MITIGATING THE PIPEDREAM: THE ODESSA-BRODY-DRUZHBA ROUTE: A

UNCLAS SECTION 01 OF 02 KYIV 000887 SIPDIS SENSITIVE SIPDIS DEPT FOR EB/ESC/IEC RGARVERICK DOE PLEASE PASS TO LEKIMOFF, CCALIENDO MUMBAI FOR KLEIN E.O. 12958: N/A TAGS: ENRG EPET ECON UP SUBJECT: MITIGATING THE PIPEDREAM: THE ODESSA-BRODY-DRUZHBA ROUTE: A VIABLE ALTERNATIVE TO ODESSA-BRODY-PLOCK? REF: A. Kyiv 4459 ¶B. Warsaw 88 KYIV 00000887 001.2 OF 002 Treat as Sensitive but Unclassified. Contains business proprietary information. ¶1. (SBU) Summary. On April 5, Managing Director for Ukraine of US-based GlobalNet Financial Solutions, Geoff Berlin, told EconCouns of GlobalNet's aspirations to resurrect the idea of using the Odessa-Brody-Druzhba (OBD) route to move Caspian crude through Ukraine, Slovakia, and the Czech Republic to southern Germany. With an investment of approximately $260 million, the capacity of the Druzhba network could be expanded to accommodate the entire 14 million metric tons per annum (mta) capacity of the Odessa-Brody pipeline without diminishing the capacity to handle current levels of Russian crude shipments. Berlin asserted that, if pipeline operators were willing to offer low transit fees in exchange for this investment, OBD could provide an economically viable and competitive alternative to the current routing of Caspian crude to southern Germany by sea through the Bosphorous and via the Trieste-Tal pipeline (the BTT route). Mr. Berlin was concerned that Russia would oppose this plan as a threat to its share of the European oil market, and would therefore need to be part of the deal in order for OBD to succeed. He contended that, unlike the proposed Odessa-Brody-Plock (OBP) route, OBD could be economically viable. End Summary. -------------- Competitive and Profitable -------------- ¶2. (SBU) The essence of GlobalNet's business plan is re-reversing Odessa-Brody to bring Caspian oil, not to Poland via Plock, but to Southern Germany and other Central European destinations via the Druzhba pipeline. According to Mr. Berlin, the principal challenge for the success of his plan was not finding supply, but getting good transit rates. Producers were already supplying Caspian crude through the existing BTT route, but that same crude could potentially get to market more cheaply via OBD, if the pipeline operators offered attractive transit rates. These would be lower (in most cases) or equal to the rates pipeline operators charged for Russian Urals crude. Berlin said that, although his plan would require an up-front investment of $260 million to increase capacity and introduce batching technologies to the Druzhba and other pipelines along the way, his calculations showed the OBD route could quickly be profitable and provide a good return on investment, even at concessionary transit rates. ¶3. (SBU) Berlin noted that the window for exploiting this opportunity was limited, however. If the Druzhba-Adria (DA) pipeline were opened to Omisalj, Croatia or Trieste, Italy, the northbound routing for OB would have little utility. (Note: plans to implement the DA route to Omisalj are currently stalled in Croatia's parliament. End note.) -------------- Pump up the Volume -------------- ¶4. (SBU) According to GlobalNet's plan, after investment in additional pumping, pipes, and batching equipment, OBD would be able to handle an additional transit volume of 14 million mta for Caspian crude destined for refining in Western Ukraine, southern Poland, Austria, Czech Republic, and southern Germany. This would accommodate the entire current capacity of the Odessa-Brody segment. Berlin admitted that investment to increase capacity would have to follow agreement of all relevant parties: Caspian crude producers, customers, pipeline operators, pipeline host nations, and Russia. GlobalNet recognized these obstacles were substantial, Berlin said, yet was hopeful in the short term of getting the parties at least to agree OBD was an economically viable option. He had expressions of interest from Ihor Kyriushyn, head of Ukraine's pipeline operator UkrTransNafta. Although the Russians might not be happy about a diminution of their current monopoly of shipments via Druzhba, diversification of supply was a selling point for the scheme in the eyes of most of the prospective parties, Berlin argued. -------------- High Hurdles -------------- ¶5. (SBU) Mr. Berlin outlined an ambitious 16-week plan for getting OBD off the ground. First, Caspian producers would have to offer KYIV 00000887 002.2 OF 002 acceptable prices to establish economic viability for the OBD route. Second, the refiners in southern Germany, Czech Republic, Austria, western Ukraine, and southern Poland would need to agree to the prices proposed by the producers. Third, pipeline companies including MERO (IKL and Czech Druzhba) Transpetrol (Slovak Druzhba), and Ukrtransnafta (Ukraine Druzhba and Odessa-Brody) would have to establish parameters for crude volume targets, investment requirements, and transit rate concessions. -------------- Whatever Happened to Odessa-Brody-Plock? -------------- ¶6. (SBU) GlobalNet's Berlin contrasted his plan for a northbound route for Odessa-Brody with the proposal to extend the pipeline to refineries in Plock in central Poland (ref b). He questioned the economic viability of the Plock option, in part because of the scarcity of additional oil supply to fill OBP (ref a). Berlin noted that Caspian Crude Blend at Novorossiysk was currently $4.12/bbl more expensive than Urals blend at Plock, even before the hypothetical cost of transport through OBP was calculated. He thus contended Caspian crude would be far too expensive to ship to Plock via OBP. ¶7. (SBU) Comment. GlobalNet seems to understand the difficulties of pulling off its plan for turning Odessa-Brody into a viable supplier of Caspian crude to the West via Druzhba. There is a real danger that the negotiation required will take longer than the window of opportunity will remain open. Moreover, although the GOU has shown willingness to consider options for the use of the Odessa-Brody pipeline, it is difficult to predict how it will react in the end to a concrete, potentially commercially viable plan that could displease the Russians, particularly if the plan hinges on pipeline operators offering lower transit rates for Caspian crude than they current offer Russian companies for their Urals crude. Taylor