Bitter Fruits of Isolationism
Is it strange that the Ukrainian option of transporting Caspian oil is not even considered in the European Union’s recently adopted strategy of European energy supplies to 2020.
Oil pipelines not transporting oil are filled with service water. Thus, if the rates of the construction of the Pivdenny Oil Terminal and Odesa- Brody connecting pipeline are not stepped up, service water will keep running through the pipes, all the way from Brody to Odesa and back. Premier Viktor Yushchenko recently assured us that the Ukrainian section of the Eurasian oil transportation route will be activated as early as on July 1. Shortly afterward, we heard that the ceremony would be put off to the end of 2001, and that the so-called golden butt joints would be welded together on the boundary between Vinnytsia and Odesa oblasts in September. One is reminded of an even more optimistic statement made by former Vice Premier Yuliya Tymoshenko in an interview with the Dzerkalo tyzhnia/Dzerkalo nedeli last September. She said that the Odesa-Brody pipeline “has been built and will start bringing in revenues soon.” How eager some people are to earn quick political dividends by making sonorous declarations based on wishful thinking!
In reality, the situation with the Ukrainian section of the Eurasian oil transportation “corridor” is a real threat to this country’s economic, especially energy, security. The trouble is that the said construction sites are elements of the “corridor” project, combining Ukraine’s diversified projects with those of Europe. Launching these components into operation jointly with, and allowing for the interests of, European countries is supposed to strengthen Ukraine’s position in terms of energy supplies, providing real conditions for joining the European economic theater.
The first decision on the construction of a marine oil terminal (MOT) in the vicinity of Odesa, to receive oil delivered by sea and then transport it to oil refineries, was made by the cabinet in February 1993.
Years of procrastination followed as the issues of the project’s feasibility and final coordination were deliberated. This made it necessary to revise previous government decisions relating to the construction of the MOT’s first stage. Now the complex was reorganized to receive Caspian oil and send it to Mediterranean countries, as well as to Europe, via the Odesa-Brody pipeline, using the existing Druzhba pipeline, along with the construction of the Brody-Adamowa-Zastawa connection in Poland. It was only on November 15, 1999, that the cabinet issued Directive No. 1247-p adopting an adjusted project of the MOT first stage with a capacity of 9 million tons a year and a total estimated cost of UAH 737.5 million. MOT’s Southern-Western-Ukraine (Odesa-Brody) 667 km connecting pipeline, 1,020 mm in diameter and with two oil- pumping plants with a design capacity of 33.4 mil. tons a year, started being built in conformity with Directive No. 34 of the Derzhnaftohazprom [State Committee for the Oil and Gas Industry] of February 23, 1996. The project’s estimated cost was UAH 569.3 mil. (in terms of 1996 costs) and it was to be carried out by the state Druzhba Arterial Oil Pipelines Enterprise.
To date, investments in the Pivdenny terminal have been UAH 150.8 mil. or 20% of the estimated cost, and the Odesa-Brody connecting pipeline by 80% (UAH 465.2 mil.). Yet remittances to the customer are delayed due to technical problems, namely because the Ukrainian Finance Ministry is still to adopt the project’s title.
Timely activation of the Odesa-Brody and Pivdenny pipelines is threatened primarily by the nagging problem of procuring some 668,000 tons of technological oil worth approximately $100 mil. Experts preparing a memorandum for the cabinet’s Committee on the Fuel and Energy Complex believe that “timely procurement of technological oil for these projects is possible only by using foreign sources of financing,” because “almost all of the Druzhba Arterial Oil Pipeline’s finance sources and those of Prydniprovia Arterial Oil Pipeline will be used in 2000-01 to pay for construction of the Odesa-Brody and Pivdenny oil pipelines.”
Who will provide the money? Back in 1998, President Kuchma, relying on the positive experience of the space industry’s participation in the Sea Launch Consortium, instructed the government to organize an international consortium to build the Eurasian pipeline’s Ukrainian section and help attract financing for the project.
The government, however, persists in ignoring the president’s instruction. The international community, in response to Ukraine’s isolationist policy, is considering other possibilities of Caspian oil transport. The US Trade and Development Agency financed feasibility studies of projects as alternatives to the Ukrainian option, particularly in Romania and Bulgaria. The Ukrainian cabinet’s no to international cooperation is regarded by the US, Polish, and other European embassies in Kyiv as stepping away from the project’s commercialization. Beginning in the spring of 2000, the Americans have distanced themselves from the Ukrainian oil route which they had earlier approved.. Powerful oil companies in Italy, France, and Germany are stepping up the development of alternative oil transport projects, so that oil routes via Iran, to the Persian Gulf, and via Romania are becoming increasingly practicable (incidentally, Romania already has an international consortium).
A detailed analysis of the way in which the cabinet has been implementing National Security and Defense Council (NDSC) decisions, based on forecasts concerning the Eurasian oil pipeline’s Ukrainian section, makes one think of the worst possible scenario such that, first, the government ignores the key provisos of the president’s actions relating to the issue and, second, high officials are loath to cooperate with the NSDC, authoritative as it is, being headed by the chief executive. For example, the cabinet sitting of March 13, 2001 chaired by the premier literally pushed through the state company Druzhba’s leadership’s conceptual approaches to the Eurasian oil pipeline project, running counter to and disavowing the the NSDC resolution to set up an international consortium. Also, the minutes reflect decisions aimed at liquidating the private Ukrnaftoterem enterprise, despite the president’s order of December 7, 2000 calling for its reorganization as a public joint stock company, so as to attract foreign, primarily Polish, partners and their money to the project.
Experts regard the cabinet’s tactics as attempts to take advantage of the domestic political crisis to nullify certain unwelcome (for certain interested parties) clauses of the presidential order. The sitting took place shortly before Leonid Kuchma’s visit to Poland, in complicated domestic and foreign political circumstances. Its decisions were deliberately highlighted by the media and during the president’s visit the Polish side’s lack of enthusiasm for the noncommercial mode of implementing the Eurasian project became clear. Sources close to the Polish embassy insist that Warsaw is seriously concerned about the Ukrainian premier’s recent statements with regard to the project, because it sees practically no room for Polish-Ukrainian cooperation in the stated budget-financing model. In addition, the Polish leadership takes a dim view of the selection of Druzhba’s CEO as project coordinator. This attitude cannot be ignored, since the project is an international one.
It should be noted that the NSDC resolution of October 31, 2000, concerning urgent measures to step up Ukraine’s participation in the Eurasian oil project, was aimed at switching from the budget-financing to the consortium model in order to encourage large oil companies to take an interest in the Ukrainian oil route. In 1998-99, after a series of talks with several US and European oil firms, the latter formally proposed to consider them as potential consortium participants. The said talks may have been among the reasons for the US administration’s consent to regard the Ukrainian route of Caspian oil transport as one possibility.
Experts attach special importance to the premier admonishing the heads of the State Tax Administration, Control and Oversight Administration, SBU, and Internal Affairs Ministry that they can Druzhba’s and Prydniprovia Arterial Oil Pipelines’ financial and business performance only “in coordination with the Cabinet of Ministers of Ukraine.” Considering the project’s scope and budget financing, the expenditures must be followed more closely. Meanwhile, the press even now does not rule out the possibility of Druzhba financing the premier’s election campaign if the Eurasian oil project continues to be budget-sustained and is placed under the company’s sole command (e.g. Kievsky Telegraf, No. 12, May 2000). It appears that the author of the newspaper article had a point. The presidential edict mentioned was ignored by the government, and the March 13 cabinet session placed special emphasis on the continuation of budget financing.
In this context, the premier’s instruction, to be regarded as circling the wagons, or as a political “roof,” to use the current parlance, of the said oil transport company, allows one to assume that part of the Eurasian oil project’s budget financing could be used for solving personal business and political tasks that are not exactly in the national interest.
These domestic political games, being carefully disguised as reforms, could cost the Ukrainian people a great deal. No one needs an oil terminal and oil pipeline without oil. The whole affair might well become yet another grand memorial to Ukrainian provincialism, as are the three 750 kW electric power lines to Europe.
