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By John Helmer in Moscow

Profit defeats politics in Ukraine’s bid to make crude oil run uphill.

In the annals of topographic desperation, it is unclear which foolish Duke of York did this to his army, but not even the nursery rhyme leaves any doubt about what he did:

Oh, the grand old Duke of York,
He had ten thousand men;
He marched them up to the top of the hill,
And he marched them down again.
And when they were up, they were up,
And when they were down, they were down,
And when they were only half way up,
They were neither up nor down.

Last week, in an unjoking effort at emulating the Duke’s performance, Ukrainian President Victor Yushchenko announced in Kiev that Azerbaijan has agreed with the Ukraine to supply 5 million tonnes of crude (about 98,000 barrels per day) for refining at two western Ukrainian refineries. This crude is to be piped by Azerbaijan to Poti or Batumi, Georgian ports on the Black Sea; tankered across the Black Sea to Odessa; and from a terminal at Odessa port pumped by pipeline towards Brody, in western Ukraine, near the Polish border.

The significance of Yushchenko’s announcement is that he is proposing to throw the pumps of the Odessa-Brody pipeline into reverse, and instead of receiving Russian oil moving southward for export through Odessa, the Azeri oil will move northward, in the opposite direction.

For several years now, the Odessa-Brody pipeline has been a north-south, up-down affair. First constructed in 2001, over almost 700 kilometres, there was no oil at all to fill the pipeline for its first three years. That was because the Ukraine was unable to secure the agreement of Chevron and other oil producers in Kazakhstan to supply the crude, according to the northward plan. There was no shortage of potential destinations for the oil – Plock and Gdansk in Poland were the main ones in the original plan. The Mazheikiu refinery in Lithuania is a recent addition, along with the Czech refinery at Kralupa. Last October, at a meeting of government officials in Vilnius, Lithuania, it was decided to form a consortium of countries to promote the northward direction of the pipeline.

Poland and Ukraine, as well as Lithuania, Georgia and Azerbaijan, agreed at the time to a scheme they hoped would be an alternative to their dependence on Russian oil. The consortium, called Sarmatia, must prepare a feasibility study for the alternative transportation system from the Caspian Sea through Azerbaijan, Georgia, Ukraine and Poland to European and international markets, said a statement released by the Lithuanian president’s office. “It means Azerbaijan is committed to fill the pipe with crude. We also expect Kazakhstan to join at a later stage,” a senior Lithuanian diplomat added.

Seven months have gone by, and Yushchenko’s announcement reinforced the direction, with the appearance that the oil is about to march uphill.

He was followed by an announcement from a Ukrainian official that the Odessa-Brody pipeline is to reverse direction as early as July 1 of this year. According to Sergei Korsunsky, a mid-level official of the Ukrainian Ministry of Foreign Affairs, speaking in Paris, the feasibility study has been completed to enable the pipeline to be reversed. Starting from July 1, he claimed that 470,000 tonnes of oil, offloaded at Odessa from Azerbaijan, will be pumped to Brody, near Lviv, on the Polish border, and then onward through the Druzhba pipeline for delivery to the Czech refinery at Kralupa.

This triggered incredulity among Russian industry analysts.

These volumes are less than half the 9-million tonne per annum shipments, which Russian oil producer TNK-BP has agreed to deliver southward to Odessa. TNK-BP declined to tell Mineweb what the Ukrainian announcements may mean for its current contracts, nor what volumes the company has been shipping since January.

Last year, Ukrtransnafta, the Ukrainian oil transport agency, put pressure on TNK-BP to up its shipment volumes to a minimum of 173,000 barrels per day (9 million tonnes pa), or face a cutoff altogether. The Ukrainian authority and Russian producer also agreed on a lowering of transit tariffs and port handling fees, which improved the profitability of the pipeline as an export route. In 2005, the pipeline volume moving southward was about 100,000 barrels per day; in 2006, 110,000 barrels per day. The latest shipment data suggest that the volume shipped through the pipeline for all of 2007 was 9.9 million tonnes (195,000 barrels per day); this counts all suppliers of Russian crude, and not just TNK-BP, which remained below the 9-million tonne level. However, this year to May 31, the daily rate has been “significantly lower” than last year’s level, according to Mikhail Perfilov, oil transportation analyst at Petroleum Argus in Moscow.

He told Mineweb the Ukrainian announcements are “unrealistic. What will they put in the pipeline to transport? There is not enough oil for this pipeline from Azerbaijan to fill the northwards direction, and not enough profit incentive for Russian shippers to justify their using the southwards direction.”

At Odessa, Boris Biryukov, an oil terminal boss, was reluctant to say that the dynamics of profitability have swung against the pipeline, or what hope there is that the five governments can change that. “I can’t comment on governmental announcements. There was a working group created to turn the pipeline in reverse mode with profitability. As to the issue, how much TNK is pumping. I am afraid that’s commercial information. I can’t tell you.”

Between the start of oil movement in 2004 and the end of 2006, the Ukrainian government earned $112 million in transit fees from the pipeline.

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