: 24-04-2003
Pascual, Studemann, Ziolkowski: An Ambiguous Reverse

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Oil and Ukraines Euro-Atlantic chance

By Carlos PASCUAL, Ambassador of the United States to Ukraine,
Dietmar STUDEMANN, Ambassador of Germany to Ukraine, and
Marek ZIOLKOWSKI, Ambassador of Poland to Ukraine

Ukraine has a pivotal opportunity to advance its economic interests and to become an integral member of the Euro-Atlantic community substantively and symbolically. The 674-km Odesa-Brody Oil Pipeline was planned and built by the government of Ukraine to diversify the countrys energy supply and to strengthen its regional position as an energy transit country. Recent market changes have greatly increased Odesa-Brodys chances of commercial success.

A successful commercial Eurasian oil transport corridor would help Ukraine achieve greater energy independence, boost Ukraines budget and position it as a reliable route for high quality Caspian crude for European markets and beyond. Commercializing Odessa-Brody would signal to western investors that Ukraine is improving its investment climate, opening the door to more foreign direct investment. To seize this opportunity the government and the Supreme Rada must make sound transparent business choices this spring on Odesa-Brody and implement them by this summer or the opportunity will have passed.

As foreigners, why do we write this article? The answer is simple. We want to see Ukraines successful integration with the Euro-Atlantic community and European markets. Odesa-Brody, if successfully implemented, can provide a tangible boost to Ukraines economic interests. Undoubtedly, American and
European oil producers and refiners would also derive benefit from it.

There is sufficient demand in Europe for Caspian and Urals crude oil. South German, Czech, and Austrian refiners, sometimes owing to significant American investment, are importing Caspian crude from the Black Sea using a circuitous sea-based route to Trieste. German and Austrian refiners also are using this route to import Urals crude. The tanker accident off the coast of Spain has highlighted the dangers of long tanker routes. The markets responded with much higher insurance rates, making the land-based Odessa-Brody route more attractive. Light, low-sulfur crude oil from the Caspian does not compete with heavier, high-sulfur Urals export blend, but displaces similar crude oil from Africa and the Middle East.

There is a clear opportunity for a win-win formula for both Russian and Caspian oil producers to reach West European markets more directly. To benefit, Ukraine must negotiate international accords that allocate pipeline capacity according to firm financial commitments and provide for economic adjustments for varying qualities of crude oil. Ukraine can make a deal that would benefit Ukraine, the rest of Europe, and Caspian and Russian oil producers. If Ukraine successfully puts this plan into action, the extension of Odesa-Brody to Plotsk would not be far behind.

To succeed, Ukraine must protect its access to pipelines in oil transit agreements. The Druzhba- Adria accords and a pending long- term oil transit agreement with Russia must leave room for non-Russian oil to flow through Ukraines pipeline system if Ukraine is to benefit. These flawed agreements surrender Ukraines rights to control the access to pipelines on its own territory. If Ukraine seeks to advance its interests, they should be amended.

Western oil producers in the former Soviet Union and oil refiners in Europe are expressing increased interest in using the Odesa-Brody Pipeline. Ever larger volumes of crude oil are flowing into the Black Sea from Russia and the Caspian region, aggravating environmental and safety concerns of shipping oil via the Turkish Straits. A working Bosporus bypass is needed to relieve pressure on the Turkish Straits. The Odesa- Brody and Druzhba pipelines can fill this need if Ukraine acts now.

Ukraine faces stiff competition from other announced oil pipeline projects bypassing the Turkish Straits. One of these projects will fill the international market niche soon if Ukraine does not act promptly to take advantage of the fact that Odesa-Brody is the first tangible transit alternative in place.

Unfortunately, temporary short-term options are diverting attention from the need to act to ensure Odesa-Brodys medium and long-term commercial success. Reversing the pipeline to make it Brody-Odesa would surrender a strategic opportunity and put more oil into the Black Sea, thus increasing pressure for an alternative Bosporus Bypass and destroying Odessa-Brodys advantage of being the first Bosporus bypass in the region. Once another bypass is built, Odesa-Brody will become irrelevant. Moreover, once the Druzhba-Adria pipeline system becomes fully operational, the Brody-Odesa pipeline will be permanently empty. Ukraines strategic opportunity to be a world class oil transit county would be gone.

It would be truly tragic if a project in which the Ukrainian people has invested hundreds of million of dollars ended up increasing Ukraines energy vulnerability. Instead, Ukraine should take advantage of immediate possibilities to provide European consumers and Central Asia producers an economic, diversified, and environmentally safe supply route, while boosting its reputation and opening up new investment opportunities. Ukraine has a chance to move boldly to join the world economy.

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