• UKRTRANSFNAFTA

    Ukrtransnafta is the only national operator that provides services for the transportation of crude oil by pipelines to Ukrainian refineries and oil transit to Central and Eastern European countries. The oil transportation system includes 18 pipelines with total length of 4 767 km in one line, 51 oil pumping stations (OPS), and 11 tank farms with total capacity of 1 083 thousand cubic meters. The company's operation is maintained by 4 200 employees. Naftogaz owns 100% of Ukrtransnafta.

    The Ukrtransnafta system consists of three branches: Prydniprovskyi Oil-Trunk Pipelines (Central East region of Ukraine), Druzhba Oil-Trunk Pipelines (North-Western region of Ukraine) and Pivdennyi Oil-Trunk Pipelines (Southern region of Ukraine).

    Oil transmission system of Ukraine


    In 2015, Naftogaz introduced changes to the company's management. Mykola Gavrylenko was appointed as the new head of Ukrtransnafta following an open recruitment process.
    Due to the poor performance of the previous leadership, which controlled the company for many years, the company was driven into a challenging financial position. Naftogaz requested state investigators to look into possible violations of the previous management. The new management has since developed an action plan aimed to resolve a number of accumulated issues and to allow for the development of the company.

    BUSINESS CHALLENGES

    Reduction in demand for oil transmission services

    Ukraine's trunk pipelines transport oil by two routes: the transit of Russian oil through Ukraine's territory towards Slovakia and Hungary, and domestic transportation of crude oil to the Kremenchug refinery.

    The biggest current challenge for Ukrtransnafta is posed by a significant drop in demand for oil transportation in recent years and the company's inability to quickly and adequately respond to these changes.

    The export flows of Russian and Kazakh oil were redirected to alternative transmission routes. Other adverse factors include the reduction in oil processing by plants in Slovakia and the Czech Republic as well as Hungary's switch to new sources of oil.

    In the context of a significant drop in world oil prices, there are increasing risks of redistribution of traditional markets between the main oil-exporting countries that could have a direct impact on the volume of oil transmission through Ukraine's territory to the Central Europe. In particular, a decrease of world prices to the level of 20-25 dollars/barrel could mean the partial exclusion of Russian Urals grade oil from its traditional markets.

    At present, the oil transportation system of Ukraine is only loaded to 15% of its total capacity of approximately 17 million tons per year.

    Volume of production and transmission of crude oilDuring the period of 2009 to 2015, the volume of Russian oil transported through the Ukrainian territory decreased from 40 million tons to 15 million tons per year. However, the transit of Russian oil through the Druzhba pipeline remains the main source of income for Ukrtransnafta. In 2015, the company's revenues from this segment accounted for 83% of total revenue and brought in UAH 1.7 billion in profits.

    In its transit business, Ukrtransnafta is currently fully dependent on Transneft, the single supplier of oil from Russia enjoying the status of exclusive contractor. The domestic segment of Ukrtransnafta's business is negatively affected by the fact that most of domestic refineries are currently not functioning. The Lysychansk, Odesa-Kremenchuk and Michurynsk-Kremenchuk routes are not operating because the corresponding refineries are out of service. The Pivdennyi marine oil terminal is idle because of the insufficiently loaded Odesa-Brody pipeline. To minimize costs, Ukrtransnafta had to transfer about 2 000 km (41%) of its pipelines to safe maintenance mode. In 2015, the domestic segment resulted in a loss of UAH 535 million due to insufficient tariffs and low volumes of transmission. Over the last six years, the domestic transmission has contracted by 81% to 1.6 million tons per year.

    Currently, the second stage of the Mozyr-Brody-State Border pipeline is the only route having stable loads. A small part of the Prydniprovskyi Oil Trunk Pipelines branch is also functioning, supplying oil from Ukrnafta fields to the Kremenchuk refinery.

    Ukrainian refineries have had to reduce their demand for oil transmission services because of the high competition from Belarusian, Russian and Baltic refineries. Because of the special duty regime for import of oil products to Ukraine, refineries in these countries have numerous advantages over Ukrainian refineries. The main advantages are the lack of Russian export duties for the import of raw materials (for Belarusian refineries) and the relative technological sophistication of the Belarus and Baltic refineries, which ensures high output of light oil products from Russian Urals grade oil.

    Insufficient capital investments 

    The underfunding of the system maintenance in 2000-2014 led to a significant physical deterioration of pipelines and processing equipment. The level of wear of fixed assets at the end of 2015 was estimated at 64%.

    Before the management change in 2015, Ukrtransnafta's operating proceeds were used to finance non-core activities and capital investments were disbursed only in cases of critical need.

    Capital investment requirements for 2016-2021 are estimated at about UAH 10 billion. In 2015, the company was able to invest UAH 233 million.

    Another issue requiring attention is the recovery of oil currently deposited since 2014 in the reservoirs of Ukrtatnafta, Halychyna Oil Refinery and Naftokhimik Prykarpattya.

    During the past years, Ukrtransnafta's own reservoirs with a total nominal capacity of 381 thousand cubic meters (35% of the company's total storage capacity) were taken out of service for repair or expert examination. As a result, in 2014 the company had to place a portion of its oil in reservoirs of other companies, which led to unjustified costs for Ukrtransnafta.

     

    Lack of transparency and poor operating efficiency

    In 2015, Ukrtransnafta management invested considerable time and effort in increasing the company's transparency and streamlining business processes. An independent international audit was conducted with the purpose of obtaining objective information about the company, as the data provided to shareholders by the previous management was unreliable. For the first time, the oil used in the company's operations was assessed and recorded at fair value. In addition, a revaluation of fixed assets was carried out (for the first time since 2009).

    Based on the results of these audits, the new management has developed a program of strategic development for Ukrtransnafta for the next five years. The program is based on five principle development vectors containing a number of short- and long-term goals.

    FIVE STRATEGIC VECTORS OF DEVELOPMENT

    • Increase oil transmission to the EU

    An increase in oil transit to the EU is one of the key strategic priorities for Ukrtransnafta. Currently, the company is exploring the possibility of creating new transmission routes to attract additional volumes of oil transit, including the completion of the Odessa — Brody pipeline to Adamovo (Poland). This would enable the integration of the Ukrainian oil pipeline system with that of Poland and would make possible deliveries of Caspian oil to the Eastern Europe via Ukraine.

    The management is also considering the possibility of creating a new oil transit route for the needs of Slovakia, the Czech Republic and Hungary via the Odessa — Brody — Druzhba route, which is technologically connected and ready for such transportation. The potential effect of an increase in oil transit to the EU could be more than UAH 6 billion a year.

    • Reducing losses in the oil domestic transportation segment

    The inactivity of the majority of Ukrainian refineries has a direct negative impact on Ukrtransnafta. Today, of the six refineries in Ukraine, only the Kremenchuk plant is operating, which processes up to 2 million tons per year of oil.

    Domestic oil transportation services are currently provided under a service plan approved by the national regulator NEURC. Present tariffs do not cover the operating costs of Ukrntransnafta. The company plans to develop and promote the adoption of new methodology for calculating tariffs for oil transmission.

    The potential effect of reducing losses from oil transportation is estimated at over UAH 405 million per year.

    • Diversification of business to improve profitability and efficiency

    Ukrtransnafta intends to diversify its business model through optimizing its existing non-core business portfolio, participating in the project to establish a system of minimum crude oil stocks and petroleum products (Directive No.2009/119/EC), and the development of the Pivdennyi marine oil terminal, including the implementation of handling of light and dark oil products and oil transshipment on road and rail. The potential effect of business diversification is estimated at UAH 0.9 billion per year.

    • Achieving operational excellence

    Ukrtransnafta's action plan provides for the introduction of modern systems for oil accounting and early detection of interference in pipeline operation, improving performance and the energy efficiency of repair works, increasing transparency of business processes (implementing a single corporate ERP system to optimize the organizational structure and improve procurement process), along with developing and implementing a modern concept for selection, development, and motivation of staff. The potential effect of these measures is estimated at UAH 225 million per year.

    • Introduction of new transparency standards

    During 2016-2021, Ukrtransnafta intends to start publishing annual IFRS financial statements, introduce government relations and public relations functions to support the necessary regulatory changes, boost public confidence in the company. Ukrtransnafta has initiated projects to improve internal control and risk management.

    The implementation of the program can potentially lead to an increase in oil transit to 35 million tons and domestic oil transportation to 7 million tons by 2021. The volume of transshipments is expected rise to 3 million tons.

    Financial results

    In 2015, Ukrtransnafta managed to transfer its deposits and bank accounts from Privatbank to state-owned banks. Another major achievement was the increase of tariffs for domestic oil transmission. The company has paid out UAH 1.2 billion in dividends (75% of Ukrtransnafta"s net profit for 2015). This sum exceeds the total amount of dividends paid by the company since the creation of Ukrtransnafta in 2001.

     

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