Kazakh oil coming to Ukraine

Ukraine is interested in transporting Caspian oil to the West through the Odesa-Brody pipeline and is discussing the possibility of processing some of this oil at Ukrainian refineries, Prime Minister Viktor Yanukovych said last Tuesday during a working visit to Lviv.

“We are definitely interested in taking an active part in transporting and perhaps refining this oil on the territory of Ukraine because we have facilities in the Lviv and Ivano- Frankivsk regions. It is possible to modernize these refineries and process some of this oil on the territory of Ukraine, because this is also part of our plans,” the prime minister said.

According to Yanukovych, work is now underway to bring together the interests of Azerbaijan, Kazakhstan, Shell, and Russia, which are extracting oil in the Caspian basin. The prime minister said that one of the options is setting up an oil transportation consortium. “The Odesa-Brody oil pipeline can be extended as far as Karlupy (Czech Republic). This can be done very quickly. About seven to eight million tons of oil can be transported in this direction,” he explained.

The prime minister also stressed that extending the Odesa-Brody pipeline to Plock and Gdansk will increase the amount of transported oil to 20 million tons. He believes there is a real possibility for exploiting this oil pipeline. At the same time, Yanukovych noted low activity on the part of European investors, especially in Poland and the Czech Republic. “There is a statement, but there are no concrete actions. Now we are suggesting that this process be speeded up. We are going to call for a meeting of oil producers, refiners, and European consumers,” he said in conclusion. The Ukrainian leader made this statement on the eve of the visit to Ukraine by President Nursultan Nazarbayev of Kazakhstan, which may be crucial in switching the Odesa-Brody pipeline back to the projected, European, direction. Because of the lack of crude oil, the pipeline is being used as a temporary measure in the reverse mode. It is pumping “black gold” from Brody to Odesa, where it is loaded onto tankers and delivered to consumers via the Mediterranean Sea.

Energy experts believe that Azerbaijan and Kazakhstan will be seeking new sales markets after the Baku-Tbilisi-Ceyhan oil pipeline becomes fully operational in late 2008.

The Kazakh government’s serious intentions “to cut an energy window” into Europe is reflected in its suggestion to Ukraine that the two countries jointly build a new refinery capable of processing three million tons of oil a year. This project, which Ukraine’s Ministry of Fuel and Energy believes should be non-governmental and commercial, will be high on the agenda of Nazarbayev’s visit to Kyiv. It will cost an estimated $8 billion and take two years to be carried out. The facility’s products will be intended primarily for the European market.

Economic calculations show that the Ukrainian pipeline can ensure the cheapest and fastest transit for oil companies because at the moment they rely on tankers that have to cruise along difficult fairways in waterways with heavy sea traffic. This raises the risks and price of hydrocarbon raw materials transportation. On the other hand, the problem of tankers passing through the Bosphorus and Dardanelles straits may vanish altogether after Russia, Bulgaria, and Greece build the Burgas-Alexandroupolis oil pipeline. But this route will require oil to be transshipped at Russian and later Bulgarian ports, transported by land, and then shipped to the customer from a Greek port. Three transshipments on this route can make oil “golden” in the literal meaning of the word.

But irrespective of these future plans, Odesa-Brody is still operating in the reverse mode, and Ukraine has to make serious efforts to keep this pipeline cost-effective. Late last year Ukrtransnafta signed a three-year agreement with Russia’s Transneft, which calls for increased shipments through the existing oil pipelines that run through Ukrainian territory. In particular, the Mozyr-Brody route — the Pivdenny oil terminal — is expected to pump at least nine million tons of crude this year.

According to Ihor Kyriushyn, chairman of Ukratransnafta’s board of directors, there is now every reason to hope that the yearly transit from Brody to Odesa can even be increased to 12 million tons. This may also enable Russian companies to make up for their failure to keep the promise to pump up to nine million tons a year through the Ukrainian pipeline, which they gave when they signed the reverse mode agreement (only 3.7 million tons were pumped last year and 5.8 million tons the year before). The increased transit of the “black gold” is expected to earn the state another 100 million hryvnias. However, this agreement also provides for a possibility to use the pipeline in the projected Odesa-Brody direction. Ukrtransnafta managers note that the projected route from Odesa to Brody and then to Western Europe is a top-priority matter, but it has not been possible to implement the project because of the lack of crude oil. In addition, transport routes for shipping Caspian oil to Odesa have not been mapped out. Of course, it can be shipped by tankers from, say, Supsy, Georgia, but the construction of an oil pipeline at the bottom of the Black Sea is considered the best but costliest option.

The situation is not that good on the European end either. The Polish companies that are supposed to join and complete the project in Gdansk or Plock are wondering how they can possibly extend the pipeline from Brody if it pumps Russian oil in the reverse direction. According to Kyriushyn, negotiations are still underway to switch the pipeline over to Europe, but everything depends on the availability of sufficient amounts of Caspian oil. The attitude of the Polish side is no less important. Ukrtransnafta hopes to establish a consortium with its Kazakh and Azeri partners in order to utilize the Odesa-Brody-Plock pipeline. The company believes that the Poles should also take part in these talks.