Posted on 05/27/2003 2:59:09 PM PDT by Ernest_at_the_Beach
BRUSSELS -- The European Union (news - web sites) Tuesday threw its political weight behind a controversial pipeline bringing oil from the Caspian Sea to Europe via Ukraine.
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EU support is crucial to the launch of the project, both in terms of political backing as well as loans, since the main buyers will be European countries, notably Poland and Germany.
A political agreement on the pipeline, know as Odessa-Brody, was signed by the EU's top energy official and ministers from Ukraine and Poland at a meeting in Brussels that was also attended by executives from the oil and banking industries.
"We have a taken a very important step," said Marek Pol, Poland's deputy prime minister, after the signing ceremony.
The war in Iraq (news - web sites) has heightened concerns in the EU over the security of its energy supplies. Two-thirds of the bloc's oil needs come from beyond its borders. Odessa-Brody will allow the EU to diversify its oil imports and reduce its reliance on producers from the unstable Middle East.
The EU's dependence on energy imports will become more pronounced as ten countries, including Poland, join next May. These nations import almost all their energy. The EU expects to be importing 90% of its oil by 2020.
Supplies from the Caspian also are seen as key in offsetting diminishing output from North Sea oil fields.
The environmental benefits are the other main attraction. The pipeline will reduce the number of shipments carried by oil tankers, thereby lessening the potential risks of devastating accidents at sea. The EU recently tightened rules on tanker safety after oil spills blackened the coasts of France and, more recently, Spain.
However, the project still faces an uncertain future.
The EU is only willing to provide technical know-how, and its cash contribution is limited to just two million euros (US$2.37 million). The countries involved "should provide the framework to attract investors," said EU Energy Commissioner Loyola de Palacio.
But getting private investors on board may prove difficult. Leading multilateral lending institutions expressed skepticism about the commercial viability of the pipeline.
"There is no question of the benefits," said Paul Shapiro, a senior banker at the European Bank for Reconstruction and Development. "The question is who's going to pay."
In particular, Mr. Shapiro cast doubts on the ability of Caspian countries to supply sufficient quantities of high quality oil. The Tengiz oil field, in Kazakhstan, for example, has "major sulfur problems", he said. In addition, Shapiro questions whether European traders and retailers, as well as refineries, really have an appetite for Caspian crude.
Francois Trevoux, the European Investment Bank's (News) oil adviser, who also attended the meeting, said the EIB will consider helping finance a Polish pipeline extension if the economics and the proposed operating structure are deemed viable. The EBRD takes the same view on another extension of the project in to southern Germany, which is budgeted at around 1.2 billion euros.
In the past, the EIB has supported pipeline links between North Africa and Europe, and its involvement, along with the EBRD, is seen as key to getting large infrastructure projects off the ground.
In the end, the governments themselves may provide the funds. Ukraine offered its support.
"Ukraine will not only complete its section, but also the Polish side," said Vitalii Gaiduk, Ukraine's vice prime minister, in answering a question of whether his country would be prepared to act as a project financier.
Support for the project could come from an unlikely source, Iraq.
Poland is poised to play a substantial peacekeeping role in postwar Iraq and in exchange could get construction contracts and a slice of oil exports. Polish refiners Rafineria Gdanska SA and PKN Orlen SA appear to be dueling for the rights to import the Iraqi oil. One proposal would see the refiner swap the oil with a Caspian oil producer. The Caspian oil would then be transferred by Odessa-Brody through to Poland. But, this plan is estimated to be years away as that is how long a Polish extension to the pipeline would take to build.
Ukraine completed the 674-kilometer pipeline in August, 2001. It links an oil terminal near Odessa with Brody, a Ukrainian town near the border with Poland. So far, the pipeline has transported "limited volumes".
The pipeline is capable of shipping 14.5 million metric tons of crude annually, but with further investments its capacity could increase to 45 million tons within the next five years, according to the PWC study. This is equivalent to around 2.5% of the EU's total annual consumption.
The pipeline would bypass Turkey's Bosphorus Strait, a narrow waterway through which all Russian and Caspian crude is being shipped for exports out of the Black Sea to the rest of the world. Turkey restricts oil shipments through Bosphorus due to environmental concerns.
Proponents of the Odessa-Brody say it could be supplying Europe within months.
"We could see the first deliveries to Europe by early next year," said Philip Nutman, director of corporate finance at PricewaterhouseCoopers (News - Websites), which conducted the feasibility study.
The study was ordered by Ukraine's state-owned oil shipping monopoly UkrTransNafta, to secure support from the EU and oil majors.
Odessa-Brody could create two new spin-off routes into Europe. The first involves extending and revamping existing pipelines to bring oil into southern Germany. The second link, or spur, would connect into the Polish network at Plock, allowing larger quantities of oil to be shipped through Poland and Germany for consumption or global export from deepsea ports such a Gdansk.
However, the project could sour relations between the EU and Russia, its major oil and gas supplier. Aside from a Russian keenness to increase exports to Europe, Moscow also has designs to use Odessa-Brody, by reversing the flow down to the Caspian, as a conduit for oil shipments to the West.
- Victoria Knight,Dow Jones Newswires; 322-285-0132
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