THE UKRAINIAN PART OF THE EURASIAN OIL TRANSPORTATION CORRIDOR: YESTERDAY AND TODAY. WHAT ABOUT TOMORROW?

David PREIGER
Irina MALIARCHUK
Viacheslav DUTCHAK


David Preiger, D.Sc. (Econ.), head of the Department of Transport Communications Development Problems, National Institute for the International Security Problems (Ukraine)

Irina Maliarchuk, Ph.D. (Econ.), state expert, Department of Transport Communications Development Problems, National Institute for the International Security Problems (Ukraine)

Viacheslav Dutchak, Ph.D. (Techn.), chief consultant, Department of Transport Communications Development Problems, National Institute for the International Security Problems (Ukraine)


Globalization will gradually and inevitably integrate the economies of all countries, create a single economic expanse based on shared interests and generally accepted rules stemming from the objective development requirements. Because of the widely varying development levels of the European states and Ukraines considerable lagging behind where the major parameters are concerned (GDP and per capita income, the structure of industrial and agricultural production, power consumption and ecological properties of local products, and labor productivity) it might take it a long time to become fully integrated. This period should be used to bring closer the social and economic levels of the old and new members of the integration process (and those who want to join in) with the use of the advantages of each.

Ukraine has weighty arguments in favor of its equal participation in the international, European in the first place, economic expanse. Its powerful pipeline transit potential that lately has not been tapped in full is among them. For example, the input capacity of the gas transportation system is up to 290 billion cu m, its output capacity is up to 170 billion cu m, while today slightly over 120 billion cu m are exported through it (recently the figure was over 140 billion cu m of exclusively Russian gas). The oil transportation system (3,894 km long in early 2002 with 37 transfer pumping stations) with an annual input capacity of up to 100 million tonnes of oil, and an annual output capacity of up to 66 million tonnes in the recent years was used to move merely 53-55 million tonnes a year on average. The last figure may drop even lower when Russia commissions the Sukhodolnaia-Rodionovskaia girt, elements of the Baltic pipeline system and the Tengiz-Novorossiisk oil pipeline of the Caspian Pipeline Consortium.

This makes it especially important to fully exploit the existing transportation means; it is doubly important to make a full use of the additional capacities that are waiting to be commissioned of the Ukrainian part of the Eurasian Oil Transportation Corridor (EAOTC). One should point out that while the pipeline and the oil terminal are absolutely ready the decision to commission them is pushed away. There was an impression that the main problem was to complete construction. Lets discuss the problems in the right order.

The Ukrainian part of EAOTC offers a possibility of moving Caspian oil to Europe across our republic. We already have the marine oil terminal Iuzhniy at Odessa and the Iuzhniy-Western Ukraine (Odessa-Brody) oil pipeline. Brody has a main transfer pumping station on the highway leading to Uzhgorod. It is part of the Druzhba oil main system.

The marine terminal at Odessa and the Odessa-Brody pipeline were built to move oil from third countries to the Ukrainian oil refineries (owned by the state at that time) through a unified system of oil mains. By that time (1992-1993) Ukraine had already gained political independence and was working on its economic independence. The country has to diversify the sources of energy fuels that mainly arrived from Russia and Kazakhstan (the larger part of them was payment for oil transit). It was expected that the terminal would receive Middle Eastern oil (the region has 70 percent of the worlds oil reserves) brought by tankers and from Samsun (the final point of the Ceyhan-Samsun pipeline going across Turkey). The design output of the terminals first phase was expected to be 12 million tonnes a year, approximately equal to the total output of the oil refineries closest to the terminal (Odessa oil refinery, about 3.6 million tonnes and Kherson, 8.7 million tonnes).

It was expected that foreign companies would invest money in the corridor. With this aim in view the Government of Ukraine issued Resolution No. 764 of 23 November, 1992 that set up an expert commission to assess proposals from potential foreign investors. Under another Resolution (No. 482 of 26 March, 1993) the State Oil and Gas Committee, the Ministry of Economy, and the Finance Ministry joined the expert commission. For some reasons this Resolution was later (on 23 July, 1993) annulled by Resolution No. 568. It was in February 1993 that the government passed the final decision on building the marine terminal. It was expected that the first tanker would be able to unload there in 1994, yet the process stalled for certain reasons. Late in 1993 the State Oil and Gas Committee was allowed to open funding before the project was officially endorsed. In May 1994 the work was stopped by the Odessa Regional Administration. It was only in March 1995 that the Cabinet of Ministers of Ukraine approved the first phase of the marine terminal. This started construction work in earnest.

The oil pipeline between Odessa and Brody had its share of problems, too. The work began on 1 October, 1996, three odd years after the decision about the projects usefulness had been passed. The golden joint was welded on 19 August, 2001, the first phase of the Iuzhniy terminal being ready for commissioning on 19 December, 2001.

The idea of the EAOTC Ukrainian stretch changed considerably while it was being built. The legislature and the media doubted the very idea mainly because the project was funded by the state, through the State Joint-Stock Company Druzhba Oil Main, that partly used the money Russia paid for oil transit. Supported by the prime minister, those who were interested in the project rejected the idea of an international consortium on which the president of Ukraine insisted. They spoke with enthusiasm about the complexs future high economic efficiency. It should be said here that the assignment to explore a possibility of an international agreement on extending the Odessa-Brody oil pipeline to the Polish pipeline Plock-Gdansk and to conclude such an agreement was ignored.

Those who supported the project a priori (without preliminary inter-state agreements or, at least, treaties with the oil companies working in the Caspian area or traders) relied on the Caspian oil that, they assured, would reach the Black Sea coast through EAOTC, mainly through the Baku-Supsa pipeline and by railway from Kazakhstan to Odessa. Certain hopes were obviously connected with the Tengiz-Novorossiisk-II main; the Ceyhan-Samsun project also remained on paper. Meanwhile, today the new owners (Russia and Kazakhstan) which privatized 70 percent of the design output of the Ukrainian oil refineries have not undertaken an obligation to move oil to the already completed oil terminal Iuzhniy and the Odessa-Brody pipeline and to use the Ukrainian stretch of EAOTC. Let us have a closer look at the Caspian oil and the ways it is moved to Europe.

We all know that today oil is the main energy fuel: its share among other primary fuels in Europe is 42 percent. The continent consumes 26 percent of the global import of oil. The European states (except the CIS and the Baltic republics) use 760 million tonnes of oil every year; 30 percent (230 million tonnes) coming from Europe (mainly from the North Sea) and 70 percent (530 million tonnes) being imported: from the Middle East (38 percent, or 200 million tonnes a year); Russia, Kazakhstan, and Azerbaijan (28 percent, or 147 million tonnes); Africa (24 percent, or 130 million tonnes), and other regions (10 percent, or 53 million tonnes a year).

Russia is the largest supplier of oil to Europe among the Eurasian countries. West Siberian oil fills about a quarter of the West European market. The West Siberian oil fields are depleting while oil production moves to other regions (Timano-Pechora, Eastern Siberia, the north of Western Siberia, the Caspian and the Island of Sakhalin). They are far removed from Europe, transport infrastructure is undeveloped, therefore it is doubtful that the West Siberian oil will be replaced by Russian oil from other areas in the nearest future.

The North Sea that supplies about 10 percent of the total requirement of the European refineries is gradually losing its stability. It has reached the peak and one can expect that in future production will drop considerably. Europe will receive less European oil: the continent will face the task of finding other stable sources of hydrocarbons.

Oil from Iraq is one of the possible solutions, yet it will come only when the sanctions are lifted. Iraq can supply 120 million tonnes a year. One should note that the quality of Iraqi oil corresponds in many respects to the quality of Urals, the Russian export grade. It cannot replace the sweet crude oil from the North Sea (Brent grade). This gives certain chances to the Caspian oil. The Russian oil contains more sulfur (1.8 percent) and is heavier (its density is 0.87 tonnes per cu m). The oil from Tengiz (the Kazakhstani sector of the Caspian region) contains less sulfur (0.5 percent), its density being 0.78 tonnes per cu m. When the Caspian Tengiz oil first reached the Mediterranean market in December 1997, one ton of it fetched $20 more than Russian Urals oil; by the mid-2001 the difference was $35. The difference in prices for Urals and the Azeri light oil (mainly from the Azerbaijani sector of the Caspian Sea) rose from $8.9 a ton in June 1999 when the grade had been first quoted to $19.9 in July 2001 (a more than 2.2 times increase). Higher prices for Caspian oil are justified by its higher grade.

This poses two important questions: can the Caspian states supply enough oil to Europe and how can this be done? Oil extraction and transportation have long ceased to be purely geological or even economic problems. They are important factors of international politics. The oil riches of the Caspian and the adjacent areas have been turned into a trump card in the game waged not only by the Caspian states. This explains why we need real assessments of the regions oil riches.

According to Oil & Gas Journal, a respected American publication, the total hydrocarbon reserves of the Caspian were estimated in 2000 at 76 billion barrels of the oil equivalent or about 10 billion tonnes (it is generally accepted that on average 1.1 thousand of cu m of gas are equal to 1 ton of oil).1 According to foreign experts, in 2000 the region extracted 66 million tonnes of oil with condensate; one can expect that in 2020 the figure will triple and reach nearly 200 million tonnes (Table 1 presents the relevant figures for the Caspian area, excluding Russia and Iran).

Table 1

The States and Prospects of Oil Extraction in the Caspian Region According to Western Expert Agencies (million tonnes)

Country 1995 2000 2005 2010 2015 2020
Azerbaijan 9.3 14.5 26.5 64.3 66.0 54.7
Kazakhstan 20.5 35.5 69.5 84.2 109.3 126.6
Turkmenistan 4.9 7.0 12.0 15.3 15.2 12.5
Uzbekistan 8.4 8.6 8.0 5.9 5.4 4.9
Total 43.1 65.6 116.0 169.7 195.9 198.7

Source: Neft Rossii, No. 7, 2001, p. 35.

Kazakhstan, the major oil producer in the area, has been actively prospecting for oil on a large scale and with great success. There are 208 prospected hydrocarbon fields of commercial categories in the republic: 98 of them are oilfields and 67 contain oil and gas. The oil is unevenly distributed: 98 percent of the exploited fields (each containing over 100 million tonnes) are found in the four western regions of the Caspian Lowland. The proven recoverable reserves of Kazakhstan (the Caspian shelf excluded) amount to about 2.8 billion tonnes of oil, actual reserves, 2.2 billion tonnes. The hypothetical reserves are estimated in the range between 8 to 22 billion tonnes, the majority of experts quote the figure of 12 billion tonnes. Preliminary assessment of oil reserves on the Kazakhstani shelf is from 4 to 9.5 billion tonnes. Hypothetical recoverable reserves are assessed at 6.3 billion tonnes (the shelf fields excluded); 70 percent of them are concentrated in Western Kazakhstan at the depth of 5 thousand m and more.

According to forecasts, in 20 years the country will increase its oil production by nearly 3.5 times (from 35.5 million tonnes in 2000 to about 126.6 million tonnes in 2020) while its share in the region with increase from 58 to 63 percent. Specialists believe that the increase will occur at the expense of two oil fields in the southeastern part of the Caspian oil and gas basin (Tengiz on land and Kashagan in the northern part of the sea). The oil and gas basin in the northeast, in the Iuzhno-Turgai depression, has a good future. There a large oil field Kumkol was recently discovered.

Azerbaijan is the second largest oil producer in the Caspian region. It is forecasted that it will increase oil production from 14.5 million tonnes in 2000 to 54.7 million tonnes in 2020, its share in the regions overall production will rise (from 22 to 27 percent). This will happen when the Azeri-Chirag-Gunashli fields start yielding oil. It should be said that in 1994 the preliminary assessments of the Azeri, Chirag and the deep-sea part of Gunashli (the A-C-G project) were estimated at 511 million tonnes. The official figure today is 620 million tonnes of recoverable reserves (the unofficial figure being 840 million tonnes). The maximal capacity of Chirag-1 is quoted as 5.8 million tonnes a year. Today, 5.5 million tonnes are extracted. The projected reserves of Azeri are 193 million tonnes. It is planned to extract about 5 million tonnes in 2005 and to reach the maximum of 18.7 million tonnes a year in 2008. At the second stage of the A-C-G project it is planned to extract 40 million tonnes of oil a year. At the third stage (when the deep-sea Gunashli is fully developed in late 2008) it is planned to reach the figure of 50 million tonnes a year. Experts say, however, that by 2024 the A-C-G project will be nearly exhausted.

According to estimates, the share of Turkmenistan and Uzbekistan in the regions oil production will be 6 and 3 percent, respectively. These are hardly the final figures. The Turkmenian sector of the southern Caspian has not been studied enough. Recently, the condensate gas and oil field Kokdumalak was discovered in western Uzbekistan with the total recoverable reserves of over 200 million of oil equivalent, over 50 percent of which is oil and condensate. Thus, if we put aside the Russian reserves in the region (its oil will hardly reach the Ukrainian part of EAOTC) and Iranian oil (until the status of the sea and the methods of establishing the share of each of the coastal states are determined together with possible transportation routes, taking into account the large, if not excessive, Caspian tanker fleet), the export potential of other regional countries (with due account of domestic consumption and exports to close neighbors) is shown in Table 2.

Table 2

Export Resources of the Caspian Countries* (million tonnes)

Country 2000 2005 2010
Azerbaijan 4.54 38.40 74.95
Armenia 3.50 3.80 4.00
Georgia 4.10 4.50 5.00
Kazakhstan 29.53 56.22 76.02
Kyrgyzstan 2.60 2.80 2.90
Tajikistan 2.40 3.50 4.30
Turkmenistan 5.36 23.09 28.76
Uzbekistan 5.35 7.73 0,71
Total 32.18 110.84 164.24

* Without Russia and Iran.

Data of the Energy Resources analytical group, U.S.A.

Source: Neftegazovaia vertikal, No. 11, 2001, p. 110.

The above shows that in several years time the region will export over 100 million tonnes of oil, and by 2010, over 160 million tonnes. Its transportation routes and the role of the Ukrainian part of EAOTC are two most important problems. When looking at the main pipeline as a whole one can discern two parts: from the Caspian fields to the Black Sea coast and from the Caucasian Black Sea coast to Europe.

The first part of the problem has been resolved. (Here we disregard the Russian and Iranian oil and part of the Kazakhstani oil moved across Russia from Atyrau to Samara.) The capacities of the old and the recently constructed pipelines meet the requirements: the Baku-Supsa pipeline has a capacity of 6 million tonnes (which can be increased to 15 million tonnes a year), the Baku-Novorossiisk-I pipeline has a capacity of up to 15 million tonnes, the Tengiz-Novorossiisk-II pipeline (first stage), 28 million ton with a possibility of increased capacity of 67 million tonnes a year (second stage).

There are sufficient oil transshipment capacities on the Caucasian Black Sea coast (in Russia and Georgia). The latter has oil terminals in Batumi and Poti with the total capacity of the stationary terminals and a floating berth in Batumi being 7 to 8 million tonnes a year (nearly all berths, except one, require modernization, overhaul or reconstruction). Tanker loading outside the berths makes it possible to deal with tankers of up to 80 thousand tonnes of carrying capacity. Outside Poti, in the Supsa settlement, there is an oil terminal with a transshipment capacity of 7.5 million tonnes of oil a year to handle early Caspian (Azeri) oil. The floating berth can deal with the tankers of up to 200 thousand deadweight tonnes.

Russia has two transshipment complexes on the Black Sea: in Novorossiisk with a capacity of 36 million tonnes and in Tuapse, 14 million tonnes a year. Sheskharis, the Novorossiisk oil terminal, has a stationary roadstead berth to handle tankers of up to 250 thousand tonnes of deadweight. Early in 2001 the terminal acquired another deep-sea stationary roadstead berth of 15 million tonnes a year and a floating berth in Iuzhnaia Ozereevka with two tanks of 100 thousand tonnes each. (In future there will be ten such tanks.) This will make it possible to handle tankers of 75 to 350 thousand deadweight tonnes. It is planned to build a roadstead berth with a capacity of 7 to 8 million tonnes a year in Tuapse to handle tankers of up to 100 thousand deadweight tonnes.

The problem of moving oil from the Caucasian terminals to Europe is another matterthere are several sides to it. An exit to the Mediterranean is limited by the Straits. Today, about 75 million tonnes are moved across them every year, and, according to expert assessment, the figure can be increased by 10 to 15 million tonnes and not more. This variant has its advantages (tanker hauling preserves oil quality), yet the Straits capacity is obviously not enough to let through the oil that will be extracted and moved to the Black Sea coast. Turkey has tightened ecological requirements to oil transport. Besides, it is nurturing ambitious plans of moving the Caspian oil to Europe through pipelines across its own territory.

There are two other variants of oil transportation that avoid the Straits. First, oil from Kazakhstan (as part of the Russian export grade Urals) can be moved along the Atyrau-Samara pipeline to Europe across Russia, Ukraine, and Belarus through the Druzhba system. Russia establishes the annual quota. In 2001 the figure reached its peak of 11 million tonnes. Russias magnanimity was caused by commissioning the Tengiz-Novorossiisk oil pipeline and Kazakhstans agreement to use the Baltic pipeline system. No matter how large the quota is not enough: according to experts, the Kazakhstani oil companies are prepared to offer for export from 18 to 23 million tonnes of oil a year. Tengiz alone produces 10-12 million tonnes of oil and is prepared to increase production. Therefore, Variant 1 cannot solve the problem.

Variant 2 is more complicated: to preserve the quality of the Caspian (Kazakhstani) oil (a ton of the Tengiz grade fetches $35 more than a ton of the Urals grade) it is advisable to use the Tengiz-Aktau (on the Caspian shore) pipeline, then move oil to Diubendy (at Baku) by tankers, from Diubendy to Ali and further on to Bairamly by a pipeline, then by railway to Batumi, and then by a ferry. On the whole, the capacity of this variant is not enough to deal with Caspian exports, either.

So far, there are no alternatives to the Straits. This forced several countries to start working on variants that may ease the transport flow across the Straits. Turkey favors the Baku-Tbilisi-Ceyhan pipeline; Rumania put forward an idea of a pipeline from Constanţa to Trieste; Bulgariafrom Burgas to Alexandroúpolis and from Burgas to Vlorë (Albania).

The United States is actively supporting the Turkish variant; its feasibility study was ready in August 1998. The preliminary assessment of the cost of construction was $2.4 billion; design capacity50 million tonnes a year; total length1,730 km, of which 1,037 km will go across Turkey. Kazakhstan is also interested in the project: in March 2001 it signed an agreement about its participation in it having in mind that by 2020 its total oil exports would reach 80 million tonnes and that the existing capacities (including the Caspian Pipeline Consortium and planned reconstruction of the pipelines) would not meet its needs. Ceyhan, on the Mediterranean already has a powerful oil terminal with a capacity of 100 million tonnes a year built in 1977 to receive Iraqi oil. This is one of the Turkish projects obvious advantages. The terminal has four stationary roadstead berths 1 km away from the shore that can handle tankers of up to 300 thousand deadweight tonnes. At an international oil and gas conference in Istanbul in 2002 it was announced that construction of the pipeline would start on 19 July, 2002 and it would be commissioned in 2005.

The Burgas-Alexandroúpolis (Bulgaria-Greece) is one of the alternatives. It will be 300 km long with the carrying capacity of 28 million tonnes a year. Russia is also interested in the project.

The Constanţa-Trieste (Rumania-Italy) pipeline will be 1,400 km long with the capacity of 30 million tonnes a year. A powerful deep-sea terminal in Constanţa is one of its obvious advantages. Russia may also take part in the project since it owns Rumanian oil processing capacities. Moscow may also contribute to the Burgas-Vlorë pipeline that will be 900 km long with the capacity of 35 million tonnes a year.

In this situation Ukraine has offered another variant of bypassing the Straits: from Odessa to Brody and further on to Gdansk in Poland. The Ukrainian stretch can be commissioned immediatelythis is one of the Ukrainian variants advantages. Early in April the first tanker carrying technological oil to test the pipeline and the system as a whole arrived in Iuzhniy. Now we have to find those who would like to use the system and extend it to Gdansk.

The Ukrainian variant has several advantages: it can be commissioned immediately and can preserve the high quality of Caspian oil while moving it to Europe; it can supply oil to the oil refineries in Central and Eastern Europe without considerable investments into the system at the projects second stage; in future it will transport oil along EAOTC to the deep-sea port of Omisalj in Croatia.

It should be taken into account that the southern part of the Druzhba oil pipeline goes across Brody to Slovakia and Hungary. There are pipelines going from these two countries to the Czech Republic, the FRG, and Croatia; a 50-km long Bratislava-Schwechat pipeline will bring oil to Austrian oil refineries. Theoretically, the Odessa-Brody oil pipeline will supply the Central European market with Caspian oil from Black Sea ports.

At the same time, even after the Iuzhniy marine terminal and the adequate oil pipeline system have been completed, it is still unclear how the Ukrainian stretch of EAOTC will be used. The first requests arrived from its potential users (Transpetrol of Slovakia and Neftekhimik Prikarpatia of Ukraine) in summer 2001. They plan to transport about 2.8 million tonnes a year, yet there are no real agreements about this.

An agreement on a grant of $125 thousand of the U.S. Trade and Development Agency to the public corporation Ukrtransneft was signed during the October 2001 American visit of Premier of Ukraine A. Kinakh. The money was intended for the feasibility study of an international consortium for exploitation of the Ukrainian part of EAOTC. It was planned to use the money to calculate economic effectiveness of moving Caspian oil to Western Europe through the Odessa-Brody pipeline. The job is being done by an American company Halliburton. The Golden Gate company from Poland plans to start working out the feasibility study of Brody-Plock-Gdansk pipeline (the cost of construction of the Polish stretch 500 km long is estimated at about $500 million) when the results are published. Obviously, the project will be launched if the results are positive.

The Ukrainian authorities are optimistic about the future of the Odessa-Brody pipeline, yet there are certain optimism-quenching circumstances. Halliburton has twice postponed publication of the results: the preliminary date of January 2002 was pushed to March of the same year and then even later; there are no agreements even on filling the system with technological oil. In addition, the leaders of Azerbaijan say that the republic will not be able to transport its oil along the Odessa-Brody stretch until 2005. There are other indications that in the nearest future the line may remain underloaded.

First, the Middle East may produce about 500 million tonnes a year of excessive oil that is more than the forecasted Caspian production. The European market has been divided between the Middle Eastern countries and Russia. As soon as the Iraqi sanctions are lifted, its cheap oil will compete on a great scale both with Russian and Caspian products. In this context, the Caspian reserves will not play a significant role in the European economy.

Second, the declared oil reserves in the region as a whole and in Azerbaijan, in particular, proved to be overestimated. There is an opinion that the republic still has no more than 22.3 percent of the initial recoverable reserves. Prepared reserves of 66 oil fields are 389.5 million tonnes that are mostly depleted, inefficient, and drowned ones. The total assessment of the hypothetical but not yet explored reserves fluctuates between 530 and 670 million tonnes. Only one of the latest wells proved to be producing, others were either dusters or marginal producers. It turned out that contracts were signed on oil fields that contained no oil. In 1998-1999 the Nord Apsheron Operating Company and the Caspian International Oil Company went bankrupt. The British Ramko, one of the pioneers operating in Azerbaijan, withdrew from the republic. The vague prospects of large-scale oil production in Azerbaijan forced Ukraine to alter its plans related to the Odessa-Brody oil pipeline. Today, it is oriented toward, at least, all functioning oil mains: Baku-Supsa, Baku-Novorossiisk, and the Caspian Pipeline Consortium.

Third, when thinking about the prospects of the Ukrainian stretch of EAOTC one has to bear in mind that Kazakhstan is working on some more possible oil routes: Western Kazakhstan-China, Kazakhstan-Turkmenistan-Iran-the Persian Gulf, Kazakhstan-Turkmenistan-Afghanistan-Pakistan. Obviously, in the nearest future the Caspian area will not produce enough oil to fill all these pipelines.

Fourth, the conflicts between Azerbaijan and Armenia, Iran and Azerbaijan, and Turkmenistan and Azerbaijan may dim the future of the Ukrainian stretch of EAOTC. The pumping rates may become another stumbling block. In 2000, Tbilisi persuaded Baku to make it a present of the pumping rate collected for the transit across Azerbaijan of the Baku-Ceyhan pipeline. Obviously, Ukraine should be prepared to offer competitive economic conditions.

Fifth, the practice accepted across the world and the Ukrainian laws should be taken into account when an international consortium is set up. International practice offers two variants: (1) the rights of property of the objects are transferred to the consortium or (2) the rights to use such objects are transferred as a concession or a lease.

Foreign investors prefer the first variant because it offers a clear structure of capital (according to the owners) and property rights with a prospect of recovering the credits and even investments. An open company (as a form of an international consortium) is the best way to attract foreign investments. In this case an entity of business activity will be set up within the Law of Ukraine on Business Companies.2

The preliminary consultations between an open company Ukrtransneft and international energy companies Shell, Chevron and others, and the EBRD have shown that potential foreign participants will prefer a consortium of the first type. Potentially, Ukraine may contribute the Odessa-Brody pipeline and the Iuzhniy oil terminal. However, their construction was funded by the state, therefore they are state property. According to the Ukrainian law, this form of ownership cannot be changed. Consequently, today these objects cannot be regarded as a potential Ukrainian contribution. Art 7 of the Law on Pipeline Transport says: The main pipeline transport is of national economic and defense importance and belongs to the state. Privatization and change of the form of ownership of the state enterprises of the main pipeline transport is banned. From this it follows that an international consortium according to the first variant requires changes in Ukrainian legislation.

The second variant under which the objects are transferred to the consortium as a concession or a lease has its limitation, too. The Law on Concessions passed on 16 July, 1999 enumerates objects that can be transferred as concessions. There is no mention of oil pipelines in the law, therefore the second variant is impossible, either.

The situation is as follows. The oil transportation objects are used by the Ukrtransneft open company, which is confirmed by Resolution No. 747 of the Cabinet of Ministers of 25 May, 1998 On Setting up the National Joint-stock Company (NJSC) Neftegaz Ukrainy. The document enumerated the property used to ensure transportation, storage and distribution of oil, oil products and natural gas, which, according to the law, cannot be privatized and transferred to the Company for exploitation.

By Decision No. 256-p of 23 June, 2001 On Setting up Open Joint-stock Company Ukrtransneft of the Cabinet of Ministers the NJSC Neftegaz Ukrainy transferred the corresponding property of the oil main and branches for use to the newly-established firm. An agreement between them signed in fulfillment of the above Decision transferred the property (gas and oil mains and facilities along them) to Ukrtransneft for day-to-day management of operations. This organization cannot transfer the property received by the agreement for use to third persons without a permission of the founder, the NJSC Neftegaz Ukrainy.

In its turn, the NJSC Neftegaz Ukrainy cannot transfer the property to third persons for use (with the exception of the enterprises that are its part) without permission from the republican State Property Fund. This is established by Agreement No. 76 of 4 February, 1998 between the Fund and the NJSC Neftegaz Ukrainy. The Law on Pipeline Transportation has not given the Fund the right to pass decisions on privatization of such objects or on their leasing.

The Iuzhniy marine oil complex cannot be privatized either under the Law on the List of Objects of State Property that Cannot Be Privatized.

The above says that the legal conditions for an international consortium can be created solely by the Supreme Rada (parliament). Any changes in the normative acts require positive results of technical and economic assessments carried out by the Halliburton. In their turn positive conclusions require a detailed analysis of the demand for Caspian oil on the European market, identification of efforts needed to attract producers, suppliers, and traders, as well as corresponding long-term agreements with the companies that will use the Iuzhniy-Brody-Plock oil pipeline to move oil to potential clients in Eastern and Central Europe.

There is the sixth variant that is less attractive to foreign partners than the other five but that does not require changes in Ukrainian laws. Ukrtransneft is discussing a possibility of setting up an international operational company (IOC) through contributions to the authorized capital. The Ukrainian side will contribute technological oil and transportation services, transshipment and tank storage. The foreign participants will invest money and oil needed to start the complex running. The tanker owners will participate by delivering oil to the Iuzhniy terminal.

The Ukrainian side sees the following advantages for the participants: the oil owners would acquire a possibility to quickly respond to the world prices and channel their oil either to Plock-Gdansk or Omisalj; tanker owners would be sure of using all their tankers when delivering oil to Iuzhniy, while Ukraine would use the Odessa-Brody system to the full thus speeding up completion of the entire EAOTC project.

Obviously, it is strategically important for Ukraine to commission its part of EAOTC. This is not easy and may require much effort from all levels of state power. The state will have to increase the economic attractiveness of the project because, being underloaded at the beginning, it may start with losing money or not fetching enough.

We need amendments and additions to the corresponding laws to take account of the Energy Charter. The normative acts that correspond to those accepted by the European Union will create a better investment climate and add competitiveness to the oil routes across Ukraine.

The new Taxation Code (to be enacted in the latter half of 2002) should not contradict the Energy Charter Treaty signed by the government and ratified by the Supreme Rada in 1998.3

The tariff policy should ensure, on the one hand, investment resources, and on the other, competitiveness of the Ukrainian routes.

The practical solution to these problems will determine the future of the Ukrainian part of the Eurasian Oil Transportation Corridor.


1 For more detail, see: Neft Rossii, No. 7, 2001, p. 35.

2 The Law on Enterprises in Ukraine has created a possibility of establishing consortiums. It describes the consortiums as temporal alliances based on industrial or banking capital and set up to reach a common aim. The alliances operate according to their treaties or rules endorsed by their founders or owners. The enterprises that are part of such organizational structures preserve their rights of legal persons and are covered by the above law.

3 To create favorable and equal conditions of fuel transportation in all countries-signatories to the Agreement they cannot introduce additional taxes or other payments for the transit of energy fuels that do not exist in other fields of entrepreneurship. The payments that the Ukrainian Rada introduced in 1999 directly contradict the main principle of the Energy Charter Treaty.


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