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Ukraine clash threatens oil to Europe

Corruption and politics in Ukraine threaten to choke off, at least in the near term, the expansion of oil exports from Azerbaijan and eventually Kazakhstan to Europe. This is the significance of Ukrainian Prime Minister Yuliya Tymoshenko's efforts in July to halt what she called the "shadowy privatization" of the Odessa-Brody oil pipeline.

The pipeline, from Ukraine's Black Sea coast to near the country's border with Poland, was built originally to transport Caspian oil to refineries in both countries, so as to decrease dependence on energy supplies from Russia. However, a route to get the requisite Caspian oil to Odessa was never found, and the pipeline lay empty until 2004, when it was used to carry fuel in the reverse direction, from Brody to Odessa, carrying Russian oil domestically inside Ukraine from Lukoil, BP-TNK, and other Russian companies. At Odessa it is loaded into tankers and exported to the world market, exiting the Black Sea through the Turkish Straits.

It was originally planned that the oil could flow from Brody to Plock, in Poland, through a pipeline to be constructed, and on to Gdansk through an existing pipeline, thus arriving at a port from which it could reach world markets. Partly due to Russian obstructionism, however, there was never enough oil to guarantee the Brody-Plock-Gdansk segment on a commercial basis.

The increase of world energy market prices, together with the construction and expansion of oil terminals on Georgia's Black Sea coast, has made it possible for Azerbaijani and/or Kazakhstani oil to reach Odessa by tanker from Georgia, circumventing Russian territory entirely.

Tymoshenko vowed at a July 30 press conference to halt what she called the "shadowy privatization of the [Odessa-Brody] oil pipeline through offshore companies". This is a reference to Milbert Ventures, a company registered in the British Virgin Islands and linked to the Pryvat Group, which has its headquarters in the Ukraine city of Dnipropetrovsk and headed by Ukrainian tycoon Ihor Kolomoysky.

Tymoshenko alleges that contracts prepared by the office of Ukrainian President Viktor Yushchenko would accord to Milbert the authority unilaterally to decide in which direction the oil would run through the pipeline and to extend the term of the contract, all while failing to guarantee that oil would ever actually fill the pipeline in any direction. Yushchenko's political stronghold is in the Russified industrial base of eastern Ukraine, and he and Tymoshenko have been at loggerheads in Ukrainian national politics for some years.

Tymoshenko promised, "Attempts to register Odessa-Brody in offshore zones, sell technical oil that fills this pipeline and leave Ukraine with virtually nothing will fail." This refers to a corruption scheme she outlined that would have given the Odessa-Brody pipeline (OBP) over to Pryvat Group via Milbert Ventures, for closing it down after emptying it, at a profit, of the oil now filling it. "Technical oil" is used for technical testing of the engineering before the pipeline is filled and put into operation on a continual commercial basis.

However, Bohdan Sokolovsky, Yushchenko's representative for international energy affairs, contests the allegation, identifying two refineries in western Ukraine controlled by the Pryvat group that were to have been destinations for contracted Caspian oil from Azerbaijan. And a month ago, Yushchenko did agree with Azerbaijan's President Ilham Aliev to fill the OBP with technical oil for testing as a first step to putting it into operation.

Calling the affair "RusUkrEnergo-3," Tymoshenko drew a parallel between the arrangement she suspected for OBP and moves to develop resources in the Ukrainian shelf of the Black Sea that she was able to veto and in which she also saw the hand of RusUkrEnergo, a Swiss-registered joint venture between Gazprom and Austria's Raiffeisen Banks that is a monopsony supplier and seller of natural gas to Ukraine. It was key, for example, in providing a resolution to the crisis caused when Russia cut off gas exports to Ukraine at the beginning of 2006.

It is also possible that Tymoshenko is trying only to get back at Kolomoysky, who supported her against Yushchenko three years ago but with whom she has since fallen out. Sources in her own parliamentary bloc state that Pryvat would have taken over OBP operations for 14 years under terms of the contracts that she has prohibited UkrTransNafta, the state oil shipping company, from signing. Functionaries in the office of President Yushchenko have used the word "treason" in warning her against trespassing the latter's prerogatives in matters of national security, including energy security.

There are two further, non-mutually exclusive possibilities. Gas, not oil, is Tymoshenko's strong point, just as oil, not gas, is Yushchenko's. Probably she wants stronger support for her "White Stream" plan to build a gas pipeline from Azerbaijan through Georgia and under the Black Sea, then to Crimea and the Ukrainian pipeline system to Europe, or else to Romania for European destinations. White Stream could open its first phase exclusively on the basis of Azerbaijani gas; the second and third phases could also take in Kazakhstani and/or Turkmenistani gas.

The other possibility is that Tymoshenko has begun to jockey for a run against Yushchenko in 2010 for the office of president. None of these possibilities has an especially optimistic prospect. UkrTransNafta is now prohibited from signing contracts for the indefinite future.

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URL:  http://www.robertcutler.org/blog/2008/08/ukraine_clash_threatens_oil_to.html
First published Asia Times Online, 2 August 2008.

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