EURO-ASIAN OIL TRANSPORTATION CORRIDOR PROPOSED AT KYIV ENERGY SUMMIT

The presidents of Azerbaijan, Georgia, Ukraine, Poland, and Lithuania agreed on May 22 and 23 in Kyiv on steps to create a Euro-Asian Oil Transportation Corridor. The planned EAOTC is a centerpiece to the concept of an Energy Transit Space, which was also launched at the Kyiv summit of Caspian, Black Sea, and Baltic countries.

The EAOTC in turn is an enlarged version of the project to extend the Odessa-Brody oil pipeline from Ukraine into Poland, in order to carry Caspian oil as originally intended into European Union territory.

Completed by Ukraine in 2001 up to Brody near the Polish border, that pipeline remained empty for three years because Russia blocked the access of oil from Kazakhstan to Odessa. Assurances by the Bush administration to the Ukrainian government in 2003 that American producer companies would supply oil volumes from Kazakhstan to Odessa were not borne out. In 2004 the Ukrainian government agreed to the use of the pipeline “in reverse,” Brody-Odessa, by Russian oil companies. This change defeated the project’s purpose to diversify pipeline-delivered oil supplies to the EU and reduce overdependence on Russia. By the same token, that change also halted the planned extension of the pipeline from Brody to the Polish refinery at Plock and potentially to the refinery and port of Gdansk.

The Ukrainian and Polish oil transport companies, UkrTransNafta and PERN, nevertheless created in 2004 the Sarmatia company for completing that project. It marked time owing to Russian obstruction of access to Caspian oil and the consequent lack of investors for the project. However, Azerbaijan’s State Oil Company, Georgia’s Oil and Gas Company, and Lithuania’s Klaipedos Nafta (owner of the eponymous maritime terminal) joined the Sarmatia consortium at the energy summit in Vilnius in October 2007. In April of this year the Granherne company, a subsidiary of KBR (formerly Kellogg Brown & Root), launched a feasibility study for extending Odessa-Brody as EAOTC and presented its concept at the Kyiv summit just held.

The project assumes that new oil export routes need to be developed in order to handle the increasing Caspian production, meet the rising European demand, and compensate for the expected decline in oil supplies from the North Sea. The Odessa- Brody pipeline, currently with a capacity of 9 million tons annually, can be expanded to a transport corridor with a potential capacity of 45 million tons per year, to be gradually enlarged in correlation with the growth of Caspian oil production and Central and East European demand.

Restoring the existing pipeline’s south-north “forward” use, as opposed to the current “reverse” use, is one of the first requirements for the project. The Russian company TNK-BP is the main reverse-user. Under the existing agreement, the reverse-use mode can be terminated with three months’ advance notice.

Pending extension of the pipeline from Ukraine into Poland, the Odessa-Brody can temporarily be used for delivering Caspian oil into the old Druzhba pipeline, from the Brody junction via Slovakia to the Czech Republic, where the Kralupy and Litvinov refineries are interested in using Caspian oil. UkrTransNafta signed a framework agreement to that end with the Czech Mero transport company at the Kyiv summit. Such an arrangement is, however, subject to agreement by Slovakia’s Transpetrol for using the Slovak stretch of the Druzhba pipeline.

The Sarmatia consortium intends to act as a one-stop window in seeking host government agreements, intergovernmental agreements, and contracts with oil suppliers for the project. It also proposes to establish an oil quality bank, which is a mechanism to compensate suppliers of high-grade oil in the event that this is mixed with lower-grade oil in the pipeline and marketed as a blend. An oil quality bank would be of particular interest to Azerbaijan as a supplier of high-grade oil.

The consortium’s countries also reckon with lucrative refining operations along the proposed pipeline route and EAOTC. For its part, Azerbaijan is interested in a partnership to build a refinery in Ukraine, as well as a chain of fuel supply stations in that country. Kyiv is keen on this prospect, so as to reduce Russia’s heavy dominance in oil refining and product marketing in Ukraine. Countries along the pipeline route and elsewhere in Europe anticipate sharp growth in demand for jet fuel and diesel fuel, along with sharp decline in demand for heavy fuel oil in post-Soviet countries.

At the Kyiv summit, Azerbaijan’s President Ilham Aliyev characterized the Kulevi terminal, owned by Azerbaijan’s State Oil Company on the Georgian Black Sea Coast, as a “crucial link” in the EAOTC project. Together with the Azerbaijan International Operating Company’s (AIOC) Supsa terminal and Kazakhstan’s KazMunaiGaz Batumi terminal, all on the Georgian coast, ample capacity is available for shipping oil to Odessa by tankers (see EDM, May 20). This route would bypass Russia’s Black Sea port of Novorossiysk, where Russia seeks to maximize its intake of oil by pipeline from Kazakhstan. Inevitably, EAOTC will have to compete with Russia for access to Kazakh oil.

Under decisions taken at the Kyiv summit, a joint working group is to submit detailed economic and technical proposals by July on aspects of the EAOTC project (“Euro-Asian Oil Transportation Corridor,” Kyiv summit, May 22-23; UNIAN, PAP, www.azer.taj, www.day.az, May 22-24).