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Ukraine poll may deliver oil to Europe

Ukraine's run-off election between Prime Minister Yulia Tymoshenko and rival Viktor Yanukovych, to be held on Sunday, may decide the future of a pipeline that could be used to deliver Caspian Sea oil to Europe, bypassing both Russia and Turkey.

The pipeline was originally intended to carry crude oil originating in Azerbaijan in an east-to-west direction from terminals at the Black Sea Ukrainian port of Odessa to Brody, near Ukraine's border with Poland. In 2004, after Ukraine built the pipeline, it was decided for reasons discussed below to instead send Russian oil in the reverse of the originally intended direction, that is, from the southern branch of Russia's Druzhba pipeline and then northwest-to-southeast domestically within Ukraine.

The possibility of again reversing the direction of oil flow, so that the fuel it carried would supply Europe as originally intended, was discussed last month at the International Energy Conference held at the Georgian Black Sea port of Batumi, which also looked at the issue of Caspian Sea basin natural gas reaching Europe (see Reconfiguring Nabucco,28 January 2010).

The complex issues of gas and oil supply to Europe from Central Asia come within the context of the Euro-Asian Oil Transportation Corridor (EAOTC), which was subscribed to at the end of May 2008 in Kiev by the presidents of Azerbaijan, Georgia, Lithuania, Poland and Ukraine.

The Batumi conference identified two priority projects. One, known as White Stream, proposes to take natural gas from the Caspian Sea basin across Azerbaijan and Georgia, then under the Black Sea for delivery to the Balkan member-states of the European Union, notably Romania, and then further shipment westwards. This is now integrated into the EU's Southern Corridor energy strategy.

The other priority was the reversal of the Odessa-Brody (now also called Sarmatia) oil pipeline. The EAOTC is the strategic vehicle for promoting that development and represents the re-assertion of a strategy that made its first appearance a decade and a half ago but which was not then realized.

At that time, before the agreement to construct the Baku-Tbilisi-Ceyhan (BTC) pipeline, it was thought that Kazakhstani oil might reach Georgia's Black Sea coast for transshipment to Odessa, thence through the pipeline to Brody and to Gdansk on Poland's Baltic Sea coast, by way of the Plock refinery in central Poland. Ukraine decided unilaterally to undertake construction of the pipeline, expecting supply and demand problems to be solved along the way.

It was thought that tankers from Batumi and Georgia's Kulevi/Poti ports would take Kazakhstan's as well as Azerbaijan's oil to Ukraine over the Black Sea for insertion into the Odessa-Brody pipeline. Azerbaijan's state company, SOCAR, owns the Kulevi terminal on Georgia's Black Sea coast, while the international AIOC consortium owns one at Supsa, also on the Georgian coast, and the Kazakhstani "national champion", KMG, has one at Batumi itself.

A decade ago it was anticipated that the oil for this would come from Kazakhstan's offshore Kashagan development. Anticipating such a development, Kazakhstan purchased a Ukrainian refinery at Kherson, an important Ukrainian Black Sea port on the River Dnieper. The Kashagan development was then delayed, leading to the sale of the Kherson refinery, and the pipeline extension from Brody to Gdansk via Plock not being built.

As a result, the Odessa-Brody Pipeline lay empty after construction was finished in 2001 until 2004, when the decision was taken to send Russian oil in the reverse of the originally intended direction. In October 2006, Ukraine's President Viktor Yushchenko proposed extending the Odessa-Brody line westward to the Kralupy refinery in the Czech Republic. The Batumi meeting endorsed this variant detailed in the feasibility study presented there; and, following presentation of a positive feasibility study for the EAOTC, the European Commission (EC) reaffirmed its May 2003 declaration of support for the project.

In particular, the Kralupy refinery in the Czech Republic would receive the crude oil through the Druzhba pipeline during the time when the Odessa-Brody pipeline has not yet been extended through Poland. The construction of new refineries in Ukraine and elsewhere in Europe would assist in the transition from Russia's heavier grades of refined products to other, lighter varieties that will complement the construction and reconstruction of new consumer networks in the newer EU members of the former Soviet bloc.

The crude oil for this project would come in the first instance from Azerbaijan, and if the initial success calls for increased volumes, then this can come either from other sources in Azerbaijan or even Kazakhstan. As long ago as mid-2007, Azerbaijan's President Ilham Aliev affirmed that his country had sufficient resources to realize the Odessa-Brody project. A series of meetings throughout 2007 laid the groundwork for the adoption of the EAOTC strategy in 2008.

Participants hope that the EC will supply $170 million towards its realization; Poland and Ukraine would furnish the remaining $520 million. Poland declared its readiness to allocate funding to the pipeline from a European Union program for environment and infrastructure. With the oil now coming from Azerbaijan in the first place, Kazakhstan will require other outlets to world markets, especially as its production ramps up in years to come.

How will the presidential elections in Ukraine affect the stakes here? President Viktor Yushchenko lost the first round of the elections - although his role in them is not yet over. The would-be president, Prime Minister Tymoshenko, is rumored to favor the White Stream gas project, which has just received strong international endorsement at Batumi. It is possible, then, that she may perform a u-turn in her opposition to reversing the flow of the Odessa-Brody pipeline.

Ukraine's original 2004 decision to reverse the flow of oil to west-to-east came only three days after a visit to Moscow by the then-prime minister, and now presidential run-off candidate, Viktor Yanukovych. In November 2006, he publicly endorsed President Yushchenko's proposal for an extension to Kralupy in the Czech Republic, as a first stage towards realizing the Plock-Gdansk flow.

But nothing can be taken for granted in view of the enduring bases of intra-elite politics in Ukraine. In mid-2008, Tymoshenko expended great effort to prevent what she called the "shadowy privatization" of the Odessa-Brody pipeline, opposing legal efforts necessary to permit the reversal of the oil flow back to east-to-west.

Her rivalry with Yushchenko likely accounts for much of this (see Ukraine clash threatens oil to Europe, Asia Times Online, August 2, 2008).

These rivalries continue. The new presidential election law endorsed this week by the Verkhovna Rada (Ukrainian parliament) revokes the electoral rule that a two-thirds quorum of representatives of both contenders is necessary to approve the count at individual polling stations. This has led Tymoshenko, a leader in the 2004-05 pro-democracy "Orange Revolution" and who has her strength in the west and center of the country, to assert the likelihood of large-scale vote-rigging and to call on outgoing President Yushchenko not to sign the law.

"This has been done because Yanukovych does not believe in his victory and he wants to get a result only through falsification," she said, according to a Reuters report.

Yanukovych, who made a similar counterblast, is strong in the Russian-speaking east and south of Ukraine and wants Ukraine to help build the Nord and South Stream pipelines planned by Russia to transit gas avoiding states like Ukraine. "We will introduce proposals about Ukraine's participation in the building of Nord and South Stream," Yanukovych said last week, according to Reuters.

Yushchenko must decide soon on whether to sign the new electoral law: the elections are scheduled for Sunday.

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URL:  http://www.robertcutler.org/blog/2010/02/ukraine_poll_may_deliver_oil_t.html
First published in Asia Times Online, 5 February 2010.

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