PhD (Economy), Leading Researcher of the Institute of World Economy and International Relations of the NAS of Ukraine

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Ukraine meets its demand in mineral resources used as sources of power for about 45% by its own production. In the majority of countries this index is similar while in many states (including some developed economies) it is much smaller. So, it is not the problem of the volume of available resources. The energy problems in Ukraine may have two aspects. First, the excessive industrial power consumption as compared to the developed countries. Even comparison with our CIS partners (to say nothing about western countries) shows that domestic power consumption per one GDP unit is 37 conventional units, in Russia-29, in Belarus - 24. Second, there is no import diversification with one-sided dependence on only one country-Russia.

However, these two aspects are but reflect the general economical situation of Ukraine conditioned by the poor investments into production covering only renovation of fixed capital and introduction of new energy-saving machinery. There is no money left for technological breakthroughs. To a great extent this situation is conditioned by the low return level of Ukrainian export revenues invested into production. A considerable share of money is hidden in western banks and offshore zones, spent on expensive import cars, estates, holidays at the fashionable world resorts, articles de luxe for Ukrainian elite against the background of impressing impoverishment of the majority of population. It is known that during the whole history of the Ukrainian independence the direst investments have reached only about $5bn while, according to some sources, the level of annual export of domestic capital from Ukraine is at least 4bn. The capital outflow is facilitated by an obligation to sell to the state 50% of the export revenues for the hryvnia exchange. If only this capital could be left at home and invested into domestic production! I think that this would help replacing the current energy-consuming production facilities for the modern energy-saving ones.

We are surprised to watch the economical successes of China and new industrial states of Asia. However, in the dynamically developing Asian countries almost 100% of the export revenues are subject to the national currency exchange and investments into the domestic production. Say, until May 1972 (the whole period of the economical development in Japan) all currency proceeds of the Japanese exporters were subject to 100% sale to the state while all foreign currency operations (up to 1980) by legal and physical persons required certain permission from a relevant ministry. In the South Korea the commercial banks were all nationalized for the transition period. The use and turnover of the foreign currency in the country (deposited at the special accounts

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in the state banks) were strictly controlled by the state together with a level of bank interest rates, pricing and investments. In particular, the state provided redistribution of income from the semi-processed commodities export into the high-tech development.

In the meantime a number of programs aimed at resolving the power problems have been developed in Ukraine recently, among them the Comprehensive state energy- saving program for the period up to 2010 providing about 86m t of conditional fuel to be saved, Program of state support for the development of non-traditional and renewable power sources as well as small hydro - and heat power engineering, "Ukrainian Coal" Program intended to re-equip perspective mines with high- productive machinery, shut down the non-perspective ones and reorganize the potentially promising oil-mining enterprises. Coal is the only power mineral resource sufficient to meet the domestic consumption in Ukraine for at least 300 to 500 years. So, the task is to ax both absolute and relative consumption levels of imported oil and natural gas with simultaneous increase of the domestic coal consumption. Development of the nuclear power engineering is also envisaged, in particular commissioning of the nuclear power units in Khmelnitsky and Rivne nuclear power plants and modernization of the currently operating power units. Certainly, implementation of these programs depends on the efficiency of economical reforms in Ukraine and on collaboration with our neighbors, first of all with Russia, which for a long time will remain our basic supplier of mineral resources used as sources of power, namely coal, oil, gas, fuel for nuclear power stations (since 2003 all Ukrainian nuclear power stations will be fully supplied with Russian fuel elements) and which is the transit country for the import of power mineral resources from other CIS countries: Turkmenistan, Kazakhstan, Uzbekistan and Azerbaidzhan.

Very often one can find accusations against Russia for refusing to remove export duty and VAT for gas, oil and gas condensate and for selling to Ukraine the power mineral resources for the prices of export to the member countries of the Eurasian Economical Cooperation (EAEC). For example, from December 1, 2002 the export duty rates for crude oil and crude oil products produced from bituminiferous rocks and exported by Russia to the EAEC non-members increased from $26.6 to $29.8 per 1 ton. It is worth saying that there are two ways to resolv the program: 1. To join the EAEC and thereby to enjoy the free trade regime with Russia including the duty-free trade of power mineral resources; 2. Considering the strategic course of Ukraine for the EU membership (which is incompatible with the EAEC membership) to diversify its power import by at least partial refusal from the Russian services and to purchase oil and natural gas not only from Russia but also, say, from the Arabic countries or Norway. Poland, for example, proceeding from the EU resolutions on the necessity to diversify the power import signed in September 2001 an agreement with Norway on supply of the Norwegian gas at the rate of 5 billion cubic meters a year from 2008 till 2024 by almost twice the price of the Russian gas.

Theoretically Ukraine could also combine its gas-transport system with the Norwegian one and receive gas from there. However, we are all very well aware that Ukraine currently does not have money for alternative power sources outside of Russia, Turkmenistan and other CIS countries. Even with export duty and VAT the prices for Russian oil paid by Ukraine are twice or thrice below the world market prices. Besides, it is possible to settle the oil accounts not with hard currency cash as at the world markets but at least partially with commodities of traditional Ukrainian export. Therefore, the problem of diversification of the sources for supply of the power mineral resources does not exist for Ukraine in the direct geographical sense. Instead, there is a problem of accumulation of resources for such transformation of the economy that would, at least to some extent, remove the pertaining system drawbacks. The power problems of

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Ukraine may be largely resolved by strengthening of its role as a power transit country, particularly by further development of the Ukrainian gas and oil transport system, which unites Russia and other CIS countries exporters of power mineral resources with the countries of Central and Western Europe.

Ukraine and Russia: Cooperation in the Gas Sector

The presidents of Ukraine and Russia signed in Petersburg on June 9, 2002 a joint statement assigning the governments of both countries to develop a Russian- Ukrainian Agreement on strategic partnership in the gas sphere. This agreement provides creation on the parity conditions of a consortium for management and development of the gas transport system (GTS) of Ukraine and a possible participation of the European gas companies in this enterprise. On June 10 the Chancellor of Germany G. Schroder joint the presidents of Ukraine and Russia in Petersburg to sign a joint agreement on cooperation in the sphere of operation of the main pipelines passing the Ukrainian territory with the aim of providing a smooth transit of gas to the European countries. As V. Putin stated, participation of the German companies in this Consortium will allow in the nearest future to attract $2..3bn for reconstruction of Ukrainian gas pipelines and in the nearest decade-$15bn.

Prime Ministers of Ukraine and Russia signed in October 2002 at the Kishinev summit the Agreement on strategic partnership in the gas sphere for the period of thirty years. In compliance with this agreement, the parties are committed themselves to develop cooperation in the construction, reconstruction and operation of gas pipelines, underground gas storage and in designing the joint projects of gas transportation to the foreign markets. The agreement also provides assistance in implementation of the projects on tapping new gas deposits in the territory of both countries. At the same time the Head of the Board of Directors of the National Joint Stock Company "Naftogaz Ukrainy" and the Head of the Open Joint Stock Company "Gazprom" signed the Agreement on creation of International Consortium on management and development of the gas transport system (GTS) of Ukraine. The Consortium is created on the parity conditions and registered in compliance with the Ukrainian legislation.

The achieved arrangements may be evaluated as an essential breakthrough in the Ukrainian-Russian economical relations. If they were implemented it would be possible to renovate the Ukrainian GTS with its 60% of the equipment being obsolete. Ukraine does not have own resources for this. The discharge capacity of the Ukrainian GTS is 170 billion cubic meters a year. In previous years 120 billion cubic meters of Russian gas on the average was transported through this system to Europe. The transit was covered by Russian gas of about 30 billion cubic meters a year. Besides, Ukraine purchased another 25-35 billion cubic meters of gas from Russia (and partially in some years from Turkmenistan). Considering the domestic production of 18 billion cubic meters the gas consumption in Ukraine is about 80 billion m3 a year. A new agreement on transit of the Russian gas for 2003-2013 providing gas supply to the European countries amounting to at least 110 billion m3 a year was signed on June 21, 2002 in Kharkiv during the seventh session of the Mixed Ukrainian-Russian Interministerial Commission on Cooperation.

The Petersburg, Kishinev and Kharkiv arrangements seem to remove from the agenda a sensitive issue (at least for the nearest future) of constructing pipeline through Belorus and Poland bypassing Ukraine. At the same time remembering the principle "never say 'never'" it seems premature to consider the Russian current decision on refusal to construct an alternative pipeline as final. Simply this construction requires sizable financial means lacking both in "Gazprom" and in Russian government. Once they are found, the issue of alternative pipeline will come up again. In the long run all depends on the European

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demand for gas. According to the western analysis, the gas consumption by 2010 will increase by 40% in the EU countries. This allows "Gazprom" to announce about an increase of gas sale to Europe from current 130 up to 170-205bn m3 a year.

There is a question in this regard: Will Russia and its European partners agree to increase the discharge capacity of the Ukrainian GTS by constructing another pipeline in the territory of Ukraine in the event of the Russian gas supply to Europe increases or will they invest almost the same money for construction of the additional pipeline outside Ukraine? I am consciously omitting the word 'bypass" here since this is rather additional than bypassing pipeline. The Ukrainian GTS passes now 90% of the whole Russian gas export to the European countries, which gives Ukraine an actual monopoly in this sphere. In the practice of international relations there is no country in the world that would be happy to depend on only one country in the sphere of energy, raw material or food supplies. Usually every state strives at increasing the number of trade partners. For example, Ukraine has initiated construction of the oil pipeline from Odesa to Brodv and farther to Ukrainian-Polish frontier with the aim of creating a new main oil transit on its territory to Europe bypassing Russia.

It was provided that oil would go by oil pipeline Baku-Georgian port Supsa and farther by oil tankers to Odesa. By this Ukraine wanted to overcome the absolute Russian monopoly as to the oil import. The oil pipeline "Odesa-Brody" is constructed but it is unfortunately idling. Poland has not constructed its section to Gdansk, it is not decided what countries will supply oil by this pipeline. Naturally the Ukrainian pipeline would be competitive to the Russian pipelines transporting the Caspian oil to the world markets. Russia in future will do the same irrespective of all our current Ukrainian-Russian oil arrangements striving to get rid of the one-sided dependence on Ukraine as to the gas transit to the West. The reasons for which our neighboring country is forced to act like this are rather weighty: first of all this is a mass theft of the Russian gas in the past and accumulated debts of the Ukrainian partners for the supplied gas.

Accumulated indebtedness of Ukraine for the supplied gas is a very essential reason, which will revitalize in the future the idea of the alternative gas pipeline. According to the Russian economists, annual power debts of Ukraine to Russia did not go below $2-2.5 bn in 1994-2000 and in some years (1997-1998) exceeded $3-3.5bn. Russia in the agreement on restructuring of the Ukrainian gas debt adopted a minimal debt estimate proposed by the Ukrainian side - $1.4bn. This concession of the Russian side is explained very simply: there is no other way out for Russia. The main part of its currency export profit Russia receives from gas export with its 90% going through Ukraine, and the rest 10%-through Belarus. Russia cannot refuse from this supply so it has to accept the requirements of Ukraine. However, it cannot last for long and Russia sooner or later will come back to searching for alternatives to transport its gas to the West. The alternative pipeline may not be obligatory built by Russia in Poland.

The construction of the Northern European Baltic seabed gas pipeline project to supply Germany and creation of marine gas pipe-bends intended for Kaliningrad Oblast, Finland, Sweden and Denmark is under development. This project does not look like fantasy. The year 2002 was marked by the completion of the gas pipeline "Blue Flow", which linked Russia and Turkey. The 360-km-long gas pipeline is laid at the record depth of 2100 m below the sea level. Annually 2003 Turkey will get 3bn m3 of gas and by 2008 this amount will grow up to 16 bn m3.

At the same time creation of the gas consortium will hardly solve the Ukrainian debt problem. Moreover, Ukraine owes several billions USD to the IMF, western countries and the CIS countries. In compliance with the Ukrainian-Russian agreement, the gas debt was restructured for 12 years with a three-year grace period. With the Gazprom it would

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be possible to settle the accounts with Eurobonds, but it does not suit the Russian side. The Gazprom repeatedly proposed to buy a part of the Ukrainian GTS including the gas debt, however Ukrainian legislation prohibits privatization of the oil-gas system as well as its concession. But who can create a consortium without the concession? Will the current Parliament be ready to adopt these changes? What will the international management of the Ukrainian GTS look like? We will get the answers to all these questions after adoption of corresponding governmental and legal documents. In the meantime it is worth noting that privatization of the gas-oil complex is a must for all countries intending to join the EU. Since Ukraine has announced its joining the EU as the strategic foreign policy priority, this requirement should be sooner or later met.

Prospects of the Oil Transit

The first stage of the 667-km-long Odesa-to-Brody pipeline with discharge capacity 9 million ton of crude oil a year (with the possible increase of up to 14.5 million ton a year) was constructed before August 20, 2001. The stage intended to pump 40-45 million tons of oil annually was designed. The whole project is worth $465.4m. The oil pipeline will use the constructed sea oil terminal Pivdenny 40 km away from Odesa. The said terminal will become one of the main elements of the Eurasian oil transport corridor intended to supply Azerbaijan and Kazakhstan oil to Europe. About 100,000 tons of the so-called technological oil out of necessary 600,000 tons costing $90m were pumped into the oil pipeline. There is a lot to be done here. This oil pipeline may be used to its full capacity only if Poland takes it on from Brody to Gdansk but the Polish side seems in no hurry. The Polish position may be influenced by unclear prospects as to the sources of the pipeline filling with oil. Today the main sources may be Azerbaijan and Kazakhstan, but they have not yet decided as to their attitude towards the project.

Azerbaijan oil

The current oil production in Azerbaijan is 15m tons a year. This oil goes to Europe by two oil pipelines. One of them is the western pipeline Baku-Tbilisi-Supsa. Its length is 920 km, discharge capacity-6 million tons a year (it may be extended up to 10m tons a year). In the Georgian port Supsa oil is loaded to the tanker and delivered through the Bosphorus and Dardanelles to the European markets. The western route through the Georgian territory was initially designed as an alternative for the Caspian oil bypassing Russia. The oil pipeline Odesa-Brody was created for joining with the oil pipeline Baku-Supsa. It was planned that the Caspian oil would be carried by tankers from Supsa to Odesa, then by pipeline Odesa - Brody, further by the pipeline Druzhba and then by the pipeline Brody-Gdansk to Europe.

There is also the Baku-Novorossiysk oil pipeline with subsequent transportation of oil with tankers through the Black Sea straits. Only a small part of this line transits the Azerbaijan territory entering a system of mains of the Russian Transneft Co. It is 1411km long, the annual discharge capacity is about 6m tons (may be increased up to 15m tons). Currently it pumps about 2.5m tons of oil a year.

However, Azerbaijan goes for the $3bn main export pipeline (MEP) Baku-Turkish port Djeikhan (on the Aegean Sea). Official decision on this issue was made in 1999 in Istanbul by the presidents of Azerbaijan, Georgia and Turkey. According to the expert's estimates, the pipeline will be profitable provided that it pumps at least 50m tons a year. The oil pipeline potential is 60m tons a year. Its length is 1730 km including 468 km in Azerbaijan, 225 in Georgia, and 1037 in Turkey.

Fifteen million tons of oil produced in Azerbaijan can not make the project feasable. Most of sea-shelf oil deposits are under prospecting and analysis. Out of 15 sea draft agreements on distribution of products that allow participation of foreign capital in the development of oil-gas deposits 6 has proved unpromising after

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exploration drilling. Only one deposit Chirag is under development so far. Only sea deposits Azery and Gyuneshli with projected oil stocks 630m tons are of any worth for the future. According to Ilkham Aliyev, the First Vice President of the State Oil Company of Azerbaijan (son of the President Geidar Aliev), the development of these deposits will bring the annual oil production ito 50m tons. In other words, this will be the minimal 12-year cost-effective quota for the oil pipeline Baku - Djeikhan.

In this case there will be no oil left either for Russian pipe Baku - Novorosiysk, or for Baku - Supsa pipe. Naturally, Ukraine will have hardly enough oil to fill the pipe Odesa - Brody. However, in 2010-2020 oil production in the Azerbaijan sector of the Caspian Sea may achieve 75-100m tons a year; it is not a common estimate though. Moreover, the oil pipeline Baku - Djeikhan will be ready before 2005 and it will need all Caspian oil produced. At the same time among negative sides of the Turkish project is its high cost (according to some estimates, the transport tariffs will exceed that for the alternative routes by $10/1 ton) and unstability in the Kurdish regions.

It is possible to try and make the route Baku-Djeikhan economically more attractive which needs higher pumping volumes. Americans backing this project count on filling this pipeline with Kazakhstan and Turkmenian oil delivered to Baku by Trans- Caspian seabed pipeline. The latter was approved by the leaders of Azerbaijan, Kazakhstan, Georgia, Turkmenia and Uzbekistan. However, this is not enough.

The Russian side opposes the "ecologically risky" project of the Trans-Caspian oil pipeline. This problem touches the interests of all Caspian states and has to be solved jointly because the closed marine system is extremely sensitive. This project has no sufficient financial backing. Neither it is supported by the transnationals. According to the estimates of the Institute of the CIS States, in the nearest decade the project will not be implemented because of very high cost and technological complexity of construction.

There is an alternative: the Kazakhstan oil is delivered to Baku in tankers from oil deposits of the Northern Caspian Sea area for subsequent pumping to Djeikhan. Kazakhstan with its enormous stocks of oil could theoretically guarantee the volumes necessary for the Turkish project feasibility. In the meantime it is economically much more profitable to export oil through the Russian pipelines than to deliver it by tankers through the Caspian Sea to Baku and then to Djeikhan. However, in the event of sharp increase of the oil production (by 2020 they plan to produce 100m tons a year) Kazakhstan is for the participation in the project Baku - Djeikhan.

Kazakhstan Oil

Kazakhstan currently produces about 34m tons of oil a year. Oil pipelines carry it through the territory of Russia. The pipeline Atirau-Samara connected to Europe by the pipeline system Druzhba allows pumping 15m tons of oil a year. The oil pipeline of the Caspian Pipeline Consortium (CPC) has become the main pipeline for Kazakhstan. It was opened on November 27, 2001 and became the largest investment project ($2.6bn) in the post-soviet domain with participation of Russia, Kazakhstan, Oman and western transnationals. The CPC pipeline is 1500-km long connecting rich oil deposits of the Western Kazakhstan with the terminal Yuzhnaya Ozereika near Novorossiysk. From there oil is delivered to the European markets by oil tankers.

The history of the CPC is related to the tough competition for transit from the Tengiz deposit of the Northern Kazakhstan to the western markets. This deposit is the largest in the Caspian Sea area with oil stock of billions tons of oil. Its development has started in the late 80s with participation of the American Chevron Co. Now the CPC shareholders include the American companies Chevron (15%) and Exxon Mobile (7.5%), the Russian-American Lukarco JVC (12.5%), Rosneft (7.5%), number of other companies as well as the governments of

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Russia (24%), Kazakhstan (19%), and Oman (7%). As we see, Russia is an important shareholder: its share together with that of Russian companies makes up 44%. It is less then a half of all shares but the rest of the shares are distributed in such a way that together with Kazakhstan, for example, Russia can exert a decisive influence on the CPC financial policy.

The design discharge capacity of the CPC was 28m tons of oil a year and after joining the "pipe' connected with other oil deposits of the Caspian area (including Russian ones) the pumping volumes will achieve 87m tons. The CPC operation is calculated up to 2040. It is provided that the transit of Kazakhstan oil through the Russian territory will bring to the Russian budget of all levels during 40 years about $23.3bn of tax revenues and income deductions. The projected revenues for Kazakhstan are evaluated at the level of $8.2bn. Cost effectiveness of the CPC oil pipeline depends on the further transportation of the oil to the world markets after shipment in Novorosiysk. The delivery route from Novorosiysk by oil tankers through Bosphorus and Dardanelles into the Mediterranean Sea is the cheapest. In compliance with the Montre Convention of 1936, Turkey is obliged to let the civil ships freely pass its straits. However, according to the Turkish side, an increase of the number of tankers will create an ecological threat for the region. Therefore, the transportation costs through the straits may considerably increase if Turkey introduces, contrary to the Convention, restrictions for tankers and additional insurance charges related to increased ecological risk.

The CPC shareholders are going now about the smooth oil transportation. The American Chevron Co. and the Turkish side have agreed to create a school of sea pilots trained to take ships through the straits.

In 2000 Turkey implemented modern Lokhid-Martin navigation. By the end of this year a system of radar controlled navigation will be put into operation. It will double the strait capacity (up to 145 tons of oil and oil products). To increase the oil transportation safety the Chevron administration decided to employ the EU-standard tankers with doubled casing.

Experts consider that there is no direct link between the CPC and ecological threat to the straits. In 2000 out of 50 thousand vessels that passed the Bosphorus only 3% were tankers, many of them moving in the opposite direction: from Mediterranean to the Black Sea. In the medium-term perspective oil transportation by the CPC (20-28m tons a year) cannot essentially increase the load on the straits due to relatively small volumes.

The CPC opponents, by the way, are using the problem of the Black Sea straits as an argument to support the oil pipeline project Baku-Djeikhan. Russian politicians and experts as well as representatives of foreign oil firms repeatedly expressed their doubts as to its economical appropriateness. However, this project is supported by the USA. At the same time, the USA backs the CPC, which is largely conditioned by the participation of American Chevron and Exxon Mobil Co. Promoting the competitive project Baku-Djeilhan the USA hopes to decrease the dependence of Central Asian states on the Russian pipelines. The overseas state considers that Russia with the main pipelines transiting its territory will have a chance to freely regulate the tariffs and the Caspian export, thus affecting the policy of the Caspian countries.

Russian Alternatives

As far as Turkey may curb the free passage of straits Russia is furthering the pipeline project providing a bypass oil transportation. For example, Russia together with Greece and Bulgaria is taking part in the preparation of the project for the Trans- Balkan pipeline Burgas (Bulgaria) - Alexandropolis (Greece). It is provided that the 320 km-long pipeline will link the coasts of the Black and Aegean Seas bypassing the territory of Turkey. Turkey is interested in the Baku - Djeikhan transportation and skeptical about the "bypass" project.

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However, the Russian experts maintain that the Burgas - Alexandrupolis alternative is cheaper. There is also a project of reloading oil in Romania (oil pipeline Constantsa- Triest). It is quite natural to remember the oil pipeline Odesa-Brody. If it goes to Gdansk it will be possible to deliver oil from Novorossiysk (transported there by the CPC) to Odesa and farther on to Poland. Another option for the Ukrainian oil pipeline proposed by the Russian oil companies was called the "reverse" pumping of Russian oil (up to 4m tons a year, which is twice lower than the capacity of its first phase) transported by the oil pipeline "Druzhba" from Brody to Odesa with a subsequent loading to tankers crossing Bosphorus. This rather miscalculated project can be saved by giving up illusions and geopolitical chimeras.

The power supply strategy of Ukraine should take into account the fact that in the nearest decades Russia will develop domestic export ways to maximally shorten oil transit through the neighboring countries. For example, there appeared oil pipeline Sukhodolna-Rodionivska bypassing Ukraine. It will make the export of Russian and Khazakhstan oil through the Novorosiysk Harbor cost efficient. The Baltic pipeline system (BPS) is intended to gain independence from the Baltic countries as to oil transit to Europe. This may boost the oil export from the Timano-Pechorsky region and reorient the export oil flows from the regions of the Western Siberia and Urals- Volga River area (including export supply of a part of Kazakhstan oil). It brings expansion of the first phase up to 18m tons a year, construction of the oil pipeline Khariyaga-Usa, boosts capacity of the oil pipeline Yaroslavl-Kirishi and expands the oil terminal in Primorsky in the Baltic Sea area.

The proposed integration of the oil pipelines of the "Druzhba" and "Adria" systems will help to bring Russian oil to the world markets bypassing the Bosphorus strait through the Croatian deep water port of Omishal. It was supported by the representatives of the Russian and foreign oil and transport companies looking for the economically profitable export. The project includes the oil transportation systems which pass through the territories of Russia, Belorus, Ukraine, Hungary, Slovakia, and Croatia. The initial volumes of oil transported will make 5m tons a year with future increase up to 15m tons.

The project for transportation of oil from the Western and Eastern fields to China by the route of Angarsk - Datsin is a long-term one but the most promising for Russia. During the first phase they plan to pump 20m tons of oil a year. The length of the route is 2499km.

Therefore Ukraine may find its place in the world oil transit only if it goes pragmatic and fully understands the interests of its partners. This is the only way to essentially improve its energy supply.

Translated by Alla Horska

Petroleum Transportation in Ukraine: P&T Survey

Euroasian Oil Transportation Corridor

According to Ukrtransnafta, many changes are expected in oil supply sources for the future. The annual export of oil from nearby Caspian countries may reach 100-150m tons in the next decade.

The most promising oil-producing region is considered to be the northern part of the Caspian Sea where the Tengiz and Kashagan oilfields are located. Kashagan is estimated as the biggest oilfield in the world developed in the last 30 years. The Baku- Supsa oil

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pipeline has been created and the construction for stage I of the Tengiz-Novorossiysk II pipeline has been completed. This allows the transportation of Caspian oil to the Eastern coast of the Black Sea. Today, the yearly volumes of oil transported through the Bosphorus and Dardanelle Straits are stable.

The Odesa-Brody Pipeline and associated Pivdenny Marine Terminal can transport Caspian oil to Europe. The Odesa-Brody Pipeline solves the capacity problem of the Bosphorus and can transport high-quality light sweet crude oil from the Caspian region to refineries in Central and Eastern Europe. In addition, since Ukraine possesses the refining potential of more than 50m tons per year, it is an important potential market as well.

Recently the Ukrainian Government and Ukrtransnafta have benefited from the support of the US Government, the Polish Government, the EU, EBRD and other international agencies. Through their support, several studies have been completed. The last study conducted by Halliburton Kellogg Brown&Root and Cambridge Energy Research Associates provides an analysis of the European downstream market and competitive tariff rates for Caspian oil transportation. Another grant has provided for technical monitoring of the pipeline.

ODESA-BRODY PIPELINE: PHYSICAL CHARACTERISTICS

(c) JSC "Ukrtransnafta", 2002.

In addition, negotiations are under way for extending the pipeline to Plotsk-Gdansk. A feasibility study of the Odesa-Plotsk

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pipeline construction was performed by Halliburton. The line would bring oil directly to Poland, with the possibility of bringing light Caspian oil directly to Northern Europe.

Existing Routes of Caspian Oil Supplies to the Black Sea Ports

(c) JSC "Ukrtransnafta", 2002. All rights reserved

The Odesa-Brody pipeline is connected to the Ukrainian part of the Druzhba pipeline, which would enable oil delivery to two Ukrainian refineries, Galychyna and Naftokhimik Prykarpattya. Their total capacity is estimated at 6m tons per year, and they were designed to refine Ukrainian light oil which is similar to Caspian oil in its characteristics. The fact that the Southern part of the Druzhba pipeline transits oil from Brody towards Slovakia and Hungary is most important. From these two countries existing oil pipelines go to the Czech Republic, Germany, and Croatia. If the Bratislava - Shvekhat oil pipeline (total length 50 km) were constructed, it would be possible to deliver oil to Austrian refineries.

Ukrainian Oil Transportation System Physical Characteristics

(c) JSC "Ukrtransnafta", 2002.

As the on-line Terminal Magazine (May 19, 2003), published by the Research Center Psychea, informs the current global market situation has recently enlivened the Odesa-Brody Project. There are good chances to finalize the project by the end of this year.

This same pipeline may be used to deliver Iraqi and Caspian oil following the nearest restoration of pumping in post-Saddam Iraq.

For the first three months of 2003 the Ukrtransnafta has increased the volume of oil transportation by 16.4% (13,821.9 m tons) as compared with the same period of 2002.

Compiled by Les Herasymchuk

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