With so many proposed supply routes on the drawing board and its position as a key transit route secure, Turkey waits to see who will pull the trigger first. When it comes to hydrocarbons, geography is destiny. Despite its limited domestic supplies, the adage also rings true for Turkey. With some of the world’s largest oil and natural gas reserves to its east and hungry markets to its west, Turkey is an indispensable piece of a complex and evolving regional energy puzzle. For decades, energy producers have shipped oil and gas to world markets through Turkey’s Bosphorus and Dardanelles straits. Ankara is wary of potentially catastrophic effects of an accident in these narrow and environmentally sensitive chokepoints and has renewed efforts to ease tanker traffic by building new pipelines.” There are no established pipelines for the transport of refined petrol, so fuel must be delivered by road and this raises costs,” said Murat Lecompte of BP. With domestic demand on the rise and new discoveries of oil and gas in the Caspian Basin, Turkey requires significant investment to fulfil its role as a transit state.
OIL: Turkey is pushing new oil pipelines in order to reduce tanker traffic in the Bosphorus. In 2009, roughly 2.9m barrels per day (bpd) of oil traversed the strait each day, off the 2004 peak of 3.4m bpd, after Russia began exporting more crude from Baltic ports. But increased production in the Caspian region means the figure may rise again. Turkey has diverted some Azeri oil to a terminal in the Mediterranean port city of Ceyhan. The 2000-km Baku-Tbilisi-Ceyhan oil pipeline began operation in 2006 and carries 1.2m bpd of light Azeri crude via Georgia to the Mediterranean. Ceyhan is also the terminus for a pipeline that skirts Syria and brings northern Iraqi oil from Kirkuk’s fields to world markets. The 1100-km-long link, which opened in 1977, remains Turkey’s largest oil pipeline with a daily theoretical capacity of 1.65m bpd, though typically about 500,000 bpd flow through the aging infrastructure. Bomb and arson attacks carried out by insurgents in Iraq and Turkey also regularly knock the pipe offline.
In addition to the Azeri and Iraqi lines, Turkey plans to build a link from the Black Sea city of Samsun to Ceyhan. The 550-km pipeline would pump an initial 1m bpd from north to south with the ability to raise that figure to 1.5m. If expanded, this pipeline could halve the number of oil tankers passing through the Bosphorus, experts say. But the $3bn project has stalled due to a dispute between Turkey and Russia. Moscow claims that the project would make transporting oil three times as expensive as moving it by tanker through the Bosphorus Straits. The oil pipeline monopoly Transneft, slated to build the pipeline, has sought more tax incentives to help cover costs.
NATURAL GAS: As it seeks to diversify its source of gas away from Russia, the EU hopes Turkey can be the transit state it is looking for. Europe consumes some 500bn cu metres of natural gas each year, and Russia currently supplies a quarter of the EU’s gas and more than half of the continent’s imported gas. About 80% of Russian gas travels through Ukraine.
A series of rows between Russia and Ukraine over pricing and supplies in recent years saw the former turning off the tap, in turn reducing supplies to Europe. In an effort to become less dependent on Russia, the EU is turning to the Caspian region and Middle East, but it needs Turkey as a transit state to aid in that effort.
BUILDING INFRASTRUCTURE: The past few years have seen significant investment in pipelines, ports, stations and refineries in Turkey. Much of the investment has been driven by the promise of the enormous Shah Deniz gas field in Azerbaijan. Estimated to hold at least 1.2 trn cu metres of natural gas, Shah Deniz would go a long way in satisfying European demand. A leading producer of Azeri gas, Russian energy giant Gazprom estimates it will boost production in Azerbaijan to more than 100bn cubic feet in 2012, a 70% increase from 2011. Shah Deniz is being developed by BP, Statoil and SOCAR, the Azeri state-owned oil company. Production on phase one began in 2006. The project’s second phase, known as Shah Deniz-2, is set to begin in 2017.
Two major and several smaller pipeline schemes are competing to carry Azeri gas to Europe. The first competitor is the so-called Southern Corridor, the heart of which is the long-discussed Nabucco project, a 3300-km pipeline from eastern Turkey to Baumgarten, Austria. Nabucco would carry 31bn cu metres of gas annually from the Caspian region and other supplying nations through Turkey and the Balkans. The EU has backed Nabucco as part of a long-term effort to link with the Caspian region to secure a steady stream of fuel. The US also favours Nabucco, which would bypass Russia and transit entirely through friendly territory.
NABUCCO PROJECT: But Nabucco has fallen out of favour in other important circles. At an estimated €14bn, it would cost more than initially expected and has run into several delays. A lack of committed gas is a major hindrance. Azeri fuel could fill the pipeline’s initial stage, but more is needed. Among other suppliers that have been mooted, Turkmenistan has failed to commit, Iraq lacks enough viable supplies, Iran is an unstable partner, and Egypt wants to export to other pipelines as well as liquefy its gas.
Cracks are beginning to show among Nabucco’s partners, which are Austria’s OMV, Budapest-based MOL, Romania’s Transgaz, Bulgargaz of Bulgaria, Ankara’s BOTAŞ and RWE of Germany. Turkish Energy Minister Taner Yıldız appeared to back away from the project when referring to it as “part of the solution for European supply security” at a January 2012 conference in Tbilisi, Georgia. German utility RWE, which was in line to become one of Nabucco’s biggest end users, has also distanced itself, with CEO Jürgen Grossmann referring to it as “a sinking ship” early in 2012. Later in a presentation in Brussels in March 2012, RWE declared “Nabucco is alive, not dead” and insisted the project remained a core part of its gas strategy. Mixed feelings aside, the project was first discussed in 2002, but construction is unlikely to begin before 2017, if at all.
The Trans-Adriatic Pipeline (TAP) will carry some 20bn cu metres of gas per year across 520 km between eastern Greece and southern Italy for $2bn. TAP is a joint venture between Swiss EGL (42.5%), Norwegian Statoil (42.5%) and Germany’s E.ON Ruhrgas (15%). It should also help extend the reach of the Trans-Anatolian Pipeline (TANAP, see below).
MAIN RIVAL: The planned South Stream would transport Russian gas under the Black Sea to Bulgaria before splitting into two legs, one servicing Serbia, Hungary, Slovenia, Austria and Italy and the other stretching into Croatia, Macedonia, Greece and Turkey. With an annual capacity of 63bn cu metres, South Stream offers twice the volume of Nabucco – at a significant cost, estimated at $25bn to $32bn. Originally signed by Gazprom and Italy’s Eni in 2007, South Stream now includes France’s EDF and Germany’s Wintershall. It is poised to beat Nabucco to the punch after Gazprom announced construction could begin as early as December 2012 with operations commencing in 2015.
Nabucco was dealt another blow in late 2011, when Turkey and Azerbaijan signed a memorandum of understanding to build a 2000-km gas pipeline across Turkey. TANAP will provide 16bn cu metres per year from Shah Deniz-2, 6bn of which would be consumed in Turkey and the remainder piped to Europe.
TANAP appears to be “the death of Nabucco, unless Turkmenistan and Azerbaijan sort out a deal to provide Turkmen gas to the project,” said Cenk Pala, the former head of strategy at BOTAŞ as well as TAP’s representative in Turkey. “Currently, TAP is the only feasible option for transporting natural gas from Turkey into South-east Europe and the Balkans.”
The decision on which route to pursue belongs to the Caspian Sea consortium, which is led by SOCAR. The EU has argued that the Southern Gas Corridor would be more profitable and makes more sense than South Stream if the aim of the new routes is to diversify supplies. Turkey argues that it would like to see both projects move forward as complements. Europe is going to need a lot of gas from many directions, it says.
WIDER IMPACT: Although these natural gas lines are designed principally to satisfy Europe’s energy demands, Turkey stands to benefit in several ways. Turkey currently relies on foreign sources for more than 90% of its oil and gas needs. Though it still enjoys excess import capacity, a large population and expanding economy could boost demand 6% annually over the next decade. The new pipelines will not only help meet that need, but they will also lower the cost of energy for consumers.
Besides oil and gas, the pipelines will bring income in the form of transit fees. Building the pipelines will help create jobs in construction and operations and new investment opportunities. With so much oil flowing through Ceyhan, for instance, Ankara envisions a regional energy hub with expanded port and storage facilities and new refineries. These pipelines have the potential to reshape regional energy flows, influencing the geopolitical landscape. Turkey sees the pipelines as a way to cement ties with its neighbours, but as the tension between Russia and Ukraine illustrates, pipelines can also give rise to considerable friction. Exploiting the benefits while avoiding the risks will require a deft hand.
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