Ministry of Economic Development and Trade of Ukraine and Ukrainian Oil & Gas Association discussed state purchases of petroleum products

Tuesday, 20 Feb 2018

How to ensure transparency, competitiveness and efficiency in the implementation of government purchases of petroleum products?

? In search of an answer to this urgent issue for the economy, the Ministry of Economic Development and Trade of Ukraine and the Oil and Gas Association of Ukraine organized a round table on February 16, 2018, which brought together the representatives of the Reforms Office and the Department of Public Procurement of MEDT, the Ministry of Defense of Ukraine, Ukrzaliznytsia, Ukrposhta, the Administration of Seaports Ukraine, Derzhrezerva, Borispol airport, Ukrainian Energy Exchange, USAID Project “Transformation of the financial sector in Ukraine”, as well as members of UOGA: Ukrgazdobycha, OKKO, WOG and SOCAR.

The purpose of the roundtable was the initiative of the participants of the Oil and Gas Association of Ukraine to use the European experience in the procurement of petroleum products — to proceed to the conclusion of long-term contracts using formula pricing. Such an algorithm of procurement will oblige the winner of the tender to fix the margin, proceeding from the quotes of Platts and the exchange rate. In the future this margin will be used for automatic calculation of prices for the day of shipment of oil products.

President of the Oil and Gas Association of Ukraine, Dmitry Kulik noted that the experience of formulary contracts was mastered by some Ukrainian enterprises in 2005. This decision has allowed to balance risks of the supplier and the buyer, to guarantee stable deliveries of petroleum products in any crisis and deficit, to provide uniformity of deliveries, effective use of financial, labor and industrial resources. First Deputy Minister of Economic Development and Trade of Ukraine Maxim Nefiodov noted that the price of specific products, for example, fuel, varies depend on the global market conditions:

“When it is possible to adjust the price in accordance with fluctuations in the market, this significantly reduces the risk of failure to fulfill the contract. Using the same formula makes the mechanism of such an adjustment transparent. Before this, the prices could’ve been changed by concluding additional agreements after the auction, but this often gave rise to corruption risks, especially when it came to confirming a change in world prices. Now, there’s a common mechanism — counted according to the formula with no double interpretations. Therefore, the Ministry of Economic Development and Trade of Ukraine supports the dissemination of the practice of applying transparent formula pricing for public procurement of petroleum products”, explained Maxim Nefiodov.

All participants of the roundtable noted the innovative experience of Ukrzaliznytsia, which on February 12, 2018 has signed the first contracts for the supply of 40 thousand tons of diesel fuel with the use of formula pricing.

“According to the formula, the current prices of the resource have decreased to 27 062 UAH / ton and 26865 UAH / ton. At these prices, UZ can select the entire contract volume if desired. At the same time, we will save 71 million UAH for the purchase” explained Vitaly Tsvigun, Head of the” Production Support Center — branch of PJSC Ukrzaliznytsia.

Julia Vitka, Deputy Head of the USAID Project “Transformation of the Financial Sector in Ukraine”, noted that exchange regulated markets are the sources of reliable forward curve, that is, transparent market future prices for petroleum products, in world practice:

“The development of exchange trade in Ukraine is impossible without the use of world standards of work. Another condition is the availability of a reliable infrastructure. It is already clear that technology and innovation will reduce the costs of conducting exchange transactions, which will make the exchange trade more efficient’’.

Thus, the participants of the roundtable noted 3 possible stages in the formation of the state system of purchases of petroleum products, namely:

1. Transition to the use of formula contracts;

2. Transition to the use of exchange instruments in the public procurement sector;

3. Use of a hedging instrument in public procurement;

As a result of the meeting, a unanimous decision was made to create a working group from the round table participants at the Ministry of Economic Development and Trade with a view to moving to formula pricing for the purchase of oil products as early as 2018.

The Ukrainian Oil & Gas Association is the industry association representing the interests of the largest players in the oil and gas market. Today, the Association consists of 14 largest wholesale, retail, producing and processing companies representing national, international, private and state-owned business, including: gas station networks of WOG, ОKKО, Shell, AMIC Ukraine, Socar, KLO, Parallel, SunOil, Glusco, Gastron, Ukrgasvydobuvannya, Tsentrnaftogaspostach and wholesale suppliers as BNK-Ukraine and Alliance-Oil Ukraine. Members of the Ukrainian Oil & Gas Association cover approximately 50% of retail trade and almost 80% of the import of petroleum products.

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