Latest decision to run contested pipeline in the direction Russian oil interests want comes after Prime Minister Yanukovych visits Moscow
Ukraine’s government has oveturned a February decision that would have mandated that the Odessa-Brody
pipeline pump only westward into Europe, choosing instead to further mull the fate of the contested pipeline.
Prime Minister Viktor Yanukovych’s government on July 5 revised a Feb. 4 resolution prohibiting reversal of the pipeline, which currently is poised to pump crude from Odessa to Brody in Lviv oblast. The oil would then be pumped further westward, providing a much-sought after source of oil for hungry European energy markets.
On July 6, Yanukovych sidestepped questions about the pipeline’s direction.
“It will operate in a direction which benefits Ukraine,” Interfax-Ukraine quoted Yanukovych on July 5. He did raise the possibility, however, that Russian crude could flow through the pipeline in the opposite direction in the short-term, allowing the dormant pipeline to generate much-needed revenues for Ukraine.
The revised resolution permits reversal of the still-unused pipeline, allowing it to be filled with Russian crude from the Urals, which would flow from the western Ukrainian town to Odessa and then be shipped across the Black Sea by tanker through Turkey’s clogged Bosphorus Straits.
The government’s decision comes days after Yanukovych met July 2 in Moscow with his Russian counterpart Mikhail Fradkov, who expressed his country’s continued willingness to fill the strategically important and much-contested pipeline with Russian crude. Insiders suggest the Kremlin has delayed signing a much-anticipated 15-year agreement for transiting oil through Ukraine until Kyiv agrees to reverse the Odessa-Brody facility.
Reversing the $500 million pipeline to carry Russian crude to the Black Sea would improve Russia’s export capacity and strengthen its grip on energy markets in Ukraine and Europe. Pumping primarily non-Russian Caspian oil to the West, as originally intended, could diversify Western European energy supplies, and strengthen Ukraine’s ties with the European Union.
Lobbying war
The original resolution on Feb. 4 was adopted after a period of intense lobbying by the United States and the EU on the one side and Russian interests on the other. Western oil concerns sent letters of intent to Ukraine that they would start using the idle pipeline to pump Caspian crude this year.
But since then there has been no concrete proposal from any leading Western oil company, leading the government to reconsider its earlier decision – or at least hint that it might – and put pressure on Western oil giants such as American oil giants ChevronTexaco. The world’s fifth-largest oil company has expressed interest in shipping crude westward from Kazakhstan on the Caspian Sea, but has yet to submit a concrete proposal. “If firms were interested, they would have given us a proposal a long time ago. I want this pipeline to be filled and to work, but where is the crude?” Kuchma said on April 28. “This remains a loss-making venture.”
In recent months, several Western institutions have nosed around the pipeline. The U.S. government-backed Ex-Im Bank has expressed its willingness to fund the pipeline’s expansion into Poland, as has the European Bank for Reconstruction and Development, which has toyed with funding the purchase of the crude needed to fill the pipeline.
A “dead end”
Earlier this year Ukraine’s deputy prime minister in charge of energy issues, Andry Kluyev, promised that Caspian crude would be flowing through the pipeline by May. Yet no concrete offers from oil operators in the Caspian region to ship significant amounts of crude have surfaced, leading Kuchma to call the matter a “dead end” in April.
Konstantin Borodin, a spokesperson at the state oil and gas company Naftogaz Ukrainy, which manages the pipeline through a subsidiary, said the July 5 decision makes sense.
“The government has finally reached the understanding that the Caspian crude is simply not there,” Borodin said.
“And I think the pipeline will be reversed if the Russians still want to use it.
“Some time has passed, and the previous aspirations of previous government officials have not come through,” Borodin said. “It can only be welcomed that the government decided not to lock itself into previous decisions, which have failed to bear fruit, and that the government is ready to reevaluate the situation. The situation has changed and it’s nice to see that the government has not become a hostage to its previous decisions.”
In a statement made on his personal Web site following the announcement, front-running presidential hopeful Viktor Yushchenko criticized the government for failing to use the pipeline.
“The current ministers were not able to find crude oil suppliers in Azerbaijan and Kazakhstan, nor were they able to find consumers in Central and Western Europe,” the statement reads. “There arises a question: Did the government really want to find oil for transit to Europe? Was there political will to do this?”
U.S. officials meanwhile continue to urge Ukraine not to reverse the pipeline. U.S. Ambassador to Ukraine John Herbst said in a July 1 interview with the Post that “American firms are very interested” in Odessa-Brody and are “preparing contracts” on it. He added that Ukraine “has a natural interest in sending oil from the Caspian basin to Europe,” and that westward use of the pipeline could help Ukraine’s European integration chances.
Cross-border concerns
In an interview with Channel 5 on July 6, Anna Skovronska-Luczinska, the Polish Embassy’s commercial attache, said her country had not been notified of any decision by Ukraine to break an agreement between the two countries and the EU about running the pipeline westward. She added that she hoped the current direction of the pipeline would not change.
The Odessa-Brody pipeline project is one of several projects intended to increase the supply of Caspian crude oil to Europe. According to its original designs for the project, Caspian oil shipped in barges from Georgia across the Black Sea to Odessa would then be pumped westward through existing Soviet-built pipelines and ones yet to be built.
Completed in 2001, the 674-kilometer Odessa-Brody pipeline can pump 9-14 million tons of crude to Europe every year, and a planned extension into Poland would more than double its capacity.
The fact that the pipeline remains unused has since last year spurred Russian lobbying efforts to reverse its flow.
Some experts had argued that reversal is the more profitable option for Ukraine over the next three years, until the pipeline can be extended into Poland and the needed Caspian crude materializes. During that time, Ukraine could generate revenue for the pipeline’s extension into Poland from Russian interests hoping to pump oil south, they argue.
Most Western analysts, including PricewaterhouseCoopers, which have developed a business plan for the Caspian option, have warned that if Ukraine reversed the pipeline temporarily, it would lose its “window of opportunity” to become a major route for Caspian supplies to Europe.
The pro-Russian option has been sharply criticized by some analysts, who fear it would further clog up the already crowded shipping lanes of the Bosporus Straits, which connect the Black Sea with the Mediterranean.
