By Ihor Demyanchuk, "Will Oil Make it from Odessa to Brody?"
Svoboda, Kiev, in Ukrainian, 30 Mar 04, p 3,
BBC Monitoring Service, UK, in English, Apr 03, 2004

The following is the text of the article by Ihor Demyanchuk, entitled "Will oil make it from Odessa to Brody?", published by the Ukrainian newspaper Svoboda on 30 March; subheadings have been inserted editorially:

Although there is still no oil, the matter is getting started. The dismissal of [former Ukrainian Fuel and Energy Minister Serhiy] Yermilov could hinder, but should not stop, the process: all the members of the government voted in a "patriotic fit" in February for the resolution on using the Odessa-Brody oil pipeline. (By the way, the fuel and energy minister was rid of not so much for his protecting the pipeline against the Russians as for coal: he had planned to curtail state subsidies for coke coal, which go to middlemen in metallurgy, not to miners.) In March Deputy Prime Minister [in charge of energy] Andriy Klyuyev made several steps in the direction of Brody.

He held talks in Strasbourg with the leadership of the European Commission and the general director of transport and energy. Vice President of the European Commission [Loyola de] Palacio expressed her readiness to assist in activating the pipeline as quickly as possible: organizing consultations with representatives of Slovakia, the Czech Republic, Poland and the European Commission, as well as helping receive funds from the European Investment Bank, the EBRD [European Bank for Reconstruction and Development] and other financial institutions. Money - that is serious and convincing. The Ukrainian government cannot find it to fill the pipeline with technological oil; credits are also needed to complete building the pipe to [the Polish town of] Plock.

In Astana on 17 March, Klyuyev agreed with Prime Minister of Kazakhstan [Daniyal] Akhmetov (no relations to [the influential Ukrainian tycoon Renat Akhmetov] of Donetsk!) to sign an agreement in April to supply oil to Ukrainian oil refineries (more exactly, the oil refineries which are located in Ukraine) and to transport Kazakh oil across Ukrainian territory. Moreover, the Kazakh side will provide commercial conditions for 2m t of oil a year to be transported across the route Odessa-Brody to Europe.

That is not much, taking into account the capacity of the pipeline at 9 to 14.5m tonnes, but there is one other thing. There are agreements with Polish, Slovak and Czech oil refineries. A Ukrainian-Polish working group, which determines routes for transporting oil in steel tanks, sets tariffs and deals with technological issues, continues its work. The pipeline from Brody to Plock is being developed and should be on line in three years.

BARRIERS TO USING PIPELINE

But barriers to pumping oil from Odessa to Brody are still significant. Using the pipeline in reverse [from Brody to Odessa to deliver Russian oil to the Black Sea coast for exports] lost any economic sense it had when in November 2003 the Mykolayivska pumping station on the Kremenchuk-Snihurivka section of the Prydniprovskyy main oil pipelines systems.

This increased the throughput capacity to the Pivdennyy oil terminal [outside Odessa] by 5m t, after which the Prydniprovskyy system can pump an additional 9m t of oil to the terminal. This is shorter and cheaper than using Brody-Odessa (Pivdennyy) in reverse. Still, the Russians are counting on this [reverse use] with the goal of blocking the optimal route to Europe for competitive Caspian oil.

Their interests are being lobbied not so much by domestic tycoons as by bureaucrats. It should be noted that the least Russian capital is in the Russianized Donetsk Region, because there they have their own big financial industrial group. Without excessive noise the "Kievites" [the business group of presidential chief of staff Viktor Medvedchuk and his business partner Hryhoriy Surkis] made another run on [Russian businessman Konstantin] Grigorishin, who has shares in the Ukrainian energy sector.

The financial industrial groups are defending their own interests (of course, this is not Ukrainian patriotism, rather a love for "one's own" and "one's own must be protected", as [Ukrainian President Leonid] Kuchma teaches).

In the meantime, bureaucrats who are entrusted with managing state property are not defending state interests that way. The head of [the Ukrainian national oil and gas company] Naftohaz Ukrayiny, Yuriy Boyko, and the general director of [the Ukrainian national oil transport company] Ukrtransnafta, Stanislav Vasylenko let loose the experiment of pumping portions of two different sorts of oil after each other through the Druzhba oil pipeline (a technology needed for the Odessa-Brody project); they did nothing to fill the pipeline. This cannot be explained as anything other than an attempt to play into the hands of the Russians.

Relations between Ukrtransnafta and the Russian Transneft [oil transport company] have changed: earlier, the Ukrainian company made agreement with individual transporters, but now Transneft has become the single monopolist operator of the Ukrainian oil transport system.

Not long ago management of the Pivdennyy oil terminal was lost as well, its operator as of the beginning of the year is the (?Collide Ltd.) company, which was registered in 2003 in the British Virgin Islands and whose authorized capital is all of six dollars. The company instituted a loading tariff of 14 dollars a tonne, but the price was lowered to six dollars after owners and traders put up a fuss. About half of the 6-dollar tariff is taken by our state [of Ukraine].

The offshore middleman, having invested a mere six dollars, is managing the facility which cost Ukraine 100 million times more! Neither the Prosecutor-General's Office, the government, the president nor [the propresidential newspaper] Kiyesvkiye Vedomosti (sprung forth from the same Virgin Islands) reacted to this fact. Although losing control over this terminal [means] not only losses but the hazard of blocking the Odessa-Brody project.

PROJECT "SABOTAGED"

Now the main problem is filling the pipeline with technological oil. The government has announced that there is no money, and this is not surprising, since the presidential campaign requires significant outlays. Boyko and Vasylenko are sabotaging this problem. According to Yermilov, the tax administration returned VAT to Naftohaz a year ago. These funds were to be used to buy technological oil. (For the refunded VAT and the Naftohaz debt to Ukrtransnafta, 75 per cent of the needed technological oil for Odessa-Brody could have been bought. The rest of the 18-20m dollars was not an issue for activating the project even in March. But the money refunded has been successfully thwarted and not a single tonne of oil was purchased", Yermilov said.

The government wants to find the money by offering the pipelines as a concession. There are several interested parties: the Russian company TNK (which can whereby solve the reverse problem), the American Chevron-Texaco, Caspian area companies and the Enerhiya concern (which is controlled by businessmen from Donetsk, in particular, by Prosecutor-General Henadiy Vasylyev). On this topic, MP Oleksandr Hudyma believes that if one is already going to give someone the pipeline which could lay "golden eggs", then one must clearly formulate the conditions on the direction of its use, restrictions on privatization and on investment and payments.

The pipeline is to begin operating in the first quarter of 2004. For this to happen in the first half year, not only do the obstacles have to be removed, but the saboteurs must be dealt with too.