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from Stratfor.com
Summary
Former Soviet Union countries are producing more oil than ever, with newer energy producers such as Kazakhstan and Azerbaijan joining Russia
in exporting large amounts of oil to the global market. The question now
is how to transport the expanding oil production. Russia seems the
logical choice, but Kremlin politics have gotten in the way of Russian
infrastructure expansion. As a result, investors seeking to create
infrastructure that will allow oil to be transported to market from the
Middle East and the former Soviet Union are pushing Turkey to become a
major global oil hub.
Analysis
Countries within the former Soviet Union (FSU) are producing more oil
than ever before, with newer energy producers such as Kazakhstan and
Azerbaijan joining Russia in exporting large amounts of oil to the
global market. Routes to get that oil to market, however, are limited – mostly passing through Russia. In light of increasingly unstable Russian energy policies and the country’s decaying infrastructure, investors are
looking to a new hub for oil export and refining: Turkey.
After a sharp decline in oil production following the fall of the Soviet
Union, Russia is now the world’s second-largest oil producer, behind
Saudi Arabia. The former Soviet state of Kazakhstan is beginning to see
its potential as a major energy producer after years of foreign
investment, and has increased its oil production to 1.5 million barrels
per day (bpd).
The Kazakh government is planning to more than double oil production
within the next nine years, to 3.5 million bpd. Oil production in
Azerbaijan, another former Soviet state, has more than doubled since
2004, increasing from less than 300,000 bpd to more than 600,000 bpd in
2006, and it is expected to further increase to more than 900,000 bpd in
2007.
The question is how to get all this oil to market. The logical answer –
especially for the European market – is through Russian infrastructure.
Russia, however, has allowed politics to
scare away those looking to invest in or finance new and expanded
infrastructure. Russian state-owned pipeline company Transneft has
exclusive jurisdiction over any crude oil – except through one line,
the Caspian Pipeline – exported via pipeline from Russia. The Transneft
system, however, is highly bottlenecked and the existing infrastructure
is in decay. This leaves the rest of the oil to be shipped along more
costly rail and river routes.
Beyond Transneft’s inefficiencies, the Russian government has not helped
to expand oil transit capacity. Its state-owned oil, natural gas and
pipeline monopolies – Rosneft, Gazprom and Transneft – have driven
away investments by refusing to grant control proportionate to the
financing private investors might provide, as well as arbitrarily
changing the fees for transporting supplies. The monopolies also are
increasing their influence in Russia and on Russian policy by using
energy to impact foreign policy with its neighbors. The natural gas
price dispute with Ukraine,
in which Russia cut supplies transported to Europe via Ukraine, is a
prime example.
This also was seen when Kazakhstan’s state-owned KazMunaiGaz proposed
buying a majority stake in Lithuania’s oil complex, Mazeikiu Nafta,
which was owned by bankrupt Russian oil firm Yukos. Kazakhstan supplied
roughly 10 percent of the complex’s oil via a pipeline through Russia.
Upon KazMunaiGaz’s proposed purchase, Transneft revoked permission for
Kazakh oil to be pumped through its pipeline to Lithuania. Rosneft then
put in its bid for the complex, though Lithuania ended up sealing the
deal with Poland’s PKN Orlen.
Foreign investors, though, are not hinging the future of energy supplies
on Russia, and have found a new hub to move the increased oil supply to
market: Turkey. The country’s geographical position makes it ideal for
moving oil to market from many locations, as Turkey sits between the
oil-producing Middle East, the former Soviet region and a major oil
market, Europe. Turkey also has major access to the important transport
routes of the Black and Mediterranean seas. The problem has been that
Turkey’s main waterways – the Bosporus and Dardanelles Strait – have
been major choke points, while no real infrastructure has been in place
for exports.
The new Baku-Tbilisi-Ceyhan (BTC) pipeline from Azerbaijan’s oil hub on
the Caspian to Turkey’s large port on the Mediterranean opened in June,
providing an alternative for Azerbaijan to
move its oil. The pipeline also has become an alternative for
Kazakhstan, which will provide half the oil when the BTC meets its full
throughput capacity of 1 million bpd by 2008. The BTC offers one of the
first large pipelines from a former Soviet state that does not run
through Russia.
Another oil transport route already in place is a pipeline from Iraq,
with a capacity of 1.6 million bpd. Since the beginning of the Iraq war,
oil flows through the pipeline have been erratic, though it is just a
matter of time before it comes back online. In March 2004, Iraq also
submitted a plan for northern Iraqi Kirkuk oil to be exported via
Ceyhan, the first such proposal in three years.
Offering even more promise for Turkey’s goal of becoming a major energy
hub are the numerous infrastructure projects planned in the country. The
proposed projects include not only pipelines to transport oil from the
Middle East or former Soviet Union to market, but refineries as well,
which would allow a ready-to-use product to hit the market – rather
than comparatively high-bulk, low-value unrefined crude oil.
The total capacity of planned refineries to be built in Turkey would
double its refining capabilities, adding another 900,000 bpd in refining
in the next few years. Three refineries are planned at the BTC’s
endpoint of Ceyhan – to be built by Turkey’s Petrol Ofisi and Cakik
Energy, Italy’s ENI and the Indian Oil Co. KazMunaiGaz said Aug. 14 it
also is looking to build a refinery in Turkey.
A key indicator of increasing investor rejection of Russia in favor of
Turkey is the plan by privately owned LUKoil, Russia’s second-largest
oil company, to build a refinery in Turkey, specifically in the Black
Sea city of Zonguldak. Although Russia is in dire need of energy
infrastructure, Turkey offers a more secure option – both politically
and financially – for transport and refining.
LUKoil also announced plans in early August to build a pipeline from the
planned refinery in Zonguldak to the Turkish port of Izmit on the Sea of
Marmara. The port of Izmit allows oil transport to completely bypass the
Bosporus and pass through the less-congested Dardanelles Strait to the
Mediterranean.
Another planned oil transport alternative is the Samsun-Ceyhan pipeline
traveling south from the Black Sea to the Mediterranean port of Ceyhan.
Italy’s Eni and Turkey’s Calik Energy finally inked their deal on the 1
million bpd pipeline in June. Once built, it will allow oil exporters
all over the Black Sea to transport their supplies to Ceyhan’s planned
refineries, as well as Turkey’s deep-water port on the Mediterranean.
With the planned Samsun-Ceyhan pipeline, the new BTC pipeline and three
planned refineries, Ceyhan is fit to become a major global oil hub.
Moreover, with the LUKoil refinery and pipeline, Turkey itself is set to
cash in on the growing oil production of its neighbors.
Turkey is becoming a crossroads between Middle East and FSU oil
producers and consumers in Europe and beyond. As a result of this
evolution, Turkey and its issues – the Kurds,
and a desired EU membership –
are becoming more important to those outside of the country.
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