Publication: Eurasia Daily Monitor Volume: 4 Issue: 41

Ukrainian Prime Minister Viktor Yanukovych’s government seems to have abandoned a project to extend the Odessa-Brody pipeline into Poland for pumping Caspian oil outside Russian control. Instead, Yanukovych is negotiating with the government of Slovakia on a plan to transport both Caspian and Russian oil through a Russian-controlled pipeline.

On February 26 in Kyiv, a Ukrainian-Slovak intergovernmental meeting chaired by Yanukovych and Slovak Prime Minister Robert Fico discussed the possibility to pump oil from Kazakhstan as well as from Russia through the Druzhba pipeline system. The route would run from Ukraine to Slovakia and farther into European Union territory. The existing Odessa-Brody pipeline connects with the Druzhba system at Brody. Instead of prolonging the line into Poland for Caspian oil, as originally intended, the modified plan would pump the oil into the Druzhba pipeline’s Slovak section, Transpetrol, which is about to pass under de facto Russian control.

This plan, moreover, envisages a highly questionable way of using the pipeline for both the high-quality oil from Kazakhstan and the lower-quality Russian-Urals blend. In order to avoid mixing the two types, it is proposed to alternate the pumping of either type of oil, in a wave-by-wave process. This method is being billed as “experimental,” its stated goal to preserve the quality of either oil brand “to the maximum extent possible.”

The problem seems familiar from the Caspian Pipeline Consortium’s (CPC) misadventures after 2001. There, light oil extracted mainly by U.S. companies in Kazakhstan was being mixed with inferior-quality Russian oil on the Russian stretch of the pipeline leading to the port of Novorossiysk. For several years, the Russian side refused to compensate the U.S. and Kazakh producers for the losses they incurred through the mixing of the two brands. The compensation mechanism, known as an “oil quality bank” and used in normal countries in such cases, does not seem to operate effectively on the CPC’s Russian stretch.

Significantly, an oil quality bank is not being proposed for the Odessa-Brody-Slovakia oil transport project. According to Fico, Slovakia is eager to participate in the project, but any decisions must be made jointly with Russian interests, which seem set to extend their reach into Slovakia’s energy systems. Slovakia “has no effective control over the transit pipeline,” he stated in Kyiv (Itar-Tass, February 26).

The Slovak transit pipeline, Transpetrol, has become a collateral casualty of the destruction of Yukos in Russia. Yukos owned a 49% stake as well as the operating rights in Transpetrol (technically through the Netherlands-registered Yukos Finance company); the Slovak government retained 51% and an option to buy the Yukos stake. The Kremlin-controlled bankruptcy court in Moscow apparently intends to award that Yukos stake with the operating rights to a Russian company. A prime claimant, Russneft, now seems to be in retreat since its chief, Mikhail Gutseriyev, lost out in some obscure political and business infighting in Russia. During the third week of February, Slovak Economics Minister Lubomir Jahnatek discussed with Gazprom and Gazpromneft the possibility of their taking over the Yukos stake (Vedomosti, February 21).

Transpetrol, 515 kilometers long and with direct connections to the Czech, Hungarian, and Croatian transit pipelines, has a design throughput capacity of 21 million tons annually. Currently operating at somewhat over 50% of that capacity, it delivers more than 5 million tons annually to the Czech Republic refineries at Kralupy and Litvinov and some 6 million tons to the national Slovnaft refinery; and it could take additional volumes of oil destined for Germany, where the Druzhba system terminates.

Unsurprisingly, the Russian government seeks control over this strategic pipeline. Loss of national control over Transpetrol could expose Slovakia as well as Hungary to full dependence on Russian oil by precluding the import option from the Adriatic Sea. That long-discussed option envisages pumping oil from Croatia’s supertanker port Omisalj, through the existing Adria pipeline northward into Hungary and Slovakia and potentially farther afield. For its part, Russia wants to “integrate” the Druzhba pipeline system with the Adria pipeline, aiming to use it for pumping Russian oil to Adriatic port terminals.

The move would be similar to Russia’s use of the Odessa-Brody pipeline since 2004 “in reverse,” north-south for Russian oil, instead of south-north for non-Russian oil that would diversify Europe’s supply sources. Just as the reverse-use of Odessa-Brody required cooperation by the Ukrainian government, so would the Russian reverse-use of the Adria pipeline and its “integration” with the Druzhba pipeline via Slovakia. The first government of Viktor Yanukovych delivered politically on the first reverse-use in 2004 and his second government now seems inclined to deliver on the other reverse-use. In this case, however, the outcome depends on Slovakia’s decision as well.

Since October 2006 both Yanukovych and President Viktor Yushchenko have aired the idea of using the Slovak route instead of the Polish route, in essence freezing the Odessa-Brody-Poland extension project. The Polish option has the advantage of being immune to Russian control.

For its part, Poland seeks assurances that the existing Odessa-Brody pipeline be also rendered immune to a Russian takeover, as a precondition to extending it into Poland for Caspian oil. To that end, Poland seeks a preemptive right for its PERN company to buy a 100% stake in that pipeline from the Ukrainian government, in the event that the latter decides to sell it. On that condition, Poland wishes to go ahead with the Odessa-Brody extension project. Deputy Minister of Economics Piotr Naimski, responsible for energy, discussed oil supplies to that project with the KazMunayGaz management in Astana on February 21, in preparation for Polish President Lech Kaczynski’s visit to Kazakhstan in March.

(Interfax-Ukraine, February 19, 21, 26)