SURGE OF INTEREST IN ODESSA-BRODY OIL PIPELINE

Political transformation in Ukraine has reactivated international interest in using the Odessa-Brody oil pipeline in the originally intended northerly direction, which involves extending the pipeline into Poland to Plock and on to Gdansk. Initially designed for transporting Caspian oil to Europe, the Odessa-Brody pipeline has instead been used “in reverse mode” since 2004 for transporting Russian oil southward to the Mediterranean basin.

Addressing the “Power-Business Partnership” forum on March 11 in Kyiv, President Viktor Yushchenko portrayed the Odessa-Brody pipeline extension project as one of all-European interest, of “enormous significance” to the task of diversifying Europe’s and Ukraine’s energy supply sources and transport options by using Caspian oil and a Ukrainian transit route. Yushchenko proposed that this transport project be correlated with oil production in Kazakhstan, notably at the giant Tengiz field, which is majority-owned and operated by Chevron-Texaco. During the same Kyiv forum, Prime Minister Yulia Tymoshenko noted that the pipeline’s “reverse use” is loss-making to Ukraine, and she suggested making arrangements with oil producers in Kazakhstan in order to use the Odessa-Brody pipeline as originally intended, once it is extended into Poland.

Also on March 11 in Kyiv, a meeting of Ukrainian, Polish, and European Commission experts renewed discussion on the extension project. The European Commission opened a 2 million Euro credit line for a technical and commercial feasibility study on extending the pipeline to Plock.

As Yushchenko recalled at the forum, it was the government he chaired in 2000-2002, with Tymoshenko overseeing the energy sector, that gave the decisive impetus to the Odessa-Brody-Plock project, with the intention to bring Caspian oil to European markets. The bulk of financial investments and most of the construction work on the Odessa-Brody pipeline were accomplished during that period.

The pipeline was completed to Brody in 2002. In May 2003, the Ukrainian and Polish governments and the European Commission signed a statement on extending the line to Plock, and formed an expert working group. In November that year, the governments of Ukraine and Poland signed an agreement of intent to use the Odessa-Brody pipeline and connect it with the Polish pipeline system. In July 2004, the Ukrainian and Polish state pipeline operating companies, UkrTrransNafta and PERN, formed the joint company Sarmatia for constructing the extension to Plock.

These agreements did not bear fruit, mainly because Russia and its state-connected oil companies stood in the way. With the Odessa-Brody pipeline dry and idle during more than two years, and authorities in Kyiv tilting politically toward Russia, the stage was set for reversing the pipeline’s use. In June 2004, a long-term Russia-Ukraine agreement on oil transport envisaged using the Odessa-Brody pipeline for transporting Russian oil. In July that year, UkrTransNafta and the Russian-British joint company Tyumen Neft-British Petroleum (TNK-BP) signed a contract on using the pipeline southward to Odessa. It envisaged pumping up to 9 million tons annually from Russian fields operated by TNK-BP and various Russian companies.

However, only 1.3 million tons were pumped during the first five months of reverse use, from September 2004 to January 2005. This means that the pipeline operates at a loss to the Ukrainian government. UkrTransNafta had estimated last year that a throughput of at least 4 million tons annually would be necessary for a break-even financial result.

Ukraine had initially anticipated a throughput of up to 7 million tons in 2005. But TNK-BP now claims that Russian oil exporters need lower taxes at the Pivdenny maritime export terminal near Odessa. Moreover, they now claim that they cannot make long-term commitments to using the pipeline to Odessa, amid ongoing discussions by Ukraine and its EU partners about adhering to the original plans of pumping Caspian oil northward to Europe.

On March 14, Lukoil chairman Vahid Alekperov discussed the possible use in the northward direction during a meeting with Yuschenko in Kyiv. Alekperov’s statement after the meeting seemed vague and unreceptive. On March 16, delegations led by the energy ministers of Ukraine and Kazakhstan, Ivan Plachkov and Vladimir Shkolnik, held potentially more fruitful talks in Kyiv on possible long-term arrangements for Kazakh crude oil deliveries to Ukrainian refineries and on to European countries through an extended Odessa-Brody-Plock pipeline.

The Odessa-Brody line is 674 kilometers long, with a design throughput capacity of 14 million tons annually. The Brody-Plock extension, 490 kilometers long, is expected to take three years to construct at an estimated cost of 450 to 500 million euros.

(Interfax-Ukraine, March 11, 12, 14, 16)