Derek Brower in London -
The governments of Azerbaijan, Lithuania, Georgia, Poland and Ukraine signed an agreement last week to develop a new oil export corridor from the Caspian to the Baltics in a move designed to break Russia's control of exports to northern Europe. However, the project, which will involve a reversal and extension of the existing Odessa-Brody oil connection, could remain a political pipedream, say analysts.
The idea has been tried - and found wanting - before. The Odessa-Brody line, built in 2001 to carry up to 290,000 barrels a day of Caspian crude from southern Ukraine to the west of the country, stood empty for three years before Kiev agreed to reverse the flow - allowing Russia's TNK-BP to send crude south to the Black Sea.
The latest idea is to reverse the line's flow to its original direction and build an extension to Plock and Gdansk, home of Poland's largest refinery.
The problem with the idea earlier this century was a lack of crude from Central Asia to fill the pipe. It is a problem that hasn't gone away, despite last week's political agreement. "This is very much a political deal rather than a commercial one," Andrew Neff, an analyst at Global Insight, told bne.
The political will of the signatories - each holding its own energy grudge against Russia - cannot be doubted. But their plan to tap Azerbaijan and Kazakhstan for oil could run into problems. Azerbaijan's oil output is set to increase beyond the existing capacity of the Baku-Tbilisi-Ceyhan export pipeline, but shipping incremental production into the Black Sea and towards Odessa will require a restart of an older, pipeline, from Baku to Supsa, in Georgia.
Neff says that of Azerbaijan's oil producers, the producer likely to be most willing to push incremental production to Ukraine, will be the country's state company, Socar. But it unlikely to have sufficient capacity to fill Odessa-Brody on its own, says Neff.
That leaves Kazakhstan as the deal breaker. Its energy minister, Sauat Mynbayev, was in Vilnius at the summit where the deal was agreed. But he injected a little realism into the proceedings when he said that Kazakhstan already had agreements in place with Moscow covering the export of Kazakh oil. And "any change of route for any volumes would have to be coordinated with Russia".
"Russia is holding all the cards," said Neff. In particular, Russian companies control 51% of a new pipeline being built between Burgas, in Bulgaria, and Alexandroupolis, in Greece - a rival to the Odessa-Brody-Gdansk project. Meanwhile, for Kazakhstan, the most important export route for its crude is the proposed expansion to around 1.3m b/d of the Caspian Pipeline Consortium's pipeline from the Caspian to Novorossiysk, on the Black Sea. Expansion of that system will be crucial to new production from the Kashagan and Tengiz oilfields, due on stream in the next few years.
Russia, however, has effectively told Kazakhstan that a capacity increase of the CPC line is conditional on Kazakh crude then flowing through Burgas-Alexandroupolis. That should be enough to ensure that Odessa-Brody-Gdansk falls well down the list of priorities for Kazakhstan and its companies.
It could leave Odessa-Brody-Gdansk struggling to find any crude to justify it. Analysts say Poland, which is particularly eager to make the project work, could sink $700m into the extension before it has secured any contracts to fill it with gas. "That would leave it with the same kind of elephant Ukraine had until it reversed the flow of Odessa-Brody," said Neff.
There is another problem. Given that Eastern Europe's refineries are accustomed to handing Urals blend crude, they would have to be upgraded to cope with oil from Central Asia.
The new project's problems have echoes of those facing the Nabucco gas development - another political project designed to diversify Europe's energy away from Russia; and another that is struggling to find non-Russian sources of energy to fill its pipeline.
The Nabucco partners admitted that the solution could be taking Russian gas through the pipeline after all. Shortly after their agreement last week, the Odessa-Brody-Gdansk partners seemed to be coming to the same conclusion. "If Russia decides to participate in some capacity in this project," a spokesman for president Yushchenko was quoted as saying on Friday, "I am convinced that we should consider its proposal and invite it to join."
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