Ukraine increasingly stretched for fuel after infrastructure assault

War-torn Ukraine is increasingly reliant on fuel supplies via truck from Poland following the destruction of up to 20 major fuel depots, damage to its main refinery, and the cutting of Black Sea shipping routes, Ukrainian experts say.

Russia's military assault on northern Ukraine has abated in recent days, but as the focus of military activity shifts to the east, the country faces increasingly stretched fuel supply, Serhiy Kuyun, head of the A-95 fuel consultancy, told S&P Global Commodity Insights.

Ukraine has long been shifting away from Russian energy and previously took Azeri crude by sea for the Kremenchuk refinery and diesel from northern neighbor Belarus. It also hosts the Odesa-Brody pipeline from the Black Sea into Central Europe.

But the Russian invasion meant cutting supplies from Belarus, which has supported Moscow, and Black Sea security risks and a Russian blockade have stopped shipments from Azerbaijan and Romania, the latter previously a source of fuel supply by sea.

With crucial infrastructure now damaged and the geography of the Carpathian Mountains preventing supply from other neighbors, Ukraine is now largely dependent on Poland; the latter is in the process of merging its two main refineries under PKN Orlen, which also operates Lithuania's Mazeikiai.

"The market has not stopped, but it has been forced to adapt," Kuyun commented in a statement. "There are no stocks of fuel anymore. We're selling as soon as fuel tanker truck arrives."

In the course of March, Russia's navy targeted fuel depots across the country, including in Lviv, Lutsk, Ternopil, Rivne, Zhytomyr, Odesa, Poltava, Kyiv, Chernihiv, Kharkiv and Dnipro.

Then on April 2 the 240,000 b/d Kremenchuk refinery was badly damaged in a Russian missile attack, putting it out of action, according to regional and company officials.

Ukraine's second refinery, the Shebelinka Gas Processing Plant in the east of the country, was taken offline Feb. 26 due to the threat of shelling.

Kuyun added that the stricken fuel depots were mostly full early in March, with later attacks coming when stores were already depleted.

The country now faces not only a shortage of fuel, but a squeeze on trucks available for bringing in fuel, he said.

"More fuel trucks are needed that can bring fuel directly from abroad," Kuyun said. "It is necessary that every owner of a fuel tanker truck has the opportunity to go and buy fuel."

Ukraine's government is also liaising with state railroad company Ukrzaliznytsia to make sure supplies can also come by rail.

Price liberalization

Kuyun advised the government should cancel price controls and lift restrictions on maximum gasoline and diesel retail prices to encourage private traders to import more.

"I know of three regional fuel chains that have already stopped selling fuel in the last two days because the cost is higher than the set prices," he said. "Even large players are forced to limit sales, because new batches of fuel arrive at the pump, but its cost is already beyond the established price corridor."

The Ukrainian parliament on March 15 cancelled excise tax on all kinds of fuel and lowered VAT to 7% from 20% on imports of gasoline and diesel fuel. The lower taxes create an incentive for private fuel suppliers to arrange more supplies and help to reduce prices at retail stations.

The government also ordered the state customs service to remove bureaucracy from customs clearing of fuel imports.

Planting season

While the turmoil of war and a flow of refugees out of the country will have impacted demand, the lack of refining capacity also poses a challenge for the vital grain sowing season — Ukraine being an important source for global grain markets.

Ukraine is likely to reduce the area planted with grain crops by up to 30% because of fighting in eastern and southern regions, in turn reducing the demand for fuel, according to the government.

In 2021, Ukraine imported 8.79 million mt of petroleum products, up 9.6% from 8.02 million mt in 2020, according to the state customs service.