are submitted, the government does not intend to address this issue.
The government can afford to sour its relations with the country’s leading oil traders ahead of the winter months, when demand for petroleum products is significantly lower. But if events unfold according to the current scenario, come spring the owners of oil refineries might reject any arrangements with the government and hike fuel prices in connection with the next seasonal increase in demand. Moreover, they will seek to compensate for the losses resulting from disruptions of supplies under export contracts. Obviously, the situation requires a new extensive document that would guarantee peace between the government and oil traders. Otherwise, the price situation on the fuel market could spin out of control next spring.
