U K R A I N E – “Project working out of the company creation selling oil products, service section of temporary fuel store, basis of its economical worth”

January 17, 2015

While studying the dynamics of average prices for the light oil products, introduced in the table below and in the drawing below, one may conclude that destabilization is a characteristic feature of the Ukrainian oil today. It displays itself in the periodic splashes of prices for the oil products. Specialists assert that these splashes were not by no means connected directly with changes of the excise-duty for the oil products but had been caused by the world and Russian oil crisis and waiting for the inflation process.

In May 1999 rapid reduce of proposition of oil products on the Ukrainian market both by the foreign providers and native producers of fuel led to the higher price rate. Besides, in 1999 inner fuel prices rose due to the growing world market prices on oil, which was 50 %, and on oil products, which was 35 % in comparison with the last year rate. Another reason lies in reducing of oil mining in Russia. One more circumstance of no small importance also took place, namely that there was no enough Ukrainian working capital of the oil re-making factories so that they were able to purchase oil, and they practically use 80 % of given raw materials.

1. Situation Analysis,

Analysis of the Ukrainian market of oil products allows distinguishing the main reasons of destabilization. Among them should be pointed out the following:

1. Rapid fluctuation in the world price rate;
2. Native seasonal factors of supply and demands for the oil products;
3. Marketing strategy “for reducing” some oil remaking factories (ORE), which managed “to draw” to their side all the volume of oil, mined in Ukraine;
4. Clash of interests of two groups in Supreme Soviet of Ukraine: the first consisting of bankers and financiers, interested in getting of foreign credits, and the second, introducing mainly the Ukrainian Agricultural Complex, and also other producers, for whom higher oil price rates mean higher manufacture cost price;
5. Practice of state administrative regulation of fuel prices;
6. Change of grivna rate of exchange to dollar (USA);
7. Other reasons, such as, for instance, Balkan war, stoppage of supplying on preferential terms throw the enterprise supported by foreign investment, rising of excise-duty tax rates on oil products in Russia, aggravation of situation in the Persian Gulf and so on.

In order to work out strategy and tactics of survival of those enterprises which are involved in oil trade on the Ukrainian market, one should understand, that our native oil market annually passes through two conditions: of richness and deficit. And it is not enough to understand the reasons leading to its destabilization. Each of these situations of market needs its own list of measures to maintain profitable functioning of oil trade enterprises.

For example, in the middle of 1999 under the influence of situation turned out on the world market Ukrainian traders drew out a conclusion that the Ukrainian market was enriched with all kinds of fuel, and more than, it was over-stocked with oil.

Table. Average price rate for oil products in the end of each month (1998 – 2000)

Drawing below.  Dynamics of average monthly prices for the oil products.

__  Petrol A-95

__  Diesel fuel

__  Petrol A-76

Such situation on the market of oil products caused aspiration of greater quantity of small-scale fuel traders to diversify their activity/ More and more often they began to engage in retail trade with the help of rented or their own petrol-stations (PS). In its turn crisis of oil products market showed in 1998 that wholesale fuel traders have got a possibility to work profitably at the expense of enlarging geography of their purchase.

Petrol tankers wholesale traders don’t have such a possibility. The main consumers of the petrol tanker batches – PS – also have a limit of their possibilities. Besides the quantity of the final consumers of these batches is limited. An attempt to improve profitability through price rising is fraught with loss of the clients, experienced with their right to make a choice. That is why statistics of that period was evidence of leaving the stage of great amount of enterprises, which specialized in small-scale trade of oil products.

By that time specialists from organizing  trade of oil products declared, referring to the experience of Russia, that with strong confidence one may suppose only direct providers, owning not only small-scale petrol tanker department but a network of PS, to survive.

Practice of state administery regulation of oil products prices showed that “regulated products” begin to disappear gradually from commodity circulation. To improve profitability of work some enterprises in such a case organize more and  more often their own oil storehouses. Usually tank-trucks are the main reservoirs for oil, their capacity is almost 70 t. It is of no use for the fuel          trade company to hope that such small reservoirs would improve their profitability. Another companies under such circumstances choose the different way of improving their profitability. They raise prices for the “non-regulated” oil products, dispensing with objective factors inflational,  compensatory and fuel shortale.

To summer up, specialists foresaw the results and tendencies of development of Ukrainian oil products market of the beginning of 1999.The biggest structures of oil business  will become a stand-by of financial and political elite of Ukraine during the elections of the President of the country. That is why under the condition of political peripeteias (till the election and 1-1.5 years after it) the Ukrainian oil products market has very vague  prospects, because of great influence of various political groupings on this sector of economy.

During the first half-year (winter-spring 1999) the native oil products market struck with its vagueness. All the serious destabilizing factors in Ukraine continued their influence macroeconomic shock confrontation between the Supreme Soviet and President concerning the excise-duties on petrol and diesel fuel, and structural changes on the oil products market, and Balkan war.

Splash of oil prices in 1999 on European markets made a ruinous impact on the volume of imported oil. “Black gold” flew away from Russia and Kazakhstan past the Ukrainian oil remaking factories. Ukraine is of intermediate importance for Russian oil miners. Only those volumes of oil, which exceed export quota within the current month. For all that, only the Russians consider Byelorussian oil re-making factories to be more attractive, all the same other conditions  are equal to the native ones. That is why, from May 1999, all the Ukrainian factories, except those in Odessa and Kremenchug, suffered many hardships. That means, that Ukraine felt fuel shortage, and this made a ruinous impact on fuel price. In connection with it, prices would hardly be lowered within the period till the year 2001. However, one may foresee with confidence raising of  quota of the native oil products on the market until their import won’t become competitable in comparison with native production.

Got going struggle about bringing intro force edict of President of Ukraine from the 24 of June, 1998 “About the excise-duty rate on oil products”. It continued to crystallize elements of strategy and tactics of surviving of the companies, dealing with all sectors of oil products market, on the background of autumn-98 – summer-99 fuel crisis. Events of 2000, which took place on oil products market, pushed this process greatly. Among these events are the following:

1. Enlargement of consolidation in the Supreme Soviet of the country lobby, asserting interests of the oil products providers;
2. Organizing by retail traders direct contacts with oil products producers or with wholesale traders, evading middle-man, or organizing fuel trade by the wholesale traders on their own PS;
3. Transferring to possible minimum barter fuel trade;
4. Acquisition, building or renting by wholesale fuel traders rather big storehouses for inflammable and lubricant oil (ILO);
5. Creation of strong financial potential, also by means of enlargement of a company founders’ amount;
6. Achieving of a high quality of saled oil products, and also improving of service of clients as a prior direction of activity;
7. Achieving of price level, available for the fuel consumers;
8. Extension of oil market companies.

Autumn fuel crisis has already become a national tragedy in Ukraine. Every year, within the August-November period, the native oil products market “is in a fever”. The present year hasn’t become an exception by the and of September some traders were expecting the raising of prices to 2,4 grv per 1iter of AI-95, and by the end of October most forecast are even more pessimistic. However, the year of 2000 has its difference: during the present autumn period Ukraine undergoes fuel problems not in the absolute solitude. According to the OPEC president’s opinion the whole world is on the edge of oil crisis. Moreover, the development countries are much nearer to it than our Motherland. World state of market, which had been influencing the Ukrainian fuel market not so strongly, can make although a mediate but appreciable impact on it. Besides changes of an excise-duty are expected within the period from the 1st of October, 2000. Diesel fuel excise-duty will raise to EUR 30 per 1 t, ahd to 60 per 1 t for all kinds of petrol. At the same time Russian government attached the duty rate to the cost of  Urals brand oil on the international Petroleum Exchange (IPE) in London. And that means, that if the oil price rate increases then even “corporative” cost of Russian oil trade companies’ product (it is 30-35 % lower in comparison with world prices) won’t make oil refinering profitable for the Ukrainian oil refineries (OR). Nowadays – and this is admitted by all the Ukrainian OR’s – a very acute problem concerning the reducing of Russian oil cost for those very Russian companies still exists.  Solving of this question may allow the Russian shareholders of the Ukrainian OR to supply these enterprises with crude oil at acceptable cost. To solve this problem a decision has to be taken on the inter-governmental level concerning the repayment of VAT (value added tax) to the Russian oil exporting companies. The supreme managers of  these companies still hope that this question will be solved by the end of the year 2000.

The Ukrainian oil traders have an opinion, that one should make several legislative changers on the oil market to provide its long-term standardization. The main idea of these changes comes to the fact, that the Parliament should allow the Cabinet to solve problems of regulating of the excise-duty as well as export-import oil duties independently.

According to the opinion of traders and oil refinery companies, it will let it not to avoid increasing of price rate then, at least, avoid fuel shortage and market crisis, as it happens annually.

Taking into account, that oil products, refined from oil, mined Ukraine, satisfy the demands of the Ukrainian inner market only from 12 to 15 %, then the native oil refiners can’t even dream abont the influence on the general fuel price formation. The experts of antiexclusive committee attached to the Cabinet forecast that for the nearest future one should expect partial stabilization of fuel prices within the limits of present days (from the end of September till the beginning of October) maximum. Such factors will promote these positive changes, as:

1. Holding of autumn agricultural work;
2. Raising of grivna course in terms of dollar (USA) (6,02 grv per 1 dollar on the 31 of December, 2000);
3. Providing of a stronger administrative control over the fuel market;
4. Destabilization of fuel market in West European and North-American countries.

More curative forecast also depends upon some other macroeconomical factors, for instance, politics of OPEC, changing character of relations between Ukraine and Russia, solving problems about alternative sources of fuel providing.  One may expect raise of grivna prices (25-30 %) by the year 2000, firstly for petrol.   But dollar prices would hardly undergo sufficient changers next year.