Publication: Eurasia Daily Monitor Volume: 2 Issue: 98

Ukraine’s presidential administration and government are multiplying emergency measures in response to severe fuel shortages and prices hikes by an informal cartel of Russian suppliers (see EDM, May 18).

Yesterday [May 18], President Viktor Yushchenko signed the legislation adopted on the preceding day by parliament, canceling import duties on high-octane gasoline and diesel fuel. The measure should stimulate imports of those products from countries other than Russia.

In an accompanying commentary, Yushchenko blamed the fuel crisis on a short-term factor and a chronic one. In the short term, he noted, the Cabinet of Ministers had exacerbated the situation by introducing price controls, which are out of line with market-economy principles. The chronic problems he identified as monopolization of oil supply, refining, and product marketing (Ukrainian TV Channel One, May 18). While the first part of Yushchenko’s commentary hits at Prime Minister Yulia Tymoshenko, the second part alludes to Russian companies, whom Tymoshenko openly assails for anti-market practices.

Also on May 18, Yushchenko instructed the Cabinet of Ministers to:

-Within a week, submit legislation for adoption by Parliament canceling value-added taxes on oil and oil products transit.

-By June 10, consolidate the state-owned minority stakes in oil refineries in Ukraine by transferring those stakes to the state company Ukrnafta. This is intended as a first step toward creating a state-owned, vertically integrated company for oil extraction, refining, and product marketing. The state company will target a 40% to 50% share of Ukraine’s fuel market.

-By the end of 2005, create a national reserve of high-octane gasoline and diesel fuel, equivalent to 10% of Ukraine’s annual requirements.

Extensively briefing the press, Naftohaz Ukrayiny chief Oleksiy Ivchenko enumerated measures under way to diversify oil product supplies immediately, and crude oil supplies in the short to medium term.

In recent days, Naftohaz has signed contracts to immediately purchase gasoline and diesel fuel consignments from refineries in “Baltic states” [presumably Lithuania], Belarus, Croatia, and Serbia. The size of consignments from each of these sources is in the range of 20,000 to 40,000 tons.

Starting this year, Naftohaz plans to buy 2 million tons of crude oil annually from Libya for refining in Ukraine. This amount will come on top of the volumes due to Ukraine from the production-sharing agreement, signed in 2004 by Naftohaz with Libya’s National Oil Company. Under that agreement, Naftohaz will extract oil and gas from four Libyan fields that hold estimated reserves of 120 million tons of oil and 80 billion cubic meters of gas. Naftohaz intends to supply its Libyan oil to Italy. The latter will, in turn, buy crude oil of equivalent value in Russia for delivery to Ukraine (a “swap deal,” obviating the need to transport that oil from Libya to Ukraine).

Two weeks ago Naftohaz signed a Production Sharing Agreement to develop two oil fields and two gas fields in the United Arab Emirates. The size of those deposits is not conclusively determined. Commercial production is expected to start in two years.

Further on May 18, Minister of Foreign Affairs Borys Tarasyuk held preliminary discussions in Baku regarding Ukrainian purchases of crude oil or oil products from Azerbaijan. In this case, the realistic option would seem to be purchases from Kazakhstan via Azerbaijan or an Azerbaijan-Georgia route. On May 30, Yushchenko will head a Ukrainian delegation to Kazakhstan and plans to focus on that topic.

Prime Minister Tymoshenko continually underscores the urgency of extricating Ukraine from its dependency on Russian supplies: “We have clearly been shown how only two companies can, quietly and without much effort, generate any kind of crisis in the country,” she remarked (ICTV, May 18), apparently alluding to Lukoil and TNK-BP, which account for a lion’s share of the oil supply, refining, and product marketing in Ukraine.

(Interfax-Ukraine, UNIAN, Ukrainian TV Channel One May 17, 18)