January 12, 2015

Once Again about a New Petrochemical Complex

Bohdan Sokolovskyi

Energy security in Ukraine has traditionally been underestimated in terms of independence. And therefore it is no wonder that we have today annexation of the Crimea and, in fact, a war in the Donbas. Even not a very deep analysis shows that this could have been avoided if Ukraine had had energy independence. And the government, which, at least, will begin real work of building energy independence of Ukraine, will earn national and international recognition as a government that has created an independent Ukraine. Until then, any government will be a government of the Ukrainian SSR: having attributes of a state, but without complete subjectiveness. Even renewed, it is… the leadership of the Ukrainian SSR.

Like it or not, but today there are four basic components of Ukrainian energy independence: natural gas industry; oil industry; electrical energy industry, inclusive with the coal industry; alternative energy industry. All four are of equal value.

The subject of this analysis is oil refining in Ukraine.

Some argue that there is no need to develop oil refining in Ukraine, because the State does not have enough of its own oil. This quite a fair point is disproved, in particular, by two facts: first: almost all developed countries consume relatively a lot of oil and, as a rule, have their own refineries, but do not have their own oil — they buy it on international markets. Second: will this way (through liquidation of its own refining) Ukraine abandon consumption, in particular, of imports of petrol and diesel fuel, that is, to give up vehicles and other equipment, and to start using, for example, a horse pulling power? We do not have enough of our own oil! The answer to the second question is obvious: in particular, no one in our present state will get out of a car and mount a mare (it is hard, for example, to imagine that all citizens of Ukraine, Ministers, Prime Minister, and President would abandon cars and start using horse carts). Therefore, the issue of oil products is sensitive to say the least.

We have written more than once about the relevance of the construction in Ukraine of a new modern petrochemical complex, which would help, in particular, addressing the issues of supplying Ukrainian citizens and industry with high-quality petroleum products.

Indeed, if we analyze the events of recent years, most of high quality oil products are imported to Ukraine. In particular, two years ago, in 2013, were imported from 75 % to 80 % (data differ). The remaining 20 %-25 % of the low-grade petrol and diesel were produced at our own (one and only!) oil refinery. It should be recalled that there are 6 large refineries in Ukraine. All are private now. And one Shebelynka State Gas Processing Plant (GPP). Last year, five refineries were idle, in particular, because their products did not have sales. All in all, in the former USSR were annually processed more than 50 million tons of oil. We do have a decent (more than 150-year old!) school of oil refining. There are highly qualified specialists, capable to fully meet Ukrainian oil refining. There is a demand for more than 10 million tons of light oil, etc. But for the most part there is a demand for high-quality petroleum products, which, unfortunately, Ukrainian refineries cannot produce due to the use of outdated technologies. We'll have to use imports, because, as our neighbors say, “holy place is never vacant”.

Here, attention is drawn to the fact that all imported petroleum products are brought from those refineries that are fully or partially work on Russian oil. That is, in one way or another they are under open or hidden influence of Moscow. Therefore, if Russia suddenly wanted to “ask” its partners (oil refineries) to cut off the supply of petroleum products to Ukraine (and nobody can stop it), now it, unfortunately, is able to do it.

Prices of all goods and services in Ukraine depend on availability and prices of oil products. And this is already a matter of national security. In particular, the issue of external influence on the initiation of social riots in our country. Consequently, we are witnessing, how national security issues are covered in commerce — though primitive, but reliable method of capturing a state. Just remember how much has been said about an importer paying or not paying import duties. But never has been doubted the fact of oil imports. No one, including the former opposition (the current government) has ever analyzed why the volume of imports of petroleum products keeps growing despite our having 6 our own oil refineries? What can be the consequences of this? What to do? While here, if we analyze deeper, our oil dependence on Russia is even greater than the gas one. And that means — a potential serious threat to the security of our state.

An additional evidence of the Ukrainian state's being able or being not able to influence the formation of prices of petroleum products, is the current situation at Fuel Filling Stations, when the world price of oil is falling, but our prices of petroleum products are growing. Consequently, the situation is at least not clear, since the prices of petrol and diesel are “covered” by the fall of the national currency against the dollar. In any case, even a cursory review leads to the conclusion that our country does not have sufficient mechanisms to influence the formation of prices for petrol and diesel in the domestic market. The state may, for the most part, ask the owners of Ukrainian refineries and fuel filling stations not to raise the price. But no one can guarantee the success of such “requests”. Especially if someone has already “worked” with individual owners.

We have repeatedly analyzed in detail what can be done in this situation. How to prevent negative developments and, in particular, corruption. There is only one conclusion: the urgent need to build a new modern petrochemical complex with the participation of Ukraine, the country (ies)-owner of oil and the country close to European principles and markets of petroleum products (ideal option: the country — a member of the EU). Apart from supplying citizens and the economy of Ukraine with oil products, a modern petrochemical complex would help to supply the Ukrainian chemical industry with raw materials. That is, among other things, it would contribute to creation of jobs in Ukraine. Not to mention using of the experience of one of the oldest in the world — Ukrainian school in the sphere of oil refining industry and Ukrainian professionals.

Only having built a modern petrochemical complex, the state, by a fully market method, can come to the market of petrol and diesel with a supply of high quality products, which, in particular, will help to curb prices for light oil at Ukrainian fuel filling stations.

Besides, as part of a petrochemical complex could be implemented the initiative of 2005 to establish in Ukraine a research base and production of bioethanol, especially relevant now both in the EU and in the world at large.

Obviously, for visual appeal and stability it would be necessary to resolve the issue of diversification of sources and routes of supply of raw materials (oil) to the Complex. We are quite capable of fulfilling such a task, and the easiest way to solve it is by providing reverse oil supplies through the pipeline “Odessa-Brody”, “Drujba” and EAOTC (Eurasian oil transportation corridor). In this regard, looks favorable the recently re-voiced at the highest level Poland's willingness to develop EAOTC.

Taking into account these and other parameters, in particular, the voiced on target parliamentary hearings in 2013 ones, it would be optimal to place that new petrochemical complex in the town of Novyi Rozdol in Lviv region.

Of course, creation of a new petrochemical complex will certainly provoke resistance of owners of Ukrainian (Soviet) refineries, which, unfortunately, up to this time have had no real motivation to modernize them. But this issue is resolvable. And there has been a precedent in modern Ukraine — it is worth repeating. That is, it is necessary to immediately begin an honest and open dialogue with owners of the existing refineries and together with them to seek a compromise solution to this problem.

Often, the current owners of oil refineries object to this because of the lobbying activities of the pro-Russian “fifth column”. But this can be overcome if there is strong political will.

It is obvious that, in one way or another, but there would arise a question of financing the development and construction of a petrochemical complex. After all, it is the matter of, at least 3 to 4 billion US dollars. Modernization of the existing refineries would not cost less. By the way, no one is rushing to give loans for the modernization. As for the new complex, there are options. Why loans? If nothing else, because the Ukrainian state has not had such sums of free money and in the nearest future will not have. This issue, as well as the entire project, was worked in 2006-2007. But, unfortunately, has never been realized. Today it would be worth to come back to it.

However, the main incentive is now Kazakhstan's intention to build a new refinery. This was clearly stated by the President of Kazakhstan Nursultan Nazarbayev December 25, 2014 at the joint meeting with Kazakhstan's government. Kazakhstan has three oil refineries with a total capacity of processing more than 19 million tons of oil per year (in 2013 they processed 14 million tons). Kazakhstan produces over 70 million tons of crude oil a year (plus more than 11 million tons of gas condensate). And all this-without the actively explored Kashagan Oil Field (oil production is expected to grow to 50 million tons per year). So, this for country it is better to process the extracted oil and to sell oil products on stable markets. Of course, one of the best options would be the EU market. That is why Kazakhstan could become our good partner in the construction and operation of the Complex. Especially because Kazakhstan has been successfully solving the problem of oil exports to bypass Russia, through the Caspian Sea. It is worth noting that Kazakhstan is not the only country-owner producing oil, who might be interested in the new high-quality Ukrainian oil refining. There is another country interested in modern Ukrainian refineries, which has good relations with Kazakhstan and other oil-producing countries. But if we keep hesitating, and Kazakhstan begins building refineries, it will be much more difficult for Ukraine to implement the project. No disaster will happen. But it will be much harder. For a long time (many years) we will have to forget about a new petrochemical complex, and Ukrainians will continue to be dependent on the Kremlin oil products with our shattered oil refining.