EU Attaches Strategic Priority To Odesa-Brody Project

LIFE AFTER ATTEMPTS TO REVERSE COURSE

The Brussels meeting was not altogether sunny for the Ukrainian delegation. It will be recalled that on the eve of the Brussels conference The Day carried a feature whose bottom line was that in April a top Naftohaz Ukrayiny executive and an Ukrtransnafta representative signed with Russia’s TNK Oil Company and Transnafta a protocol of intent on the possibility of pumping Russian oil via the Odesa-Brody pipeline in the reverse mode, that is, not from Odesa to Brody, but the other way around. This alerted business circles as well as representatives of the Polish government and European Commission, who have repeatedly expressed interest in developing the Ukrainian pipeline project in the direction of Europe. In The Day (No. 12, April 8, 2003), the ambassadors of the US, Poland, and Germany in Ukraine voiced their concern over the possibility of operating the Odesa-Brody pipeline in the reverse mode. Ukrtransnafta Chairman of the Board and Ukraine’s special EOTC negotiator Oleksandr Todiychuk was the first to allay such fears.

First, he stressed that his deputy Stanislav Vasylenko, who signed the protocol in Moscow, was not authorized to do so. Second, Mr. Todiychuk told journalists that on learning about the protocol he immediately sent a letter to Naftohaz Ukrayiny Chairman Yury Boiko stressing the inconsistencies of the protocol. “The state is pursuing a strategy to develop the project in the European direction,” Mr. Todiychuk stressed. He further called a provocation the furor about the economic benefits of operating the pipeline backwards. Thus, questions must be posed to the Naftohaz Ukrayiny management, since, if one is to believe official statements, the Ukrainian government opposes using the pipeline in the reverse mode. On May 16 the government held a meeting on the EOTC, which, The Day has learned, centered around the issue of reverse pumping. Finally, the government decided to further develop the Odesa-Brody project in the European direction. Ukraine’s Fuel and Energy Minister Serhiy Yermilov assured journalists that the Ukrainian delegation came to Brussels “with clear directives from the president and government” to take the project in the direction of Europe.

It makes no sense to stop working in the European direction at a time when EU representatives have started to actively signal their interest in the pipeline. The reverse option would negate benefits building the Odesa-Brody pipeline, which was initially meant as a transport route to relieve excessive tanker traffic in the Bosporus and Dardanelles. Answering journalists’ questions, EC Vice President Loyola de Palacio recognized the technical feasibility of using the Odesa-Brody pipeline in the reverse mode. “This is not the problem. The Bosporus is the problem. We need more routes to transport oil, since there are limitations on oil shipments through the Turkish straits,” an EC representative said.

FROM PRECAUTIONS TO POSSIBILITIES

“Imagine what could happen if oil tankers lie idle in the Bosporus,” was the argument in favor of the advantages of the Odesa-Brody pipeline from the organizers of the commercialization of the pipeline project, auditing company Pricewaterhouse Coopers (PwC), which presented in Brussels the concept of a business plan for the Ukrainian pipeline. PwC representatives not only stressed the expediency of developing the Odesa-Brody project but also offered concrete steps to implement it.

PwC consultant Malcolm Rifkind called attention to Europe’s growing oil demand as well as rising Caspian oil exports. Transporting oil across the Black Sea and through the Bosporus is complicated by the Turkish government’s limitations on tanker traffic. Fearing a possibility of an ecological disaster at its doorstep, Turkey has imposed quotas, with last year’s oil slick caused by the Prestige tanker that sunk off the Spanish coast serving as a constant reminder of such a threat.

According to Mr. Rifkind, between 120 and 130 million tons of oil are transported through the Bosporus annually. Should oil companies in the Caspian region step up oil production, a long line of tankers could form in the Bosporus. This would mean losses for companies and threats of an environmental catastrophe near the Turkish coast, which already has a record of sunken tankers. Under such conditions alternative oil transport routes are attractive, Odesa-Brody being one of them.

According to Pricewaterhouse Coopers estimates, the business plan for the Ukrainian pipeline can be implemented in three stages. The first stage envisions transporting oil via the existing routes, that is, the Druzhba pipeline to an oil refinery in Kralupy in the Czech Republic and Ingolstadt and Warburg oil refineries in South Germany. The second stage foresees building up transport capacities used during the first stage. During this stage oil will be supplied via the Odesa-Brody pipeline to oil refineries in Austria’s Schwechat and Germany’s Karlsruhe. The third stage, which will take longer to implement (PwC hopes for four to five years), envisages expanding the transport infrastructure still further. During this stage oil will be transported via the Odesa-Brody route and its extension to be built on Polish territory to Plock and thence to Germany’s North Sea port of Wilhelmshaven. During each of these stages Ukraine would cooperate with EU companies, since the Czech Republic, Hungary, and Slovakia, whose oil refineries could be on the receiving end of the pipeline, will become EU members next May. “There are people who can find reasons not to develop the Odesa-Brody project. But such statements are shortsighted. The pipeline spells economic benefits for producers and consumers alike,” PwC representatives summed up.

Incidentally, some experts believe that the project is profitable even for Russia, since its companies will have more opportunities to transport oil through the Bosporus. By contrast, Polish and EU politicians admit off record that the Odesa-Brody pipeline will help reduce their dependence on Russian oil.

POLITICIZED PIPE

Participants at the Brussels Conference assigned a major role to political lobbying in the implementation of the Odesa-Brody project. Ironically, this very factor has often been criticized earlier, saying that the pipeline is politicized to such an extent that commercial benefits are out of the question. Meanwhile, it was stressed at the Brussels Conference that political backing is essential during the initial stage of the project. “Ukraine’s independent decision to build the Odesa-Brody pipeline proved to be a historic event in the diversification of fuel supplies to the European market,” stressed Fauzi Bensarsa, a representative of the EC General Directorate for Transport and Energy.

Mrs. Loyola de Palacio called attention to the document approved by the EC on May 13 on the energy policy of the enlarged European Union toward partners and new neighbors. The document reads in part that the Pivdenny Oil Terminal in Odesa is “part of a diversification strategy that will make it possible for Caspian oil to reach Central Europe and the Baltic region.” “The EC offers new neighbor states to use the advantages of the European market,” Mrs. Loyola de Palacio commented on the document. “We attach strategic importance to the Odesa-Brody-Plock pipeline. This project reflects pan- European interests. It will make oil transport environmentally safe and relieve traffic in the Bosporus,” the vice president further stressed.

According to Ukraine’s Foreign Ministry State Secretary for European Integration Oleksandr Chaly, “Despite all the speculations, we consider this project a major instrument of our foreign policy aimed at integration with Europe. The Odesa-Brody pipeline is an efficient mechanism of Ukraine’s integration with the EU.”

It was obvious during the Brussels Conference that the EOTC can help Ukraine translate words into deeds in its cooperation with the EU. Earning its trust could in turn promote the commercialization of the project. At least none of the representatives of oil companies attending the conference said the Odesa-Brody project had no future or called it uninspiring. “It will enable us to create a competitive model on the Polish oil transport market,” said Pawel Olechnowicz, Chairman of the Board of the Gdansk Oil Refinery. “We are interested in developing the project,” said Rudolf Schulz, managing director of Germany’s Nord-West Oelleitung GmbH company. “The Odesa-Brody project offers long-term prospects for transporting Caspian crude oil to Europe,” believes Elshad Nasyrov, general manager of Azerbaijan’s State Oil Company. Representatives of two major banks expressed support for the project. The EBRD confirmed its interest in the project, while the European Investment Bank did not rule out the possibility of investing in the project. “We would consider funding the project when all the environmental and commercial aspects have been considered,” said EIB manager Francois Trivo.

Thus, now the Ukrainian leadership is facing even more challenges. First it should develop a specific business plan, reach an agreement with the oil companies which has been talked about for year on end, and sign contracts for crude oil purchases with European oil refineries. There is not much time left, but it will show whether Odesa-Brody will be a successful project or just one more wasted opportunity.