Ukraine is set to begin building its maiden strategic oil reserve in 2018, a measure required by the European Union as part of the association agreement which allows a non-member Kiev closer but flexible ties with the EU.
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Five existing oil product storage tanks scattered across Ukraine will be used to create reserves of up to 2 million mt of crude and oil products, helping Ukraine withstand any potential oil supply shock.
The five tanks will be merged into one company called Naftorezerv, according to Vadym Mosiychuk, the head of the State Reserve Agency, which operates Ukraine's strategic reserves of commodities.
The development comes a month after Janez Kopac, the head of the Secretariat of the European Energy Community, criticized Ukraine for its slow pace in creating the reserve.
Under EU requirements, member countries must hold emergency oil stocks that include either 61 days of consumption or 90 days of net imports.
"For us the latter is more optimal," Mosiychuk said recently. "According to preliminary calculations by experts, the stocks that we have to have at least 2 million mt."
The Ukrainian government is considering two models for managing the reserve: one in which the state owns 100% and the other in which the state owns 70% and private traders own a combined 30% stake.
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To accumulate the oil and products by 2022, the government plans to keep buying oil, but not sell anything until the reserves reach the target of 2 million mt.
"Through all this time we will be working on input only in order to accumulate the fuel, and will only have opportunity to release it after 2022," Mosiychuk said.
Ukraine used to import most of its oil needs from Russia, but this has gradually changed since 2010 as it now imports most of its oil from Azerbaijan, Iran and Kazakhstan.
Ukraine imported 856,300 mt of crude worth $364.4 million in January through October, according to the State Customs Service.
Azerbaijan supplied 82.7% of crude, while Iran provided 10% and Kazakhstan 4.8%.
OIL PRODUCT STOCKS
The government had earlier this year selected UkrTransNafta, the state oil shipper that operates oil pipelines, as the entity that will be the keeper of the strategic reserves of crude.
At the same time, petroleum products will be kept by a number of entities under the State Reserve Agency's administration.
The agency will also seek input from private traders, Mosiychuk said.
The share of the total reserves filled by crude will probably account for 30%, while the remaining 70% will account for products, such as gasoline and diesel.
"The most important factors for its steady operation, especially for crude oil, is how often it can be replenished and how far it is located from Ukraine's only [operating] oil refinery," UkrTransNafta General Manager Mykola Havrylenko said.
Ukraine is importing most of its diesel and gasoline needs from Belarus, Russia, Lithuania, Greece and Poland to meet domestic demand.
Ukraine imported 5.28 million mt of petroleum products in January through October, down from about 5.45 million mt imported a year earlier, according to the service.
Ukraine imported 515,950 mt of crude worth $173.8 million in 2016, compared with 248,160 mt worth $89 million in 2015, according to the service.
Ukraine imported 7.41 million mt of petroleum products in 2016, up from 6.76 million mt in 2015, the service said.
Oil shipments via Ukraine to European countries increased 2.1% year on year to 12.73 million mt in January-November, according to data from UkrTransNafta.
The volume of oil transported to Ukraine's refineries in January-November amounted to 1.88 million mt, up 45% (583,600 mt) from the year-ago period.
In November, oil transit through Ukraine declined by 18.2% compared with the same month last year to 989,800 mt, while transportation to the country's refineries increased by 65.4% to 195,200 mt.