Although Ukraine has made efforts at exploration, particularly in its sector of the Sea of Azov, oil production has remained relatively flat since independence (see Fig. 1). According to the Oil and Gas Journal, Ukraine has 395 million barrels of proven oil reserves in 2007, the majority of these are located in the eastern Dnieper-Donetsk basin. Consumption, on the other hand, has fallen dramatically, from 813,000 barrels per day (bbl/d) in 1992 to around 343,000 bbl/d in 2006 (see Fig. 1). Despite this decline in consumption, Ukraine remains highly dependent on imported oil, most of which comes from Russia and lesser amounts from Kazakhstan (see Russia and Kazakhstan Country Analysis Briefs for more information). In 2006, net crude oil imports totaled roughly 267,000 bbl/d, representing roughly 78 percent of consumption.

Ukraine's geographic location makes it an ideal corridor for oil and natural gas to transit from Russia and the Caspian Sea region to European markets (see EU Ukraine Oil Map). According to Ukrainian oil ministry data, Ukrainian oil pipelines transported an average of about 900,000 bbl/d in 2006, a decrease of 4 percent from 2005. Approximately 22 percent of Russia’s 4.1 million bbl/d crude oil exports either transited Ukraine to reach European markets or were consumed domestically. The exports flow via the Druzhba and the Pridnieper pipelines to Slovakia, Hungary the Czech Republic, and the Black Sea. Transit tariffs are discussed in great detail at the Energy Charter Treaty website.

As much as 1.6 million bbl/d eventually could be exported through Ukraine after a 15-year intergovernmental oil transit improvement agreement in 2003 comes to fruition. Most of the oil transited via Ukraine is Russian oil, sent in part through the 1.2-million-bbl/d capacity Druzhba pipeline. The southern fork of the pipeline runs through Ukraine (see map below). Also, the Prydniprovski Main Pipeline operates nine interconnected pipelines throughout Ukraine with a total length of 1,500 miles and a capacity of 2.1 million bbl/d. The Pridnieper pipeline transports crude to refineries in southern Ukraine as well as around 200,000 bbl/d of Russian and Kazakh crude through Odessa on the Black Sea.

Ukraine’s government has made clear its goal of becoming a transit center for oil from the Caspian Sea region. Oil production from the region is expected to increase from 2.5 million bbl/d in 2006 to around 4.3 million bbl/d by 2015. One potential conduit for this oil in the Black Sea region is the Odessa-Brody pipeline. The pipeline was completed in 2001 and extends from Ukraine's Black Sea port of Odessa northward to the city of Brody (see “Proposed Pipeline Reversals” map below).

The pipeline was initially intended to load 300,000 bbl/d of Caspian Sea oil from the newly completed Black Sea marine terminal, Pivdenniy (or Yuzhniy) and carry it northward through the Ukrainian system to Europe. However, for approximately three years the pipeline remained mostly dormant because Ukraine was unable to secure oil supplies from Caspian Sea area suppliers. Russia is now using the pipeline in the reverse direction, moving oil from the Urals basin southwards to tankers in the Black Sea and onwards to world markets. Since January 2003, TNK-BP has used the last 32-mile leg of the pipeline (in reverse) for these purposes.

Map 1: Proposed Pipeline Reversals

Faced with the possibility of losing direct access to Caspian Sea region oil, European governments have voiced their opposition to the reversal project in newspaper articles and public statements. Leading Caspian Sea region producer, Kazakhstan, has also taken counter-measures. In July 2003, for instance, Kazakhstan agreed to help construct a 32-mile pipeline parallel to the segment currently being used in reverse to transit Russian oil.

If the pipeline does run in its originally intended direction, from Odessa to Brody, then Ukraine would like to extend the pipeline from Brody to Plock in Poland, and then Gdansk on the Baltic Sea. A preliminary agreement was signed between Azerbaijan, Georgia, Lithuania, Poland and Ukraine, and a Kazakh deputy minister in May 2007 to begin working on a multinational agreement.

There are multiple reasons why the extension may not be currently feasible. The primary hurdle is securing commercial guarantees of Caspian oil, especially in light of recent developments with Kazakhstan agreeing to send oil via the Bourgas-Alexandropoulis pipeline and BTC routes (see maps section). Azerbaijan will be sending most of its oil through the BTC pipeline. Also, the European Bank for Reconstruction and Development (EBRD) has stated it may make more economic sense to construct the extension further to Wilhelmsaven, Germany, where it would avoid the crowded straits off the Danish and Swedish coast. Additionally, industry players have publicly stated that Caspian crude oil will be unlikely to displace cheaper Urals blend crude oil from Russia at central European refineries. Finally, the refinery at Plock would have to be upgraded to accommodate the lighter quality Caspian crude.

Ukraine has six crude oil refineries, with a combined throughput capacity of approximately 880,000 bbl/d. However, with domestic demand at just over 30 percent of the country's refining capacity, Ukraine's refineries are operating below capacity (around 50 percent in 2005). Until recently, Ukraine's refineries did not even receive enough crude oil supplies to supply the country's domestic petroleum product demand.

Ukraine has begun to achieve better results in securing sufficient crude oil supplies for its refineries by offering oil exporters in Russia and Kazakhstan a stake in the country's refineries. Ukraine's recent success in privatizing its refineries has allowed the country to secure additional oil supplies to meet domestic demand, as well as to attract funds for necessary renovation work and to boost utilization rates at its refineries.