Why is there no oil for Odessa-Brody pipeline?

Jun 29, 2004 02:00 AM

Why is a major oil pipeline in Europe still empty nearly three years after it was built?
The Ukrainians built the Odessa-Brody oil pipeline without international investors or commitments by petroleum producers to use the pipeline. After the line opened for business, a struggle emerged over the pipeline's direction flow, whether it would run east-west for Caspian exports or if Russia would use it to flow west-east to ship Siberian oil via Odessa. As of this date, it still has yet to be decided.

The Ukraine announced in December 2001 that it completed the first stage of Pivdennyy oil terminal near Odessa and its accompanying 418-mile long, 39 inches in diameter Odessa-Brody oil pipeline. Building the pipeline cost $ 500 mm, which runs from the Black Sea to the town of Brody on the Polish border.
Energy-poor Kiev was looking to gain a share of lucrative transit fees from expanding Caspian oil production. By the end of September neighbouring Poland invested almost $ 70 mm, which amounted to 1.58 % of foreign investments in the Ukraine at the time.

The policy seemed to dovetail well with Washington's increasing interest in the region's energy resources. In the aftermath of the September 11th attacks, the US attempted to shift its energy policy by lessening US dependence on OPEC through deepening ties with Kazakhstan, Azerbaijan, and Turkmenistan.
The Ukraine saw this as an opportunity. Tankers would take oil from Georgia's Supsa and Russia's Novorossiisk ports westwards across the Black Sea to for transhipment via the Odessa-Brody oil pipeline to Eastern and Western Europe. One flaw in the plan became immediately apparent; in the absence of a Ukrainian tanker fleet, foreign vessels would have to be chartered to transport the oil.

The pipeline's initial capacity in 2001 was 9 mm to 14.5 mm tpy of oil. A growing fear about lack of users induced the Ukraine to reach out to its neighbours. In July 2002, the Ukraine government invited other countries to take part in an international consortium where the Odessa-Brody pipeline would be extended to Poland's Baltic port of Gdansk, opening up for the possibility for the pipeline to supply Scandinavia.
Ukrainian Prime Minister Anatoliy Kinakh also invited Georgia to join the international consortium involved in the second part of finalizing the Odessa-Brody-Gdansk oil pipeline line, increasing the pipeline's capacity to 40-45 mm tpy by extending the pipeline first to Plock in Poland and later to Gdansk, but this has been put on hold; the Ukraine and Poland have not even determined a date to begin construction for the extension. Despite the fact that the pipeline has no oil running through it, the Ukrainians nevertheless still wish to increase the pipeline's capacity.

Kinakh noted at the time that the Ukraine was not seeking to compete with the Baku-Tbilisi-Ceyhan pipeline, believing that other routes for energy supplies resources are necessary to fuel Europe. Whereas the Baku-Tbilisi-Ceyhan pipeline would flow southwest to the Mediterranean, the Ukraine sees Odessa-Brody as prime energy pipeline to supply Europe.
Two years ago, Poland initially seemed supportive of the project; Polish Prime Minister Leszek Miller commented that the pipeline was designed to enhance European energy security and diversify energy sources from the Caspian. Kinakh saw Poland as a major planner in the project stating, "We should as quickly as possible end work on economic and technical grounds of the project and set up an energy consortium. We see Poland as one of the basic elements of this system." Shortly afterwards Polish President Aleksandr Kwasniewski said, "the pipeline built with the participation of Poland was important for including Ukraine into European structures."

Kinakh subsequently began to express some concerns about Polish reluctance to commit to the project, stating, "According to various sources, 2002 Polish-Ukraine trade turnover amounted to between $ 1 bn and $ 2 bn. We are not satisfied with the present level of economic cooperation between our countries because their potentials are much bigger."
Kinakh also sought Polish investment in the Ukraine, proposed free Polish visas for Ukrainians in exchange for assuring no visa duty for Poles coming to the Ukraine.
Despite Ukraine's efforts, Poland remained non-committal. If Poland, a transit partner was getting cold feet, so were producers.

"The Kazakh side has expressed readiness to participate in the construction project as an observer for the moment," said Kazakh Economics and Budget Planning Minister Kairat Kelimbetov in September 2002 when asked if Kazakhstan would participate in the Odessa-Brody-Plotsk-Gdansk oil pipeline project.
Kelimbetov added, "We have also requested the commercial and legal conditions for transiting and transhipping Kazakh oil to the port of Gdansk, and the government will consider supplying Kazakh oil to Polish refineries."

Angered that the pipeline remains almost idle, several members of Ukraine's Verkhovna Rada parliament subsequently drew up proposed legislation so that the government relinquish its ownership of Odessa-Brody and move for privatisation. This legislation garnered little support. Deputy Chairman of the Verkhovna Rada's Committee for Industrial Policy Vladimir Demekhin opposed the legislation, arguing that the government should instead try to attract investors and consider plans for granting a concession to a consortium.
The Odessa-Brody once allowed Tyumenneft (now TNK-BP) to use a 33-mile section of the oil pipeline to export 80,000 bpd through Odessa in the early part of 2003. The Ukraine was so desperate to get the pipeline going that it was even willing to consider a stop-gap measure by using Odessa-Brody as a storage facility.

Other Ukrainian government entities now got into the act to secure supplies. Ukrainian state-owned pipeline operator Ukrtransnafta invited Uzbek, Kazakh, Azeri and 10 Russian state-owned companies to help fill the Odessa-Brody pipeline to bring it up to 380,000-420,000 tons of petroleum for delivery to refineries in Poland by the end of October 2003. The Ukraine asked Azerbaijan to join by providing "as much as Azerbaijan is able to offer," said Ukrainian First Deputy Prime Minister Oleh Dubyna.
Azerbaijan's annual oil output is a little over 15 mm tons, which is about the capacity of the pipeline. Russian oil producer TNK-BP nevertheless continued to seek the reversal of the pipeline's oil flow as Russia pressured potential suppliers of Odessa-Brody.

ChevronTexaco -- operator of the giant onshore Tengiz field and one of the largest investors in Kazakhstan -- wanted to sign on in October 2003 with Ukrtransnafta on the Odessa-Brody oil pipeline by using it to ship 9 mm tons of Kazakh oil annually. It also wanted to store petroleum in the Pivdennyy oil terminal for six months. Because of Ukraine's uncertainty about the project and Russian lobbyists seeking to hinder project efforts, the plan never materialized.
Ukrtransnafta was also concerned that ChevronTexaco's proposalwould only bring in $ 1.35 mm per month and actually cost the state $ 1.5 mm per month because the Pivdennyy terminal could not transport any oil that it stored for ChevronTexaco. Because no other Caspian producers expressed interest in Odessa-Brody, the oil pipeline remains unused.

The Azeri government also appeared to shut the door on using Odessa-Brody; Azeri President of the State Oil Company (SOCAR) Natik Aliyev said in mid-May, "Azerbaijan will not participate in this project and we do not plan to join the project in the future. Ukraine proposes that we invest in the Odessa-Brody project, but we are financing the construction of the Baku-Tbilisi-Ceyhan pipeline. In this case, SOCAR's participation in a project to pump Azerbaijani oil via the Odessa-Brody pipeline is inexpedient."
Russian pressure also influenced Azerbaijan's decisions not to invest in Odessa-Brody. Threat to Russian monopoly Baku-Novorossiisk (Azerbaijan), CPC (Kazakhstan) -- exorbitant transit fees Russia, in the meantime, does not want to see extension plans fulfilled but instead have Siberian oil shipped to world markets out of the Odessa port via the Black Sea.

With the Azeri option now gone, the Ukraine was again considering Russia's plan for the short-term because Ukraine could profit from Russian oil transit while the extension to the Polish border was being built but the plan never materialized. Supporters of the extension argued that even a short-term reversal of the pipeline could jeopardize potential future investment because international investors might see the pipeline as too controlled by Russia.
Washington has supported Kiev's plans for a westward-flowing line, but not to the extent of providing financial support. The US fears that an eastward flow could increase Ukraine's dependence on Moscow and could increase the possibility of a major oil spill in the Turkish straits because of the intensified oil traffic.

The lack of progress clearly frustrated Ukrainian President Leonid Kuchma; last month he admonishedhis Cabinet, the European Union, and the Polish government for not financially supporting the Odessa-Brody project. Kuchma was also angered that his own government did not support reversing the pipeline to an eastward flow to export Russian petroleum.
Kuchma expressed concern that Caspian oil producers could not fill the pipeline and that their reserves did not suffice for the Odessa-Brody pipeline, expressing desires to maximize its capacity. Kuchma railed, "If we keep being picky, Ukraine will be bypassed and no one will need those pipes."

Oleksandr Todiychuk, who was fired by President Kuchma as Ukraine's special representative for the Eurasian oil transportation corridor in May 2004 echoed his former boss's concerns.
"Since 2002 and until now, despite numerous decisions made by the Ukrainian Cabinet of Ministers and Fuel and Energy Ministry, the full commercial operation of the Odessa-Brody main oil pipeline has finally not started. Other components of our oil transportation system were utilized only at 52 % of their capacity. Only 2.1 mm tons of oil has been pumped through the Yuzhnyy (southern) terminal (Odessa), whose potential carrying capacity amounts to 9 mm tons. As a result, the Ukrainian budget loses hundreds of millions of dollars every year," Todiychuk said.

Kuchma sought to influence the Poles but to little avail. On May 28 Polish Deputy Treasury Minister Tadeusz Soroko diplomatically noted, "If the Ukrainians don't alter their approach to this issue, then we are unlikely to complete it. Half a year ago, I estimated the possibility of a successful accomplishment at 80 %; now my optimism has fallen to 50 %. Since the very beginning, it's seemed that the Ukrainian side wasn't fully convinced. It was visible in talks that part of the Ukrainian government supports the project, while the other part is less excited about it.”
“Now it seems that the Ukrainian side is walking away from the project, and the information we already have -- that the Ukrainians intend to shift power over the currently existing pipeline to the Russians -- makes this project difficult to accomplish."

The beleaguered Odessa-Brody pipeline might yet have found a saviour: Slovakia. According to Slovakia's Economy Minister Pavol Rusko, Slovakia's national oil-pipeline operator Transpetrol is considering transporting Caspian oil via the Ukraine the Czech Republic's Unipetrol Company. Oil would be shipped via Transneft's Druzhba pipeline, then through Ukrtransneft's Odessa-Brody pipeline.
Rusko added, "It is our priority that this oil gets through to Europe. Transpetrol is a company based in Slovakia and we want it to respect Slovakia's interests. These include reviving the Odessa Brody pipeline. Such a move requires an investment with long-term returns. Diversification has its own price and will have to be paid for."

The Ukraine has invested $ 500 mm but has yet to recover its construction costs, let alone generate revenue.
The Ukraine expected to obtain investors once the pipeline would be built;three years have passed and there are still no investors.

Source: United Press International
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