ODESSA-BRODY
DISCUSSION ON STRATEGIC PARTNERSHIP BETWEEN ALL CONCERNED SIDES IS NECESSARY TODAY

The Deputy Director of the All-Russian Research Institute under the RF Ministry of Economic Development, Candidate of Economic Science, Professor V.A. Vasilyev

Ukrtransnafta OJSC presented offers on mutually beneficial partnership in the field of oil transportation to Russian companies on February 8, 2006 in Moscow.

It can be said that things are moving on due to meetings and negotiations carried on between Russia and Ukraine. Misunderstanding and mistrust of each other’s projects are outdated. Round-table negotiations have opened a new stage in Russian-Ukrainian cooperation.

While viewing the offers of Ukrtransnafta OJSC, it is necessary to consider growing oil demand in the world, which is an important stimulus to motivate the concerned Russian companies actively increase oil exports abroad, thus contributing to oil production development.

The reviewed materials virtually consider two variants of the Odessa-Brody oil pipeline’s use, the first being transportation of Caspian oil to Europe and the second involving transportation of Russian oil to the coast of the Black Sea. Considering favourable forecasts on further steady growth of world oil consumption, Russian companies strive (and will strive in future) to use favourable conjuncture of world oil demand. Due to high levels of effectiveness and profitability of export deliveries, the Russian oil firms will keep on striving (in the near and long-term perspective) to increase oil production volumes to form a necessary export resource base. Besides this, development of the oil transportation infrastructure in the country will require heavy investment due to significant distances between areas of production and consumption. Increasing production growth levels and oil export result in the necessity to expand and upgrade the oil transportation infrastructure.

In 2005, Russian oil exports went down by 1% and comprised 251.5 million tons including oil supplies to Ukraine, which reduced by one-third and thereby caused net surplus of capacities in the pipeline system. TNK-BP Holding (37.82 million tons), Rosneft (34.42 million tons) and Lukoil (34.42 million tons) were the main export suppliers from Russia.

In compliance with the forecasts of the RF Ministry of Economic Development, in 2006, the oil exports are expected to grow by 4.5% and require additional transport infrastructure.

It is impossible to disagree with the statement of the Ukrainian company claiming that further development of the transport infrastructure implies complete use of the existing facilities, expansion of already operating facilities and construction of new pipeline routes, which will provide:

• effective oil transportation from old and new fields, both involved in exploitation or destined for prospecting to the local and Russian oil-oriented foreign enterprises;

• steady growth of the Russian oil export to the largest and steady-growing raw-stuff markets of China, other APR countries and the USA;

• expand attraction of transit export oil supplies of the Caspian states as the production volumes within these countries is expected to grow in the near future based on forecasts.

Presently, due to the historically defined single-vector orientation and the trend already established pipeline transportation infrastructure, Europe accounts for a third of Russian oil exports. The largest pipeline company of Russia is Transneft JSC, which pumped 194.233 million tons in 2005.

Against this background the proposals made by Ukrtransnafta OJSC are quite urgent and could interest the Russian petroleum and transportation companies as during the soviet period Russia used to be the primary investor and initiator of formation and exploitation of the whole Western Europe-oriented oil transportation pipeline system.

Therefore, it is worth remembering the following:

• the volume of crude consumption at the European oil market is quite stable and countries supplying Europe with oil are virtually "glued" to refineries;

• Noticeable intention of the Far Eastern, African and Caspian oil exporters to compete with the Russian oil supply to Europe.

According to the "Energy strategy of RF until 2020", Russia would like to hold and strengthen her position at the European market and simultaneously expand exports of Russian oil supply to the markets of China, APR and USA.

Thus, the following main conclusions can be drawn from the offers of Ukrtransnafta OJSC:

1) Almost all offers concern expansion and strengthening of cooperation between Ukraine and the Russian Federation in the field of developing oil flows to Europe, which implies formation of a single energy space for two states within the framework of still "dying" idea of SES (single economic space);

2) It is necessary to maintain in every possible way the initiative of the Ukrainian side to rehabilitate and direct the former Druzhba pipeline system together with Adriya oil pipeline to Schwechat (Austria) and Ingolstadt (Germany), which currently receive oil through the Trans-Alpine pipeline due to expanded oil supply to these regions;

3) The offer to use the alternative route of Samara-Kremenchug-MOT Pivdenniy instead of the currently operating route Samara - Unecha-Mozyr – Brody – MOT Pivdenniy deserves serious attention, especially considering the target to bring the volumes of pumped oil to over 10 million tons a year;

4) Use of the Odessa-Brody oil pipeline by suppliers from Azerbaijan and Kazakhstan on the condition to extend the pipeline to Plotsk and Gdansk thus stimulating creation of a new energy space in Europe. Growing potential of Kazakhstan and rapid growth of energy resources production in Azerbaijan (rapid growth of oil production amounted to 27% in 2005) will contribute to this process. Therefore, the Russian companies possessing the privilege to export within Europe should work out all variants stimulating development of offered projects considering growing significance of Caspian oil, which at first was oriented to the East, China, India and USA rather than the European market. The Heydar Aliyev Baku-Tbilisi-Ceyhan oil pipeline and Kazakhstan-China (Atasu-Alashankou) pipeline, Caspian Pipeline Consortium, which started operation in December 2005 will serve to obtain these targets;

5) Supplies from Russia, Far East and the North Sea virtually completely meet the needs of the European countries in crude oil. Due to reduction of oil production at the North Sea’s fields, the competition between the Russian and Far Eastern oil will intensify. Russia will succeed in this competition if it uses the oil pipelines crossing the territory of Ukraine. From this point of view, proposals made by Ukraine turn to be more appealing;

6) It is necessary to specify volumes of Russian oil transportation and conditions of transit through Ukraine as well as measures to be taken by Ukrtransnafta OJSC to expand Urals brand oil shipment from the Ukrainian ports;

7) The tension appearing from time to time between Ukraine and Russia practically minimize all efforts of the countries aimed at effective use of the export and transit oil flows transported through the territory of Ukraine to Europe. Due to this, Russia searches for alternative routes to deliver oil to Europe. Firstly, this involves the expansion of the Baltic pipeline system (up to 60 million tons a year), definition of routes to transport eastern Siberian oil and start up of the Western Siberia – Barents Sea oil pipeline.

Despite this fact, Russia and Ukraine search for joint potential opportunities to transport oil bypassing Bosporus and Dardanelles (the Burgas-Alexandrupolis oil pipeline) and benefits of integrated use of Druzhba and Adriya oil pipelines for oil export through Samara-Omishal (Croatia).

Thus, in our opinion, the matter related to implementation and loading the Odessa-Brody oil pipeline is not political within the interstate relations of the countries. Besides, most likely the opportunity to use this pipeline is not associated with estimation of various oil transportation routes as these norms can be changed depending upon volumes of conditions of agreements concluded by the partners, but with the commercial strategy of various Russian, Azerbaijan, Kazakh and other leading companies on expansion of production and oil transportation in the long-term perspective during 15-20 years.

Therefore, today the matter should concern the strategic partnership between all concerned sides guiding by the principles of equal rights and equal benefits within the cooperation.