Ukraine's Cabinet approves originally planned use of pipeline (02/08/04)

Ukraine's Cabinet approves originally planned use of pipeline

by Roman Woronowycz
Kyiv Press Bureau

KYIV - Ukraine's Cabinet of Ministers approved a recommendation to use the Odesa-Brody oil pipeline in direct mode, ending months of controversy over which way oil should flow in the yet-to-be utilized oil transportation tube.

"The direction will be Odesa to Brody," announced a satisfied First Vice Minister of Energy Andrii Kliuyev after a meeting of the Ukrainian government that unanimously approved the recommendation.

The decision came from a recommendation by Energy Solutions, a consulting firm that had issued a report providing nine alternatives for using the 667-kilometer tube. The pipeline, completed in early 2002 at a cost of $500 million, has yet to find a user.

The decision by the government killed an attempt by one of Russia's oil giants, TNK-BP, to obtain a three-year exclusive right to use the pipeline in reverse. TNK-BP had attempted to coerce Kyiv into agreeing to the alternative usage by arguing that Ukraine could obtain much-needed revenues in temporarily utilizing the barren pipeline in reverse as it continued to search for long-term users to transport oil from the Caspian Sea to Europe, as was originally planned.

Most energy experts have noted that if Ukraine had agreed to reverse usage, even for a short period of time, it would have lost out on the more lucrative concessions for transporting the higher grade light sweet crude now beginning to flow out of the Caspian Basin.

TNK-BP claimed that it needed the line merely for a three-year period to pump 9 million tons of Russian Ural heavy crude annually to Brody and on to Odesa, where the oil was to be put on freighters and shipped through the Bosporus Straits to southern Europe.

Eventually TNK-BP's claims that such an agreement would give Ukraine $35 million in revenue were exposed as dubious at best because company's plans called for no new oil to be shipped, but merely the transfer of oil that currently moves via rail to the cheaper pipeline system. Consequently, reverse mode would have given TNK-BP extensive savings at Ukraine's expense.

First Vice Prime Minister Kliuyev explained that the rights to the oil pipeline, along with capacity use of the Pivdennyi oil terminal in Odesa, would be given in concession via tender bidding. He said that a working group would be formed to coordinate contracts between suppliers of Caspian high-quality light sweet crude and consumers in Central Europe. Refineries in Poland, the Czech Republic and Slovakia have expressed an interest in receiving shipments of the Caspian oil.

The line, which has a current capacity of 14.5 million tons per year, should be expanded in several years to be able to handle 40 million to 45 million tons annually.

The day before the decision was made, Minister of Fuel and Energy Serhii Yermilov said that the U.S.-based Chevron oil corporation, a major developer of Caspian Basin oil deposits, had told the government it was ready to obtain transportation concessions this year, according to Interfax-Ukraine. Mr. Yermilov said the Ukrainian government estimated that 4 million to 5 million tons of crude could flow through the tube by the end of 2004.

TNK-BP, which wielded a fierce political battle to obtain the right to reverse the line, said it was not about to give up its effort. Oleksander Horodetskyi, chief executive officer for TNK-Ukraine, told Interfax-Ukraine that he believes the Ukrainian government decision is a mistake and expressed doubt that Caspian oil would be supplied via the pipeline in the near future.

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