East European leaders to sign deal for pipeline connecting Black and Baltic seas

During a two-day meeting of officials from more than 20 countries, the presidents of Azerbaijan, Georgia, Lithuania, Poland and Ukraine will agree to extend Ukraine’s Odessa-Brody pipeline, allowing it to carry Caspian oil to Poland and beyond. The agreement will call for building a 490-kilometer (300-mile) extension to an existing pipeline in western Ukraine northward to the Polish port of Gdansk on the Baltic Sea, and securing supplies of Azerbaijan’s crude from the Caspian Sea. The pipeline will have a capacity of 14 million tons per year. The first leg of the pipeline — from Odessa to Brody — was completed in 2004 in the hope of delivering Caspian oil to Central Europe. However, the project has languished, and now Russia uses it to export oil via the Black Sea.

The €500 million ($700 million) pipeline is considered to be a victory for East European governments, who are increasingly weary of Russia’s nationalistic energy policy and are searching for both alternative energy sources and alternative supply routes. In the past three years Russia has wielded its energy resources as a diplomatic weapon, punishing former Soviet satellite states for not toeing the Kremlin line. Russia has temporarily cut off natural gas supplies to Ukraine and Belarus and permanently ceased oil deliveries to Lithuania and Latvia. Europe receives 25% of its natural gas and a third of its crude oil from Russia, according to Eurostat, and dependency has been increasing in recent years. Several East European states, particularly the Baltics, receive nearly all of their hydrocarbons from Russia.

Still, it was unclear whether Azerbaijan would be able to commit enough crude to the new pipeline to make the project economically viable. “That’s an excellent question,” Antanas Valionis, a Lithuanian lawmaker and former foreign minister, told The Associated Press. “But I am optimistic.”
For Lithuania, the pipeline is crucial after Russia stopped delivering crude to Mazeikiu Nafta, the only refinery in the Baltics, citing a pipeline accident in July 2006. The refinery’s owner, Poland’s PKN Orlen, the largest fuel retailer in Eastern Europe, has been forced to supply the refinery with oil via tanker, which is considerably more expensive than deliveries by pipeline.

The Odessa-Brody oil pipeline is one of several projects by European countries seeking to reduce their reliance on Russia. Nabucco, a pipeline planned by Hungarian Mol and Austria’s OMV AG, would bring gas from Central Asia through Turkey. Such plans are encouraging Russia to loosen ties with its European customers, building gas-liquefaction plants and new oil pipelines to seaports to make its resources available on world markets, said Ron Smith, chief strategist at Alfa Bank in Moscow. “They’re trying to get alternative customers, to get some strategic negotiating power,” he said to Bloomberg. “All sides could benefit from diversifying, by giving themselves some more options.”  (FT, Bg)