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Ukraine: Kyiv Hopes To Benefit From New Link In The Pipeline Chain

Kyiv, 25 May 1998 (RFE/RL) -- It took six months of tri-lateral diplomacy, but Ukraine appears set to become a functioning transportation corridor for crude oil shipments between Azerbaijan and Western Europe.

Ukrainian officials reached a verbal understanding with counterparts in Baku to begin volume shipment by the end of the year, industry sources confirmed to RFE/RL. Representatives from private industry and from Georgia, which would also participate in the project, took part in the talks. Since the beginning of the year, President Leonid Kuchma has orchestrated a diplomatic blitz in Baku and Tblisi to prepare the ground for a corridor connecting Azeribaijani oil with Western markets, across Ukraine's 'black earth.'

Officials in Kyiv have predicted that once signed and operational, the deal would increase Ukrainian export earnings by some $300 million. Precise routing options and final agreement timing for the Ukraine link remain under discussion. But, one decision is already clear - when the oil does move, it will not cross a meter of Russian territory.

"We do not want to depend on one source of energy," said Foreign Minister Gennady Udovenko in the wake of a March meeting with Azerbaijani President Geidar Aliev. "We need alternative sources of energy," commented President Leonid Kuchma.

About 95 percent of Ukraine's petroleum needs come from Russia. But every drop of crude that does go from Azerbaijan to Western Europe, via Ukraine, will have to negotiate many obstacles.

One possible path across the Caucuses to the Black Sea and Ukraine begins with the Baku-Supsa pipeline, which is under construction. Once in Supsa, the oil would transfer to tanker. But, the most direct route west for a tanker, via the Bosphorus and Dardanelles, is heavily congested. An alternate destination for a Supsa-loaded tanker bearing Caspian crude is Odessa Oil Terminal which, by no coincidence at all, is co-located with the Odessa Oil Refinery.

That route would be particularly beneficial for Ukraine as it would not only generate transfer fees, but also value-added income from refining the crude into fuel and lubricants, which would be primarily marketed domestically.

But the big money is not in retailing gas to relatively poor Ukrainians, but in marketing oil to massive European Community (EC) refineries. An ex-Supsa tanker could theoretically form a link in that chain, pumping cargo at the Odessa or Marioupol oil terminals directly into the Druzhba pipeline for onward Brody (Ukraine) -- Adamowa Zastawa -- Gdansk routing.

But Ukraine's oil terminals are often at capacity, pumping Russian crude onto Europe-bound tankers. Factor in unloading and loading a tanker and the middlemen to make that happen, and the result is cost, perhaps prohibitive. "A day of a tanker's time can cost $10,000," said Odessa-based shipping analyst Aleksei Yatsenko. "Tankers that come to Odessa, often they have to wait."

This is one reason why Ukraine has, for its entire existence as an independent country, pushed to construct a larger-capacity oil terminal in nearby Yuzhniy. But, in the face of limited government receipts and active opposition by Odessa-based oil traders protecting a virtual monopoly on Siberian oil exports into the Black Sea, the Yuzhniy Oil Terminal remains to date a muddy site adorned with rusting construction equipment. A simpler, cheaper, but complicated solution is tanker cars. "Overall, tanker cars are not the cheapest way to move oil," noted Psikheya Research Oil Industry Analyst Igor Anansky. "But it has the great advantage of being quite possible to do it."

By this scenario, oil would be loaded onto humble Soviet-era rail tanker cars, which would -- still crossing not a centimeter of Russian earth -- trundle their way to the port of Poti.

A rail-ferry service inaugurated with great fanfare of Georgian/Ukrainian brotherhood in the beginning of 1998 connects the Georgian port and Ilychevsk Ukraine weekly. "And moving a tanker car to Europe via Chop (at the Hungarian border)," Anansky noted, "is something both the railroads and businessmen have long experience with."

Azerbaijan, Georgia, and Ukraine successfully tested the tanker car route this April, moving five cars from Baku to the Ukraine/Poland border.