Wednesday, August 23, 2006

Dubious oil memorandum

Below is the best piece I've seen on Monday's memorandum between the Ukrainian gov't, and Ukrainian oil processors and producers. [Its from I've reproduced it in full.]

"Oil companies agree to increase crude

KIEV, Aug. 21 - Russian and Ukrainian oil companies will seek to boost supplies of crude to Ukraine in order to increase production and exports of gasoline, according to an agreement signed with the government Monday.

The government pledged to provide tax breaks for modernization of oil refineries and will probably increase duties on imports of gasoline to make oil refining in Ukraine more profitable, according to the agreement.

Top managers of major Russian oil companies such as Lukoil, TNK-BP, Alliance Oil and Tatneft, and also Ukrainian oil companies such as UkrNafta and UkrTatNafta, met Prime Minister Viktor Yanukovych on Monday.

This was the second meeting between the government and major oil companies over the past seven days as the government seeks to prevent a rapid increase in gasoline prices. “We stress that we favor market relations in order to create rules of the game… for the sake of the price stability,” Yanukovych said after signing the agreement.

Gasoline prices in Ukraine stabilized at 4.7 hryvnias ($0.93) per one liter of 95-octane gasoline over the past seven days, ending three weeks of rapid growth, during which in some regions the price had reached UAH5.2 per liter.

At the meeting a week ago, the oil companies apparently agreed to keep the prices at UAH4.7 per liter after the government had threatened to use regulations that could hurt them.

Ukraine has six oil refineries, most of them owned and managed by Russian oil companies such as Lukoil, TNK-BP, Tatneft and Alliance Oil, but the refineries have been staying idle for most the past year.

Lukoil closed its Lukoil-Odessa refinery in July 2005 for a three-year modernization, while Alliance shut Kherson NaftoPererobka in August 2005 indefinitely, citing the need to upgrade.

Analysts said the closures were forced by an influx of cheap gasoline from Eastern European oil refineries such as Mazeikiu Nafta of Lithuania and Mozyr of Belarus. The influx increased after the government of then-Prime Minister Yulia Tymoshenko pushed through a resolution that lifted duties on imports of gasoline and diesel fuel in May 2005. The move was aimed at ending rampant increases in gasoline prices at the time, but oil companies, unable to compete with modern oil refineries in Eastern Europe, reduced supplies of crude to Ukraine in response.

Oil supplies to Ukraine dropped 29.9% on the year to 6.29 million metric tons in January-July, down from 9.4 million metric tons a year ago, according to the Energy and Fuel Ministry.

Oil companies have been persistently asking the authorities to re-introduce the duties on imports of gasoline and diesel fuel. Energy and Fuel Minister Yuriy Boyko said Monday the government may actually re-introduce the duties later this year. “The best time to cancel the zero duties is the end of fall, when demand for gasoline is declining,” Boyko said.

Before introducing zero duties on gasoline and diesel fuel imports, Ukraine used to charge duties between €15 and €40 per metric ton.

The Economy Ministry recently suggested setting the duties at between €20 and €25 to encourage domestic oil refineries and to prevent an increase in gasoline prices."

I'm not an authority on these matters, but it seems to me that shutting the door onto imports of fuel may cause problems, because Ukrainian's aging refineries have difficulty at the moment satisfying domestic demand for higher quality grades of gasoline. Shutting out these imports will not encourage Ukrainian oil processors to improve the quality of their products, and they will rig the market between themselves, as before.

A bit more on the story I wrote about yesterday.

The 'zakazchyk' who ordered the kidnapping and murder of Roman Yerokhin, a colonel in the Adminstration for Tackling Organized Crime [UBOZ], is a Donetsk businessman and a parliamentary deputy, according to minister of internal affairs, Yuriy Lutsenko.

A key witness, former UBOZ employee Vadym Klikovskyi, is being hunted. His evidence can 'finger' the zakazchyk, but he has twice been tipped off and has, so far, evaded capture. Lutsenko says the gang that kidnapped and murdered Yerokhin includes former employees of the state tax police, former employees of the ministry of the interior, and criminal elements.

A lot more on this case [in Ukrainian ] here. Tomorrow Lutsenko will attend Yerokhin's funeral in Donetsk. This story could 'have legs' and potentially be 'very big', but the involvement of the Prosecutor-General diminishes the chances of charged ever being brought against the perpetrators - absolutely disgraceful..

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