By Kamil Tchorek, Warsaw Business Journal
Warsaw, Poland, Tuesday, April 13, 2004

The American energy giant is in Poland this month to discuss the formation of a joint venture company to construct and operate the project later this year.

The project is expected to cost zl.1.4 billion (?300 million) and will take until the end of the decade to complete.

This foreign direct investment (FDI) opportunity was only made possible thanks to an essential bilateral agreement signed between Ukraine and Poland in February. Before the agreement, energy experts pointed to a very real threat that the project would be stalled by Russian lobbyists, who have seemingly lost influence to their American counterparts.

The existing 674-km, one meter diameter pipeline, running from the Ukrainian port of Odessa on the Black Sea to Brody near the Polish border in western Ukraine, was completed, together with a terminal at Yuzhny, in May 2002. It currently has the capacity to transport up to 14.5 million tons of oil per year.

This is now set to be extended as far as Plock in Poland and from there to Gdansk. Once the massive infrastructure project is completed, oil will be shipped from the Georgian coast to Odessa, piped to Gdansk and then shipped on to Western Europe and the rest of the world.

However, a Russian plan envisages a 'reverse supply' solution, whereby the extension to Poland would never be built, and Russian oil from Siberia would instead be piped south to Odessa, and then shipped on from there to world markets.

In the words of Ilan Berman, vice-president for policy at the American Foreign Policy Council in Washington, DC, "Since the Odessa-Brody issue has less to do with output than with controlling Ukraine's economic and political independence, Russia has continued to press for reversal."

Indeed, the Russian 'reverse supply' solution has seemingly irrational aspects to it, such as the chronic congestion of the Bosphorus Straits that would barely be able to host a surge in tanker traffic caused by the supply of Siberian crude from Odessa.

Russia currently enjoys a relatively monopolistic position in Eurasian energy, controlling the pipelines from major new oil finds in Kazakhstan and Azerbaijan to the rest of the world. A pipeline route that omitted Russia would work in favour of the world's big oil consumers in America and Western Europe, offering price competition and a degree of choice.

"Multiple pipelines are more competitive than single pipelines. The interest of the USA and the EU and in Central and Eastern Europe is to have multiple sources of supply," says Joseph Stanislaw, vice-president of Cambridge Energy Research Associates. "Multiple routes enable the consumer competitive opportunities that enable economic growth in the resource-using areas. If you are the producer, you'd rather have total control."

One major influence group is the Caspian Pipeline Consortium (CPC) which is constantly looking for cheaper ways to get Caspian oil to major world markets. "The Russian mindset is very different," argues Stanislaw. "They can charge a lot for their transportation, except that Russia does not own the resources they are trying to move across. Russia has an economic interest in who owns the pipeline."

It is precisely to preserve the project by placating as many interested parties as possible that Polish pipeline operator PERN has invited some as yet unnamed Russian energy companies into the joint venture with Chevron Texaco. "A climate is being created," PERN President Stanislaw Jakubowski told the press. "We have been talking to Chevron... we have also invited some Russian companies to join the project."

The momentum for securing the direction of oil flow north from Odessa rather than south to Odessa is also being maintained by a number of local downstream developments. Although the existing pipeline ends in Brody, within two months oil will be piped there, siphoned into tankers and transported to refineries in southern Poland. A demonstrable demand and supply chain is said to be vital in securing finance for the massive infrastructure project.

"In May or June, the transport of light crude oil should begin," Oleksadnr Todiychuk, president of Ukrtransnafta, the Odessa-Brody operator, told the press.

Cezary Filipowicz of Uktransnafta's Poland division added that in recent days his company has secured an arrangement where Caspian crude transported via Odessa will be refined in Kralupy in the Czech Republic. "This is a very good signal to investors," Filipowicz says. "It shows that the Odessa-Brody pipeline makes sense."

At a recent conference in Warsaw, Nursultan Nazarbayev, president of Kazakhstan, the biggest supplier country of the Caspian region, discussed the progress of the Polish side of the project with the national oil companies of Poland, the Czech Republic, Slovakia, and Ukraine, as well as multinationals such as ConocoPhillips, Shell, Channoil and Chevron.

Ilan Berman maintains that the extension of the Odessa-Brody pipeline to Plock and eventually Gdansk could still be disrupted. "With Ukrainian President Leonid Kuchma again under fire politically - this time as a result of a series of controversial constitutional amendments aimed at manipulating the electoral process," argues Berman, "the current administration in Kiev may find it tempting to turn once again to the Kremlin to broker its continued legitimacy."

Berman also points out that America's increased military involvement with Poland, which is likely to see U.S. military bases relocating from Germany, coincides with Poland's increasingly strategic location in energy geopolitics. In an article in Insight magazine Berman writes, "The Odessa-Brody extension deal has positioned Poland to be a major energy hub for new, non-OPEC and non-Russian crude from Central Asia."