It might not be all that bad after all.
The National Security and Defense Council of Ukraine has decided to resolve the issue of returning to state ownership the oil pipeline, which is in fact controlled by a member of parliament from the Opposition Platform - For Life party, a godfather of Russian President Vladimir Putin. Victor Medvedchuk. This decision fits into the overall system of sanctions the Ukrainian government is imposing against "Putin's godfather." Diesel fuel supplies to Ukraine via the pipeline have already been halted, and there is a risk that Russia will stop the transit of petroleum products to Europe through it, blaming our country for this, as has often happened in the past with natural gas transportation. "Apostrophe" I found out how serious the risks are and whether diesel fuel prices will rise for Ukrainians as a result.
Ukraine is returning to state ownership the domestic section of the Samara-Western Direction oil pipeline, which for many years was in private hands and, according to authorities, provided profits to "Putin's godfather," Opposition Platform - For Life MP Viktor Medvedchuk.
The corresponding decision was made at a meeting of the National Security and Defense Council (NSDC) on February 19 as part of sanctions against Medvedchuk and his entourage.
The pipeline and associated facilities have been transferred to the temporary safekeeping of the state-owned company Ukrtransnafta.
Law enforcement and judicial authorities should investigate why the oil pipeline, which by default should be state-owned under Ukrainian law, was privatized. It would also be appropriate to separately examine the use of this pipeline for supplying oil products to Ukraine, as well as the consequences of its "nationalization."
Unstable imports
The Samara-Western Direction oil pipeline, built during the Soviet era, is used to supply diesel fuel from Russia. Some of the fuel transited to Europe, while the rest remained in Ukraine.
Diesel fuel imports through this pipeline continued even after the annexation of Crimea and the outbreak of war in Donbas. The reason was quite simple: Ukraine relies heavily on imported petroleum products, including diesel fuel. Supplies from Russia account for at least a third of all diesel used in our country, and Russia's share of diesel fuel imports can reach approximately 45%.
However, the majority of imports from Russia did not go through the “Medvedchuk pipeline”.
Moreover, there were periods when this pipeline was not used for diesel fuel imports at all. As oil market analyst Alexander Sirenko told Apostrophe, the pipeline remained dry for over a year and a half between 2014 and 2016. Furthermore, after the introduction of a 3,7% duty on deliveries (later increased to 4%) in 2019, deliveries through the pipeline were also halted for several months.
In any case, the share of imports via the Samara-Western Direction oil product pipeline was not critical for our country. And it has only been declining in recent years.
"While in 2018 there were approximately 2 million tons, in 2019 there were one and a quarter million, and in 2020 there were just over 600 tons," Gennady Ryabtsev, head of special projects at the Psyche Scientific and Technical Center, told the publication.
He added that in January 2021, approximately 30 tons of diesel fuel were delivered to Ukrainian consumers via the pipeline, compared to the country's monthly consumption of 300 tons.
Following the aforementioned decision of the National Security and Defense Council, deliveries to Ukraine via the product pipeline were stopped.
Will there be a diesel shortage?
However, the cessation of imports via the Medvedchuk pipeline will not have a significant impact on Ukraine's overall balance of petroleum products.
According to Sergey Kuyun, director of the A-95 consulting group, the Ukrainian petroleum product market is already sufficiently diversified, and replacing lost pipeline supplies will be easy. "This will occur both through the reorientation of pipeline volumes to rail shipments and through domestic refining reserves and seaborne imports," he stated.
Alexander Sirenko agrees: “We have the sea, we have European factories, we have Belarus and Lithuania nearby, and therefore I don’t see any reason to panic.”
Most likely, supplies from Russia will also continue.
Sirenko recalled that the oil pipeline supplied fuel from the state-owned Rosneft to Ukraine, while the railway supplied resources from the Russian private company Lukoil.
"It's possible that some of Rosneft's volumes will flow through Ukraine's eastern border," the expert added.
It is also quite possible that Rosneft will continue to use the Samara-Western Direction oil product pipeline to supply diesel fuel to Ukrainian consumers, but it will be unloaded in Gomel, Belarus, and then sent by rail to Ukraine from there, noted Gennady Ryabtsev.
“There will definitely be no shortage,” he concluded.
Price issue
However, it's important to understand that pipeline transportation of petroleum products is the cheapest option. However, given the insignificant volumes of fuel recently imported via pipeline, the closure of this route is unlikely to lead to an increase in diesel prices.
"The maximum is 1-1,5% due to the reorientation to the same fuel, only from Gomel," says Gennady Ryabtsev.
However, a small and temporary increase in diesel fuel prices can't be completely ruled out, says Alexander Sirenko: "I expect a small, situational increase, but that would be speculation. And we'll have to closely monitor who's responsible."
Meanwhile, not only is there no diesel fuel shortage in Ukraine, but there's even a surplus. "Since the start of the pandemic, in March-April of last year, Ukraine's carryover stock has been around 200 tons. We have about 30% carryover every month. And to really 'dry up,' we could avoid importing anything for a month and buy only from Kremenchuk (the Kremenchuk Oil Refinery, owned by oligarch Ihor Kolomoisky, is the only refinery currently operating in Ukraine) and 'eat' the remainder," Sirenko said.
This doesn't mean price increases are completely ruled out. However, if oil product prices in Ukraine do rise, it will be driven by external factors, such as the hryvnia devaluation and rising crude oil prices.
The exchange rate has been fairly stable lately, but oil prices are rising.
Incidentally, petroleum product prices in our country are still slowly rising. While the average retail price of A-95 gasoline was 26,5 hryvnias per liter at the beginning of February, by the end of the month it had already risen to just over 27 hryvnias per liter. Diesel fuel prices have increased on average during this period, from 25,9 hryvnias per liter to 26,45 hryvnias per liter. Gas station prices for motor gas have increased even more significantly, from 13,2 hryvnias per liter to 15,3 hryvnias per liter.
Russian transit
Incidentally, the National Security and Defense Council's decision regarding the Samara-Western Direction oil pipeline is related to a nuance unrelated to diesel fuel supplies to Ukraine and, accordingly, the issue of its price.
As Gennady Ryabtsev noted, Russia could very well shut off supplies to Europe through this pipeline, citing risks from Ukraine, which has decided to "expropriate" the pipeline.
However, according to him, this risk has been minimized by the efforts of specialists from the National Security and Defense Council apparatus, thanks to whom the adopted decision does not speak of confiscating the pipeline, but of "conducting an inspection of compliance with legal requirements" during the commissioning, use, and alienation of the Ukrainian part of this "pipeline."
Victor Avdeenko
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