finance & markets

Who needs a new refinery?

07.02.2014 | Andriy Starostin

Construction of a new oil refinery could portend Chinas massive investments

Before his dismissal, Minister of the Energy and Coal Eduard Stavytsky announced that Chinas largest state-owned oil company PetroChina is considering the possibility of creating a new oil refinery company in Ukraine. We prepared and signed a plan and a memorandum between PetroChina and the Ministry of Energy with a detailed description of the project, said Stavytskiy. Given this, it appears that Ukraines authorities decided to go back to the old orange concept of building a new oil refinery in Ukraine

Three variants from the past

For more than seven years there was no proposal for the construction of a new oil refinery. The reasons are obvious: certain officials expected some help from the Russian owners of Ukrainian refineries in providing Ukraine with domestic fuel in exchange for customs privileges and tax exemptions. However, by 2014 100% of those owners for various reasons were forced to withdraw from the Ukrainian oil refining market and the idea of construction of a new plant was revived on its own.

On the first stage of preparation of the project for a new refinery (2005 2007) three locations were chosen as priority areas for its construction the first was between the terminals of the Odesa Port Plant (OPP) and Ukrtransnafta at the Pivdenniy sea port, the second was near the oil metering unit Brody of the international oil pipeline Druzhba in the Lviv oblast and the third was between the train station in Ayvazovska and the Prymorskiy village in Crimea. The option of Pivdenniy was considered at that time to be the worst due to anticipated difficulties with the traffic of tanker deliveries of raw materials, including the complexities of an environmental, navigational and meteorological seasonal nature. And in 2007, during Viktor Yanukovychs second term as the premier, the option of construction of a refinery at Brody was discarded due to the unclear political orientation of certain local deputies, who at that time had planning permits for future construction.

In addition, the option in Brody was too complicated due to significant foreign policy risks. Among them were Kyiv´s impromptu relations with the Libyan African Investment Fund, which was interested in displacement of Russian oil from the Druzhba pipeline. When the fund manager Muammar Gaddafi was executed by the opposition, Russian oil from the southern branches of the Druzhba was ousted by resources from Iraq and Persian Gulf countries, which are now successfully supplied to Hungary, Slovakia and Austria according to the formula of replacement of Russian imports. As a result, the suburbs of Feodosia remained the optimal site for the future location of a refinery.

The attractiveness of construction of a refinery near the Primorskiy village was justified by the proximity of the so-called Kerch oil route, the availability of free capacities of the local remote marine terminal and cheap shipping traffic.

In addition, the attractiveness of the project for possible investors was calculated on the basis of the proximity of the future refinery to the promising raw material base, which includes hydrocarbon structures in Subbotin, Pallas and other areas on the Kerch section of the Black Sea.

On the other hand, among the negative aspects of the Feodosia option that experts pointed to is the complete absence of pipeline networks required for the full-scale operation of the refinery, as well as the notorious congestion of Crimean railways.

Refinery in exchange for the OPP

The current government seems to have taken these shortcomings into account and decided to return to the Odesa option. Its former drawback of high-density traffic of tanker supplies disappeared after the transit of oil through the ports of Odesa and Pivdenniy declined by more than 50% over the last few years. And until recently, the widely known and controversial project of construction of an LNG terminal in the Pivdenniy port has been Kyivs only official tool of struggle with falling incomes in these cities due to the outflow of oil transit. But after this project became a bargaining chip at the most recent Ukrainian- Russian gas talks in December 2013, the land allotment for the LNG terminal has become attractive for its conversion into the project for the construction of an oil refinery. The first clarifications given to the press by the Energy Minister prove the growing attractiveness of this apparently orphaned land acquisition in Pivdenniy . Announcing the start of Ukrainian Chinese negotiations on technical enquiry for the new refinery, Minister Stavytsky said the Kherson Oil Refinery and the Odesa oblast are considered as possible grounds for the new refinery.

The first Kherson construction project is disadvantageous due to the unavailability of access for large tankers with a dead weight of more than 30,000 t. According to several inspections, in the event of the expansion and deepening of the existing shipping channel of the Kherson Commercial Seaport and transshipment facilities on the Quarantine Island, heavy salty seawater will flood freshwater marshes and completely destroy the unique aquatic and bottom biosphere of the Dnipro delta. In view of this fact, the Pivdenniy Port is the most probable option for the Chinese investors. Some Ukrainian experts assumed that the choice of the Chinese in favor of this option might be affected not so much with the project of oil refinery, as the prospect of expanding the influence of Chinese companies on the port itself and Russias ammonia pipeline going from it, which is considered to be one of the key elements of the global nitrogen fertilizers market.

Oil is oil, but until recently, experts attributed the foreign trade operations management of the Pivdenniy OPP to the sphere of influence of companies controlled by Dmytro Firtash and Yuriy Ivanyushchenko, who allegedly constantly competed for primacy in this deal. However, by 2014 the influence of both businessmen in Ukrainian political spheres has been severely shaken. In this light, the expected arrival of Chinese companies to Pivdenniy under the pretext of building a refinery looks like quite a logical conclusion of the long-term fight between major Ukrainian investors.

For PetroChina, which was presented by the acting Energy Minister as Ukraines partner in the construction of a new refinery, its dominance on the global market of nitrogen fertilizers is officially and simply described as a lateral direction of developed chemistry and processing of oil and natural gas. In addition, the trade flows of nitrates supplied to global markets by enterprises belonging to this company reach the level of several million tons and significantly exceed operating conditions of all of Firtashs Ukrainian nitrogen assets.

All these considered, the announced feasibility study for the new refinery can and will be implemented in the stated format. However, luring PetroChina to Ukraine may be only an element of the governments attempt to sort out relations with Firtash on the eve of the once again announced privatization of the OPP. It is unknown how the management of China´s largest corporation will accept it. However, it should be noted that the Chinese company knows how to work on extremely complex local markets. For example, it is the largest foreign investor in the Republic of South Sudan and the Darfur region, which are labeled as warfare zones.

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