Oil pipeline bottleneck makes little sense according to European charter

An energy strategy for Ukraine was adopted at a cabinet meeting on March 16. This is a timely decision, all things considered, for if the current situation continues, Ukraine will in all likelihood lose its oil refineries, which are extremely dependent on foreign oil supplies. The current oil inflow is a small spring that is dwindling away. In February, 31.7 percent less oil was supplied to Ukraine than last year. If the borders were not open to importers, Ukraine would be facing a serious oil crisis, and the possibility that one will arise cannot be ruled out today.

Experts say that the main problem with oil transportation to Ukrainian refineries, and its transit, is the 15-year agreement between Ukrtransnafta and the Russian company Transneft, concerning the provision of services in the sphere of oil transportation, which was signed by Ukrtransnafta’s former executive during the Kuchma era. As a result, Ukraine has lost the right to manage its own oil transportation capacities and can no longer arrange for additional oil deliveries from other customers without Transneft’s knowledge and consent. Because of this Ukraine’s capacious oil transportation system remains underloaded.

An agreement made with a customer-intermediary that does not have its own oil resources is a great impediment to a flexible tariff policy aimed at providing favorable conditions for additional oil transport across Ukraine. There are alternative oil transport routes in Europe, so Ukraine must closely follow competitors’ tariff policies. Today, any such flexible policy is practically impossible in Ukraine, because Transneft is applying markups for oil transportation operators, and there are other possibilities in terms of payments and surcharges. There is no way Ukraine can influence their size and origin.

This agreement is Russia’s Trojan horse in Ukraine’s energy strategy. Transneft will do its utmost to make the Ukrainian oil transportation routes look least inviting to Russia’s oil-mining companies. In doing so, Transneft will direct them to its own transit routes, once again acting in keeping with Russia’s energy strategy.

At the same time we hear Russian companies accusing Ukraine of raising oil transportation tariffs. In fact, Ukraine has not raised them in a long time. In contrast, Transneft may charge any tariffs when concluding contracts with Russian oil companies about oil transportation through Ukraine — and without the Ukrainian side’s prior knowledge. In other words, Russian companies wishing to transport oil via Ukraine will find themselves under twice the pressure from the intermediary: first, the latter’s services, and second, its tariff policy.

Moreover, this agreement is binding on all Ukrainian oil refineries that have also been taken hostage by the intermediary. This will undoubtedly influence the level of the Ukrainian oil refineries’ load, as well as the price-setting policy with regard to the end product, gasoline. As a result, the average Ukrainian citizen, the ultimate consumer, will suffer.

Today it is safe to assume that since this agreement was concluded, the volume of oil transportation via Ukraine has noticeably decreased: by 20 percent on the routes that were quite effective before the agreement was concluded. In 2005 Ukrtransnafta’s new executive made every effort to preserve oil transit at the level registered in 2004. Ukraine’s annual losses stemming from lower oil transit transactions, after signing the 15-year contract with AK Transneft, amount to more than 130 million hryvnias (a total of 1.95 billion over 15 years).

In addition, Ukraine is deprived of the possibility of attracting additional volumes of oil transport to its territory and creating new transit directions. Taking into account the average transit tariff, every additional million tons of transit oil would earn Ukraine 30 million hryvnias every year. Thus, Ukraine’s minimum losses in terms of profits it did not receive, but could have, from additional oil transport capacities over 15 years (just transporting an additional million tons of oil a year) amount to 450 million hryvnias. Transporting an additional four to five million tons a year, the sum would reach 1.8-2.3 billion hryvnias.

Another oil transportation problem is the rent that increased by 30 percent in 2005 (from 0.685 to 0.89 US dollars per ton). This payment is instituted without any analysis of the oil market situation or loading prospects for Ukrainian oil refineries and possible consequences for Ukrtransnafta’s financial and economic state. It was this very approach that facilitated the increase in rental charges in the existing conditions.

The introduction of oil transport cost deductions in 1999 (later identified as a “rental payment”) took place with oil transport across Ukraine in excess of 65 million tons. At present, it is 45-47 million tons a year (mostly after building the Sukhodilna-Rodionivska bypass pipeline and reducing the Ukrainian oil refineries’ output). The rental payment increased in 2005 and remains on the same level in 2006. For oil transport services alone, a rental payment is levied on all volumes of transportation without exception, while a rental payment for similar services related to the transport of gas and ammonia is taken only from transit volumes.

The increase in the rent payment is automatically reflected in the transportation tariffs and stands at 10 to 57 percent. Therefore, Ukrtransnafta has been placed in a difficult condition by the agreement with Transneft and the rent payment, and primarily with regard to a flexible tariff policy that benefits the partners.

Oleksandr Biletsky, president of the European Movement in Ukraine, told The Day that the nature of rental payments in Ukraine contravenes the European Energy Charter. However, oil and gas transportation systems are the only practical linkage between Ukraine and Europe, what with Ukraine’s “ardent desire” to join the European community of nations. It is time to correct mistakes.