Without Kazakhstani Oil, Odessa-Brody Becomes Brody-Odessa

On July 26-27, Ukraine’s state pipeline company UkrTransNafta announced the signing of agreements with Tyumen Oil-British Petroleum (TNK-BP, the Russian-British joint company) on the reverse use of the Odessa-Brody — henceforth Brody-Odessa — oil pipeline. The agreements envisage the transit of 9 million tons of Russian oil annually for a three-year period, starting in August 2004, in the southerly direction. TNK-BP, commercial operator of the project, will pump 1.3 to 1.4 million tons per year, or 15% of the annual volume. Lukoil, Sibneft, Slavneft, and other Russian companies are expected to use the pipeline as well. The agreements include “pump or pay” provisions, such as: 100% prepayment; paying the transit services for the full contracted volume, irrespective of the volume actually pumped; and penalties for shortfalls in those volumes.

Under the agreements, UkrTransNafta may change the direction of the oil flow (i.e., redirect it northward) with three months’ advance notice to the user companies. That direction was originally intended for the transport of Caspian oil to Poland and potentially on to Germany. The United States and European Union countries encouraged this project as part of efforts to avoid Western overdependence on Russian oil, diversify outlets for Caspian energy, and reinforce Ukraine’s links with Europe.

From the Pivdenny maritime loading terminal near Odessa, the pipeline was laid as far as Brody on the Ukrainian-Polish border by 2002, with the Ukrainian government financing the construction. However, no funding materialized for continuing the pipeline on Polish territory to the major refining center at Plock and on to the Gdansk refinery and port. Proposals to carry the oil from Brody to Plock by rail and/or tank-trucks were unrealistic because of high trans-shipment costs.

Moreover, Caspian oil turned out to be unavailable for this pipeline. Kyiv’s efforts to obtain Azerbaijani oil were unsuccessful because that country’s output is already committed to the Baku-Tbilisi-Ceyhan pipeline. Kazakhstani oil would have been the solution (and remains the only option for using the pipeline in the originally intended northerly direction), but Russian control of Kazakhstan-Black Sea transport routes frustrated that solution.

Thus, for at least two years after its completion, the Odessa-Brody pipeline remained dry (and Pivdenny terminal operated at a fraction of its capacity) for want of Caspian oil. To recoup the investment and realize the anticipated transit revenue, Kyiv entertained Russian offers of “reverse use” of the pipeline (see EDM, July 20). U.S. officials repeatedly interceded with Kyiv to turn down those offers. Last year in Washington, U.S. Vice President Richard Cheney prevailed on the visiting Ukrainian Prime Minister Viktor Yanukovych to postpone a then-imminent reverse-use decision, while the Chevron-Texaco Company was considering possibilities of shipping oil from its Kazakhstani fields to Odessa. As late as February 2004, the Ukrainian government resolved an internal battle by deciding to use the pipeline in the originally intended, northerly direction, although securing Kazakhstani oil had almost become a case of hope-against-hope at that point.

Finally on July 5, the Cabinet of Ministers authorized the reverse use for Russian oil, and the agreements were finalized in connection with the July 26 Yalta meeting of Presidents Putin and Leonid Kuchma. In the final analysis, the Odessa-Brody pipeline is a casualty of an inconsistent policy on Caspian energy by the United States and the EU, both of which have in recent years accepted Russian monopolization of the transit of Kazakhstani oil extracted by Western companies (Interfax, July 26, 27).