UP THE PIPE

The much-talked-about conflict between Ukrainian President Viktor Yushchenko and Prime Minister Yuliya Timoshenko is gaining momentum. The secretariats of the president and the cabinet are constantly accusing each other of every mortal sin. This strident confrontation has affected the Odessa-Brody oil pipeline too, and developments around the pipeline have become part of the presidential campaign which is already under way in Ukraine.

The Odessa-Brody oil pipeline was built from 1996-2001 and was initially intended for the transit of Caspian oil to Central Europe - and, in the future, to Baltic Sea ports too - via an alternative route through Russia. It is 674 kilometres long and has a capacity of 9 million tons a year. In late May 2003, Ukraine, Poland and the EU signed a declaration in which they supported the idea of transporting Caspian oil and extending the pipeline to Plock, Poland. However, the pipeline was empty for as long as three years. After lengthy debates on the benefits of using the Odessa-Brody pipeline in forward or reverse direction, the decision was made in 2004 to begin operating it in reverse mode in cooperation with Russia. The EU, and especially Poland, voiced its displeasure at this development. Turkey too made critical comments.

In the mean time, on 22 May, President Viktor Yushchenko signed a decree, 'On the functioning of the Odessa-Brody oil pipeline in the intended direction'. A working group was created which included representatives of the Ukrainian president's secretariat, the Ukrainian Supreme Rada, line ministries and departments and the heads of two Ukrainian oil refineries which are recipients of oil from the Odessa-Brody oil pipeline (the Galichina oil refinery and the Naftokhimik Prikarpatya refinery). The working group developed and began to implement a scheme of organizational, legal and technical measures to pave the way for reversing the direction of oil flow in the pipeline.

Later, on 30 June, the Ukrainian and Azerbaijani presidents, Viktor Yushchenko and Ilham Aliyev, agreed that the Odessa-Brody oil pipeline would, in the near future, be filled with process oil. The Azerbaijani president said that a full feasibility study was under way on the project which would fully describe the commercial attractiveness of the project. For his part, Viktor Yushchenko stressed that all agreements on the project to transport Caspian oil to EU countries via the Odessa-Brody oil pipeline were being observed, including an agreement reached during the Kiev energy summit on the supply of Caspian process oil via that pipeline. "Both sides, including the Sarmatia joint venture, are making progress in the implementation of the agreements reached at earlier meetings," noted Yushchenko, stressing specifically that "there are no problems relating to these issues at government level."

However, it emerged that there are problems within Ukraine itself. On 18 July, President Yushchenko's secretariat expressed its anger at an action of the country's cabinet. According to the head of state's representative on issues of international energy security, Bohdan Sokolovskiy, Viktor Yushchenko wanted to hold a meeting on 16 July on issues relating to the implementation of the Odessa-Brody project at which documents were to be signed that are required for putting into practice the president's decree on reversing the direction of the pipeline. Two draft agreements were almost ready on the supply of more than 5 million tons of Caspian oil to the companies (the Galichina and Neftekhimik Prikarpatya refineries) and the transit of 3 million tons of oil via Ukraine. These agreements were to cover 2-year terms.

However, Yushchenko was forced to cancel the meeting because, on the previous day, the president's secretariat received by fax a copy of an instruction signed by Prime Minister Yuliya Timoshenko. Citing as the reason the fight against corruption, the instruction banned the representatives of government organizations and state-owned companies from taking part in talks, meetings or consultations, or from signing documents on oil transportation via the Odessa-Brody oil pipeline until the government had taken an appropriate decision.

Bohdan Sokolovskiy described this event as "unprecedented" and added that the "situation will postpone the implementation of the project by at least several months."

"I do not know what was forbidden. Is it forbidden for the two Ukrainian refineries to receive oil? Is it forbidden for Ukrainians in the west of Ukraine to have jobs? Is it forbidden for Ukrainian motorists to fill their tanks with quality fuel? To what extent should one not want this country to do these sorts of things? - The presidential representative appeared angry.

Sokolovskiy pointed out that the situation in the Ukrainian oil and oil products market is dangerous:  the state has the facilities to process more than 50 million tons of oil per year, but imports more than 50% of its fuel, petroleum and diesel. Some of the refineries have been on the verge of bankruptcy for a long time because of shortages of raw materials. In Sokolovskiy's words, Viktor Yushchenko has been working hard for the last three years to diversify the sources and routes of oil supply.

It seems, however, that Yuliya Timoshenko was not impressed by Viktor Yushchenko's efforts. Having ignored Sokolovskiy's words, the Prime Minister said that the government would not allow irregularities and machinations on the Odessa-Brody pipeline. Timoshenko is certain that the Ukrainian President's secretariat is trying to strike a spurious deal on the oil pipeline - to sign an agreement with offshore companies which cannot be held accountable for the outcome of international projects.

Yushchenko, on the other hand, calls the Odessa-Brody project "unique" and warns that if "more political debates are held on the oil pipeline, the Ukrainians might get sidelined."  He did not explain, however, who could sideline them, or how. At the same time, the Ukrainian leader is certain that "no project in Europe today can be compared to the Odessa-Brody-EU project, although three alternative projects have been designed." Yushchenko also continually stresses that filling up the oil pipeline with Caspian oil was a commitment of Ukraine's international obligations: "I think that we should not give anyone an opportunity to hand down unauthorized instructions to stop this or that activity with this or that legal body when international obligations and government obligations have been assumed. This is not within the authorities' competence. This is the right of the economic entity."

So, an "oil-and-gas war" between Yushchenko and Timoshenko began in earnest. On 24 July, the Ukrainian president said at a press conference that it was clear to him that these developments demonstrate the existence "of political motives which contradict national priorities" and that "corruption has nothing to do with it." Just a few days later, on 31 July, the Constitutional Court of Ukraine received a query on the consistency with the constitution of presidential decree No 474 'On the functioning of the Odessa-Brody oil pipeline in the intended direction' dated 22 May 2008. This was also expected - the Constitutional Court has been a frequent actor in political "rows" in Ukraine of late. It is already examining a number of requests of similar nature regarding the president's decrees.

At the 31 July news briefing, Timoshenko once again confirmed her position. "We will never support cooperation and what is effectively a grey-area privatization of the Odessa-Brody oil pipeline via offshore companies which deny Ukraine the right to influence the project. The offshore company with which they want to sign an agreement wants to take about $100 million worth of process oil in the pipeline, and there is nothing with which to replace that oil. This is simply a matter of a major grey deal which the government will never allow and will never support," said the head of the Ukrainian cabinet.

At the same time, Timoshenko stressed that she supports initiatives to use the Odessa-Brody oil pipeline in forward mode, although only "when a consortium, a group of countries, takes shape which will be ready to extend the pipeline further into Europe and, of course, guarantee a reliable supply of oil."

Matters escalated into accusations by Yushchenko's supporters that the "orange lady," Timoshenko, is lobbying for the interests of Russian companies which are interested in keeping the Odessa-Brody oil pipeline in reverse mode, because a forward mode for the pipeline would prevent them from exporting oil from Russia to the EU via the Yuzhnyy oil pipeline near Odessa.

"Today, the system of main oil pipelines in Ukraine effectively depends on two foreign customers - the Russian company Transneft and the offshore company Skilton (Nicosia, Cyprus). The cabinet wants clarification and an explanation as to why these two companies effectively control all the oil pipeline routes in Ukraine," said deputy head of the president's secretariat Andrey Goncharuk. He added that according to an SNBO decision (the National Security and Defence Council) which, under the Ukrainian Constitution, is mandatory for all government bodies in Ukraine, the cabinet must complete all the necessary legal and organizational procedures to make it possible to use Odessa-Brody in forward mode.

The Skilton company, which Andrey Goncharuk mentioned, was registered in Cyprus on 22 January 2001. Its founder is the TNK International company, which is registered in the British Virgin Islands and is part of TNK (Russia). This information was discovered during a study of transparency in the Ukrainian oil and gas sector conducted by the Nomos Centre with support from the Vozrozhdeniye (Revival) Foundation. "The offshore company (Skilton) was nominated in the proposal to switch to reverse flow as a creditor for $90 million, holder of a pledge and a facility agent for the Ukrtransneft Joint Stock Company's account at a first-rate European bank. The system entailed five agreements which were closely interlinked economically, financially and legally. Control was to be established over a promising oil transportation system to both receive revenues from oil transit and to redistribute them in an illegal manner," - such was the conclusion of the Nomos Centre as cited by the Ekonomika internet news site.

It was also pointed out that after Timoshenko secured the Prime Minister's portfolio, she announced a plan to eliminate all corrupt dealings in the oil and gas sector which had been put into operation by her predecessors. She focused her efforts on gas imports, ignoring the oil sector. Thus, the conclusion is drawn that the Prime Minister gave the secretariat the opportunity to make accusations against her regarding the Odessa-Brody pipeline.

Sergey Pashinskiy, parliamentary member of the Yuliya Timoshenko Bloc and member of the Rada committee for the fuel and energy sector, nuclear policy and nuclear security, said that "Today, up to 9 million tons of Russian oil is pumped via the Odessa-Brody pipeline annually in the reverse direction. This brings Ukraine $70 million in revenues."

However, the argument of opponents is that the independent companies carried out their first financial evaluations of forward flow back in 2004 and they said that using the pipeline in forward mode was economically profitable. With the rising price of oil, profits are also growing. And it is a convenient route for the supply of Caspian oil to consumers in Ukraine and Central Europe.

As we can see, the Odessa-Brody project is a political football in exchanges between Viktor Yushchenko and Yuliya Timoshenko. It would be appropriate here to cite the opinion on this issue of political analyst Yuriy Yakymenko, director of political and legal programmes at the Razumkov Centre of Economic and Political Studies, that the launch of the Odessa-Brody project with GUAM (Georgia, Ukraine, Azerbaijan and Moldova) support would be a real success for Yushchenko. For his part, Vladimir Fesenko, chairman of the board of the Centre for Applied Political Studies, Penta, said that implementation of the Odessa-Brody project would be a litmus test for GUAM. "If the Odessa-Brody oil pipeline can be operated in the forward flow direction, the organization will have clear-cut economic prospects," Fesenko said.

A great many nations are interested in the Odessa-Brody project because it is a new source of oil for Europe. As Nesdet Pamir, head of the Turkish national committee, said, "Diversification of export routes is vitally important, because they all cross the Russian Federation on their way to the EU." "No one benefits from this monopoly - neither Ukraine nor the Caspian countries. There is a need to try to make one's economy more independent," Pamir said. And we think that quite a few people would agree with him.