UKRAINE: UKRTRANSNAFTA HEAD DISCUSSES ODESA-BRODY

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SUBJECT: UKRAINE: UKRTRANSNAFTA HEAD DISCUSSES ODESA-BRODY

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KYIV 00000941 001.2 OF 002


Treat as Sensitive but Unclassified. Contains business proprietary
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1. (SBU) Summary: Meeting with Ambassador, Ihor Kyriushyn, the
chairman of Ukraine's state oil transport company UkrTransNafta and
Geoff Berlin of GlobalNet Financial Solutions reviewed plans to
transport Caspian crude to Europe via the Odesa-Brody-Druzhba route
(reftel). Kyriushyn felt the proposal had commercial merit.
UkrTransNafta had already obtained interest from several Central
European refineries in deliveries of Caspian crude and is expanding
its own oil storage capacity to be ready for re-reversing
Odesa-Brody. A key first question will be resolving the sale of the
49 percent share of Slovakia's Transpetrol now held by Yukos; at a
later stage UkrTransNafta might be interested in purchasing a
portion. Kyriushyn argued the extension of Odesa-Brody to Plock was
not realistic and only could be considered at a later stage.
Kyriushyn said they would try first to see if the deal could work
for the various oil transport companies involved, and then would
seek to find a way to approach the Russians about the deal.
Ambassador encouraged Kyriushyn and Berlin to discuss the proposals
with Washington. End Summary.

ASSERTS ODESA-BRODY-DRUZHBA COULD WORK


2. (SBU) Mr. Berlin reviewed for Ambassador his company's arguments
why a routing of Caspian crude via the Odesa-Brody-Druzhba (OBD)
pipeline could be competitive with current shipments via the
Bosphorus to Trieste and then via pipeline to Germany (reftel).
Kyriushyn and Berlin maintained the issue was transport, not new
capacity or production. Kyriushyn said UkrTransNafta had already
had preliminary discussions with Slovakia's Transpetrol about the
routing and planned talks with the Czech Republic's pipeline
operator MERO next week. UkrTransNafta had also talked to
refineries about their interest in Caspian crude -- Kralupy (Czech
Rep.) wanted 2.7 million tons/year, Ingolstadt (Germany) also 2.7
million, and Schwechat (Austria) 4 million tons. In addition two
western Ukrainian refineries (Nadvyrna and Drohobych) needed major
upgrades to continue using Urals crude and so might be able to be
reconfigured for Caspian crude. These volumes were big enough,
Kyriushyn said, that the Ukrainian side would be willing to make
concessions on transit rates to make the OBD route competitive with
the current shipping route.

TRANSPETROL OWNERSHIP MAY BE A KEY


3. (SBU) One precondition for moving forward on a consortium to
ship via OBD was resolving the ownership of Transpetrol, Kyriushyn
asserted. Currently the Slovak government was trying to decide
whether to buy the 49% share of Transpetrol held by Yukos, and
either sell it to Russia's Gazpromneft or buy the share itself. If
the Slovaks agreed to sell to the Russians, they planned to insist
that the GOS get 3 of 5 seats on the board, that Gazpromneft would
not block any attempt to ship Caspian crude, and that they would
agree to increase Transpetrol's capacity by 7 million tons/year.
Currently the sale by Yukos is tied up in litigation in the
Netherlands, Berlin noted, but they expected a ruling soon and hoped
the sale would be finalized by June or July. If the GOS bought
Transpetrol, Kyriushyn said UkrTransNafta might be interested in a
25 percent share financed by the European Investment Bank; they were
possibly interested in a consortium with the U.S. Zuckerman group
for the minority share.

ODESA-BRODY-PLOCK: NOT A COMMERCIAL PROPOSITION


4. (SBU) Kyriushyn expressed strong doubts that the extension of
Odesa-Brody to Plock would ever be a realistic commercial project.
He estimated that the payback for the project would be 20 years or
more. The Polish government kept expressing interest, but Kyriushyn
stated the only justification for the extension would be for
political/strategic reasons, if the EU wanted alternative supplies
of crude for the northern Druzhba pipeline to the refinery at
Schwedt or onward to Wilhelmshafen.

COMMERCIAL DIPLOMACY NEEDED AHEAD


5. (SBU) Kyriushyn noted UkrTransNafta was already expanding its
capacity to be in a position to make the OBD route a reality. With
EBRD financing, they were constructing 120,000 tons of additional
storage at the sea terminal at Pivdenniy, as well as additional
storage tanks in Brody. He and Berlin estimated forming a
consortium could take about 4 months, while building the extra
capacity would take 2-3 years. They argued the additional volumes
could give the capacity expansion project attractive internal rates

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of return for the pipeline operators.


6. (SBU) Kyriushyn and Berlin planned to move quietly to assemble
the consortium, to avoid alarming the Russian side, who might
reflexively slam on the brakes. They asked for U.S. support for the
project, once their analysis could demonstrate it would be viable.
In particular, they felt diplomatic support might help with the
Czechs, whom they expected would tend to sit on the fence. Only
once they had obtained agreement from the Central European pipeline
operators and refineries would they seek to engage the Russians,
Kryiushyn stated. He felt the Russians might be persuaded the OBD
route and capacity expansion would be in their interest, especially
as it would allow additional volumes of their Urals crude to transit
as well.

CONTACTS IN WASHINGTON


7. (SBU) Ambassador thanked Berlin and Kyriushyn for their briefing.
He said post would report on the meeting and forward an electronic
copy of their presentation to relevant offices in the Department.
Ambassador also suggested it would be worthwhile for Kyriushyn and
Berlin to seek to brief EUR DAS Bryza about their project. Berlin
and Kyriushyn agreed.


8. (SBU) Comment: Kyriushyn seemed clearly on board for the
project, and after the meeting he told Econ Counselor he thought
Fuels and Energy Minister Boyko also would support the project
because it met two of Boyko's objectives: it provided supply
diversification and kept the Odesa-Brody pipeline working. As post
noted in reftel, there are a lot of open details about this project
that could spell its demise if almost everything does not go right.
Still, at this stage it seems worth exploring the option, especially
if the commercial case can be made for OBD.
TAYLOR