The 674-kilometre Odessa-Brody pipeline, planned and built as a method of assuring transportation of Caspian crude oil to Europe bypassing Russia, has had a confused and chaotic history. The pipeline, from Odessa on the Black Sea to Brody near the Polish border, was originally 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 in 2001 during the reign of President Leonid Kuchma, Ukraine did not have the funds required to fill the pipeline with Caspian crude and the EU was unwilling to build the connecting pipelines needed to link Odessa-Brody to Western Europe.
The pipeline remained unused until 2004 when an agreement was signed between Ukraine and Russia to begin moving Russian crude in the opposite direction from that originally intended. While the original Caspian to Europe design is still strongly supported by many in Ukraine, most notably President Viktor Yushchenko, the reality remains that the flow of the Odessa-Brody pipeline has been reversed and has seen only limited movement of Russian crude.
During the first five months of the agreement with Russia in late 2004 and early 2005, only about 1.3 million tonnes were pumped, which meant the pipeline operated at a significant loss to the Ukrainian government during that period. In 2004, the government-owned oil transport company UkraTransNafta estimated that a throughput of at least 4 million tonnes were needed annually for the pipeline to break even based on a tariff of USD 10 per tonne, but sources close to the situation suggest that Ukraine operated Odessa-Brody at a loss throughout 2005 and 2006 because it agreed to substantially lower tariffs with Russian-British conglomerate TNK-BP. Only now, in mid 2007, with a much higher throughput has the pipeline some chance of profitability.
Healthy tax revenues from pipeline
On July 11, Russian-British firm TNK-BP, one of the largest oil companies operating in Russia, 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 4.566 million tonnes in the first half of 2007. TNK-BP also said that Ukraine had received a total of USD 170 million in transit charges and port taxes since the contract began in 2004.
David Sears, an energy consultant who headed the Ukrainian government study on the original intended use of the pipeline says: “These recent figures are impressive but they fail to deal with the underlying 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 moves towards 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 a rapid reversal towards the west.
“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 the high potential for big losses,” says Sears.
Further development of Odessa-Brody was a major topic at the June summit of GUAM, a regional grouping of four ex-Soviet countries - Georgia, Ukraine, Azerbaijan and Moldova.
In response to Yushchenko’s fervent support at the June 2007 GUAM summit in Baku for using Odessa-Brody as a means of diversifying energy routes and reducing dependence on Russia, Azerbaijani President Ilham Aliyev assured 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 for sea transhipment from the Caspian to Odessa, would ever be the most desirable transport option.
Pro-Russia lobbying
Furthermore, prospects of developing the Brody-Plock portion of the pipeline have been clouded by Ukraine’s inability to fill the original portion with oil. Moreover, little in the way of firm movement in that direction has been possible 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, 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 usage 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 United States and is widely regarded as nothing more than a ‘talking shop’ with little hope of expansion and an uncertain future.
Kazakh prospects dim
The construction of the Odessa-Brody pipeline largely accomplished through the determination of President Kuchma and with Ukrainian money still has the possibility to see substantial use in the originally intended direction. However, it appears that for the foreseeable future, the Odessa-Brody may only see Russian crude flowing the other way.
“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 14.5 million 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 45 million tonnes per year. However, no one in Ukraine has ever shown the necessary determination to sit down and work out a contract with the Kazakhs, the potentially largest supplier of Caspian oil to Europe and the world,” Sears comments.
The problems with striking a deal with the Kazakhs are many, but boil down mainly to the pro-Russian orientation of those in the Ukrainian government-owned oil sector and the preoccupation of the country’s top officials with the upcoming parliamentary elections: no one wants to take the lead in negotiations at present when it is unclear if they will still be in a position to complete them after September 30.
Short window of opportunity
Unless Ukraine takes strong steps soon to assure completion of pipeline development in the westward direction, 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.
“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,” Sears concludes.
