Ukraines geographic location makes it an ideal corridor for oil and natural gas to transit from Russia and the Caspian Sea region to European markets. According to Ukrainian oil ministry data, Ukrainian oil pipelines transported an average of about 934,000 bbl/d in 2005, a decrease of 15 percent from 2004. Some of the decrease in transit volumes was due to Kazakhstan choosing cheaper transit routes (such as the Baltic Pipeline System in northern Russia) for its crude oil shipments. Of the total, 627,000 bbl/d were transported to Slovakia, Hungary and the Czech Republic, down 4 percent from 2004. The amount of oil supplied to Ukrainian refineries fell 32 percent on the year to 306,000 bbl/d. Oil transportation via the Druzhba pipeline system increased 17 percent, to 480,000 bbl/d, in 2005. Oil transportation via the Prydniprovski Main Pipeline system fell 34 percent to 455,000 bbl/d.
As much as 1.6 million bbl/d eventually could be exported through Ukraine after a 15-year intergovernmental oil transit improvement agreement in 2003 comes to fruition. Most of the oil transited via Ukraine is Russian oil, sent in part through the 1.2-million-bbl/d capacity Druzhba pipeline. The southern fork of the pipeline runs through Ukraine. Also, the Prydniprovski Main Pipeline operates nine interconnected pipelines throughout Ukraine with a total length of 1,500 miles and a capacity of 2.1 million bbl/d. Prydniprovski transports crude to refineries in southern Ukraine as well as a substantial amount of Russian crude through Odessa on the Black Sea. Odessa loads approximately 192,000 bbl/d of Russian and Kazakh crude oil for export.
In 2001, Russia completed construction of a 160-mile pipeline that allows it to bypass Ukrainian territory. The Sukhodolnaya-Rodionavskaya line directly links two other pipelines and decreases oil flows through Ukraine by 500,000 bbl/d, or about 30 percent of Ukraines total.
Ukraines government has made clear its goal of becoming a transit center for oil from the Caspian Sea region. Oil production from the region is expected to increase from 600,000-800,000 bbl/d over the next five years. One potential conduit for this oil in the Black Sea region is the Odessa-Brody pipeline. The pipeline was completed in 2001 and extends from Ukraines Black Sea port of Odessa northward to the city of Brody. The pipeline was initially intended to load 300,000 bbl/d of Caspian Sea oil from the newly completed Black Sea marine terminal, Pivdenniy (or Yuzhniy) and carry it northward through the Ukrainian system to Europe. However, for approximately three years the pipeline remained mostly dormant because Ukraine was unable to secure oil supplies from Caspian Sea area suppliers. Russia is now using the pipeline in the reverse direction, moving oil from the Urals basin southwards to tankers in the Black Sea and onwards to world markets. Since January 2003, TNK-BP has used the last 32-mile leg of the pipeline (in reverse) for these purposes. corridor for oil and natural gas to transit.
Faced with the possibility of losing direct access to Caspian Sea region oil, European governments have voiced their opposition to the reversal project in newspaper articles and public statements. Leading Caspian Sea region producer, Kazakhstan, has also taken counter-measures. In July 2003, for instance, Kazakhstan agreed to help construct a 32-mile pipeline parallel to the segment currently being used in reverse to transit Russian oil. In 2004, the Ukrainian government pledged that its final intent for the pipeline would be for it to flow from Odessa north to Brody. But while the pipeline sat idly, the Ukrainian state oil company UkrTransNafta, effectively reversed that decision, declaring that it had accepted an offer from the Russian-British company TNK-BP to ship 180,000 bbl/d from Brody south to Odessa (in reverse). On a temporary basis, in September 2004, the first tankers shipped from Odessa with Russian crude oil, and the 32-mile pipelines initial capacity level was roughly 97,000 bbl/d. Total exports of oil from Odessa totaled over 500,000 bbl/d during 2004.
If the pipeline does run in its originally intended direction, from Odessa to Brody, then Ukraine would like to extend the pipeline from Brody to Plock in Poland, and then Gdansk on the Baltic Sea. The European Bank for Reconstruction and Development (EBRD) has stated it may make more economic sense to construct the extension further to Wilhelmsaven, Germany, where it would avoid the crowded straits off the Danish and Swedish coast. Ukraine has yet to secure contracts for Caspian crude oil supply, and industry players have publicly stated that Caspian crude oil will be unlikely to displace cheaper Urals blend crude oil from Russia at central European refineries. Also, the refinery at Plock would have to be upgraded to accommodate the lighter quality Caspian crude. Currently, Ukraine and Poland are studying the feasibility of various extension plans, and the results are expected in the next several months.
Ukraine has six crude oil refineries, with a combined throughput capacity of approximately 880,000 bbl/d. However, with domestic demand at just over 30 percent of the countrys refining capacity, Ukraines refineries are operating below capacity (around 69 percent in 2004, according to TNK-BP). Until recently, Ukraines refineries did not even receive enough crude oil supplies to supply the countrys domestic petroleum product demand.
Ukraine has begun to achieve better results in securing sufficient crude oil supplies for its refineries by offering oil exporters in Russia and Kazakhstan a stake in the countrys refineries. Ukraines recent success in privatizing its refineries has allowed the country to secure additional oil supplies to meet domestic demand, as well as to attract funds for necessary renovation work and to boost utilization rates at its refineries.
In early 2005, UkrTransNafta, which controls Ukraines largest refinery at Kremenchug, announced a $1.7 billion modernization plan to boost petroleum product quality in line with EU quality standards. The largest component of the plan includes upgrading the Kremenchug refinery to improve gasoline quality and to lower sulfur content.