KYIV CHANGING IDEAS, MIXING SIGNALS ON ODESSA-BRODY OIL PIPELINE

Yesterday, November 15, Prime Ministers Viktor Yanukovych of Ukraine and Jaroslaw Kaczynski of Poland announced that they would support building an extension of the Odessa-Brody oil pipeline westward, to the Kralupy refinery in the Czech Republic. The announcement implicitly changes the original intention to extend that pipeline northward to Poland’s refining center at Plock and potentially farther to Gdansk. Yanukovych proposed the change during Kaczynski’s visit to Ukraine and the Polish prime minister indicated his acceptance after a detailed discussion.

Stunning perhaps to the public in both countries, the change had recently been considered by decision makers in Kyiv. President Viktor Yushchenko proposed an extension to Kralupy via Slovakia during the European Union-Ukraine summit in Finland on October 27. Yushchenko asked the EU to encourage participation by top European companies and financial institutions in the Brody-Kralupy project (Glavred [Kyiv], October 31). The change of mind might have surprised the EU participants as well, inasmuch as Brussels had held talks with Ukrainian officials about possible EU support for the extension to Plock as recently as mid-October, and Yanukovych himself reaffirmed interest in that project during his Brussels visit in September.

As recently as November 7, Azerbaijan’s President Ilham Aliyev had discussed his country’s possible inputs into the Odessa-Brody extension project, following up on recent Ukrainian and EU proposals to Baku. Azerbaijan envisages its possible inputs into this project not only or necessarily in the form of crude oil supplies, but rather as participation in refining the oil and marketing the products. On November 8 Ukraine’s Cabinet of Ministers tasked the state oil and gas company Naftohaz Ukrainy to reach agreement with Kazakhstan until 2008 for oil supplies to an Odessa-Brody-Plotsk pipeline and to seek financing for the extension to Plock from the European Bank for Reconstruction and Development and the European Investment Bank. And, on November 13, Yanukovych had received Kazakhstan’s Ambassador in Kyiv, Amangeldy Zhumabayev, to discuss Kazakhstan’s possible participation in extending the Odessa-Brody pipeline into Poland. Underscoring the project’s significance, Yanukovych proposed that the two sides jointly build and operate the extension to Plock.

Further mixing its signals, Ukraine’s Cabinet of Ministers also approved on November 8 the contents of a proposal to be submitted to Russia to connect Brody by pipeline with Ukraine’s refinery at Kremenchug. Given the Odessa-Brody pipeline’s relatively modest capacity of some 9 million tons annually (expandable perhaps to 15 million tons through the addition of pumping stations and chemical agents), its possible extensions could hardly be commercially attractive if the oil flow is subdivided in several directions.

Proposals to extend the Odessa-Brody pipeline to Poland — or, now, the Czech Republic — are all part of efforts to restore the pipeline’s originally intended use in the northward direction. Ukraine completed the pipeline and the Pivdenny maritime terminal in 2001-2002 to carry Caspian oil into European Union territory. However, the line stopped at Brody, near the Ukrainian-Polish border, and remained empty for another two years because Russia blocked the access of oil from Kazakhstan to Odessa. In June 2004, Ukraine (with Yanukovych serving his first term as prime minister and Yuriy Boyko as chief of Naftohaz Ukrainy) signed an agreement with Russian oil producer companies for “reverse-use” of the pipeline, to carry Russian Urals Blend oil southward to Pivdenny for export via the Black Sea. TNK-BP is the main user of the pipeline in the reverse direction. This agreement set back attempts by Ukraine and the EU to reduce their dependence on Russian oil.

The contract for reverse use, in force since September 2004, never met Ukraine’s expectations in terms of transit revenue. The contract stipulated a transit volume of up to 9 million tons annually southward. Instead, the pipeline has only carried 7.9 million tons in the two-year period from September 2004 through October 2006. The forecast for the calendar year 2006 is maximum 4.5 million tons. Ukraine received $123 million in transit fees for the reverse-use to date, which is Kyiv’s main rationale for having chosen reverse use over an idle pipeline.

Irrespective of political color, all Ukrainian governments have sought agreement with Poland and the EU to use the Odessa-Brody as originally intended in the northward direction for Caspian oil. Ukraine’s and Poland’s state pipeline operators, UkrTransNafta and PERN, signed a series of agreements to that end in 2004-2006 and formed the Sarmatia consortium to plan the construction and raise the financing for the pipeline’s extension from Brody to Plock and Gdansk. While the EU endorsed these efforts, Russia did not allow either Kazakhstan or U.S. companies in Kazakhstan to use Russian territory or the Novorossiysk maritime terminal for delivering oil to Ukraine.

Securing deliveries from Kazakhstan is the key to this oil supply diversification project for Ukraine and the EU, and this is only possible through transit routes that bypass Russia or swap deals, by companies that do not already feel hostage to Russia in their extraction or transit projects.

(UNIAN, Interfax-Ukraine, November 7-15)