By Roman Olearchyk, Kyiv Post Staff Writer
Kyiv, Post, Kyiv, Ukraine, Feb 5, 2004

In a landmark decision, the government rejected Russian efforts to reverse the still-empty $500 million Odessa-Brody oil pipeline and accepted a last-minute offer by United States oil giant ChevronTexaco, which promised to pump Caspian crude through it to Europe as early as this year.

"The direction of flow will be from Odessa to Brody," deputy Prime Minister Andriy Kluyev told journalists upon conclusion of the Jan. 4 cabinet meeting in which the decision was made.

The decision came four days after a Feb. 1 deadline set by President Leonid Kuchma. The government claims the decision was unanimous, yet it was clearly one of the hardest economic and geopolitical decisions Ukraine has made since independence.

Reversing the pipeline, pumping Urals crude from Brody to Odessa, would have improved export capacity for oil giants to the north, strengthening Russia's grip on energy markets in Europe and Ukraine. The originally intended option could diversify energy supplies in the region and tighten Ukraine's ties with Europe.

But the government's decision marks a serious blow to the Russian- and British-owned TNK-BP and other Russian oil producers, which have in recent months lobbied Ukraine hard to reverse the pipeline, permitting them to pump about 9 million tons of Urals crude annually to Odessa, on the Black Sea, from where it could be shipped to markets by tanker.

The Russian option was sharply criticized by some analysts, who feared it would further clog up the already crowded Bosporus straits, which connect the Black and Mediterranean Seas.

By resisting reversal of the pipeline and yielding it for ChevronTexaco's use, Ukraine appears set to strengthen relations with the United States.

ChevronTexaco, which has interests in Kazakstan's portion of the oil-rich Caspian Sea basin, has for months quietly expressed its desire to pump its oil through the pipeline to Europe.

The United States, the European Union and Kazakhstan urged Ukraine to resist Russian pressure to reverse the pipeline's flow. California-based ChevronTexaco last year expressed its interest in using the pipeline, but the company has provided few details to the public.

In a statement issued late on Feb. 4, the United States Embassy in Kyiv welcomed the decision, but hinted that much work still lies ahead.

"The United States is very pleased with the Cabinet of Ministers' decision. The United States has long supported commercialization of the Odessa-Brody pipeline in order to ensure Ukraine's energy independence, energy sector reform and European integration. We hope that this decision will allow Ukraine to redouble its efforts to conclude a transportation agreement with interested western companies. Ukraine will be best served if it assures western companies interested in shipping Caspian crude to central Europe and European consumers that Ukraine is committed to an open and transparent negotiation process. Ukraine will infuse more momentum by a transparent process as it considers new initiatives, such as tendering Odessa-Brody for concession," the statement reads.

Kluyev said a government working group would develop a plan with oil producers for utilizing the pipeline. The principal producer at hand is ChevronTexaco, whose proposal was handed to Kluyev by U.S. government officials during a visit to Washington on Jan. 29, where he discussed the pipeline's future with U.S. State Department and Energy Department officials.

Last minute lobbying efforts by the U.S., which has urged Ukraine not to reverse the pipeline, have apparently proved successful.

A document produced by a public relations firm obtained by the Post details plans to scahedule meetings between U.S. and Ukrainian officials as part of the effort to ensure the pipeline not be reversed. Some of the meetings scheduled in the document were to occur into late February, with the participation of U.S. officials, ChevronTexaco and other oil firms.

On Feb. 3, Energy Minister Serhy Yermilov announced through an Internet chat session that ChevronTexaco had proposed pumping oil through the pipeline as early as this year. It is envisioned that as much as four to five million tons could be pumped through the pipeline this year, Yermilov added.

The Odessa-Brody pipeline project was one of several projects intended to increase the supply of Caspian crude oil to Europe. It was planned that Caspian oil would be shipped in barges from Georgia across the Black Sea to Odessa, from where it would be pumped westward through existing Soviet-built pipelines and ones that would be built. Completed in 2001, the 674-kilometer pipeline has the capacity to pump 14 million tons of crude to Europe every year, and a planned extension into Poland could more than double its capacity.

But it has stayed unused, and chances it would pump Caspian crude faded as Russian oil firms last year launched lobbying efforts to reverse its flow.

Some experts had argued that reversal was the more profitable option for the next three years, until the pipeline was extended to Poland and large amounts of contracts for Caspian crude materialized. During this time, Ukraine could generate revenue to pay for the construction of the pipeline and fund its extension into Poland, they argued.

Other analysts, for example PricewaterhouseCoopers, hired to develop a business plan for the Caspian option, warned that if Ukraine reversed the pipeline temporarily, it would lose its "window of opportunity" to become a major route for Caspian supplies to Europe.

Temporary reversal of the pipeline was too risky, according to Yermilov. "Talk about short-term benefits is not good enough, as we don't plan on dying in one or two years. This time period will pass quickly. And studies show that in two to three years, alternative routes will be developed that could make this pipeline completely useless [as a channel for Caspian crude to Europe]," Interfax-Ukraine quoted Yermilov as saying.

A consortium of consulting firms headed by Arizona-registered Energy Solutions, founded by ex-pat David Sears, had a difficult time preparing a feasibility study for the government on the reversal option.

A document dated Jan. 13 obtained by the Post indicates that the firm first advised Ukrainian officials to temporarily accept TNK-BP's offer and reverse the pipeline for three years, and only later to shift to the better long-term Caspian-option.

Energy Solutions was scheduled to submit their study results on Feb. 19, but requested an extension, finally presenting it to a government-established commission on Jan. 27.

The study results have not yet been made public, but a copy has been obtained by the Post. The recommendations in the final study are noticeably different from those in the Jan. 13 document. The final study cites the Caspian option as the best among nine different options, one of which is reversal in line with TNK-BP's proposal.

Officials at Ukrtransnafta, Ukraine's oil transportation company, have accused the Energy Ministry of pressuring Energy Solutions to amend their study results in favor of the Caspian option. Another source close to Ukrtransnafta and the Ukrainian government confirmed the accusations, saying: "Energy Solutions was told they wouldn't get the last $90,000 of their $225,000 payment for the study unless the final recommendations were changed."

Sears was unavailable for comment. The Energy Ministry declined comment. Peter Cameron of Energy Markets Ltd., a British consultancy which participated in the study, denied the allegations.

"I have not been pressured by anyone to change our Odessa-Brody pipeline study results, nor has anyone else in Energy Markets," he said.