Oleksandr TODIYCHUK: Taking the European oil transport route
The Day has on more than one occasion touched on the issue of the Ukrainian section of the Eurasian oil transport corridor. Now the problem has again surfaced, assuming geopolitical significance after the US, German, and Polish ambassadors shared their views on our pages (The Day, No. 12, April 8). Now that Ukraine has additional oil transport capacities it has grown stronger as a transit state. This project allows Ukraine to diversify its crude oil supplies by adding Caspian sources. It also allows EU countries the opportunity to enhance their energy security. Politically, it is safe to assume that the project provides the preconditions for Ukraine to strengthen its international prestige and opportunities for European integration. It is also true, however, that, despite all the potential advantages, the oil pipeline remains idle. Worse still, changes in the projected oil transport routes are being discussed.
After building a sophisticated and powerful oil transport complex involving staggering expense, Ukraine appears unable to use it as an advantage over those lobbying for their own oil routes to Europe. Why?
Several years ago, Trokhym Kovalchuk, Ph.D. in economics and Deputy Secretary of the NSDC, warned on our pages that keeping the project nationally isolated was a bad policy, for the project was international by its very nature. That policy was basically championed by Lubomyr Buniak, former manager of the Druzhba oil pipeline system. Viktor Yushchenko’s cabinet placed him in charge of the construction of the Ukrainian section of the oil transport corridor, so it could be adjusted to the international crude oil output, transport, and consumption infrastructure. The domestic isolationists’ strategy was based on the assumption that, once the pipeline was ready, everybody would be standing in line to get their oil pumped through it. It is now difficult to say who made what mistake, whether it was our habitual arrogance or someone’s malicious intent. The obvious result of our passivity is that the bulk of the oil pipeline is still filled with industrial water and only a 52 km section (less than 10% of the total length) is in use, pumping Russian oil in the opposite direction, which is not what anybody originally expected. One can understand how Ukrtransnafta, currently in charge of the pipeline, feels. They must earn money to maintain the oil transport complex. Unless additional finances are enlisted, it will eventually become unusable. In addition, keeping even part of the capacity busy would reduce the losses sustained by Ukraine because of its being idle. Ironically, the Yushchenko cabinet’s patriotic stand against the international consortium may result in the pipeline being used by Russian companies for their own benefit, with Ukraine losing an important means for access to the European energy market.
At present, even the inveterate “patriots” are increasingly aware that the NSDC findings were correct (which then caused such an uproar in the press). Several council meetings studied the situation involving the oil transport complex, stressing the need to not only step up construction, but also to develop international cooperation and enlist foreign investors. An international consortium should become the institutional base, and the president ordered its formation in early 1998.
“Unfortunately, that directive was not carried out, we wasted time and had to take urgent measures to catch up on it,” Oleksandr TODIYCHUK, special representative of Ukraine for the Eurasian Oil Transport Corridor (EOTC), told The Day. “The only thing inspiring hope is what the current cabinet is doing. It doesn’t deny political support to this project, which is of such strategic importance to our country — and I mean both domestic and foreign political support.”
We have received tangible support of the pipeline’s Western sector also from the ambassadors of three such influential countries as the United States, Germany, and Poland. They had an article carried by The Day, praising the European integration orientation of the Odesa-Brody oil pipeline. What do you think of the diplomats’ assessment?
O. T.: Quite frankly, your publication was a pleasant surprise. In a way, it was an eye- opener. For the first time the ambassadors of countries, whose role in carrying out the EOTC project is so important, came out with a joint statement. In fact, our partners’ views and approaches to the place of Ukraine in the European energy system coincide with ours. This is only natural, for our EOTC policy is based on talks, consultations, and conferences with the world public being most actively involved, specifically people representing US and European political, business, and scientific circles.
The EOTC has attracted considerably greater interest recently. This is evidenced by the heightened activity of potential partners and increased media coverage. Odesa-Brody is mentioned at almost all top-level meetings discussing Ukraine’s strategic issues. There is an extensive list of basic Ukrainian oil transport scenarios, with the system evolving into a powerful EOTC project. The commercial and strategic aspects of these scenarios are analyzed. A business plan will be completed in late June 2003, yet we have the first findings from PricewaterhouseCoopers. They show that the project has good prospects. International experts believe that transporting Caspian oil to the Czech Republic, Germany, and Poland will be economically advantageous. There is also an interesting option of delivering oil to the deep-sea port of Wilhelmshaven (Germany).
In addition, we are back to actively studying the possibility of cooperation with the Caspian Pipeline Consortium (Ukr. abbr., KTK) to work out the Tikhoretsk-Lysychansk-Kremenchuk-Brody route bypassing the Black Sea. All this spurs potential customers and users of the oil transport system to take action — and it’s starting to look like a real competition. Since other projects lack such powerful international support, there’s a good chance to begin the real full-scale integration of the Ukrainian economy into a United Europe. Even now the European Union regards the Ukrainian option as a general European project and an important element of the new EU energy safety strategy. European Commission Vice President for Energy and Transport Loyola de Palacio noted that, if fully implemented, the EOTC would be important not only for any two given countries (like Ukraine and Poland) but also for the European Union as a whole. European Commission Chairman Romano Prodi praised and supported the project when meeting recently in Brussels with Ukrainian Premier Viktor Yanukovych. We constantly feel the US administration’s attention and support (remember Stephen Mann’s visit to Ukraine not so long ago?), and our cooperation with our Polish and German partners is gaining momentum. A lot has been said on the subject in the media. When effectively carried out, this project will have strategic meaning for the EU and will also enhance our national security.
We were glad to hear EBRD President Jean Lemierre announce, during talks with the Ukrainian Premier, that his bank was prepared to join the oil transport consortium as a creditor and investor. It was also an encouraging message to our partners.
How important is the EOTC project for Ukraine’s integration into the Euro- Atlantic community and European markets?
O. T.: Back in the nineteenth century John D. Rockefeller said that by controlling oil transport you control oil extraction and processing. The same applies to the twenty-first century. Energy transport remains a traditional element of geopolitical and geoeconomic doctrines. Ukraine has determined its own priorities here, of which the highest are cooperation instead of dictatorship, partnership instead of dependence, and diversification instead of monopolization.
When carrying out the EOTC project, Ukraine is proceeding from a new philosophy; we want such pipelines as mechanisms producing new opportunities, lessening our dependence on one supplier, increasing the political freedom of our leadership in choosing the nation’s development priorities and helping develop mutually advantageous international cooperation.
A new geoeconomic and geopolitical landscape is taking shape in Europe. Ukraine stands a real chance of having a European future, yet the road there lies not through verbiage but through the implementation of certain projects that are advantageous to Ukraine and needed by the EU. The EOTC is one of, unfortunately, the few such projects that Ukraine and Poland can offer the European Union.
Considering the geopolitical position of both countries, the Ukrainian-Polish tandem may well play a key role in upholding EU energy security in the course of expansion. The Odesa-Gdansk EOTC could become the backbone of Kyiv-Warsaw partnership — not in the declarative but true sense of the word. If accomplished, it could lessen the dependence of both countries on traditional supplies of oil, enhancing the role of Ukraine and Poland as a transit tandem on the European continent, giving new meaning to cooperation within the EU-Ukraine-Poland triangle.
I am glad to note that our cooperation with Poland in carrying out the Odesa-Brody- Gdansk project received an impetus after the Polish business forum in Rzeszow, organized under the auspices of both presidents.
In their article the ambassadors warned against the possibility of reversing the Odesa-Brody pipeline. How possible is this scenario and what are the risks involved?
O. T.: The consequences of changes in the Odesa-Brody pipeline ideology are hard to calculate. As mentioned, its strategic meaning is the transport of oil from Odesa to Brody and westward to Plock. LUKoil, UKOS, and TNK have suggest we reverse the flow, but we haven’t received any business proposals. We will consider all the options, which is standard business procedure, but I don’t expect any such radical changes in Ukraine’s strategy. Even if those companies promised us mountains of gold we’d have think about our future. At present we are a step ahead of our rivals, for we have actually built a pipeline bypassing the Bosphorus.
The new oil transport projects are already paying quite a lot to the budget and will shortly operate at full capacity. After we start pumping oil from Odesa to Brody, we may receive additional revenues in phase one, but simultaneously we will suspend project development, thus losing the head start we now have (compared to the Burgas-Alexandroupolis, Constan ю ta-Omisalj, Baltic pipeline system, and other rival projects). In fact, those currently interested in pumping oil from Odesa to Brody and vice versa could lose interest after such projects are completed.
The oil transportation route suggested by TNK, UKOS, and LUKoil — across Belarus, then from Brody to Pivdenny [the Southern] oil terminal — is the longest one for carrying oil from Samara. The flow rate is somewhat impeded by the Belarusian oil transport system, where the customers will have to pay $2.50 more per ton than using to any other serviceable Prydniprovia pipeline.
At present, we are using a 52 kilometer section of Odesa-Brody and the Pivdenny (Southern) Oil Terminal in the reverse mode, under a short-term business plan, to pump additional oil from Kremenchuk. The expedience of using this section the way we do was stressed in the findings supplied by Halliburton Kellog Brown & Root and Cambridge Energy Research Association in 2002.
At least 4 million tons of oil will be delivered to the port of Pivdenny under contracts with four companies, via Michurinsk-Kremenchuk-Pivdenny and Velykotsk-Lysychansk-Kremenchuk-Pivdenny. In late 2003, Ukrtransnafta’s export potential is expected to reach 7 million tons of oil a year. In other words, the Russian oil companies mentioned will have fresh export opportunities, using mutually advantageous routes.
Since January of this year we have supplied some 500,000 tons of oil through the Pivdenny terminal. This year the central budget will receive at least 400 million hryvnias in proceeds from the new oil transport projects at 4 million tons payload. If the traffic is increased to 7 million tons, there were be an extra 70 million hryvnias or thereabouts. Using such revenues, Ukrtransnafta will be able to buy technical oil, so that early next year Odesa-Brody could start the commercial transport of heavy oil, much to the chagrin of certain people outside Ukraine. Previous studies done by PricewaterhouseCoopers point to the project’s quite optimistic prospects. It should be remembered, however, that any inconsistent steps by the Ukrainian side, like making changes in the pipeline strategy, will not go unnoticed by our partners and they will regard this as mounting political risk for the project.
The US, German, and Polish ambassadors also warned that the Druzhba-Adria project accords had numerous shortcomings. Could this in any way impede Odesa-Brody?
O. T.: Even before that publication the United States pointed out that the Druzhba-Adria accords, signed in 2002 by Russia, Ukraine, Belarus, Slovakia, Hungary, and Croatia, were blocking the Odesa-Brody project. Extensive consultations were held. Actually, the emphasis had been on the Druzhba-Adria terms and conditions. US experts warned that Ukraine could lose free access to the Druzhba pipeline and this would restrict pumping high-gravity oil from Odesa-Brody. A task force of the project member countries is working on this jointly with our experts.
At the same time, I’d like to point out that neither the expert finding, nor the article we’ve been talking about contain any objections to the Druzhba-Adria project, or any remarks concerning its incompatibility with Odesa-Brody. On the contrary, the idea of Caspian oil deliveries from Odesa to the deep-sea port of Omisalj in Croatia is actively supported by US experts. Ukrtransnafta experts, in turn, are working on the technical aspects of separate, consecutive, and parallel transportation of the Urals and high-gravity oils.
