VITAL OIL TRANSIT PROJECT NEEDS EXTERNAL FINANCING.

Two recent Ukrainian-Polish high-level meetings discussed the need to accelerate and complete the construction of the Odesa-Gdansk transit project for Caspian oil. That project topped the agenda of the bilateral Presidential Consultative Committee session in Lviv on June 30, co-chaired by Ukraine’s National Security and Defense Council Secretary Yevhen Marchuk and Poland’s National Security Council Secretary Marek Siwec; as well as the agenda of President Leonid Kuchma’s and other Ukrainian leaders’ meetings in Kyiv on July 3-4 with a Polish delegation headed by parliament chairman Maciej Plazynski. “An indispensable project, a vital issue for Ukraine” is how the Verkhovna Rada’s chairman, Ivan Plyushch, characterized the oil transit project.

Both countries aim to reduce dependence on Russian oil. In Poland’s case, that also means foot-dragging on Russian proposals to lay a westbound export pipeline for Russian oil via Poland. Such a route, bypassing the existing one via Ukraine, would nullify Kyiv’s sole possible counterleverage in negotiations with Russian oil suppliers over the terms of deliveries. At the meetings in Lviv and Kyiv, the Polish side reassured the Ukrainians that Poland will go for the Odesa-Gdansk project, not for any new pipeline from Russia around Ukraine.

The plan envisages building a modern terminal at Pivdenniy in the Odesa Region and laying, on Ukrainian territory, 667 kilometers of pipelines with the diameter of 1020 millimeters, for a throughput capacity of 40 million tons annually. Investment costs are projected at US US$465 million for the pipeline, not including the terminal. Commercial calculations suggest that the pipeline would need to put through at least 25 million tons of oil annually in order to be profitable. Ukraine and Poland look to Azerbaijan and Kazakhstan as supply sources. The Caspian oil would reach Pivdenniy and/or Odesa by tanker via the Black Sea from Georgia.

According to Ukrainian officials, 436 kilometers of pipe have thus far been laid on the route between Odesa and Brody on the Ukrainian-Polish border. The Pivdenniy terminal is said to be only 10 to 15 percent complete. Other major work, such as building modern compressor stations, is lagging. The tanker fleet which would haul the oil to Ukraine from Georgia has yet to be created.

To streamline and accelerate construction operations on its territory, the Ukrainian government recently appointed the Druzhba state company as general contractor for both the pipeline and the Pivdenniy terminal, as well as majority owner of the latter. The current priority is to reduce the gap between the terminal’s and the pipeline’s completion levels. But it is clear that Ukraine and Poland lack the means to finance the construction and that they need–as the participants in the Kyiv and Lviv meetings clearly recognized–jointly to seek external private financing for the project (Infobank, June 30; UNIAN, July 3, 4; Eastern Economist Daily (Kyiv), July 3-5; see also the Monitor, March 20, May 26, and the Fortnight in Review, March 30).

IMPLICATIONS OF THE EAST KASHAGAN OIL BONANZA.