Odesa-Brody pipeline potential remains unused

Mon, 15 January 2007

EU MINISTERS are understood to be asking the same questions they asked in January 2006 when Russia halted supplies of gas to Ukraine: is Russia a reliable fuel supplier, or is it using energy as a weapon to re-establish hegemony over the former Soviet space? But the question that is not being asked is why Russia’s crude-oil customers within the EU find themselves so heavily reliant on the Druzhba pipeline. Have no alternative routes been considered in the past, and if there were, why were they rejected?

A case can be made that Russian deception, combined with European miscalculations and inactivity, set the stage for recent events, and this is best illustrated by the case of the Odesa-Brody pipeline in Ukraine. Ukraine built the 674-km Odesa-Brody pipeline in the hope of competing with other routes for moving Caspian oil to the West. Azerbaijani and Kazakh crude oil, a high-quality blend, needed to avoid being transported by Russian pipelines where it could mix with the sour Urals blend, and constructing the Odesa-Brody route, which runs from the Black Sea to the Polish border, was seen as the ideal solution. The pipeline's first phase was put into operation in May, 2002, and had a capacity of 9m tons/yr, with the capability to reach 14.5m tons/yr. The pipeline was intended to transport Caspian oil from the newly built Pivdenny terminal to the existing Druzhba pipeline for transport to European refineries. From there it would be sold to distributors in Europe and elsewhere. Both projects came under the direct jurisdiction of the Ukrainian state-owned oil and gas monopoly, Naftohaz Ukrayiny, and its subsidiary company, UkrTransNafta, the operator of all the oil pipelines in Ukraine. As these projects were under construction, Alexander's Oil And Gas reported on 9 June, 2000, that US Energy Secretary Bill Richardson said the US government supported Ukraine's plans to build the new Pivdenny oil terminal and the Odesa-Brody oil pipeline. Mr Richardson added that the new terminal would help Ukraine diversify its energy sources and thus make the country less dependant on Russia; the project was also encouraged by the European Union. However, after the pipeline was completed, Ukraine did not have the financial resources required to fill it with Caspian crude, and none of the European states was willing to build the connecting pipelines needed to link the pipeline to refineries. As Stratfor Commentar noted on 8 September, 2003, "The end result was that Kiev found itself saddled with a white elephant rusting picturesquely in the Ukrainian countryside." But serious doubts were also expressed as to the direction oil in the Odesa-Brody would take. Matthew Sagers of Cambridge Energy Research Association was quoted by Interfax on 15 August, 2003, as saying that there was no demand for Caspian oil in Northern Europe due to its high price and that there would be no problems if the pipeline were to transport oil south, to the Pivdenny terminal and then via the Bosporus. Sagers claimed that an additional 9m tons/yr would not overburden the heavily-trafficked Straits. At this time the Russian-British firm TNK-BP began a major lobbying campaign in Kiev to reverse the flow of the Odesa-Brody – sending its oil south to the Black Sea. Despite a decision by Ukraine's Cabinet of Ministers to send oil in the northerly direction, Ukrainian President Leonid Kuchma agreed that Russian oil should be put into the pipeline and pumped south. On 29 April, 2003, the head of Kazakh state oil firm KazMunaiGas announced that Kazakhstan would start filling the Odesa-Brody pipeline in the second half of that year, and that a deal had been made with other members of the Tengizchevroil consortium that included ChevronTexaco, ExxonMobil, BP, and Lukoil to supply 6m tons/yr to the pipeline. The only matter that needed clarification was the price the Ukrainians would charge. The lobbying effort was apparently making progress. On 28 April, 2003, Interfax-Ukraine announced that President Kuchma said at a press conference that "the shipment of Caspian oil via the Odesa-Brody pipeline is unlikely to take place because it would be a money-losing proposition, so Ukraine must reconsider the use of the pipeline for Russian oil shipments from Brody to Odesa." This view was rapidly seconded by Deputy Prime Minister for Fuel and Energy, Andriy Klyuyev. Interfax quoted the Ukrainian president as saying that "the fact is that, as of today, there is neither a Caspian oil seller nor a buyer. Visit Baku and speak to analysts and learn if there is Caspian oil. There is none and there will not be any. As for Russian oil, it exists, and we can earn $90 million in profits from the reversed use of the pipeline." The following day, US Deputy Assistant Secretary of State for European and Eurasian Affairs Steven Pifer strongly contradicted Kuchma's statement and said that Ukraine had not done anything to ensure Caspian supplies that could fill the Odesa-Brody pipeline. Mr Pifer reminded the Ukrainian president that Germany and Slovenia both had refineries working with Caspian oil, and that Ukraine was in an excellent position to utilize its pipeline to send Caspian oil to these refineries. Interfax-Ukraine, which reported Mr Pifer's statement, also added that he went on to say that if Ukraine wanted to integrate into Europe, "this is a wonderful way to unify its energy system with the European one." In mid-June 2003, Russian Industry and Energy Minister Viktor Khristenko visited Kiev, where he met with Serhiy Tulub, the Ukrainian minister for fuel and energy. A few days after this meeting, Khristenko sent a letter to Tulub explaining his government's position on the Odesa-Brody pipeline. According to Interfax on 18 June, 2003, the Russian minister wrote that Russia was not interested in seeing Odesa-Brody flow in a northerly direction (to Brody). Mr Khristenko explained this by saying that there were no markets for Russian light oil in Northern Europe and that sending oil north to Brody would destabilize the markets in Southern Europe for Russian and Kazakh light oil. He said that Russia was still interested in seeing the Odesa-Brody pipeline used in reverse mode, but at lower volumes than originally planned. In effect, he was telling the West that Odesa-Brody was off-limits. At the same time, Mr Khrystenko noted that Russia was still interested in seeing the Odesa-Brody pipeline used in reverse mode, but at lower volumes than originally planned. The argument that Russian light crude did not have a market in Northern Europe was somewhat exaggerated, however, as most Russian crude is Urals blend. Khristenko also chose to speak on behalf of the Kazakh oil industry, which had already agreed to supply oil to fill the Odesa-Brody pipeline. Following this, there was no further activity on the possible project until 2005, when the European Commission agreed to award a contract to a consortium of European companies to finalize the technical, economic, and legal studies required for the construction of the pipeline to the Polish refinery in Plock, Poland. The press release issued by the European Commission to Ukraine and Belarus on 8 August, 2005, said that "the construction of the Black Sea-Ukraine-Poland oil transportation corridor is a crucial infrastructure project in the context of EU and Ukrainian policies for security of oil supplies." However, up to now little – if anything – has been done by this consortium of European companies to progress the project.