UKRAINE: UKRTRANSNAFTA HEAD DISCUSSES ODESA-BRODY

UNCLAS SECTION 01 OF 02 KYIV 000941 SIPDIS SENSITIVE SIPDIS DEPT FOR EB/ISC/ECA - RGARVERICK, EUR/UMB DOE FOR LEKIMOFF, CCALIENDO MUMBAI FOR KLEIN E.O. 12958: N/A TAGS: EPET ENRG PREL RS UP SUBJECT: UKRAINE: UKRTRANSNAFTA HEAD DISCUSSES ODESA-BRODY REF: Kyiv 887 KYIV 00000941 001.2 OF 002 Treat as Sensitive but Unclassified. Contains business proprietary information. ¶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 KYIV 00000941 002.2 OF 002 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