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New Europe pushes old pipeline idea

A LONG-DISCUSSED plan to import Caspian oil through the Black Sea and Ukraine to Poland received a boost last month when five former soviet states signed an agreement to develop the project. The plan would involve reversing the flow of the existing Odessa-Brody pipeline in Ukraine and extending it to Plock and Gdansk, in Poland. Poland and Lithuania, two signatories to a deal agreed at a summit in Vilnius last month, think the pipeline would help break their countries' dependence on Russian crude supplies. Analysts say it is an old idea with little future.

For the Baltic States the political incentive to diversify oil imports has increased since Russia cut off piped shipments to the Latvian port of Ventspils, in 2003, and to Lithuania last year. Transneft, Russia's state-owned crude-oil pipeline monopoly, says the break in exports is the result of technical problems with pipelines to the Baltics. Latvia and Lithuania say the cause is political.

The latest plan – also agreed by Georgia, Ukraine and Azerbaijan – would restore the Odessa-Brody pipeline to its original purpose: importing crude shipped through the Black Sea to Odessa and piping it to northwest Ukraine. After the 290,000 barrels a day (b/d) line was built in 2001, however, it stood empty for three years before the government of Leonid Kuchma, under pressure from Moscow, agreed to reverse its flow and lease capacity to TNK-BP.

Viktor Yushchenko, president of Ukraine, said the latest agreement was "a historic moment when the project of transporting Kazakhstani oil to Europe shifts from a political to practical sphere". Yet while no-one doubts the political will of the five countries, the practical sphere remains the biggest challenge for the project. The problem for Ukraine when the line was first built was finding oil to ship to Brody. Analysts say the same issue could thwart plans to reverse the flow and extend the line to Gdansk.

"This is very much a political project, not a commercial one," says Andrew Neff, an analyst at Global Insight, a consultancy. Crucial to the project's viability will be tapping Central Asian oil. But that could be difficult. Given Azerbaijan's support for the project, that country is the likeliest supplier. Oil companies producing crude from the Caspian will soon add incremental production beyond the present capacity of the Baku-Tbilisi-Ceyhan pipeline.

But it will not be enough to meet the needs of the Odessa-Gdansk project, which Yushchenko previously said could be expanded to handle 0.8m b/d. Imports from Azerbaijan would also need a restart of throughput on the 150,000 b/d Baku-Supsa pipeline, which has been shut down since 2006. Local reports say the line could be back on stream next year. But Neff says state-owned Socar is the only exporter likely to use it.

A bigger problem is Kazakhstani oil. Last year, the country said it would send some crude through Odessa-Brody if Ukraine reversed the flow. But the energy ministry seems to be backing away from that prospect. Its minister, Sauat Mynbayev, was in Vilnius at the summit where the deal was agreed. But he disappointed listeners by saying Kazakhstan already had agreements in place with Russia covering the export of its crude. And "any change of route for any volumes would have to be co-ordinated with Russia".

"Russia is holding all the cards," says Neff. Russian firms own 51% of a new oil pipeline between Burgas, in Bulgaria, and Alexandroupolis, in Greece, and Moscow wants to ensure Kazakhstani crude flows through it and not through the rival Odessa-Brody line. To make sure, analysts say, Russia has told Kazakhstan that it will only agree to a capacity expansion of the Caspian Pipeline Consortium's (CPC) pipeline from western Kazakhstan to Novorossiysk, on the Black Sea, if Kazakhstani companies agree to ship their crude through the Burgas-Alexandroupolis link. Expansion of the CPC system (from 0.7m b/d to 1.3m b/d) will be crucial to deliver to market new production from the Kashagan and Tengiz oilfields in the next few years.

The supply problems dwarf other issues, such as the need to upgrade refineries in eastern Europe designed to handle Urals blends so that can process Caspian crude. And they leave Odessa-Brody-Gdansk looking like another political plan without any grounding in commercial reality.

"It is the oil equivalent of the Nabucco [gas] pipeline," says one analyst. Or the equivalent of another speculative idea floated at the Vilnius conference – the White Stream pipeline to take Caspian gas through Georgia and across the Black Sea to Ukraine. Another analyst pointed out the real reason for the re-emergence of the Odessa-Gdansk link: "Don't forget that these plans were made in the week before the Polish election," he said. "It means the politicians are talking up anything that is even remotely anti-Russian."

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