Geography of diesel fuel supply to Ukraine: Dependence on Russia is quite strong

Author : Olena Holubeva

Source : 112 Ukraine

Belarus, which produces petroleum products from Russian oil, has become the main supplier of diesel fuel for Ukraine
15:03, 25 October 2019

Open source

In September, after the suspension of work of the only Prykarpatzakhidtrans oil pipeline, due to the introduction of special duties, diesel fuel deliveries through Ukrainian ports rose to record levels. At the same time, marine supplies still do not play a crucial role in the market: Belarus, which produces petroleum products from Russian oil, has become the main supplier of diesel fuel for Ukraine (in recent months, the country's share has grown to almost 50% of the Ukrainian market). As a result, the Ukrainian diesel fuel market is dependent on Russia, but due to the rise in the price of logistics, it began to receive diesel fuel at a higher cost, experts say. According to them, at the current stage, the authorities manage to restrain price increases, including by “manual methods”, but the additional costs will ultimately fall on the shoulders of the consumers, which would affect the cost of goods, services, and lower living standard.

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The geography of diesel supplies has changed

Deliveries of sea shipments to the southern ports of Ukraine in September more than doubled compared to August, to 131.500 tons. The volume of diesel fuel that has passed customs clearance at the ports has reached a historic record. For comparison: in the first 6 months of the year, only 162.000 tons were delivered by sea, the authoritative industry publication Argus reported the other day. Most of the fuel came from Greece: 41.600 tons or 19.400 tons more than in August. In September, a product from Bulgaria, Israel, India, Italy, Turkmenistan, and Turkey was also imported to the country's market. Moreover, Israel has become a new country of supply to Ukraine - until September, there was no practice of importing diesel fuel from there. At the same time, deliveries through ports still do not play a decisive role for the market. In autumn, import through ports amounted to about 20% of the market balance, the press service of Galnaftogaz specified.

The increase in sea supplies is associated with the cessation of diesel fuel pumping from Russia through the Prykarpatzakhidtrans oil pipeline. This was a consequence of Ukraine’s imposing of import duty on such shipments.

As you know, over 40% of all diesel fuel consumed in Ukraine was supplied through the oil product pipeline. “Before the pipeline was shut down, Russian diesel supplied via this route (oil product pipeline) was cheaper. But in September, a shortage of the product began, and prices, mainly speculatively, increased significantly. The differences in prices have erased - diesel fuel from any source has the same price. Now the cost of diesel fuel in the south of Ukraine is lower than in other regions, due to an excess of product that was actively imported by tankers to the ports of Ukraine," Argus Petroleum Products of Ukraine correspondent Mykhailo Kalyukin said.

Thus, before the introduction of the special duty, Russia occupies first place in the supply of diesel fuel to Ukraine. According to Argus, in the first half of the year, 1.41 million tons were imported from the country from the total import volume of 2.8 million tons, and compared to the same period in 2018, supplies increased by 21%. As already mentioned, the main volume swung through the oil product pipeline. The second place belonged to Belarus (1.04 million tons), the third - to Lithuania 183.000  tons. For sea supplies in the first half of the year, 5.6% accounted for. In July - September, the opposite trend was outlined. Import of diesel fuel through ports is actively growing, which is due to the suspension of supplies through the pipeline (Prykarpatzakhidtrans), Kalyukin noted.

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And although Russian diesel continues to flow to Ukraine by rail (the terminal in Gomel, which is one of the loading points on the oil product pipeline), Belarus might come out on top in terms of supplies in the second half of the year. According to market participants, the share of this country in the volume of imports, which accounted for 88% of the market in the first half of the year, now exceeds 50%.

Why duties on pipeline supplies were introduced

At the time of the introduction of the duty on pipeline deliveries, the Ukrainian authorities were well aware that they were the cheapest resource due to logistics, a senior official from the team of President Zelensky said. At the same time, Zelensky’s office was concerned that over the past three years, deliveries through the pipeline had grown from zero to almost 45%.

The authorities also insured themselves at the level of intergovernmental agreements. According to a senior source, Zelensky’s team was looking for solutions that would prevent a boom in the price of diesel fuel, and one of the market participants advised Zelensky to speak with Belarusian President Lukashenko. Belarus agreed to postpone the repair of the Mozyr Oil Refinery (the main supplier of diesel fuel and gasoline to Ukraine), as well as increase the supply by 20%.

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“After the stoppage of pipeline deliveries of diesel fuel from the Russian Federation, which were undoubtedly the cheapest, a tense situation arose in the Ukrainian market: authorities did not rule out that many would want to use it in order to get additional income from a situation with a possible shortage and speculative price increase. At that time, President Zelensky held talks with Belarusian President Lukashenko, after which a government delegation flew to Minsk," Serhiy Fedorenko, director of Ukrhazvydobuvannia commercial issues, said.

He specified that following the trip, the Naftogaz group entered into agreements for the supply of electricity and diesel fuel, where the UGD acted as a trader, which was to promptly offer a resource on the market and bring down the panic mood. At the negotiations of the Belarusian and Ukrainian delegations, agreements were also reached, according to which the repair of the Mozyr refinery was postponed until the end of September. It is worth noting that to ensure the supply of electricity from Belarus, the scandalous “Gerus amendment” was adopted, which made it possible to import electricity under bilateral agreements from Russia, which, according to experts, threatened the energy security of Ukraine.

Under the contract for the supply of diesel fuel, which was concluded between the Ukrainian Ukrgasvydobuvannya and the Belarusian BNK until the end of 2019, the state-owned company began supplying about 20.000 Belarusian diesel fuel per month to Ukraine, which corresponds to about 5% of the total diesel fuel market. The company noted that this was her first experience since 2014 as a trader. Fedorenko emphasized that the operation made commercial sense, because the state-owned company was quickly shipping to everyone, including Ukrzaliznytsia, and it sold fuel at a market price. “I’m not inclined to overestimate the role of Ukrgasvydobuvannya in overcoming the crisis that could have occurred after about 40% of the fuel supplied by the pipeline left the market, but thanks to them, they managed to prevent an artificial shortage and, accordingly, speculative price increase,” Fedorenko said.

Taking into account the supply of UGD and the import of diesel fuel from Belarus by non-state traders, the country's share in the Ukrainian market has already grown to more than 50%, which, according to experts, also poses certain risks.

“Belarusian oil products, which have occupied the vacant niche for the wholesale supply of diesel fuel, are produced from the Russian oil. Thus, the geography of the primary origin of energy resources does not change for us,” Serhiy Sapegin notes. In addition, there is a certain risk that in the past there were precedents for stopping the supply of fuel from Belarus, which would provoke rush prices in Ukraine. So, once again deliveries stopped in April. Then, restrictions on the supply of motor fuel from the country were introduced in order not to provoke a deficit in the domestic market due to the reduction of refining volumes to the largest Belarusian refineries to a minimum. The reason was a sharp deterioration in the quality of the Russian export Urals oil mixture, which enters in transit to the section of the Gomeltransneft Druzhba oil trunk pipeline. The Ukrainian market responded with a sharp increase in diesel prices, followed by gasoline and gas.

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What will happen to diesel prices in Ukraine?

“Due to the increase in the cost of logistics, the Ukrainian fuel market received diesel fuel at a higher cost. If these additional costs ultimately fall on the shoulders of end consumers, this will affect the cost of goods, services and lower living standards of the population, as well as a decrease in the country's transit potential,” Sapegin notes.

Ports remain a risk factor. A-95 director Serhiy Kuyun emphasized that the state had lost its leverage over the situation in ports: “Before the annexation of Crimea, we had a powerful oil transshipment in Feodosia, now this industry is essentially monopolized by the Privat Group.”

There is another risk factor: authorities do not exclude the introduction of duties on deliveries of diesel vehicles from Russia by cars. At the same time, a high-ranking source made it clear that the special duty on pipeline deliveries will not be canceled in the near future, as traders have already contracted large volumes of more expensive than Russian resources from alternative directions.

“I don’t think that the duty will be canceled in the near future, even taking into account the dubious benefits of its influence on the market. In addition, the new branch ministry is conducting the reforms, and officials are increasing the number of unresolved problems and documents," Sapegin said.

“If European quotes and the exchange rate remain stable, diesel will continue to get cheaper in the coming weeks. Traders' margins are still very high, and there is no fuel shortage, so now there’s a struggle for a client in which companies are trying to cut sales and reduce prices," Mykhailo Kalyukin assures.

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“Operators have enough stock to lower prices. How big is this stock? The retail price of diesel fuel can be lower than the current one by 20 cents per liter. And this applies not only to diesel fuel but also to high-octane gasoline. Is this potential of lowering the price for the final consumer realized? I think not. The fact is that the company’s market inefficiency is covered by high prices for the final consumer. According to the Psycheya Center, a number of gas stations in Ukraine 4.5 times exceed the needs. And this is the extra infrastructure that someone has to pay for. In addition, traders compensate for the declining strains through the gas stations with the higher margins that we talked about above. All these costly components are passed on to the end consumer," Sapegin notes.

Experts have repeatedly emphasized that the growth of domestic diesel fuel production in Ukraine could improve the situation, which, according to the results of the first half of the year, accounted for only 12% of the market. "Indeed, Ukraine could increase the volume of oil refining," Sapegin assures. However, in reality, Ukrainian plants continued to reduce production volumes. Kremenchuk Oil Refinery and the Shebelinsky Gas Processing Plant are the only existing diesel fuel producers in Ukraine (recently it was put into operation after a scheduled repair).

The authorities, despite all the loud calls for the need to revive the domestic production of petroleum products, continue to be inactive. Although, as Serhiy Sapegin assured, "the issue of reducing dependence on Russian oil products by increasing domestic oil production (at the first stage - oil imports) and increasing the volume of oil refining at Ukrainian facilities is currently being actively worked out in the relevant ministry and will be taken into account in the Development Concept fuel market and oil refining industry of Ukraine."

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