FSU refineries: Ukraine's Kherson refinery

by Heiko Pleines

The Kherson oil refinery is Ukraine's third largest refinery. The refinery underwent modernisation in 1992-1994, when a catalytic reformer was installed. In addition, a hydro-treater for diesel fuel went into operation in 1998, increasing the plant's capacity from 6 mm tpy to 8.6 mm tons.
However, the post-Soviet crisis, falling demand and scarce crude supplies have hit the Kherson refinery hard. During the first three quarters of 1999, it stood idle for more than 100 days and was fighting off bankruptcy.
In the summer of 1999, the Ukrainian government decided to hand its 55 % share in the refinery over to a temporary manager for five years. The manager was expected to prevent the refinery's bankruptcy, make business operations profitable and ensure that at least 1.8 mm tons of oil was refined per year. The refinery ended up processing a mere 820,000 tons in 1999. If these conditions were not met, the winner would be stripped of the right to run the refinery.

Since these parameters were not very attractive, foreigners stayed away from the management contract tender, which was held in August of 1999. Ukrnefteprodukt Trade House, a subsidiary of Ukrnefteprodukt, was eventually declared the winner.
As the journal Oil & Capital (Neft' i Kapital) commented at the time: "It is critically important that Ukrnefteprodukt is a state company and has in its authorised capital controlling stakes in regional marketing companies. So all that has happened is that the Ukrainian government has handed over the right to manage the Kherson refinery from one of its agencies (the State Committee for the Oil and Gas Industry) to another. Like the State Committee for the Oil and Gas Industry, Ukrnefteprodukt does not have its own oil in sufficient quantities for the refinery to work at capacity. Having handed over a controlling stake in Kherson to a state-owned company, Kyiv has virtually ruled out foreign investment in the refinery. No one is going to invest in Ukrainian oil refining unless they have guarantees in the form of shares."
This may explain why the Ukrainian government decided in October 1999 to chose Kazakhoil as manager for the majority share in the Kherson refinery, ignoring protests from Ukrnefteprodukt and its British partner Interlink. The Kazakhstani national oil company promised annual crude supplies of 3 mm tons. Deliveries through the Russian pipeline system were to be organised by Russia's Alyans Group.

The head of the group, Zia Bazhayev, was elected as chairman of the oversight council of the Kherson refinery. The group's vice president, Viktor Tarkhov, became responsible for running the plant.
In January, Alyans declared operations at the Kherson refinery to be successful. The refinery had received the first deliveries of Kazakhstani crude, had paid some back wages and started some upgrading measures. However, the Ukrainian government announced its decision to reverse the transfer of the refinery to Kazakhstan without officially giving any reasons. Since the decision was not implemented, one can speculate that it was first of all meant to put pressure on the Kazakhstani and Russian partners.
This interpretation is backed up by the fact that the Alyans Group unveiled a $ 60 mm plan for the revamp of the refinery only two weeks after the government's announcement. However, Kazakhoil's President Nurlan Balgimbayev stated that realisation of the project and crude oil supplies to the refinery were only possible on condition of "greater guarantees backed by ownership of refinery assets." Kazakhoil and Alyans Group also announced plans to develop a distribution network in the region once they had acquired a controlling stake in the refinery.
Though Bazhayev's sudden death in March puts a question mark over the future of the Alyans Group, Kazakhoil seems to be determined to buy the majority stake in the refinery on the basis of a protocol signed with the Ukrainian government in March.

Since Kazakhstan has very limited refining capacity of its own andat the same time limited access to export routes beyond the CIS, investment in the Ukrainian downstream business may be a reasonable long-term strategy -- if Ukraine's market for oil products recovers and if a reliable and not-too-expensive transport corridor from Kazakhstan to Ukraine can be established. These are, however, two big 'ifs'.

This series aims at providing portraits of all major FSU refineries. It will continue in the next issue with a look at refineries in western Ukraine.