LUKoil Closes Refinery After Pipeline Reversal

LUKoil, the country’s second-largest oil producer, suspended operations at its Odessa Refinery indefinitely Friday after Ukraine reversed flows along a key pipeline to import non-Russian crude.

Ukraine’s oil pipeline monopoly said “national interests” were behind its decision to use the pipeline to supply Azeri crude to its largest refinery, Kremenchug, thus cutting off flows of Urals crude to Odessa’s refinery and Black Sea port.

“Transneft is technically incapable of ensuring uninterrupted oil deliveries to Odessa Refinery via other routes in October 2009,” LUKoil said in a statement, referring to the Russian state oil-pipeline monopoly.

“Thus, LUKoil has to suspend operations at the refinery for an uncertain period and cease petroleum products manufacturing.”

Russia and Ukraine have fallen out on several occasions in recent years, culminating in a dispute over gas prices and transit that left large parts of Europe without Russian gas for two weeks in January.

LUKoil said its decision to stop its refinery was a result of the decision by Ukraine’s pipeline company, Ukrtransnafta, to stop pumping crude along the Lysychansk-Kremenchug-Odessa Refinery route Thursday.

Ukrtransnafta plans instead to deliver light seaborne crude to the Kremenchug refinery in reverse mode along the pipeline from the port of Odessa, market sources said.

Urals crude exports from Odessa will fall to zero this month as a result, a final October export schedule for Russia showed.

Russian and Ukrainian interests have locked horns before over the Kremenchug refinery, in the town of the same name on the Dnepr river.

In 2007, Russian oil companies halted supplies to Kremenchug after a feud over the refinery’s management.

Ukrtatnafta, the company that runs the plant now, is controlled by state and private Ukrainian interests. Tatneft, controlled by the republic of Tatarstan, also retains an interest and has challenged the current ownership structure.

Ukrtransnafta, the pipeline firm, said it had proposed that LUKoil find alternative supply routes to Odessa, which produces more than 40,000 barrels per day. But LUKoil says this would make it more expensive to refine crude.

An alternative route, from the Belarussian border to Odessa via Brody, would increase transportation costs by $5.7 per ton, LUKoil said. At recent production rates, this would add up to an additional $228,000 per day.

While the stoppage has raised concerns over Russia’s ability to refine oil in Ukraine, or to ship crude via Ukrainian ports, analysts said the incident was likely to be a one-off commercial dispute that would have minimal impact on LUKoil’s bottom line.

“It’s immaterial for LUKoil. Last year, processing of oil at Odessa accounted for only 3.6 percent of LUKoil’s total refinery output,” said Svetlana Grizan, an analyst at VTB Capital.