In contravention of earlier decision, Ukraine OKs reverse use of pipeline (07/18/04)

In contravention of earlier decision, Ukraine OKs reverse use of pipeline

by Roman Woronowycz
Kyiv Press Bureau

KYIV - Europe and the United States reacted harshly to a political turnabout by the Ukrainian government of Viktor Yanukovych on July 5 giving the go-ahead for the reverse use of the Odesa-Brody pipeline. The announcement rescinded a decision made in February to use the oil transportation pipeline only in the direct mode as originally envisioned.

Poland, the European Union and the United States officially questioned the purpose and need for again bowing to pressure from a Russian oil company to move oil through the pipeline in a direction not originally intended.

UkrTransNafta, the quasi-governmental agency responsible for developing the Odesa-Brody pipeline, announced on July 8 that it will support the new government recommendation, inasmuch as there was no hope of utilizing the oil transportation tube to move oil from the Caspian Basin to Central and Western Europe in the near future.

Ukraine has complained that none of the major oil-producing companies now working in the Caspian region have expressed a willingness to utilize the pipeline to ship Caspian light sweet crude to Central Europe until the final segment from Brody to Plock, a town located in Poland near the Baltic Sea, is completed - a process that may take years. The Odesa-Brody pipeline, completed at the end of 2001 and ready for use in early 2002, has yet to have crude moved through it.

TNK-BP, a joint venture between the Russian and British oil giants, has been pushing strongly for reverse usage of the pipeline for more than a year. UkrTransNafta said it would enter into final negotiations with the oil company within a month. TNK-BP has said it would like a three-year contract during which it would move up to 9 million tons of Urals heavy crude, a poorer quality, sulfur-filled oil, through the pipeline from Brody to Odesa, then via oil tanker through the Black Sea and the Bosporus into the Mediterranean and on to Western Europe.

The Ukrainian government said the agreement would bring $92 million of gross income, with a net profit of $30 million.

The Odesa-Brody pipeline currently can move up to 14 million tons of crude oil annually. It is envisioned that, with improved pumping stations, the amount could be raised to 40 million tons within a few years.

Poland, Ukraine's partner in the project, after hearing of the policy turnabout declared that Ukraine was rejecting European integration.

The comment, made by Polish Vice Prime Minister Jerzy Hausner to BBC Ukrainian Service on July 12, was echoed by the European Commission, the governing arm of the European Union, in a statement released the same day. The EC statement also addressed the dangers to the environment posed by increasing the amount of oil to be shipped from Odesa through the Bosporus.

"While acknowledging that this decision lies entirely within Ukrainian sovereignty, the commission expresses concern on the impact this decision will have on the longer-term use of the pipeline and on the increased environmental risks this could have for the Black Sea and the Bosporus, as well as the energy security of supplies for Ukraine and Central Europe," the European Commission noted in its statement.

U.S. Ambassador John Herbst questioned the advisability of the decision in a statement to the newspaper Fakty i Kommentari, stating that there was no substantial gain for Ukraine in reversing the flow of the oil pipeline to accommodate the desires of the Russian firm TNK-BP. Mr. Herbst explained that the decision would not increase the amount of oil that flowed through Ukraine, inasmuch as TNK-BP would simply be redirecting some of the oil it had transported earlier via rail and via the Prydniprovska pipeline to the Druzhba line and then into Odesa-Brody.

Mr. Herbst also echoed the environmental concerns noted by the EC, as well as pointed out that the Bosporus was already badly congested with shipping traffic. Mr. Herbst suggested that the Ukrainian government should better explain to the Ukrainian people its motivation for the decision to reverse the intended flow of Odesa-Brody.

In an interview with The Weekly last year, the U.S. ambassador had said that TNK could even see financial benefit from the arrangement because the cost of shipping via Odesa-Brody would be cheaper than via Ukrainian rail, which it currently utilizes.

After obtaining the right to negotiate a contract with UkrTransNafta, TNK-BP director for Ukraine, Oleksander Horodetskyi, who has led a strong and unyielding public relations and lobbying campaign to obtain access to the Odesa-Brody pipeline, unexpectedly announced on July 12 that because economic conditions had changed TNK-BP would now only transport about 1.4 million tons of oil through the controversial pipeline during the course of the three-year contract.

According to an Interfax-Ukraine report, he stated that the other major Russian oil companies, including Lukoil, Yukos, Sibneft and Slavnet, had expressed substantial interest in the project and would combine to provide the amounts needed to achieve the 9 million ton figure. The Kyiv newspaper Den reported on July 14 that none of the companies enumerated by Mr. Horodetskyi had confirmed plans to utilize the Odesa-Brody pipeline.

The Ministry of Foreign Affairs defended the decision by the Ukrainian government to put Odesa-Brody in reverse mode at its weekly briefing on July 13. MFA spokesman Dmytro Svystkov stated that the Ukrainian government was forced into its decision and underscored that the reverse flow of oil through the pipeline was strictly a temporary phenomenon. He did not clarify whether he meant that the pressure to bend was of a political or economic nature. He also emphasized that the decision should not be unduly politicized. Later, in a separate conversation with The Weekly, Mr. Svystkov denied calling the decision forced.

Meanwhile, the Ukrainian Cabinet of Ministers issued a statement the same day explaining that there were several reasons for the decision to go with TNK-BP. A Cabinet of Ministers press release noted that the proposal put forward by TNK was much better than any offers currently on the table, including anything made by oil companies who wanted their oil moved to markets in the Czech Republic and Poland.

It pointed out that at the moment there was little demand for moving oil through Odesa-Brody in the originally intended direction and explained that the oil companies in the Caspian Basin had stated that it would be inefficient to transport crude through Odesa-Brody before the last portion of the pipeline, to Plock, was completed. The press office statement also explained that to move Caspian light sweet crude from Brody into Central Europe through other currently available European pipelines would take an additional investment of 45 million euros ($60 million).

The Cabinet of Ministers underscored that the use of Odesa-Brody in reverse mode was temporary and its decision to move oil to Europe from the Caspian Sea remained as its goal.

Polish Ambassador Marek Ziolkowski, in an interview with Holos Ukrainy, reminded the Ukrainian government on July 13 that it had promised to move oil through the Odesa-Brody pipeline "in a European direction," in an agreement signed with Warsaw earlier this year in which the two countries had agreed to cooperate to complete the pipeline to Plock. Mr. Ziolkowski also expressed concern that the Ukrainian government had failed to keep Warsaw informed on current negotiations taking place with Uzbekistan and Kazakstan on utilization of the pipeline. The decision to reverse Odesa-Brody - and the controversy surrounding yet another turnabout in Ukrainian government policy on the matter - came in the same days that UkrTransNafta and its Polish counterpart, the Przedsiebiorstwo Eksploatiacji Ruriciagow Naftowych Przujazn S.A. (PERN), signed an agreement in Warsaw on setting up the Ukrainian-Polish International Pipeline Enterprise Sarmatia Ltd.

The joint venture, signed on July 12, was created from an agreement between Ukrainian President Leonid Kuchma and his Polish counterpart, Aleksander Kwasniewski, that was signed on June 25. It is to be funded by a $1.2 million investment, with equal shares coming from each side, for the purpose of constructing a 490-kilometer stretch of pipeline from Brody in Ukraine to Plock in Poland.

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