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

UNCLAS SECTION 01 OF 02 KYIV 000887

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DOE PLEASE PASS TO LEKIMOFF, CCALIENDO
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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

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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.

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Competitive and Profitable
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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.)

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Pump up the Volume
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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.

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High Hurdles
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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.

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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