BUSINESS PLAN PROSPECT OF THE ODESSA-BRODY-PLOTSK PROJECT

A fundamentally new stage of the EAOTC project development is connected with completion of the business plan of the Odessa-Brody-Plotsk project (to be called a business plan later) worked out by the international consulting consortium Sweco Pic-Ilf-Kantor.

The primary objective of the business-planning process is to work out a complex document that would serve as a good ground for commercial negotiations with potential strategic partners, international financial institutions and market operators. On March 15, 2006 the framework Business-plan of the project was presented at the expanded session of Ukraine-Poland-EC joint working group held in Brussels. The document (about 350 pages of the main part and several appendix-volumes with maps, calculations, graphs and other informational appendices) consists of five main parts:

• Economic calculations of the route, including its tariff component,

• Technical estimation, including system engineering, coordination of the route and estimation of the project cost,

• Legal analysis, including matters related to the national and intergovernmental legal regime and project corporate structure,

• Project structuring,

• Financial analysis.

At the invitation of the Kazakhstan Petroleum Association the joint delegation Ukrtransnafta OJSC, Pshiyazn and the International Advisory Consortium, which works out the business plan on the Odessa-Brody-Plotsk project, took part in the session of the Board of the above-mentioned Association held on March 17, 2006 in Almaty. During the session the members of the Association (the leading international petroleum companies producing oil in the Caspian region) presented the Odessa-Brody-Plotsk project and its framework business plan. The members of the Board of the Association were informed in details about financial and economic indicators of the project which provide the project’s competitiveness, attractiveness of the route for potential suppliers and oil consumers. The companies showed special interest in the information related to guarantee to preserve the quality of the oil that will be delivered within the framework of the project to the target markets of Central and Eastern Europe owing to separate transportation of various petroleum sorts.

Project stages

According to the business plan the project consists of three phases:

• Stage 0: Using the Odessa-Brody oil pipeline in reverse direction. Deliveries of the Caspian oil to Central European petroleum refineries through Southern Friendship. The phase period will last from 2007 to 2028. The Odessa-Brody oil-pipeline does not require additional investments. The international expert working group will determine the amount of means to be invested in the Slovak part of Southern Friendship before late March, 2006.

• Stage 1: Construction of the 800-inch Brody-Plotsk oil-pipeline (the pipeline is about 550 km long, in compliance with the general prospect its planned throughput capacity is 25 million tons, the construction is to be implemented in 2007-2009, the pipeline is scheduled to be started up in 2010). Expansion of the Odessa-Brody oil-pipeline’s capacity. Investing in the tank farm in Odessa and Brody. Construction of new terminal in Odessa. Transportation of the Caspian from Odessa to Plotsk and Gdansk and its exporting from Gdansk terminal - 2028.

• Stage 2: Expansion of the capacity of Odessa-Brody and Brody-Plotsk pipelines. Additional investments in the tank farms in Odessa and Brody. Construction of an additional berth in Odessa. The construction is to be implemented in 2008-2010. Additional facilities will be started up in 2011.

Expanded Stage 2: Extension of the oil-pipeline to deep-water Wilhelmshaven port, North-Western Germany. Transit of significant additional volumes of various oil sorts through Ukraine and Poland to the markets of North-Western Germany and then to the USA.

Key conclusions of the business plan on the basis of fundamental prospect of the project

• The route is competitive at most target markets. The project possesses the strength margin to achieve proper competitive capacity for markets of Central and Eastern Europe still remaining problematic.

• The projects gives opportunity to preserve the quality of light brands of the Caspian oil in the process of delivery to the targeted petroleum refineries, their system marketing in the Baltic region on FOB conditions,

• Light sorts of the Caspian oil will be in requisition at the target markets as additional to the traditional Urals supplies that improve the economy of procession and competitive capacity of petroleum refineries,

• The Odessa-Brody-Europe route provides the Caspian and Russian light oil producers with a commercially profitable extra opportunity to diversify the routes of their oil deliveries to European and world markets, and gives competitive at the regional oil processing markets,

• The project is to be profitable from the first year of the oil-pipe’s operation.

The profitability will significantly increase after implementation of Stage-2 and expansion of the throughput capacity of the route.

• The project payback period is 9 years.

• The Project provides the attractive norm of internal profitability

Next steps: spring 2006

• Working on the Intergovernmental agreement on the project

• Negotiations to be carried on with oil producers, petroleum refineries, financial institutions on the basis of the business plan

• Starting of the sponsor group’s working on the OBP project

• Harmonization of tariffs, optimization of the project CAPEX and OPEX

• Establishment of the project corporate structure

• Deepening the dialogue and reaching understanding with EU regarding the new level of the system support of the project from the side of Brussels