With the world markets fixing new record prices for oil, Ukraine’s Odesa-Brody oil pipeline project has gained new hope of working in the manner originally planned with Ukraine and its partners once more planning that the pipeline can provide the EU with Caspian oil in the most economical way. However, this hope needs support not only from the active participants of the recent Kyiv energy summits, but from the biggest oil suppliers in the Caspian region and final consumers of the product. Otherwise, Odesa-Brody as well as the whole Euro-Asian Oil Transportation Corridor will remain nothing more than an attractive prospect on paper for diversifying Europe’s oil supplies.
Over May 22-23, Kyiv played host to an International Energy Forum and a Summit on Energy Safety Issues during which President Viktor Yushchenko announced that Odesa-Brody will work in the original direction and transport oil from the Caspian region to Europe. In a joint statement released by the Ukrainian, Polish, Georgian, Azerbaijani and Lithuanian presidents this idea was identified as a strategic priority for all five countries. Ukraine and Azerbaijan also agreed to supply 470 thousand tonnes of Caspian technical oil for experimental pumping into the Odesa-Brody pipeline and then its transportation through the Druzhba (Friendship) pipeline to the Czech Republic. “Completing Odesa-Brody to Plotsk will provide a serious impetus to the question of supplying European countries with Caspian oil. We are sure that EU countries will favour the most direct possible access to Caspian oil. This access should prove to be the most economical,” commented Mr. Yushchenko.
New plans, old pipeline
The presidents of the five countries involved in the recent Kyiv signing have effectively created a new transit route for oil from the Caspian region to Europe, something that has been on the geopolitical agenda for some years but has remained embroiled in political difficulties. The first step in creating the Euro-Asian Corridor will be the launch of Odesa-Brody-Plotsk in the direction it was originally designed for instead of its current mode, which takes Russian oil to Odesa for loading onto tanker ships. According to Mr. Yushchenko, the results of the technical and economic examinations of the project satisfied all interested parties and boosted confidence that the pipeline will soon work as intended.
Odesa-Brody is expected to start working in the original direction in around two years, though oil industry analysts continue to voice doubts about the reality of this time frame. “To fully function the Odesa-Brody project requires the construction of new refineries which will take from three to five years and could cost approximately USD 4 billion,” explains Vitaliy Kulik, the director of the Research Centre for Problems in Civil Society.
Construction of the Odesa-Brody pipeline was completed in 2002 and it was initially planned for the transportation of Caspian Sea oil to Europe. For two years Ukraine tried to reach agreements with companies about oil transportation to the West but repeatedly failed amid accusations that Russian interests were at work to prevent a rival route opening up. The deadlock was finally broken when, in the middle of 2004, the government permitted the use the pipeline for the transportation of Russian oil from Brody to Odesa and then from the port’s refineries across the Black Sea by tanker. By 2008 the pipeline had transported 19.276 million tonnes of oil.
The race for Azeri approval
The new agreement with Azerbaijan and assurances from Kazakh officials about the readiness of their country to participate in the project confirm that Odesa-Brody will be a part of a new transportation corridor and will finally work in accordance to the initial plan. However, even politicians such as Mr. Yushchenko who have made the project a foreign policy priority appreciate that in order to capitalise on its enormous strategic potential the pipeline first requires the construction of oil refinery complexes in Ukraine. “Both projects have great prospects,” states the Ukrainian President, who in recent months has made a number of overtures to Middle Eastern and Caspian Sea energy-rich nations over co-operation in building new refineries in Ukraine.
Diversifying Europe’s supply
The potential to bypass Russia makes the project appealing both to regional countries and to a wider European market, which should help secure broad-based support for a fully functioning Brody pipeline. “The countries most interested would be Ukraine, Poland, Kazakhstan, Georgia and Azerbaijan. The interest for Europe is in a supply of crude that is not of Russian origin, as Russia currently controls the majority of the oil reaching Europe. Another reason for Europe is to get supplies of Sweet Caspian Crude (low sulfur content). Currently it comes mixed with Russian Sour,” states president of consulting company Energy Solutions David Sears.
Depending on Kazakhstan
However, Europe’s dependence on Russian oil is much less than the current dependence on Russian gas and this fact decreases the attractiveness of the new oil transportation corridor for potential consumers. “European countries do not depend only on Russian sources. Of course, the EU could be interested in providing Czech and German refineries with light oil but they are not ready to invest money into risky projects of this kind. And there is no sure source for the oil,” says Mr. Kulik. The analyst explains that Azerbaijan will not be able to load the pipeline completely and Ukraine needs guarantees from another Caspian oil provider – Kazakhstan – which is still hedging its position.
On one hand, its representative at the Kyiv summit, the deputy minister of energy and mineral resources Lyazzat Kpnov, announced that Kazakhstan is ready to participate in the project. “Kazakhstan is ready to deliver energy supplies according to your scheme,” he said at the press conference in Kyiv. On the other hand, on the day of Kyiv’s forum Kazakh president Nursultan Nazarbayev and Russian President Dmitriy Medvedev discussed the future of Caspian oil in Kazakhstan, the Russian business newspaper Vzglyad reported. President Nazarbayev has never participated in Kyiv energy summits.
“First of all, Kazakhastan is closely connected with the Russian Federation and depends on it politically and economically. It takes into account Russian interests. Secondly, Kazakhstan doesn’t want to invest money into risky projects. It is diversifying its sales because pipelines to China are being constructed as well as some to other neighbouring countries. The project in Ukraine is not worthwhile for Kazakhstan because Russia offers better terms and Kazakhstan will not decline Russian projects on behalf of Ukraine’s strategic interests,” explains Mr. Kulikov.
Russian resistance to regional alternatives expected
Kazakhstan’s currently uncertain stance over its potential role in plans to cut Russia out of a share of the lucrative Caspian Sea oil transit market reflects Russian opposition to sharing the trade with its former vassal while losing control over the strategically important west Ukrainian pipeline. “The geopolitical arguments with Russia should prove interesting, as Russia will resist efforts to wrestle away their current control of the Odesa–Brody pipeline. It will ultimately affect their internal oil pipeline network and their Caspian oil strategy, which has been very rigid,” Mr. Sears states.
