№ 9 (September 2008)
Ukraine Reverses Odessa-Brody Pipeline Flow
The Ukranian politics are reflected in economy just as much as the president gets along with the prime-minister and the other way round. Reciprocal curtsies of the sworn friends accompany every serious business transaction.
By Alexander Serafimovich
The Ukranian politics are reflected in economy just as much as the president gets along with the prime-minister and the other way round. Reciprocal curtsies of the sworn friends accompany every serious business transaction. And when production, processing and transportation of hydrocarbons is concerned, such nasty things happen that the oilmen’s tears streaming in both reverse direction and averse directions fill in the pipeline instead of the “black gold”.
On Aug. 15, the Ukrainian President Viktor Yushchenko signed a decree “On resolution adopted by the National Security and Defense Council of Ukraine on July 28, 2008 ‘About urgent measures to ensure the operation of the Odessa-Brody pipeline in the direction as designed.’ ”
The government was tasked with completing by Sept. 1, 2008, the necessary organizational and legal arrangements and ensuring that by the end of 2008 the Odessa-Brody pipeline operates in an averse regime. The Secretary of the National Security and Defense Council Raissa Bogatyreva is charged with supervision of the implementation of the decree. The Secretariat of the President has often criticized the government’s position with relation to starting the pipeline operation in an averse mode. On Aug. 1, Andrei Goncharuk, the deputy chief of the Secretariat of Ukrainian President, said that recent pronouncements of the head of the government on the plans to operate the Odessa-Brody pipeline in the direction as initially designed show that the cabinet of ministers is determined to continue to sabotage the plans. According to Goncharuk, the main goal of operating the Odessa-Brody pipeline in an averse direction is to ensure a flow of oil supplies from the Caspian and other regions to Ukrainian and international oil refineries. Besides, today this the only real opportunity to save the Ukranian oil refining industry from decline. Regrettably, though, the Ukranian president’s decree is not the final say in the protracted battle over the pipeline’s direction.
As early as July 1, the Ukraine President Viktor Yushchenko emphatically said that all agreements reached on supply of Caspian oil via the Odessa-Brody pipeline to EU countries are being complied with, including the agreements reached during the Kiev energy summit about supplying crude Caspian oil for this pipeline. “Both parties, including the joint venture Sarmatia, are taking steps to implement the agreements reached at the previous meetings,” said Yushchenko adding that “there are no disputes over these issues at the level of the states.” Yes, it is very likely there will be no disputes at the level of the states, unless the state concerned is Ukraine.
On the same day, the prime-minister of Ukraine Yulia Timoshenko commented on the situation at a briefing in Ternopol. She believes that the plans for averse operation regime of the Odessa-Brody which are now being contemplated by the Secretariat of the Ukranian President are just a corrupt scheme similar to that of RosUkrEnergo.
The agreements that are due for signing have nothing in common with the international projects. This is yet another deal being hustled through by the President’s Secretariat,” emphasized the prime-minister. “Just like the RosUkrEnergo project fell through, just like the plans to take away from Ukraine the Black Sea shelf together with its biggest gas fields were thwarted, this trick will not come off either – appropriating the Odessa-Brody for their offshore firms, selling the crude oil used to fill the pipeline today and practically leaving Ukraine with nothing. Maybe this will happen sometime in the future, but I do not think this is going to happen any time in the nearest 20 years while our team is at the helm,” said Timoshenko.
Commenting on the written order whereby Timoshenko prohibits the director of the Ukrtransnafta board Igor Kirushin and his deputies to sign relevant documents and participate in meeting and consultations about oil transit via the Odessa-Brody pipeline before the government issues a special resolution, the head of the Ukranian President’s Secretariat Baloga reminded about the President’s Decree No. 474 signed in May this year which requires that all organizational and technical arrangements for ensuring an averse operation mode for the Odessa-Brody, as initially designed, be accomplished by the end of 2008.
Baloga firmly rejected the prime-minister Timoshenko’s allegations of corrupt intents in the plans operating the Odessa-Brody pipeline in an averse regime. Previously the President’s Secretariat said that the government was obstructing the signing of an agreement about management of the Odessa-Brody pipeline with a company of Igor Kolomoisky’s Private Group.
“A unique diversification of the Ukranian position in energy sector. A unique European project,” said Viktor Yushchenko on July 28, while opening the session of the National Security and Defense Council of Ukraine.
“Today in Europe there is no other project like the Odessa-Brody-EU pipeline, although there are three alternative pipeline projects,” added Yushchenko. With this argument in hand the president warned about possible consequences of delaying the implementation of the project itself. “We can lose the race if we continue the political debates around this project,” he said.
The National Security and Defense Council expressed its disapproval of the Cabinet of Ministers’ efforts to ensure the operation of the Odesa-Brody pipeline in an averse regime. Besides, the National Security and Defense Council ordered that the cabinet of ministers prior to September 1 review the proposals of an interagency task force and either approve its conclusions or submit its own proposals with regard to crude oil suppliers needed for operating the pipeline in an averse regime.
The announcement that the Odessa-Brody pipeline is to be filled with technological oil in the nearest future was made on July 1 during the general press-conference devoted to the results of the talks between the president of Ukraine and the president of Azerbaijan held in Baku. “Very soon we shall start a test run of the pipeline and evaluate these plans in action,” said Ilham Aliyev. The president of Azerbaijan added that presently work is underway to prepare a complete feasibility study of the project, which will give a full picture of the commercial advantages of this project.
He emphasized that the test run of oil for which Azerbaijan is ready will also fully demonstrate the potential of the project. Yet, the parties did not specify the date when the project was to begin only saying vaguely that this would happen “in the nearest future.”
In May 22-23 in Kiev the International Energy Security Summit took place, attended by delegations from nearly 30 countries. One of Ukraine’s main partners at the summit is EU. This was demonstrated when at the opening of the International Economic Forum in May the president Viktor Yushchenko said that the EU could provide $2.5 billion for renovation of the Ukrainian gas transportation network.
The new project was to have as its basis the Odessa-Brody-EU pipeline, and the need to complete the construction of the pipeline was one of the top issues of the summit’s agenda. The Czech Republic, Poland, the Baltic nations, Belarus and several other Central and Eastern European nations are interested in completing and putting into operation the pipeline as soon as possible.
Ukraine initially planned to use the Odessa-Brody pipeline for transporting Caspian gas and oil to Europe. When the construction was completed in 2002 the 674-kilometer-long pipeline, built at a cost of 550 million hryvnyas – the sum denominated in the as yet soft national currency, could annually transport up to 14 million tons of oil to Ukraine’s western border.
The cost of building the additional line of the Odessa-Brody pipeline reaching Poland will cost up to 350 million euro. Such was an estimate of the chairman of Ukrtransnafta Igor Kirushin. “The cost of building the new branch reaching Poland will be 300-350 million euro. I don’t think this is an awful lot of money. After we start operating the Ukrainian section of the Odessa-Brody in a mode as initially designed, it will be much easier to secure the money. We have the period from 2009 to 2010 to complete the pipeline construction,” said he. According to Kirushin, the Granherne company is figuring out the optimal route for the pipeline: whether it would lead up to Pock or to Adamowo-Zastawa. A final version of the feasibility study will be presented at the 4th Energy Summit in Baku in November.
At that time there were hopes that the initial operation mode of the pipeline would catch the interest of European governments and companies keen on ensuring security of energy supply.
However, in spite of the token gestures made by the potential partners in oil/gas supply and transit or the fact that influential auditors (for instance, PriceWaterhouseCpers) assessed the project as internationally competitive, the Odessa-Brody remained idle for three years. Representatives of the Polish political circles and oil industry were in no hurry to extend the pipeline to Pock, and Central Asian suppliers were in no hurry to set aside oil from the already contracted volumes. So operating the pipeline in a reverse mode was the only possible alternative usage.
In 2004 Ukrtransnafta and a Russian-British joint venture TNK-BP signed an agreement providing for the transport of up to 9 million tons of Urals oil vie the link Mozyr-Brody-Yuzhny oil sea terminal for three years. Overall for the whole period when the pipeline was operated in a reverse mode (from late 2004 to May 1, 2008) 22,036,000 tons of crude oil was pumped through, Ukraine’s profits from the transit fees and harbor dues totaling $226.3 million. By the end of 2006 the parties announced they were ready for further cooperation and struck an agreement providing for the transit of 9 million tons of Russian oil and gas via the same link annually until 2010.
As we can see, a reverse regime proved not that bad. Especially in the absence of realistic alternatives.
On July 21 the presidium of the government of Russia was doing exactly that – discussing supply of Russian oil and gas in connection with the issue of oil supply to the Czech Republic. “In effect, the Czechs are addressing their claims to a wrong party,” said the Russian deputy prime-minister Igor Sechin. “The Ukrainian plans for starting to operate the Odessa-Brody in a reverse regime this year has stirred concerns among Russian companies supplying oil to the Central and Eastern European markets and make them look for more stable transportation links. In particular, our companies are looking closer at routes through Novorossiisk and Primorsk which can ensure a more stable work and efficiency of supply,” said he.
However, the head of the Russian government Vladimir Putin opined in response to Igor Sechin’s statement, “This is not going to be a reverse mode, this will be an averse mode.” Obviously, this is what is going to happen.Although Kiev is unpredictable. And it would be too early to make any conclusions at this stage.
Meanwhile, the directors of Galitchina oil refinery (Drogobych oil refinery, Lvov region) and Petrochemist of Ciscarpathian Region (Nadvirnyansk oil refinery, Ivano-Frankovsk region) accused the Ukrainian cabinet of minister of failure to adopt a decision to switch the Odessa-Brody pipeline to the Odessa-Brody direction. Such was the statement made during a press conference on July 22 by the head of the board of the Galitchina oil refinery Alexander Lazorko and the head of the board of the Petrochemist of Ciscarpathian Region Alexander Shilyaev.
According to them, memorandums of understanding were signed providing for transportation via the Odessa-Bordy link of 5 million tons of light Caspian oil annually for refining at two Western Urkanian refineries with a “pump or pay” payment scheme benefiting Urktransnafta. They added that Ukrtransnafta would have been getting as much money as it is getting now from pumping Russian oil from Brody to Odessa.
The prime-minister Yulia Timoshenko said she considered it indispensable that oil supplying countries participate in the project to start operating the Odessa-Brody pipeline in an averse mode (toward Brody). She told that at a briefing at the cabinet of ministers on July 30.
The prime-minister added that the cabinet of ministers will never allow that the Milbert Ventures company (Virgin Islands) sign contracts for supplying Caspian oil via the Odessa-Brody pipeline operating in an averse mode. “The cabinet of ministers would not support any strange schemes for operating the Odessa-Brody pipeline and so we will never support the partnership and de-facto shady privatization through an offshore company,” said she.
However, the government is not alone in its opposition to the president’s plans. On July 31 59 parliamentarians submitted to the Ukraine’s Constitutional Court a request to review the constitutionality of the Ukrainian president’s decree “About ensuring the operation of the Odessa-Brody pipeline in the direction as designed” of May 22, 2008 No. 474. In accordance with the Constitutional Court’s rules, the request has been submitted for review to the Court’s secretariat.
Reverse or averse? Is this really the question? The future of the Odessa-Brody pipeline depends solely on whether clients will be found. Otherwise Ukraine risks ending up with nothing, suffering the same defeat as when the Baku-Tbilisi-Ceyhan pipeline was built resulting in most Caspian oil being “syphoned off” via Turkey.
Thus, one of Ukarine’s most ambitious oil and gas projects initially conceived as an enhancer of the country’s security of energy supply and a boost to its international reputation in fact proved to be a big headache.