Ukraine’s Multi-vector Energy Policy

On July 5 the Ukrainian government reversed a February 4, 2004, decision on which countries would supply oil to the Odessa-Brody pipeline. In February the decision had been made to transport Azerbaijani (and perhaps Kazakhstani) oil in a south-north direction from Odessa to Brody. The July reversal of this decision will instead bring Russian oil from Brody to Odessa through a contract with the Russian-British joint venture oil company TNK-BP.

The Ukrainian government described this change of heart as “temporary” (Ukrayinska pravda, July 13). But how “temporary” this will be is impossible to answer in Ukraine, especially during election year. On July 19, Fitch, the international business ratings organization, described the decision as likely to be permanent (fitchratings.com). The same warning was given by Price Waterhouse Coopers, which had earlier predicted that the decision on the direction of oil would mean Ukraine would lose its opportunity to become a major transportation route for Azerbaijani oil into Europe (Kyiv Post, July 8).

Ukraine’s decision to reverse the flow of oil came only three days after Prime Minister Viktor Yanukovych visited Moscow. When asked upon his return as to why Ukraine had changed its mind, his response was, “It will operate in a direction which benefits Ukraine” (Kyiv Post, July 8). President Leonid Kuchma also stressed that Ukraine’s interests should come first on the Odessa-Brody pipeline, “We are trying to please [Europe] at our own cost” (Itar-Tass, April 27).

It was no coincidence that the decision came on the heels of Yanukovych’s visit to Moscow. Russia had delayed signing a 15-year agreement for transporting oil through Ukraine until Kyiv changed its February decision on Odessa-Brody. Another factor that played a role in the decision was the need to improve relations with Moscow after Russian businessmen were excluded from the privatization of Ukraine’s largest steel producer, Kryvorizhstal, in June. Finally, the reversed oil flow will increase Yanukovych’s support in Moscow as he approaches the October presidential elections.

The decision may also go down well among pro-Russian oriented voters in Ukraine. Yanukovych will undoubtedly use the first shipment of Russian oil flowing north-south in the pipeline to prove he is committed to good relations with Russia and to filling the budget, according to the Center for Peace, Conversion, and Foreign Policy, a Ukrainian think tank (cpcfpu.org.ua).

The February decision in favor of a south-north flow of oil came after intense lobbying by the United States and Western Europe. Western oil companies had sent letters of intent stating that they would begin pumping Azerbaijani oil this year. The U.S.-government backed Ex-Im Bank and the European Bank for Reconstruction and Development had both expressed a willingness to fund the extension of the pipeline from the Ukrainian border to the Polish city of Plotsk.

But, between February and June, no oil company came forward with a concrete proposal. In April, President Leonid Kuchma complained about the lack of concrete proposals from Western oil companies. Three million Euros ($3.3 million) from the European Union were ridiculed as a token sum that was not even available yet. Kuchma also pointed out that Poland had not made a “single poke of a shovel” on the pipeline issue and had not allocated funds to extend the pipeline to Plotsk (Interfax-Ukraine, April 27).

During the same period, Azerbaijan had expressed its intention to continue oil exports via the Russian port of Novorossiisk, rather than through Odessa-Brody. President Ilham Aliev said, “Azerbaijan will not participate in this project and we do not plan to join the project in the future” (UPI, June 29).

The July decision to opt for the Russian supply of oil to the Odessa-Brody pipeline came as a shock to domestic and international supporters of using it for Azerbaijani oil. For presidential candidate Viktor Yushchenko, the change of heart was a reflection of how government decisions are made in a non-transparent manner. Neither Prime Minister Yanukovych nor President Kuchma ever felt it important to explain to Ukrainian citizens why the February decision for a south-north route had been changed to a north-south route (yuschenko.com.ua, July 6).

The Ukrainian decision also came as a complete bombshell to Poland. The extension of the Odessa-Brody pipeline to Plotsk would have doubled its 10 million tons of crude capacity. Poland’s Commercial Attache in Kyiv, Anna Skovronska-Luczinska, complained that Kyiv had not informed Warsaw that the February agreement would be overturned (Channel 5 TV, July 6).

The July 6 decision was also surprising because three days earlier Ukraine’s Ukrtransnafta and Poland’s PERN Przyjazn had created a joint venture to build the Brody-Plotsk extension. The Sarmatia joint venture aimed to attract foreign investment. The status of the joint venture after the Ukrainian government’s decision to reverse the oil flow is unclear. Polish Deputy Prime Minister Jerzy Hausner complained about the lack of consultation or forewarning about the Ukrainian government’s decision, coming as it did so soon after the creation of Sarmatia (Ukrayinska pravda, July 11). The decision further undermined trust in Ukraine, Hausner added.

Besides Poland, Turkey, the European Union, and the United States also criticized Kyiv’s change. Turkey’s Foreign Minister Abdalla Hul called upon Ukraine to return to the original south-north route (Ukrayinska pravda, July 16). The EU also warned about the environmental damage that a north-south route would cause.

The U.S. Ambassador to Ukraine, John Herbst, denied Kuchma’s complaints that American firms are not interested in the pipeline. He foresaw U.S. contracts on the way (Kyiv Post, July 1). Herbst added, “There is no apparent reason to reverse the flow” as the original south-north flow would have increased Ukraine’s energy independence from Russia (Fakty i komentarii, July 15).

Ambassador Herbst criticized the decision from two angles. First, it would inevitably negatively influence relations with Western governments and international organizations. Second, the policy shift raises questions about Yanukovych’s election pledge to work for a “flowering Ukraine” when he, at the same time, turns down opportunities for Ukraine to become an oil transit corridor into Europe (Ukrayinska pravda, July 12).

Yushchenko, Yanukovych’s principal opponent, pointedly asked, “Did the government really want to find oil for transit to Europe? Was there political will for this?” (yuschenko.com.ua, July 6). Evidently Ukraine was not fully committed to the south-north flow, as “part of the Ukrainian government supports the project, while the other part is less excited about it” (UPI, June 29). Ukraine’s energy policy is apparently as multi-vectored as is its foreign policy.