May 10, 2010

Austrian oil pipeline through the Central European Aquifer

By Andrej Nosko, and Martin Horanský guest author

Slovak government is still unclear on the support for the project of oil pipeline extending the Soviet-era pipeline Druzhba through the largest Central European Aquifer of Žitný ostrov (Rye Island) from early nineties. The previous actions of the ruling party ministers are not matching the pre-election promises. The project of exporting the Russian oil into the Austrian refinery of Schwechat close to Wien was started by the joint venture between the Slovak Transpetrol (74% share) and Austrian OMV (26% share) in 2005.

This project made sense for both parties in the consortium, the Slovak Transpetrol fully under managerial control of largest Russian private oil company Yukos (with 49% ownership in Transpetrol) having access to its own upstream production, as well as the OMV, large refinery seeking to diversify its crude oil imports away from pricey Mediterranean tanker based supplies, in order to increase its competitiveness in the Central-European market (also against the Slovak refinery Slovnaft which is only 60 km away). The 60 km long pipeline with the capacity of 2.5 Mcm (with possibility of doubling this capacity) was nonetheless stopped by the Slovak Ministry of Environment (under control of minister László Miklós – SMK – Hungarian Coalition Party of the Dzurinda’s government), because of the questions around the ability to protect the important Aquifer as is illustrated in the Environmental Impact Assessment - EIA of the project from 2005.

Last year, the idea of building the oil pipeline through the national water reserve and important European Aquifer has been resurrected by the Fico’s government, when on 16 October 2009, his minister for Economy Jahnatek and his Austrian counterpart Mitterlehner signed a Memorandum of Understanding resurrecting the project, originally proposed by Vladimir Meciar on 2 March 1993.

This was complemented by an attempt of Fico’s party colleague MP Pellegrini, who attempted to reassign the level of protection for the Aquifer area in order to simplify the permitting process. Only under the intensive pressure from the media this attempt have been withdrawn. The concern for the public is that while there is an alternative routing for the pipeline, this would prolong the pipeline and in order to protect the aquifer, pipeline would have to pass through Austrian bird-refuge areas.

The current option, which has already received the Austrian green light for the 50km in Austria, is problematic for Slovaks, because of the strategic importance of the Danube Aquifer. According to the publicized information from the back-than minister Simon, the 10 km of projected pipeline in Slovakia is to be wholly owned, and under the control of the Slovak government. It is only the 50km of Austrian pipeline where the Slovak government has ‘only’ 74% share.

Therefore it is not understandable why in this context the Slovak government does not take active steps, although the politicians are uttering the pre-electoral words, the planning continues as if there was nothing to loose, or as if the environment on the Slovak side of the border was of lower value than that on the Austrian side.

It is appropriate to remember that it was the Fico’s minister of Economy who has re-started the Meciar’s project, and it is very important to remind our readers, the current ownership structure of the consortium: The shares in the joint venture Bratislava – Schwechat Pipeline GmbH, are same as in 2005, nonetheless the sole owner of Transpetrol a.s. is the Slovak Republic represented by Slovak Ministry of Economy. It is the same ministry, which is governed by Mr. Ľubomír Jahnátek (of Fico’s SMER-SD).

While the project is of small economic importance to Slovakia (EUR 30-90M per year if the whole capacity was utilized, less amortization and operating costs of transit depending on the split of revenue and the level of tariff, which are not known; in case the transit on the whole territory of Slovakia is considered, which is cca 0.03-0.09% of GDP), the risks for the country are too high. Besides the ecological risks from building the pipeline through the aquifer, there are additional economic risks. Pipeline, could improve the possibility of OMV's Schwechat refinery to compete with the Bratislava's MOL-Slovnaft refinery, thus potentially endangering the employment and tax revenues in Slovakia. Economic competition is a positive, nonetheless, not when the negative externalities are to be borne unilaterally by Slovakia.

Therefore what is really puzzling is why, the government and party of Robert Fico is supporting projects which are of minimal benefit for Slovakia and make more
sense for Russia and Austria?

Regardless of the recent PR statements of Robert Fico saying, that while he is the prime minister, there will be no pipeline, and he does not understand why this is still making news. PM Fico has a track record of proposing projects of questionable value for Slovakia, while at the same time of real benefit for Russia. Recently, he agreed to fund a feasibility study to build a wide-gauge railroad through Slovakia, thus enabling direct rail connection from Russia to Austria. Similarly to the pipeline, this project has negative costs to Slovakia and lacks the commensurate benefits. While the railroad is different story, similarly to pipeline it increases the revenues and tax incomes of Slovakia’s neighbors at the costs of Slovakia. (Since the recently modernized rail transfer terminal Cierna nad Tisov in the high-unemployment burdened east of Slovakia would go out of business if the rail link to Vienna is completed)

The energy security argument, although mentioned by the politicians, does not work in this case. The theoretical possibility for Slovakia, to import oil from Austria and thus further diversify its oil supplies is unrealistic and not feasible. The AWP pipeline from Adriatic to Wiena does not have sufficient capacity to supply both Austria and Slovakia, (through the new pipeline in reverse mode) should a need arise, this has also been a reason why in early nineties, diversification for Czechoslovakia was not done via AWP but via TAL through Ingolstadt to Kralupy and Litvinov.

Moreover, Slovakia is already connected to Adriatic via Adria-pipeline connection shared with Hungary, which could supply additional oil in case of crisis, or need for price-motivated diversification of MOL owned Bratislava based refinery. Finally, if the rationale has been security, Fico’s government should not have turned down the offer from MERO, we have written about previously.

It therefore remains puzzling why is Mr. Fico acting more in the interest of Russia (and Austria) than in the interest of the country he has been elected to be a prime minister of.

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