VZCZCXRO3765
RR RUEHDBU RUEHIK RUEHLN RUEHVK RUEHYG
DE RUEHKV #0887/01 1030747
ZNR UUUUU ZZH
R 130747Z APR 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 1955
INFO RHEBAAA/DEPARTMENT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEHBI/AMCONSUL MUMBAI 0012

UNCLAS SECTION 01 OF 02 KYIV 000887 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EB/ESC/IEC RGARVERICK 
DOE PLEASE PASS TO LEKIMOFF, CCALIENDO 
MUMBAI FOR KLEIN 
 
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 
 
KYIV 00000887  001.2 OF 002 
 
 
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. 
 
-------------------------- 
Competitive and Profitable 
-------------------------- 
 
¶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.) 
 
------------------ 
Pump up the Volume 
------------------ 
 
¶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. 
 
------------ 
High Hurdles 
------------ 
 
¶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. 
 
---------------------------------------- 
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