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CONFERENCE 2004
International Conference
NEW OPPORTUNITIES IN OIL TRANSIT AND REFINING IN CIS AND THE BALTIC STATES

10-12 June 2004
Odessa, Odessa-Kempinski Hotel

Premier Sponsor JSC Ukrtransnafta



Official Sponsors:
SULZER and LUKOIL-UKRAINE


†††

Session Sponsor

ODESSA OBSERVATIONS

The participants of the International Congress "New Opportunities in Oil Transit and Refining in CIS and the Baltic States" took a closer look at the future of the industry

The downfall in oil transit volumes has turned in painful reality for the countries like Latvia, Lithuania, Estonia and Ukraine. Therefore it came as no surprise that some 150 representatives of oil transit and refining related industry from these countries, as well as from Belarus, Kazakhstan, Russia and other countries, thirteen in total, positively responded to the invitation of the OilMarket publisher, UPECO company, to meet in Odessa on 10-12 June 2004 and discuss the problems of the transit, closely linked with crude and products exports, as well as to examine possible solutions to the maladies of refining sector in the post soviet countries.

The Congress was supported by Ukraine's national monopoly JSC Naftogaz Ukrainy and pipeline operator JSC Ukrtransnafta, as oil transit development is one of their strategic priorities. The problem of the transit, is becoming though, increasingly acute for other transit operators in Ukraine. According to Andrei Yegorov, head of Odessa sea port, the hike in railway tariffs implemented in early 2004 for oil transit volumes from Russia and Kazakhstan, had already resulted in steep downfall in oil transit shipments via the port - by some 800,000 t over the first five months of 2004, compared to the same period last year. The volumes of the transit oil shipments via the territory of Ukraine continue their steep decline. In May this year the volumes of oil products shipped through Odessa marine port fell by 19% compared to April 2004, resulting in multi-million losses not only for the owners of the oil terminal, but also for the Ukraine's budget.

Attractive oppurtunities
For the Ukrainians, as well as for transit operators in Belarus and in the Baltic states, the misfortune is two-fold as the decline in transit shipments is coincides massive growth in oil production in Russia and Kazakhstan. Berik Tolumbaev, vice-president of Kazakhstan's pipeline operator Kaztransoil, has told the Congress that his country planned to produce this year some 57mn t (1.14mn b/d), expanding the production volume to 2mn b/d by 2010, and reaching 3.4mn b/d by 2015. Meanwhile, the crude runs at refineries in Kazakhstan show little indications of growth, which means that Kazakhstan will rapidly expand its crude exports volumes. This alone, though, does not imply that volumes of the export shipments from Kazakhstan will flood the oil terminals in Odessa, Pivdenny, Feodosia and other ports, either in Ukraine or in the Baltic region.

Kazakhstan successfully implements its strategy of export shipments diversification and intends to boost oil transit via Russia's pipeline systems using Atyrau-Samara pipeline link (mainly in the direction of Primorsk oil terminal in the Gulf of Finland) from current 300,000 b/d to 500,000 b/d in 2006.

Besides, on the 17 May Kzakhstan signed strategic agreement with China of development of a new export route from Kazakhstan to China via the pipeline system of Atasu-Alashankou. The launch of shipments is expeted as soon as in the end of 2005.

However, even taking into account the expansion and development of other export routes from Kazakhstan, the export potential of the country will be far from realized. This implies that transit operators should step up their efforts in attracting export volumes as, according to Mikhail Perfilov, development director of Argus Media Group in Moscow, in the coming years the situation on world markets will be stimulating for the further growth in oil exports from Russia, Kazakhstan, Azerbaijan and Turkmenistan.

A cold shower
Still, with all the potential for the growth of production and exports in place, the current outlook for increase of transit crude shipments and growth of products exports from refineries in Ukraine, Belarus and the Baltic states is far from bright. This is due to the strategies of Russia's railways and pipeline monopoly Transneft, both quite logically maximizing shipments via marine terminals on Russian territory. Another important reason has to do with generally obsolete state of the refining industry both in Russia and Ukraine.

The speech of the professor of Moscow Oil and Gas Gubkin University oil refining technologies department, Dr. Vladimir Kapustin although very bitter, gave a very sober outlook of the very deem future for the refiners in Russia, Ukraine and Kazakhstan, which is pretty much the result of unwise investment policies of the Russian and Kazakh oil companies in the field of refining. With all the criticism expressed, the speech of Dr. Kapustin was welcomed even by those, whom he had criticized.

Although the number of refineries in Russia increased from 27 to 42 over the post-soviet period, those newly built facilities are no more than atmospheric topping units. Their light straight run residue is getting back into the oil pipelines to be sent for exports as Russian export crude blend. The recent years only cemented Russia's refining industry traditional role of a feedstock supplier with fuel oil, gasoil and naphtha remaining principal export products of Russia's refineries.

Meanwhile, speaking at the Congress Dr. Roberto Ulivieri, leading analyst of Purvin & Gertz consultancy reminded that the implementation of the new EU oil products standards next year will render useless exports to the petrol stations in EU even from those recently modernized refineries in Russia, which managed to reduce sulphur content in their gasoil output below 0.035%. Millions of tonnes of fuel oil produced in Russia, Kazakhstan, Belarus and Ukraine will be squeezed out from the heating oil and utility market sliding to the refinery feedstock market with all respective price losses to follow. Inevitably, high sulphur content will put mounting pressure on the price of crude and oil products sent to the EU and USA markets from the refineries in Russia, Belarus, Kazakhstan and Ukraine. Dr. Ulivieri added, that saturation of the Russia's domestic market and slow down of demand in EU closer to the year 2010, will be another important bearish factor, bringing the price of Russian export products down. Only growing demand for the motor fuel imports to the USA looks to be a steady trend, making exporters from the CIS countries increasingly dependent of the Transatlantic arbitrage opportunities.

A ground for discussion
The congress brought together the representatives of oil companies, state authorities, pipeline operators, refiners, owners of oil terminals, stevedoring companies and equipment suppliers - all those having practically no time to meet and discuss the general state of the industry, putting together many pieces of an oil industry puzzle, often shocking by the complexity of interconnections and abundance of hidden ties, particularly in the CIS and Baltic states.

In the situation, when Russia and Kazakhstan, as the owners of crude give increasingly clear definitions of their export interests and demonstrate rising determination implementing them, and Ukraine was well-advised to hear the opinion of those sides when drafting own plans of oil transit development.

Opinions of experts evaluating these plans sounded very contradicting. Kazakhstan indicated that from their side only US ChevronTexaco could supply crude volumes for the Odessa-Brody link for shipment to the European refineries. At the same time, Berik Tolumbaev told the Congress, that up until 2010 Kazakh companies had no plans of crude shipments to the terminal in Pivdenny.

On the top of this, Sergey Mishin, vice-president of Belarus Belneftekhim monopoly, told the Congress, that uncertainty of the Ukrainian side in the issue of Odessa-Brody shipments already resulted in Belarus operator having to spend additional funds for the pipeline expansion on its territory in order to comply with its transit obligations under the international agreement on shipments along the Druzhba-Adria line, also the project of high significance for Ukraine.

Problems raised at the Congress resulted in such a broad range of discussions and debates that a three-day timeframe proved to be insufficient. The dynamics of the refining and export industries in CIS are so intense that the need in the similar, just larger Congress, with more detailed set of problems and discussion format next year becomes obvious.

The third day also proved to be very busy and draw a lot of interest, as delegates of the Congress visited oil terminals in Odessa, Pivdenny and Illichevsk, as well as Odessa refinery.

Visitors of the terminal had an opportunity to see the results of that large amount of work done by Ukraine's transportation companies in order to sustain and develop the transit potential of the country. However, currently the productivity of their work largely depends on the decisions of Ukraine's government in the issue of Odessa-Brody system use, as well as on Ukraine' state owned Ukrzaliznytsya railways operator transit tariffs policies. The representatives of both Ukraine's government and the railway monopoly participated in the Congress. But will the official Kyiv hear the anxious voice of Ukraine's and other CIS countries ' oil companies and transit operators?
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