UkrTransNafta president criticizes decision on use of Odesa-Brody pipeline (10/19/03)

UkrTransNafta president criticizes decision on use of Odesa-Brody pipeline

by Roman Woronowycz
Kyiv Press Bureau

KYIV - The president of the Ukrainian state-owned company responsible for the Odesa-Brody oil pipeline on October 16 criticized a decision by its supervisory council to have the pipeline used exclusively in reverse fashion to move oil from Brody to Odesa.

Oleksander Todiichuk, president of UkrTransNafta, who was chairman of the supervisory council until his replacement in August, explained in an interview with The Ukrainian Weekly that a preliminary agreement signed between Ukr-TransNafta and the Russia oil giant TNK would limit Ukraine's options. It could even completely eliminate a future role for the country in the transportation of lucrative Caspian Sea oil to Central and Western Europe.

"This proposal offers the least advantageous of all the possibilities," Mr. Todiichuk said.

On October 3, UkrTransNafta's council, which consists of representatives and specialists of the Ukrainian government, recommended by a vote of 4-3 to give TNK the right to fill the Odesa-Brody oil pipeline and allow it to pump only lower-grade oil for a one- to three-year period in the direction opposite from its intended use.

TNK, which was recently purchased by British Petroleum, would like to pump its Ural crude "in reverse" from the Russian city of Samara on the Volga through the Prydniprovska pipeline of Belarus down to the Ukrainian town of Brody and on to the port of Odesa, where ocean tankers would carry it through the Bosporus Sea and on to Europe.

TNK agreed to supply the Odesa-Brody line with 450,000 tons of "technological oil," the crude that is initially pumped into the pipeline to fill it, and to pump 9 million tons of crude annually through the line for up to three years.

Mr. Todiichuk - who was replaced as chairman of the supervisory council and moved to his current, more symbolic post in August over disagreements on how to utilize the pipeline he helped build - also noted that Ukraine was needlessly succumbing to pressure to immediately fill the empty Odesa-Brody pipeline. He emphasized that a strenuous lobbying and disinformation campaign was succeeding in convincing politicians and experts alike that the pipeline needed to begin pumping oil as quickly as possible.

"In the agreement Ukraine commits not to pump [Caspian] light sweet crude in the Odesa-Brody line for one year. This fact is not widely mentioned in the press," noted Mr. Todiichuk.

Light sweet crude oil is of higher quality and in more demand in Europe than the sulfur-laden heavier crude TNK pumps out of the Ural Mountain wells.

Mr. Todiichuk, who underscored that "it is evident TNK is doing a masterful job of lobbying" and that "we need to develop similar strategies in order to be successful," also dispelled widespread belief that the Ukrainian pipeline would rust if not used, calling the notion "nonsense." He said that the pipeline had been purposely filled with a special substance to protect it from corrosion for a 10-year period.

The Odesa-Brody pipeline, which was completed in May 2002, can handle from 9 million to 14.5 million tons of crude annually. It was intended originally to pump Caspian light sweet crude to Poland - from a pipeline hook-up near the town of Brody in Lviv Oblast to the city of Plock, located near the Baltic Sea - in an agreement with the Polish government. A joint Polish-Ukrainian parliamentary resolution on October 15 reasserted that intention.

That pipeline would take the oil to the Baltic Sea and on to Europe. However, the lack of private financing has stalled the Polish project, in part because potential European partners and end-users of the oil have shown little initial interest as they wait for the Caspian oil fields to be further developed and transportation kinks to be ironed out.

The Ukrainian government - which has been looking for more than a year for someone to utilize the empty pipeline and must give approval for how it will be utilized - had initially looked favorably on the TNK project, but decided after the vote of recommendation by UkrTransNafta's supervisory council on October 3 to first conduct evaluations of the project's potential. On October 15 Ukraine's Fuel and Energy Ministry gave the nod to two United States-based firms, as well as a Canadian firm and a British firm, to bid on developing a feasibility study on the TNK initiative.

The TNK recommendation has taken on political overtones, as well. Some politicians are questioning why the Russian oil giant, which agreed to the British Petroleum buyout because it was cash-strapped, would now be willing to lose $3 a ton in order to ship its crude an additional 600 kilometers. Experts have speculated that the TNK strategy is simply to grab the Ukrainian pipeline for itself and decide its future use later.

Mr. Todiichuk explained that Ukraine must move carefully because the next couple of years will be critical in determining who will be the major players in transporting the huge reserves of Caspian Sea oil - thought to be second only to Saudi Arabia's vast fields - to Europe. He noted that since last year's ecological disaster off the Spanish coast of the Atlantic Ocean, where an old oil tanker broke up and sunk, the price of transporting oil via sea vessels had risen dramatically and multinationals were now looking to move their product over land as much as possible.

The UkrTransNafta president said that if Ukraine agreed to the exclusive contract with TNK, it might find multinational oil companies and European refineries looking elsewhere to transport the crude, or other countries constructing there own pipelines while Ukraine was stuck with the TNK exclusive.

Mr. Todiichuk also noted that Ukraine shouldn't think that TNK was in a position to guarantee that the Odesa-Brody line would be utilized even at its minimum requirement of 9 million tons annually because, for one, Russia would still set pumping and export limits for its crude on an annual basis to support its prices, and also because Turkey had established limits how much shipping could pass through the already overly congested Bosporus and Dardanelles shipping lanes it controls. As a result, both countries could influence how much oil TNK would actually move out of Odesa.

Mr. Todiichuk said he believes that Ukraine must utilize the flexibility that the Odesa-Brody pipeline offers to move both the light sweet crude of the Caspian region and the heavier Urals crude from Russia. He explained that the main reason an exclusive contract with TNK is a mistake is that an optimal alternative is available to Ukraine.

"We can move the oil both ways. We have the technology - the last of it was recently installed," explained Mr. Todiichuk. "We can load both types of crude and utilize different pressures to pump it."

UkrTransNafta has entered into negotiations with Chevron-Texaco, spurred by a recent meeting in Washington between Prime Minister Viktor Yanukovych and U.S. Vice President Dick Cheney, during which the Odesa-Brody pipeline was discussed.

While negotiations remain in the initial stages, there have already been points of agreement, said Mr. Todiichuk, who described the talks as "fruitful."

"I think that Chevron understands the potential. They have the PriceWaterhouseCoopers feasibility study (which determined that the Odesa-Brody pipeline could be profitable), and they have their own analysis. I believe we will agree on something," he noted.

However, Mr. Todiichuk said it would take time to hammer out an agreement with Chevron-Texaco, which TNK fully understands, and that is the reason it was pressuring Ukraine to act immediately.

"We need to patiently think through all our alternatives," Mr. Todiichuk underscored.

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