Clouded Future for Odessa-Brody Pipeline

Economic News

22 Jul 2010
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The 674-km Odessa-Brody pipeline, planned and built to allow transportation of Caspian crude oil to Europe without passing through the Russian pipeline stranglehold, has had a confused and chaotic history. With its basic configuration - from Odessa on the Black Sea to Brody near the Polish border - completed in 2001 during the term of President Leonid Kuchma, the tube remained unused until 2004 when an agreement was signed between Ukraine and Russia to begin moving Russian crude in what is considered opposite direction from the original plan.

The pipeline was intended to transport Caspian oil from the newly built Pivdenny terminal in Odessa to the existing Druzbha pipeline for transport to European refineries. However, after it was completed, Ukraine did not have the money required to fill it with Caspian crude and none of the European states was willing to build the connecting pipelines to link Odessa-Brody to European refineries.

While the original Caspian to Europe design of the pipeline is still strongly supported by many in Ukraine, most notably President Viktor Yushchenko, the reality is that the flow of the Odessa-Brody has been reversed in the southerly direction to the Black Sea and the pipeline has seen limited movement of Russian crude from late 2004 until the present time.

During the first five months of reverse use in late 2004 and early 2005, only about 1.3m tonnes were pumped, which meant that during that period the pipeline operated at a loss to the Ukrainian government. In 2004, the government oil transport company UkraTransNafta estimated that a throughput of at least 4m tonnes annually would be necessary for a break-even financial result. This was based on the beginning tariff of just over $10 per tonne. Sources close to the situation suggest that Ukraine made no money on the pipeline in 2005 or 2006 because it agreed to substantially lower tariffs with TNK-BP. It is only now in 2007 with much higher throughput that there may be some chance of pipeline profitability for Ukraine.

On July 11, the Russian-British firm TNK-BP Ukraine, one of the largest oil companies operating in Russia (Russian oil giant TNK was purchased by British Petroleum in 2003), announced that Russian oil pumped across the Belarussian-Ukrainian border via the Mozyr-Brody oil pipeline and then from Brody to the Pivdenny oil terminal in Odessa amounted to 4.566m tonnes in the first half of 2007. TNK-BP also said that Ukraine had received $170m as payment for transit and port taxes since the contract began in 2004.

David Sears, an energy consultant who headed the Ukrainian government study with regards to use of the pipeline in the reverse direction, told OBG, "These recent figures are impressive but they fail to reflect the more important reality, the cost of buildings, staff and operating costs associated with the Odessa-Brody pipeline. Today's news is very similar to articles we read in 2003, governments still sign agreements, as they have done since completion, but I'm not aware of any significant contracts for either breaking ground on Brody-Plock construction or Caspian oil supplies. Many of those who were working hard on those issues have been replaced or dismissed."

Use of the Odessa-Brody pipeline for its original purpose of transporting Caspian oil to Europe continues to be a matter of discussion, but considering profitability concerns and the increasing use of the pipeline for movement of Russian crude southward, it is hard to imagine rapid development in the westward direction.

"In our study, we laid out five major parameters that should be met, but most were not realised. As I recall, the contract comes up for negotiation in August and proponents of either reversal or direct use will be stating their cases. My current opinion is that the government will extend the contract (with TNK-BP), in spite of high potential for big losses."

Further development of Odessa-Brody was a major topic at the June summit of GUAM, a regional grouping of four ex-Soviet countries. Begun in 1997 by the leaders of Georgia, Ukraine, Azerbaijan and Moldova, GUAM was joined in 1999 by Uzbekistan, which later withdrew.

In response to Yushchenko's fervent support at the June 2007 GUAM summit in Baku for using Odessa-Brody as a way of diversifying energy routes and reducing dependence on Russia, Azerbaijani President Ilham Aliyev reassured other GUAM members that his country had enough crude in its Caspian fields to fill the pipeline. There was, however, considerable scepticism among observers, given the intense interest of China and other far eastern countries in Caspian oil, that Odessa-Brody, with its necessity of sea transshipment from the Caspian to Odessa, would ever be the most desirable marketing and transport option.

Further interest in the Brody-Plock portion of the pipeline has been clouded by a lack of Ukraine's ability to fill even the original portion with oil. Moreover, little in the way of firm direction emerged because of the weakness of the Yushchenko administration, vacillating governments and a considerable number of old-line energy professionals within the government-owned oil company who pushed the Russian alternative relentlessly and effectively.

The future of GUAM, originally the brainchild of then presidents Kuchma of Ukraine and Eduard Shevardnadze of Georgia, and the future of the Odessa-Brody pipeline - at least so far as its original direction is concerned - seem intertwined. Designed as a counterbalance to the Commonwealth of Independent States (CIS), GUAM has been critical of the CIS because of Russia's domination. However, it is no secret that GUAM has always been, to a large extent, dependent upon substantial financial backing from the US and is widely regarded as nothing more than a "talking shop" with little chance of expansion and an uncertain future.

The construction of the Odessa-Brody pipeline, largely accomplished through the determination of Kuchma and with Ukrainian money, still has the possibility to see substantial use in the westward direction. However, it appears that in the near future, the Odessa-Brody may only see Russian crude in the other direction.

Sears added, "From my discussions with the Kazakh leadership, I have no doubt whatsoever that they are ready to sign a contract with Ukraine that would guarantee full utilisation of the current capacity of 14.5m tonnes per year in the westward direction. Also, once that capacity is reached, the pipeline could be self-financing to further develop it to carry 45m tonnes per year. However, no one in Ukraine has ever shown the determination and will to sit down and work out a contract with the Kazakhs, the potentially largest supplier of Caspian oil to Europe and the world."

The problems with striking a deal with the Kazakhs are many, but in general they come down to the strength of the pro-Russian orientation of many of those in the Ukrainian government oil sector and further to the preoccupation of top officials with upcoming parliamentary elections. No one wants to take the lead in negotiations when it is unclear who will be in the energy power positions after the elections now scheduled for September 30.

Sears concluded, "The window was open but will soon close because of other developments. Ukraine is on the verge of missing one of the best energy trains ever to leave the station."

Unless Ukraine soon takes strong steps to assure completion of pipeline development in the westward direction, the possibility of increasing demand from China and other far eastern buyers willing to pay a higher premium for Caspian crude could turn Odessa-Brody into a virtually irrelevant footnote in Eastern European energy history.

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