ODESSA-BRODY-EUROPE OIL TRANSPORT PROJECT SHELVED INDEFINITELY

Information released following the December 10-11 session of the Ukraine-Kazakhstan Intergovernmental Commission on Economic Cooperation suggests that Russia has successfully forced an indefinite postponement of the Odessa-Brody-Plock oil transport project. Kazakh and U.S. companies in that country were to have been the oil suppliers and Poland the first among European Union consumer countries, once the pipeline would be extended to Plock in Poland under a EU-backed project.

The Ukraine-Kazakhstan Commission’s co-chairmen, deputy prime minister responsible for energy Andriy Kluyev and Energy and Mineral Resources Minister Baktyhoja Izmukhambetov, made public the following information at their concluding joint briefing:

At present and for some time to come, all oil volumes reaching the Black Sea from Kazakhstan are allocated to export directions other than Odessa and the pipeline to Brody. In plain language, this means that Russia does not allow oil reaching Novorossiysk from Kazakhstan to be shipped to Odessa and pumped through that pipeline. A related implication (though it should not have had a direct bearing on the Odessa-Brody-Plock project) is that the overall volume of oil pumped from Kazakhstan to Novorossiysk through the Caspian Pipeline Consortium’s line (CPC) is finite and stagnant, because Russia is blocking the expansion of that pipeline’s capacity.

Evidently summing up Russia’s position (with which Kazakhstan differs), Izmukhambetov said that it would first be necessary to complete the CPC pipeline’s expansion and only then will it be possible to hold talks on supplying oil from Kazakhstan to the Odessa-Brody pipeline for Europe. At that future stage, the issue would have to be discussed jointly by Kazakhstan, Ukraine, and Russia. Again, what was left unsaid publicly is that Russia sets a number of preconditions on the CPC pipeline’s expansion. Those preconditions include extortionate financial terms for the U.S. oil companies involved in extraction and transit as well as the demand that a Bosporus bypass pipeline, Burgas (Bulgaria)-Alexandropolis (Greece), be completed before the CPC pipeline is expanded. Thus, Moscow’s squeeze on U.S. interests and Kazakhstan in connection with oil transit from that country seems to be forcing an indefinite postponement of the EU-backed oil transport project Odessa-Brody-Poland.

For its part, Kazakhstan seeks to obtain international financing by early 2007 to start the expansion of CPC. According to Izmukhambetov, Kazakhstan has reached a “preliminary” agreement with Russia regarding transit of “hydrocarbons” from Kazakhstan through Russian territory and on through Ukraine to Europe. However vague this sounds, such an outcome would nullify the basic purpose of Odessa-Brody and other energy transport projects for Caspian fuels to Europe. That strategic purpose is to bypass Russia’s territory in order to preclude manipulation of the transit terms by Russian authorities. Re-routing those planned transport lines through Russia would defeat, instead of promoting, the declared EU and U.S. goals of supply security and diversification.

According to Kluyev, Ukraine’s cabinet of ministers has just forwarded draft legislation to the Verkhovna Rada on turning the state-owned Odessa-Brody line into a concession and creating a consortium of suppliers and consumers to extend and operate the pipeline to Plock. The Ukrainian side envisages the possibility that companies from Kazakhstan, Russia, Azerbaijan, Poland, and “perhaps” U.S. ones might participate.

While that seems a long and uncertain prospect, Ukraine and Kazakhstan have agreed on a smaller-scale project that adds to question marks about Odessa-Brody. The new project involves connecting the Pivdenny oil maritime terminal to the Prydniprovie pipeline system by laying a 52-kilometer pipeline link. The Pivdenny terminal serves the Odessa-Brody pipeline, which is being used “in reverse” (north-south) by Russian oil companies, instead of the originally intended “direct” use (south-north) for Caspian oil to Europe.

As confirmed by the Ukraine-Kazakhstan joint commission’s session, construction work on the Pivdenny-Prydniprovie connector is expected to start in early 2007 and be completed the following year, though international financing has yet to be lined up. UkrTransNafta and the KazMunayGaz Trading House (subsidiaries of the state oil and gas companies Naftohaz Ukrainy and KazMunayGaz, respectively) had signed in September 2006 the agreement setting up a joint venture to upgrade the Pivdenny terminal and link it with the Prydniprovie system. The joint venture will own and operate the new connecting pipeline.

In recent months and weeks, Ukrainian officials had repeatedly changed their ideas and mixed their signals regarding the Odessa-Brody-Poland project. In the latest maneuvers, President Viktor Yushchenko proposed to the EU-Ukraine summit in October to pump oil from Brody via Slovakia to refineries in the Czech Republic, instead of Poland. Prime Minister Viktor Yanukovych advanced the same proposal in November to the visiting Polish Prime Minister Jaroslaw Kaczynski, who indicated his acceptance.

However, given the Odessa-Brody pipeline’s relatively modest capacity of some 9 million tons annually (augmentable perhaps to 15 million tons through the addition of pumping stations and chemical agents), any proposals to subdivide the oil flow in several directions can only undermine the planned line’s commercial viability and discourage investment in the project Moreover, according to some Ukrainian sources, Warsaw is beginning to lose interest in the extension to Plock, out of concern that Russian companies might ultimately take over the indebted Naftohaz Ukrainy, particularly if the arrangements with RosUkrEnergo push the Ukrainian state company into insolvency.

(Interfax-Ukraine, UNIAN, December 11; see EDM, November 16)