Global Insight Perspective
A ground-breaking ceremony for the planned 1-million-b/d Samsun-Ceyhan oil pipeline was held today at Ceyhan, the Mediterranean port that Turkey is seeking to turn into an energy hub.
The pipeline is the latest in a series of "Bosphorus bypass" pipeline projects to be announced in recent months as Black Sea littoral states compete to capture oil transit business from the growing volume of oil exports coming from the Caspian region.
With Azerbaijan already committing to sending its major export volumes via the Baku-Tbilisi-Ceyhan (BTC) pipeline and Kazakhstan's oil exports tied to Russia's plans, the north-south Turkey pipeline risks having no oil to transport.
Yet Another Bosphorus Bypass
With today's ground-breaking ceremony for the Samsun-Ceyhan oil pipeline, the race to capture the "Bosphorus bypass" oil transit business is officially under way. Attended by Turkish and Italian government leaders, together with officials from Calik Enerji, Eni, and Indian Oil Corp. (IOC) Ltd, the ceremony at Turkey's Mediterranean port of Ceyhan kicked off the construction phase of the 550-km, 1-million-b-/d-capacity pipeline linking Turkey's Black Sea to its Mediterranean coast. Eni and Calik both have a 50% stake in the Trans-Anadolu Pipeline Co. (TAPPCO), the company building the pipeline, while IOC Ltd has an agreement in principle to acquire a 12.5% stake.
The ceremony marks Turkey's official entrance into the heated competition for oil transit volumes emanating from Kazakhstan, Azerbaijan, and Russia. With stricter Turkish regulations on oil tanker traffic via the Bosphorus Straits, and increasing congestion via the Bosphorus and Dardanelles prompting shippers to look for alternative routes, a bumper crop of "Bosphorus bypass" pipeline options has been proposed in recent years. A number of these—including the Burgas-Alexandroupolis and Constanta-Trieste pipelines—have received the green light in just the past two months, signalling that the race is on (see "Related Articles" below). The Samsun-Ceyhan pipeline plans received government approval last year.
Today's ceremony should have been on 28 March, which would have allowed construction to begin before the agreement on the Constanta-Trieste pipeline, but the start date was pushed back by Calik, the company that had exclusive rights to build Samsun-Ceyhan before forming TAPPCO with Eni. The pipeline will take around two years to construct and cost an estimated US$1.5 billion, according to TAPPCO. Shell has also expressed interest in joining the project and could become a TAPPCO consortium member eventually. Calik has also agreed to build a refinery and petrochemical complex at Ceyhan with IOC Ltd as part of the government's efforts to make Ceyhan a regional energy hub.
Repeating Ukraine's Mistakes?
It was Turkey that triggered the bypass oil transit sweepstakes by imposing greater restrictions on oil tanker traffic via the Bosphorus in the first place. With construction of this latest pipeline now officially under way, there are fears that the government is repeating a mistake made by Ukraine more than five years ago. The 674-km Odessa-Brody pipeline was originally built in 2001 with Ukrainian government funds to serve as a non-Russian transit route for Caspian oil supplies to Europe, but is still awaiting its first supply of Caspian oil. It sat idle for more than three years before the administration, under then-president Leonid Kuchma, opted to reverse the pipeline's flow and allow Russian oil exports to be sent to the Pivdenny terminal on the Black Sea. Although current President Viktor Yushchenko has pledged to reverse the pipeline once again, this is contingent on construction of an extension to Plock and then Gdansk in Poland.
Construction of the extension, however, is being held up by Poland's unease about committing to the project without a firm guarantee of supplies from Kazakhstan or Azerbaijan. With Poland's PKN Orlen already coping with a halt in pipeline oil supplies from Russia at its Lithuanian Mazeikiu Nafta oil complex, the country is eager to see a non-Russian supply route develop that would allow it to access Caspian oil. However, given that the bulk of Azerbaijan's oil export volumes are committed to the BTC pipeline, and Kazakhstan's oil export options are currently limited by Russia's refusal to sanction an expansion of the Tengiz-Novorossiisk pipeline, the chances of significant volumes of either flowing to the Odessa-Brody pipeline in the near future are relatively remote. Odessa-Brody extension plans are on the backburner as a result of Ukraine's current political power struggles, and a reversal of the pipeline is unlikely in the short term; but if Ukraine stops using it in the reverse direction, the pipeline may go dry altogether.
Outlook and Implications
With plans moving forward for the Burgas-Alexandroupolis and Constanta-Trieste pipelines, the window of opportunity for the Odessa-Brody pipeline to secure a stake in the Bosphorus bypass oil transit business is rapidly closing. Its main advantage—that it was already constructed and ready for use—is disappearing as the other bypass projects make good progress. The danger for Turkey is that the Samsun-Ceyhan pipeline is being built with the same rationale as Odessa-Brody: build it and the oil will come. If Turkey is hoping that it can gain the upper hand by building the Samsun-Ceyhan pipeline faster than those originating in Bulgaria or Romania, it should look north across the Black Sea at Ukraine's folly to see that merely having the infrastructure in place does not ensure success.
The premise for Samsun-Ceyhan may be flawed from the outset in looking to capture additional Azeri oil, but the pipeline could be hampered more by Russia's attempts to steer Kazakh oil to its favoured route from Burgas. Virtually all of Azerbaijan's oil exports are already committed to the BTC pipeline; any additional volumes would either be sent by pipeline or by rail to Georgian ports. It makes little sense for oil sent from Kulevi, Batumi, or Supsa to be reloaded into a pipeline at Samsun for transport to Ceyhan; rather, oil from these will likely be shipped to points further west en route to the European market. A move to loop the line on BTC and expand its overall capacity beyond 1 million b/d would seemingly make far more economic sense.
Similarly, with Russia committing its support to the 700,000-b/d Burgas-Alexandroupolis pipeline, Turkey would be foolish to count on additional Russian volumes for the Samsun-Ceyhan pipeline, particularly after the Turks antagonised Russia with the Bosphorus oil tanker traffic restrictions. Furthermore, the Russians, by making an expansion of the Caspian Pipeline Consortium (CPC)'s Tengiz-Novorossiisk pipeline contingent on shareholder support for the Burgas-Alexandroupolis pipeline, are essentially forcing Kazakh oil volumes to be routed via Russia's preferred Bosphorus bypass route.
Indeed, if Russia has its way, no Kazakh oil will flow west via any other route besides the Bulgaria-Greece route until that pipeline is filled, despite Kazakhstan showing an interest in other projects that would carry its oil exports—which are growing—via Ukraine and Turkey. It is therefore understandable that Kazakhstan is at least seeking to make the best of it by angling to get an equity stake in the Burgas pipeline. The country is unlikely to be able to supply any additional oil for Samsun-Ceyhan or Odessa-Brody unless there is a second expansion of the CPC route beyond its design capacity of 1.34 million b/d. This would take at least several years and there is no guarantee that the Turkey route is even the best option; indeed, some of the additional Kazakh oil export volumes will likely be sent eastward to China. Some Kazakh oil exports will be sent to Azerbaijan and could be sent to Kulevi and the Georgian ports, but again, a more economic option would seem to be via an expanded BTC. Hence, Turkey's gamble that it can build a pipeline and lure sufficient oil volumes to make Samsun-Ceyhan a success risks becoming a costly and ultimately failed endeavour in the face of the oil export commitments and limitations of Azerbaijan and Kazakhstan, respectively.
Bulgaria: 5 April 2007: Kazakhstan Seeks Stake in “Bosphorus Bypass” Pipeline Via Bulgaria
Europe: 4 April 2007: Agreement Reached on New Oil Pipeline to Europe
CIS: 2 April 2007: Kazakhstan, Russia Discuss Oil Transit, Expansion of Atyrau-Samara Pipeline
Kazakhstan: 30 March 2007: Kazakhstan President Signals Interest in Odessa-Brody Pipeline Extension to Poland
Turkey: 27 March 2007: Kazmunaigaz to Join Turkish Refinery Construction Project
Georgia: 23 March 2007: Competition for Caspian Rail Oil Re-Export Business Heats Up in Georgia
Bulgaria: 16 March 2007: Deal Signed on Burgas-Alexandroupolis Pipeline; Construction to Begin in 2008
Turkey: 2 May 2006: Turkish Government Says "Yes" to Samsun-Ceyhan Oil Pipeline
CIS: 15 February 2006: Transneft Links Approval of CPC Expansion to Bosphorus Bypass Pipeline
Global: 15 November 2004: Bosphorus Bypasses: A Multitude of Projects Offer Alternatives to Shipping Oil Through the Bosphorus Straits