Energy: Success of oil pipeline depends on whims of Moscow

By David O’Byrne

At 30km long but just 700m wide at its narrowest, Istanbul’s Bosphorus strait is one of world’s most crowded and potentially hazardous waterways, where even with state-of-the-art radar monitoring, transiting ships are still obliged to take on a pilot.

Fringed with forests and villages on its upper reaches, and the palaces and mosques of Istanbul at its lower end, it is also one of the most beautiful.

It is no surprise then that with oil tanker traffic through the straits having more than doubled since 1995 and expected to double again in the next decade on the back of fast-rising oil production in Russia and the Caspian basin, Turkey is keen to provide an alternative export route.

“Traffic through the strait already presents an unacceptable risk to the population of Istanbul, and any oil pipeline that can relieve the pressure will be welcome,” says Burak Ozugergin, spokesman for Turkey’s foreign ministry which has long warned of the dangers posed by too much tanker traffic.

Turkey’s own proposed solution is the Samsun-Ceyhan, or Trans Anatolian pipeline, planned to carry oil from Turkey’s Black Sea coast, 550km across the country to the Mediterranean coast, bypassing the crowded Bosphorus.

Sponsored by a consortium of Turkey’s Calik Enerji and Eni of Italy it is designed to carry up to 1.5m barrels per day.

It is also expected to help kickstart a new petroleum refining, petrochemicals and manufacturing sector at the Mediterranean port of Ceyhan, which Turkey has long harboured ambitions of turning into a major regional energy hub.

However despite presiding over a ground-breaking ceremony at Ceyhan in 2007, Calik and Eni have struggled to secure sufficient commitments of oil to ensure the line will be commercially viable.

Eni can supply oil from the giant Kashagan field in Kazakhstan which it is developing in partnership with Kazakh state oil company KazMunaiGaz, but the line also needs oil from Russian or Kazakh producers.

Support has been slow in coming, however, with Russia having long backed a rival project to build a pipeline through Bulgaria and Greece – a far shorter route, and Kazakhstan having long declined to commit to any of the competing schemes.

That situation has now changed with a recent agreement between Turkey, Italy and Russia committing the three countries to work together on this and other regional energy projects.

Russian prime minister Vladimir Putin also announced that he had secured Kazakh support for the project – a claim yet to be confirmed by Almaty.

“The agreement allows for Russian oil companies Rosneft and Tatneft to join the project either by committing oil or by becoming partners,” says Mustafa Aksoy, Calik Holding’s Director of Projects and Investments.

“With these two companies on board the project we expect to be able to make the final investment decision by the end of 2010,” he adds.

It is an important step, but there is still no definite commitment of oil to the Samsun-Ceyhan line. It also confirms that Moscow can make or break the project.

“Shipping oil by tanker through the strait is always going to be cheaper than any pipeline,” says John Roberts, Caspian analyst at Platts.

“Ultimately Russia controls the oil routes from the Caspian to the Black Sea, and only Russia can ensure the line has enough oil to make it viable.”

Such a move by Russia would come at a price, he cautions, pointing out that the recently signed agreements make only one definite commitment – for Turkey to allow Eni and Russia’s Gazprom to conduct a feasibility study for a by-pass line of their own.

They plan to construct that line, the South Stream gas pipeline, across the Black Sea to export Russian gas to Europe, by-passing Ukraine which has previously attempted to leverage its location on Russia’s gas export route to obtain cheap gas.

Russia is also hoping to co-operate with Turkey on other pipelines, including a second gas line across the Black Sea and an extension of an existing gas line south across Turkey to Ceyhan and on to Israel that would also allow for the development of gas-based industries at Ceyhan.

Copyright The Financial Times Limited 2009.