Also at this show, the U.S. Department of Commerce is representing and promoting six new-to-market American companies looking for agents/distributors in Ukraine.

Odesa-Brody

Now I would like to talk to you about Ukraine's future in Europe, and how energy, which is recognized universally as a critical element in economic development and national security, plays an important role. Ukraine, as a large industrial country is a big energy consumer, and, located at the crossroads of Europe and Russia, a major transporter of oil and gas to the West. Therefore, the need to diversify energy sources and strive for energy independence is a central pillar of the country's security -- or, from our view, should be. These notions are re-emphasized -- and have been brought sharply into focus -- by recent rising oil petroleum prices.

Ukraine, however, finds itself highly dependent on a single supplier -- Russia -- for a much of its energy needs. To some extent, given geography, this is inevitable. At the same time, though, Ukraine has well-developed oil and gas pipeline systems, is rich in natural resources, and possesses a large cache of unexploited energy resources. Moreover, Ukraine has not taken advantage of opportunities to diversify sources and lessen dependence on a single supplier.

I am sure that everyone here has long been aware that the United States has strongly supported the use of the Odesa-Brody pipeline to ship Caspian oil from the Black Sea into Europe. We have supported this proposal for two reasons. First of all, we want to see as many export routes for growing Caspian production as possible. Secondly, we believe, as noted, it would serve the national interest of Ukraine by diversifying its energy supplies and by strengthening its links to the rest of Europe.

We know, however, that Ukraine, in cooperation with Russia, has decided to reverse the flow of the pipeline, shipping Russian Urals and, perhaps, Kazakh oil, from Brody to Odesa and through the Bosphorus Straits. UkrTransNafta completed the technical fill of the pipeline last month and commercial flows southbound have begun. Moreover, we understand that prime ministers Yanukovych and Fradkov signed agreements on August 18 in Sochi regarding long-term Ukrainian-Russian cooperation in the oil and gas sectors, and that these agreements run counter to previous arrangements under which Ukraine supported flows of Caspian oil through the pipeline. Further, we hear that Ukraine and Russia may be considering additional lines of oil and gas cooperation that include long-term agreements on volumes and routes of Russian oil flowing through Ukraine and cede additional management control to Transneft. While we recognize Ukraine's need to cooperate on economic matters with its Russian neighbor, we hope that these developments do not reflect a permanent change of policy in terms of Odesa-Brody.

Additional agreements, we fear, could lock in current routes without guaranteeing increased, adequate supplies from Russia, and thereby seal the fate of the Odesa-Brody pipeline for years to come, causing Ukraine to forego an opportunity to diversify its supplies and sources of oil while expanding cooperation with Europe. Already, indications are that Transneft, which initially pledged "up to nine million tons" of oil to Brody-Odesa for 2005, will limit volumes of oil to the southbound pipeline, perhaps to as little as 4.8 million tons next year. Ukraine's leaders have begun to acknowledge publicly the lower volumes, with some noting that, regardless of ultimate volumes for Brody-Odesa, overall amounts of oil supplied by Transneft to Ukraine will not significantly increase next year. That means that flows of Russian and Kazakh oil to Ukraine may be diverted or re-routed from other pipelines or from other modes of transportation, such as rail.

The Sochi Agreements, as we understand them, include vague references to a southern flow of oil through Brody-Odesa, but allow Ukraine to change the direction of the flow -- to reverse the reversal -- with only a 90-day notice to Russian partners. The procedure, however, may not be as flexible as it sounds. Oil sector insiders tell us that financial clauses tied to Brody-Odesa within the Sochi Agreements would make re-reversal very difficult, especially in the short term.

We note, too, that the European Union also supports the use of Odesa-Brody to ship Caspian oil into Europe. The Bosphorus Straits have become severely overcrowded and oil shippers are looking for ways to avoid lengthy delays. Russian entities, including Transneft, are exploring alternative routes for bypassing the Bosphorus with the likes of Turkey, Bulgaria and Greece. It's ironic, perhaps, that TNK-BP, which played a central role in reversing Odesa-Brody, has shown interest lately in alternative bypass routes.

Odesa-Brody stands as a bypass option that is already built. Proposals to extend the pipeline into Poland and Germany, or to take advantage of its connection at Brody with the nearly complete Druzhba-Adria pipeline to Central Europe, have generated great interest. Nonetheless, if Ukraine waits too long to convert Brody-Odesa back into Odesa-Brody, other bypass options may come into commission and an extraordinary opportunity might be lost.

For these reasons, we encourage Ukraine to keep its options open in terms of oil flows, and continue to consider proposals to transport Caspian oil through the Odesa-Brody pipeline to Poland and Germany, or elsewhere in Europe, and to work in good faith with American and European partners.