Who Will Save Ukraine’s Dying Refineries?

Ever since war broke out in Eastern Ukraine, the energy industry has been guessing what will happen to Ukraine's gas transit and its transmission system. In the background, however, Ukraine's oil sector has remained in tantalizing agony, as only one out of the country's six refineries is currently functioning (at a 10% utilization rate), most of the products supply taken over by neighboring countries and all this with no end in sight. Almost every refinery was built with some sort of Russian involvement - as an owner, co-investor or crude supplier - yet after 2014, against the background of unprecedented antagonism between Ukraine and Russia, Russian companies have left the country for good. Now the question is: who will step into the vacant spot? So far it seems that no one is willing to.

Kremenchug Refinery

Nominal capacity: 18 mtpa

Current refining status: utilization rate at a mere 10-15%

Out of Ukraine's six oil refineries only one is functioning currently, the Kremenchug Refinery, even though at a mere 10% utilization rate. Another Soviet remnant from the 1960s, for much of modern Ukraine's history it has been under the control of Ukrtatnafta - initially a joint venture between Tatneft and the Igor Kolomoyskiy-led holding, Privat. Following a successful 2007 hostile takeover, the ownership structure now includes the privately-owned Privat (56%) and the Ukrainian state (43%), a pairing which proved to be contentious to the maximum. Ukrainian authorities want to gain full control of the refinery, for reasons manifold - among others, Ukraine has to pay Russia $150 million for the illegal seizure of Kremenchug which happened against the government's will. Adding to the piquancy of the situation, Ukrainian authorities have no idea how much crude exactly does Kremenchug actually refine - overall, we should expect a protracted quarrel until the dust settles.

Odessa Refinery

Nominal capacity: 2.8 mtpa

Current refining status: idle since 2013

It is in many ways understandable why Odessa was chosen as a refinery site back in 1937 and why the possibility of the Odessa Refinery being brought back onstream remains a real one, despite a relatively low Nelson complexity index of 3.9. Close to the Black Sea, Odessa was LUKOIL's asset for almost 14 years (1999-2013) and it is largely due to the Russian major that its refinery slate became significantly lighter - i.e. in the 1990s HFO took up half of the yield, by early 2010s it was a quarter of it. However, as the stakes rose economic disputes loomed large here, too - LUKOIL could not find a modus operandi with the port terminal operator Privat (port fees artificially high) and decided to sell the refinery in 2013 to avoid greater damage. LUKOIL sold it to the Yanukovych-close VETEK energy group, hence, after the 2014 coup the Ukrainian state tried to lay its hands on the refinery - the legal battle between the two promises to linger for many years to come. Related: OPEC: IMO Rules Will Boost Oil Demand By 400,000 Bpd

Lisichansk Refinery

Nominal capacity: 8 mtpa

Current refining status: idle since 2013

The 8.2 Nelson complexity Lisichansk refinery, albeit finished in 1976, is Ukraine's youngest and most complex, however, under current circumstances of small-scale yet perpetuous conflict in Eastern Ukraine it is also the country's worst-located one. Before it was sold to TNK-BP in 2000, it mostly functioned in a on-and-off way, its fortunes turned to the better afterwards even though the refinery's performance remained to be volatile in terms of profitability. As Rosneft swallowed up TNK in 2011, the refinery ended up in its hands, as it turned out, for a brief period. Just two years later in 2013, the Yanukovych coup and the military conflict that followed, the Russian state giant initiated the Lisichansk's modernization, only to roll back any financial injections later. Given the refinery's substantial war-caused damages combined with the current Ukrainian authorities anti-Russian stance, Lisichansk will most likely remain a grim reminder of how sour just things turned.

Kherson Refinery

Nominal capacity: 7 mtpa

Current refining status: idle since 2006

Kherson, similarly to Drogobich and Nadvornaya (see below), saw no Russian involvement, hence due to a lack of substantial capital investments is one of the least likely candidates to be brought onstream ever again despite its relatively high nominal refining capacity. After a tumultuous period of ever-changing ownership in the 1990s, the refinery has been under the control of the Ukrainian business group Continuum, which has used the refinery as a product storage facility. Any modernization initiatives were generally linked to foreign investment, not Ukrainian funds. Two Chinese national companies, Sinopec and later CNPC were alleged to hold negotiations in early 2010s over a potential takeover, however, the talks were largely a market reconnaissance undertaking. Related: The Biggest Wildcard In The Iran Sanctions Saga

Drogobich Refinery

Nominal capacity: 3.22 mtpa

Current refining status: idle since 2011

One of the three refineries owned by the Ukrainian consortium Privat, the 1963-built refinery has been out of operation for seven years and is only used as a storage asset. As usually with Ukrainian idle refineries, it requires a significant amount of money to be modernized and brought to a competitive level - with a Nelson complexity of 3.5, Drogobich cannot even produce Euro 4-quality fuels, let alone meet Euro-5 quality standards (since January 2018, Euro-5 has been the standard required by the Ukrainian state). The likelihood that any investor will want to renovate Drogobich is close to zero, realistically it would be much easier to build a new one than to replace all of its units from the 1950s.

The sixth refinery, Nadvornaya, traces its foundation to 1897 and is in many ways similar to Drogobich - more or less offline since 2007 and being so outdated that it cannot produce fuel even compliant with Euro-3 standards, its future is remarkably dim. All the more so that when it did refine some oil in the past, it refined domestic Ukrainian the output of which almost halved to 32kbpd in the last decade. What to do in such a futureless state of things? Three Russian majors have left in the last ten years, either due to political pressures or weak economics, and no Western major filled their shoes. Until the self-defeating oil sector internal showdown comes to a close, it is highly unlikely there will be any to do it. Doubly unlikely that Russian investors will want to return anytime soon.

By Viktor Katona for Oilprice.com

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