Russia completes construction of oil pipeline bypassing Ukraine
On September 4, Russia’s Transneft Company announced the completion of the Sukhodolnaya- Radionovskaya stretch of the oil pipeline bypassing Ukraine. The annual capacity of this 260 kilometer pipeline running along the Ukrainian border is 26 million tons of oil. The Sukhodolnaya- Radionovskaya stretch directly links up the Samara-Lysychansk and Lysychansk-Tykhoretsk pipelines. Earlier, supplies of oil via these pipelines were possible only using the territory of Ukraine. The owners announced they will start pumping in oil in two to three weeks. In the past, Russian oil-exporting companies had to use Ukrainian territory to transit oil to the Black Sea port of Novorossiysk. A stretch of this possibly dying oil pipeline turns to Ukraine near the village of Sukhodolnaya (Rostov oblast), with a branch to Odesa, and returns to Russia near villages Rodionovo and Nesvetaiskaya, going further on to Novorossiysk. Now, the future of the Ukrainian Prydniprovsk Oil Pipelines Company (POP) has been called into question and this large enterprise with its numerous staff could be subject to layoffs. Incidentally, POP ended 2000 with a net profit of UAH 136.2 million.
Russia began laying a bypass pipeline in the wake of ViktorYushchenko’s government refusal to lower transit tariffs for the Russian oil from $2.35 to $1.4 per ton. “The aim of this project is to secure acceptable prices for the transit of oil and to become independent of the Ukrainian authorities,” Transneft President Semen Veinshtok said on March 27, 2001 when the construction got under way.
Earlier, in late February, President Kuchma requested Transneft management refrain from the new pipeline, promising to reduce transit tariffs for the Russian oil in exchange. When the new bypass line was more than half ready, new Ukrainian Premier Anatoly Kinakh stated his readiness to lower the fees. To turn the tide his way, he held talks in St. Petersburg with his Russian counterpart on June 15. “If the Russians go ahead with the new pipeline, we may lose POP which, under the circumstances, will not make any economic sense,” the premier acknowledged. But Russia decided not to play diplomatic games this time and continued construction. Eventually, $240 million has been spent on this openly anti- Ukrainian project, with the European Bank for Reconstruction and Development involved in providing credit for the construction.
At the latest session of the National Defense and Security Council the government announced expected losses from the commissioning of the Sukhodolskaya- Radionovskaya oil pipeline, about UAH 100 million a year. According to POP first deputy head and chief engineer Mykhailo Stetskiv, the transit pumping of the Russian oil to Novorossiysk yearly earned POP $61 million. Now POP’s role will be reduced to servicing the transit of the Russian oil to Odesa, with pumping volumes at a mere 10 to 12 million tons and a likelihood of their considerable drop in the future. On the other hand, Russian oil companies will gain much. According to the Petroleum Argus report, the present transport tariff from Nizhnevartovsk to Novorossiysk is $13.3 per ton plus the Ukrainian tariff of $2.35. With cheaper fees, Russian oil companies will save 5-6% in transport costs.
What lies in store for POP now? In fact, only two scenarios can be considered. Either selling POP to a big investor who has oil (one of the Russian oil companies, if viewed realistically), or to dismantle the pipeline. Oil pipelines are not subject to privatization under Ukrainian law. To dig the pipes out would cost about UAH 80 million, POP experts say. In other words, whichever option is taken, it would be difficult to solve the problem of the moribund POP both from the political and budgetary points of views.
PS
Naftohaz Ukrayiny CEO Vadym Kopylov told a September 6 press conference that the state monopoly he runs plans to finish work on the terms and conditions of the consortium to use the Odesa-Brody pipeline to transport oil by October.
Ukraine has long intended to open the pipeline to increase oil transit via this country from Azerbaijan, Kazakhstan, other Central Asian states, and the Middle East to Europe. Its carrying capacity is nine million tons of oil a year at the first stage, and this can later be increased to 40 million. Project cost is set at $465.4 million. The pipeline is 667 kilometers long and oil transport cost is expected at UAH 27.50 per ton all across through the Ukrainian section of the Eurasian oil transportation corridor.
Mr. Kopylov also said that NU expects to submit the documents (prepared by the joint Ukrainian- Polish-Russian task force) to the cabinet in October.
The Internet newspaper Forum reports that the Ukrainian government and NU are looking for customers interested in using the oil pipeline, and that the United States is providing active support and consulting services.
