CAPITAL: Kiev

MONETARY UNIT: Hryvnia

REFINING CAPACITY: 1,148,446 b/cd

OIL PRODUCTION: 49,000 b/d

OIL RESERVES: 395 million bbl

GAS RESERVES: 39.6 tcf

Since independence in December 1991, Ukraine had posted negative real gross domestic product growth rates, including a 4-year period of 1993-96 of double digit negative growth. Toward the end of the decade, real GDP was 40% of 1990 levels.

The economic decline slowed to 1.7% in 1998, but fallout from the collapse of the Russian ruble in 1998 was projected to lead to a 3% decline in GDP in 1999. Inflation had declined since reaching more than 10,000% in 1993.

For 1998, the inflation rate was 10% but was expected to rise to more than 30% in 1999 following devaluations in the Hryvnia after the Russian ruble crisis.

Economy and government

Ukraine`s transition to a market economy was slow.

After the Rada, the Ukrainian parliament, allowed President Leonid Kuchma to reduce the budget deficit, the International Monetary Fund granted a 3-year, $2.2 billion loan in September 1998. However, the government had not passed legislation on privatization, tax reform, bankruptcy laws, and energy sector restructuring.

Ukraine publicly stated it sought foreign investment but failed to create an attractive investment climate. The Economist Intelligence Unit business environment index ranked Ukraine 59th out of 60 major world economies. As a result of this poor environment, Ukraine had received a cumulative foreign investment of about $2.2 billion, among the lowest in the region.

Efforts at privatization of energy companies were halted in December 1998 following allegations that government officials were profiting from privatization by selling stakes to companies with which they had ties.

Upstream developments

Most of the nation`s proved oil reserves are located in the Dnieper-Donets basin, the major oil and gas producing region located in the eastern part of the country.

The oldest producing region is the Precarpathian basin in western Ukraine.

During the last 20 years of the 1900s, the country`s oil production declined by more than 60%. Much of the decline was due to the Soviet Union`s diversion of resources to develop oil reserves in Siberia, combined with insufficient investment in Ukraine`s oil sector since its independence in 1991. Ukraine in 1999 imported nearly 80% of its oil, almost all of it from Russia.

In 1998, Ukraine produced 74,000 b/d of oil, down from a peak of about 279,000 b/d in the mid-1970s, and consumed 332,000 b/d. Oil production declined by 5% during first-quarter 1999 due to economic problems and depletion.

Early in 1998, President Kuchma created Naftogaz Ukrainy by uniting state-owned oil and gas companies and establishing a single state-owned oil and gas company. Naftogaz Ukrainy controls oil and gas production and marketing, as well as the national oil and gas pipeline network, one of the country`s largest sources of revenue.

Processing activity

Ukraine endured a number of unsuccessful attempts to sell off state-held shares in its six refineries. The combined capacity of the plants is 1.1 million b/d.

In February 1998, the State Property Fund (SPF), the state agency tasked with overseeing privatization sales, offered a 40% stake in the 320,000 b/d Lisichansk refinery at a price of $30 million. As part of the tender, the winner was to guarantee deliveries of at least 4 million tonnes/year of crude oil for 7 years and to share the responsibility for the refienery`s $170 million debt.

At the same time, SPF offered two stakes, of 30% and 31%, in the 172,707 b/d Kherson refinery at a combined price of $17.3 million. No bids were received for either refinery, and the sale collapsed in late March 1998. The SPF reduced the prices and retendered the refineries for a second time in April 1998 and a third time in June 1998, but again no bidders came forward.

In April 1999 a 51.9% stake in the 78,321 b/d Odessa refinery was sold to Luk-Sintez, a 60-40 joint venture of Russian oil company Lukoil and Sintez.

Transportation

A key component of Ukraine`s strategy of reducing its dependence on Russian oil was the $1.3 billion Pivdenny (Yuzhnyi) oil terminal near the Black Sea port city of Odessa.

Modernization of the terminal was under way despite financing problems. The terminal, with a throughput capacity of 800,000 b/d, was expected to be capable of supplying all six of Ukraine`s refineries as well as permitting oil transshipments to other markets.

The Pivdenny terminal was expected to handle oil from Kazakhstan, Azerbaijan, and the Middle East.