OP-ED by Vladimir Socor, Senior fellow
Institute for Advanced Strategic & Political Studies
For The Wall Street Journal, New York, NY, October 17, 2003

Will Europe be able to reduce its risky overdependence on Russian oil? Will U.S. policy succeed in promoting multiple pipelines to bring Caspian oil to European Union consumer countries? And will Ukraine support those strategic U.S. and EU goals, which clearly dovetail with Ukraine's own national interest to orient itself toward the West? The answers -- and the high stakes involved -- depend on whether Ukraine becomes a link in the transit of Caspian energy to Europe.

American, EU and Ukrainian leaders considered aspects of this issue during two meetings last week. In Washington, Vice President Dick Cheney discussed it with Ukrainian Prime Minister Viktor Yanukovych. And in Ukraine , the EU leaders Romano Prodi, Javier Solana, and Silvio Berlusconi (the latter for the EU's current presidency) raised this issue with President Leonid Kuchma during the annual EU-Ukraine summit.

At issue right now is the use of Ukraine's Odessa-Brody pipeline to supply European countries with oil from Kazakhstan. This could be the first move toward ensuring that Ukraine becomes a transit country for Caspian oil and gas on its way to Western countries. Devising the transit solutions is now a matter of urgency as the commercial development of big Caspian oil and gas deposits gathers momentum. Ukraine possesses some of the world's largest transit pipeline capacities, mostly dating back to the Soviet era and needing Western-assisted modernization.

The Odessa-Brody pipeline is an exception. The line -- and the Pivdenny maritime terminal serving it -- were commissioned last year. The 670-kilometer line runs from the Black Sea port of Odessa to the Polish border at Brody, and is projected to be extended into Poland to Plock and then to the Baltic port of Gdansk.

The pipeline's first-stage capacity, 9 million tons annually, can easily be doubled with additional compressor stations. It has been designed to carry light, high-quality brands of oil from Azerbaijan and Kazakhstan for European countries, with Germany as a leading prospective user. But the pipeline has remained dry for more than year, because Caspian oil transit remains a Russian monopoly for now. However, with Caspian production growing rapidly, so does the need for outlets.

Last month, Kazakhstan's national oil and gas company KazMunaiGaz announced that it wants to supply Europe via Ukraine . The company describes Odessa-Brody as much preferable to Russian pipelines, which carry the lower-quality Russian oil known as Urals Blend. Russian pipeline users mix their inferior blend with the high-quality Caspian light oils. This procedure inflicts substantial financial losses on the Caspian producers, because the mixed product sells for less.

KazMunaiGaz -- now a financial power in its own right, thanks to Kazakhstan's oil boom -- also announced its interest in joining an investment consortium for the Odessa-Brody pipeline's second stage and extension into Poland. This month, the Kazakh company reaffirmed its intentions and proposed to begin discussions on pumping its oil into the pipeline.

Enter the Russian TNK-BP giant (the Tyumen Oil company, into which BP recently made a $6 billion investment). It has made an offer that Ukraine's state pipeline company -- UkrTransNafta, which runs the Odessa-Brody pipeline -- apparently feels it can't refuse. TNK-BP wants to use that pipeline in the reverse direction, pumping Urals Blend oil from Russia to Odessa, for loading on tankers and shipping through the Turkish Straits and the Mediterranean.

Such "reverse pipeline use" by TNK would be bad for everybody else. It would reinforce the existing Russian monopoly on Caspian oil transit; defeat the U.S. policy and the European interest in multiple supply pipelines -- in this case, to Central Europe and Germany. It also would increase Ukraine's dependence on Russia; and increase tanker traffic through the already overcongested Bosporus, in spite of the growing Turkish anxieties for the safety of navigation and of Istanbul.

Ultimately, the "reverse use" would undermine Western interest in Ukraine as a transit country. In effect this would ensure that Ukraine remains a Russian transit concern, and perhaps a Russian concern overall, instead of allowing Ukraine to use its huge transit potential in that ways that would make it a Western concern in energy terms, and strategically.

On Oct. 2, TNK-BP turned up the pressure by giving UkrTransNafta six days for a take-it-or-leave-it decision. And UkrTransNafta took it the next day, when it approved the "reverse use" -- in an obscure session of an incomplete board, a murky vote count and with Mr. Kuchma's representative on that board reportedly voting against the "reverse use." Mr. Yanukovych is also apparently opposed. On Oct. 10, Ukraine's cabinet of ministers decided to postpone for three months a decision on the direction of oil transit by the Odessa-Brody pipeline.

The meetings with U.S. and EU leaders clearly helped avert a mistaken decision in Kiev -- for now. Mr. Cheney made a strong case against the reversal; and the Chevron-Texaco company came up with proposals to use Odessa-Brody for delivering oil from its fields in Kazakhstan to Europe. The EU leaders for their part told Mr. Kuchma that a decision to change the transit direction away from Europe would damage Ukraine's relations with the EU.

That meeting discussed options for extending Odessa-Brody into Poland. The Ukrainians rightly urge extending it all the way to Gdansk and using it as a segment of the EU-planned transit corridor from the Caspian Sea to Europe. Mr. Kuchma has more than once made that case.

If the U.S. multiple-pipeline and the EU's supply diversification policies are to be pursued consistently, they should implement the long-mulled plans for a trans-Caspian pipeline from Kazakhstan's giant offshore fields, via Azerbaijan and Georgia to the Black Sea -- not to Novorossiisk where the Urals Blend arrives, but to a Georgian port such as Supsa -- and via the Black Sea into Odessa-Brody, ultimately reaching Gdansk on the Baltic Sea.

That would be the way to reduce European consumers' overdependence on Russia, dent the latter's Caspian transit monopoly (and producers' dependence on it), and ensure that Ukraine can exercise its European choice.