Derek Brower: Another lame duck

A proposal to import Central Asian oil into eastern Europe and break the region’s dependence on Russian crude faces the same old problems Derek Brower, journalist FOR politicians in Poland and the Baltics, it seems like a wonderful idea. If Russia is no longer willing to export oil to the region, then upgrade an existing pipeline and bring in crude from the Caspian. At a summit in Vilnius last week, the heads of government of Ukraine, Poland, Lithuania, Georgia and Azerbaijan agreed to do just that. The deal called for an extension of the Odessa-Brody pipeline in Ukraine to be built, stretching to Plock and Gdansk in Poland. President Yushchenko, of Ukraine, says that the pipeline could eventually handle 800,000 b/d, sufficient to meet the bulk of demand in each of the countries, and certainly to diversify their import requirements away from Russia.

To the right, Europe

With the exception of Azerbaijan, each of the countries has good reason to see diversification of its energy supplies as a political necessity. Lithuania’s imports of Russian crude, for example, have been shut in since last year, when Russia’s state oil transport company, Transneft, ceased exports for “technical reasons”. Lithuania says the supply cut was punishment for allowing a stake in the Mazeikiu Nafta refinery that Yukos once owned to be bought by Poland’s PKN Orlen, and not a Russian firm. Since then, Lithuania has been importing crude by sea. The latest idea would actually restore the Odessa-Brody pipeline to its original purpose, to import crude into northwest Ukraine. Built in 2001, the pipeline stood empty for three years before the government of Leonid Kuchma, under pressure from Moscow, agreed to reverse the flow of the line and lease capacity to TNK-BP, allowing it to export into the Black Sea. The good news for the politicians in New Europe who have backed the latest plan is that Baku is willing to export oil to help fill it. The bad news is that Socar, Azerbaijan’s state company, is the only producer in the country likely to be interested, according to analysts, and it won’t have much spare capacity to offer. The BP-led AIOC consortium, which is producing oil from the Azeri-Chirag-Guneshli fields in the Caspian, has committed its output to the Baku-Tbilisi-Ceyhan export pipeline. Indeed, after that export route came on stream in 2005, a previous export route, from Baku to Supsa on Georgia’s Black Sea coastline, fell into disrepair. It remains out of commission and any exports to Ukraine would require investment to repair it and bring it back on line. There are other problems with Odessa-Brody-Gdansk. Refineries in eastern Europe process Urals blend crude, so upgrading them to handle Caspian grades would be necessary. But the biggest problems is that Kazakhstan now seems unlikely to support the line, despite saying last year that it would have spare capacity to send to Brody. Kazakhstan’s energy minister, Sauat Mynbayev, was in Vilnius at the summit where the deal was agreed. But his comments there were hardly encouraging. Kazakhstan already has agreements in place with Moscow for the export of its crude, he said, and “any change of route for any volumes would have to be coordinated with Russia”. The key for Kazakhstan is a new Bosphurus by-pass pipeline being built between Burgas, in Bulgaria, and Alexandroupolis, in Greece. Russian companies own 51% of that pipeline and Moscow, say sources, has told Kazakh companies that unless they agree to export crude through it, Russia will not agree to expand the infrastructure that takes Kazakh crude to Novorossyisk, a port on the east coast of the Black Sea. That could be decisive for Kazakhstan. With new production from the Kashagan and Tengiz oilfields due on stream in the next few years, Kazakhstan needs the Caspian Pipeline Consortium to increase the capacity of its export system from 700,000 b/d to 1.3m b/d. Resolving that bottleneck, it seems, could have implications for Poland and Ukraine’s plans. It leaves the Odessa-Brody-Gdansk pipeline “a political project without any commercial basis” says one analyst. “Poland could sink $700m into the extension and be left with the same white elephant that Ukraine had before it reversed Odessa-Brody in the first place.” Another analyst says that the political imperative could soon weaken, too. “It is the Polish elections next week, so politicians are going to say anything that is even vaguely anti-Russian.” Eastern Europe has a Russian energy problem – but if its politicians are playing games with the issue, it is unlikely to go away soon.