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Can Caspian oil flow to the West? - Analysis

On the 12th of May, the informal Eurasian Energy Six-nation Summit was concluded in the southern city of Poland Krakow. President of Poland, Ukraine, Lithuania, Georgia and Azerbaijan and Deputy Kazakhstan Minister Energy and Natural Resources attended the summit.

Afterward the six countries issued a joint, hoping that they can strengthen cooperation with each other in the field of energy and set up joint ventures to handle the organization and preparatory work for the construction of the oil pipeline connecting Odessa and Brody. The pipeline connects Odessa, a coastal city along the Black Sea, with Brody, a border city between Ukraine and Poland. The total length is 674 km. Its designed oil transport capacity is 1,450 million tons. Ukraine constructed the pipeline on the purpose of transporting the Caspian oil in Azerbaijan and Kazakhstan to European countries through its territory. However, after the pipeline was completed, it failed to solve the problem of oil resources. In desperation, the Ukrainian government had to rent it out to Russian oil companies.

In 2003, Ukraine, Poland and the EU issued a statement in support of extending this pipeline to Plock in Poland. After that they will have it connected with the existing domestic pipeline in the country. Eventually the pipeline will reach the northern port city Gdansk. This coming Odessa-Gdansk pipeline, if completed, will become an oil transport corridor starting from the Caspian Sea, then crossing the Black Sea and finally reaching the Baltic Sea. As a result, Poland and other countries along the Baltic Sea will be able to get the oil directly from the Caspian Sea by detouring Russia. Obviously, the project is of great significance for Ukraine. By completing this project, it not only will be able to achieve the diversification of energy supply, but also can make money from collecting oil transit costs. Meanwhile, it can promote the economic development of its western area. Therefore, all Ukrainian political forces in the nation support the construction of the pipeline. Even the Yanukovych government, with close ties to the Russian, also actively advocated extending the pipeline to Poland and suggested that the oil transport capacity should be improved to 20 million tons.

In addition, Georgia and Azerbaijan, members of 'GUUAM' together with Uzbekistan, also have shown strong interest in the project. In this context, the informal Eurasian Energy Summit has helped the demanders (Poland and Lithuania), transiting countries (the Ukraine and Georgia) and the suppliers (Azerbaijan and Kazakhstan) make joint political decisions to make the pipeline longer. In recent years, whether emerging major oil producing countries can provide oil resources to this pipeline has become the key to success. However, Kazakhstan has always been ambiguous on this issue. It only sent its deputy minister of Energy and Natural Resources to attend the summit on behalf of its president. On the one hand, the Kazakhstan representatives said that that Kazakhstan is only exploring the feasibility of the project and it is too early to make any commitment. However, he also said that Kazakhstan will not miss any possibility to export oil to different markets and is interested in any program.

During the informal Eurasian Energy Summit, Russian President Vladimir Putin paid an unprecedented one-week-long visit to Kazakhstan and Turkmenistan. The theme of his visit is energy cooperation. In the meeting with Putin in Astana, Kazakh President Nursultan Nazarbayev said that Russia-Kazakhstan energy cooperation is of strategic significance and Kazakhstan fully endorses to transport oil to international oil market by transiting through Russia. In addition, Kazakhstan has officially decided to join hands with Russia, Bulgaria and Greece in constructing the Bourgas-Alexandroupolis pipeline. It also recommended that the oil transit capacity of Caspian Sea oil pipeline should be promoted from the current 23 million tons to 40 million tons, so as to guarantee a sufficient oil source for the Bourgas-Alexandroupolis pipeline. Nazarbayev's claim and Kazakhstan's participating in the construction of the Bourgas- Alexandroupolis pipeline has made the prospects of Odessa-Gdansk pipeline quite dim. Some analysts pointed out that Putin's trip to Central Asia has not only declared the ending of the Odessa-Gdansk pipeline, but also indicated the outcome of Caspian Sea oil exports.

In 2006, Kazakhstan exported a total of 52.3 million tons of oil to other countries, of which 42 million tons are transited through Russian. On this basis, Kazakhstan will further rely on cooperation with Russia and promise to ship more oil to North Russia, then to the European market. Although it has agreed to supply oil to the 'Baku-Tbilisi-Ceyhan' pipeline and gave verbal support to the construction of Odessa-Gdansk pipeline, it actually has had very limited oil sources available. About 95% and 100% of oil consumption in Poland and Lithuania come from Russia. During the 'oil dispute' between Russia and Belarus early this year, Polish's oil imports from Russia were once suspended. The oil supply in Lithuania was also unstable. Starting from July 2006, Russia suspended transiting oil to Lithuanian through the 'Friendship' oil pipeline extension. It explained that it needed to do the maintenance. However, local media believed that this was closely related to Lithuanian oil company's defeating Russian oil company in acquiring Mazeikiai refinery in last year. The second Eurasian Energy Summit will be held in Vilnius, capital of Lithuania in October this year.

Countries like Poland and Lithuania will make greater efforts to get access to Caspian Sea oil without being controlled by Russia. However, Kazakhstan's president has announced that Kazakhstan is willing to be Russia's energy partner rather than competitor, and hope to get Russia involved in the construction of Odessa-Gdansk pipeline. This is actually against the original intention of those who proposed the construction of the pipeline. (