FIGHT FOR MARKETS

The growing oil flow via the Bosphorus, all the more difficult transit conditions, as well as the progress achieved in construction of the main Caspian pipeline (read in det. in the previous issue) Baku-Tbilisi-Ceyhan (minimal throughput 50 mln tons of oil per year) push to appearance of more new pipeline projects around the single sea way connecting oil producing countries of the Caspian-Black Sea basin with the Mediterranean market. Thus, the initiator of rather interesting new pipeline routes is Turkey, alarmed with the next branch of the "soft diplomatic" conflict with Russia.

Prehistory

This January the Turkish leadership introduced next temporary restrictions on passage of Russian tankers via the Black Sea straits, which caused immediate crises at oil producing plants of South Europe and rise of oil price in the European energy market. Ankara sounded the reason officially - worsening of weather conditions in southwest part of the Black Sea, which created danger for shipping in the mentioned straits and might cause a huge ecological catastrophe in the region in case of an accident of a Russian tanker.

The real cause of the Turkish side's restrictive measures might be Turkey's reaction to construction of a new ammoniac and oil terminal in the Taman peninsula by Russia, believe many analysts. In summer 2003 the Russian side activated construction of a new transport energy corridor from the central areas of Russia in direction of the Black Sea, which is to solve the problem of increasing petrochemical products' transportation to the world market.

However this project's essential problem is still its full dependence on the Black Sea straits, which Turkey demonstrated to Russia. In answer Russia stated by lips of its officials and oil industrialists that Turkey's fears concerning the risk of the Bosphorus strait congestion are too exaggerated. And that in 2003 oil transportation by tankers via the Bosphorus equaled to 135 mln tons of the max possible 200 mln tons, and this year it will not exceed 160 mln tons. Certainly, this is by 60% more than 5 years ago, but it is not the limit of the strait's throughput capacity. However the problem really is, and for many years. Its essence is that shipping conditions in the straits, particularly in the Bosphorus, are quite complex. In particular, width of the narrowest part of the Bosphorus is around 600 m and besides, at passing via it ships turn actually at right angles. It creates a quite serious danger of ecological catastrophe in case any large-scale tanker crashes in the area of many-million Istanbul. Such cases have already taken place. For example, a serious accident occurred in March 13 1994, when a tanker under the Cyprus flag carrying about 100,000 tons of oil collided with a dry cargo ship. It stimulated Turkish government's introduction of new rules on ships' passage through the straits. In July 1 1994 the national Regulation of shipping in the area of Black Sea straits entered into force, and 59 amendments were made to the Turkish law regulating movement in the straits. The amendments significantly restricted the large-scale tankers' passage via the straits. In particular, control over ship movement, restriction of movement rate, the requirement to use only the Turkish pilots' services etc. was introduced.

However the most essential is that the passage of over 150,000 tons tonnage tankers became actually impossible. In opinion of the Turkish authorities, the straits cannot physically stand the load created by large-capacity tankers. Consequently, transportation of 80 mln tons of oil by the tankers with max admissible capacity for the straits will take around 550 trips per year. However according to the safety requirements, passage of a large-scale tanker may block movement of the rest ships in the Bosphorus for several hours. This, in addition, increases cost of the transportation to a significant extent. One may expect that as the oil flow via the Bosphorus keeps on growing, the rigidity of the Turkish position will increase as well, and new safety rules will be introduced, realization of which can significantly increase oil transportation cost.

Russia, just like a number of big international petroleum companies, protests against the restrictions introduced by Turkey on oil transportation via the Bosphorus. They base on the Montre Convention of 1936 regulating the rules of strait employment, which in particular contains a provision on freedom of shipping. Some countries, as well as Russia assert that Turkey needed the restrictions on passage of large-scale tankers through the straits to make all the sides interested in Caspian oil to agree with the Baku-Ceyhan oil line construction project passing around the Bosphorus and Dardanelles on land.

They say as well that establishment of modern ship passage systems in the straits using computer technologies may solve the shipping safety problem. However, despite of all these arguments, presently there is no, and apparently will not be any signs of that the Turkish leadership could reconsider its approach to the problem of oil transportation via the Bosphorus, writes the British Financial Times. The fact that RF has lost more than $120 bn during the ten years of new conditions of passage through the Turkish straits first of all due to the idle times, delay sanctions, broken contracts and penalties speaks as well in favor of the new directions bypassing the Bosphorus.

Georgian project

Perhaps the "oldest" bypass project - Novorossisk-Supsa-Ceyhan, which as planned by the initiators, will link Novorossisk's capacities with the biggest Ceyhan terminals. This project costing around $2 bn and of 35 mln t/y capacity enlisted support of two companies - the Georgian International Oil Corporation (GIOC) and the Russian Rosneftegazstroy. As it is known, none of the companies possesses the necessary oil volumes to fill the pipe, which however did not prevent them to prepare the project's feasibility report in 2001-2003 and submit it to consideration of the Russian government.

First GIOC proposed this project in 1996. One of the inhibiting factors is passage of the probable route through the territory of Abkhazia, with which the conflict strained this summer. In short, lack of the political will of the project's major planned participants - Russia and Turkey, as well as free oil volumes, still freeze this project.

Russian project

By the available information, Turkish Energy Ministry studies today 5 possible pipeline projects. Two of them stipulate construction of 193 km oil line via the Thracian territory, west from Istanbul, between the Black and Aegean Seas. One of the projects is sponsored by the Turkish businessmen, who concluded a memorandum on mutual understanding with the Russian oil line monopolist Transneft JSC and THK-BP.

FT informs that Turkish official reps met with reps of the oil companies in Ankara to discuss these proposals. The other meeting with reps of Russian petroleum companies, which are of the biggest users of Bosphorus, is planned later this month. In opinion of experts of oil circles, Russian powers would hardly agree to 10%'s exchange of the sea way to pipelines, because they would regard this violation of Russia's right on unimpeded access via the Bosphorus, Marmara Sea and Dardanelles strait to the Aegean and Mediterranean Seas.

The Russian pipeline monster Transneft, THK-BP company and the Turkish transport company Caspian Trans Co. widely known to the Caspian oil traders (headed by its founder Okan Tapan) concluded a memorandum and suggested the Turkish government to build the Kiyikey-Ibrikbaba pipeline this summer. Its throughput is designed as 50-60 mln tons, length - 193 km. According to the Transneft president Semen Vaynshtok, expenditure of $913 mln on construction of the bypass pipeline will be repaid in one and a half years.

Transneft's motives are fully understandable, in 2003 about 80 mln tons of oil from the total volume of 135 mln tons conveyed via the strait was sent through the Novorossisk terminals via the Bosphorus. Of this the share of CPC, via which Tengizchevroil petroleum is transported, made around 16 mln tons.

With growth of CPC throughput in 2010 up to 67.7 mln t/y, together with Russian oil around 140 mln tons will be transshipped via the Novorossisk terminals. This volume equals to around 90% of Russia's current oil export. If to take into account the fact that the Russian West Siberian mixture Urals is bargained today against the Brent with $2-3 discount, then this difference will make already $4-5 in the Caspian oil. Supposedly, the Russian monopolist has got what to fight for, the one who owns pipeline valves will be able to maintain and increase own influence significantly both from the standpoint of geopolitics, and the price formation in all the more growing southeastern Europe. Therefore the price of the issue is evident.

However this issue is not of less importance for Kazakhstan, which oil Transneft is going to manipulate.

Kazakhstan project

Kazakhstan unlike its competitor in this case - Russia, (which had a chance to join BTC, but did not use this chance actually withdrawing its biggest oil producing company from the project in 2002), has two real options of exporting own oil around the Bosphorus.

1. Aktau-Baku offshore route by tankers (up to 20 mln t/y), and further by the pipeline of over 30 mln t/y capacity. The pipeline project costs about $1 bn.

2. The Igneada-Saros project from the Black Sea to the Aegean Sea via the Turkish territory recently emerged at the Kazakhstan business-establishment. The pipeline's throughput capacity can equal to 60 mln tons, 198 km length. The project's supporters assert that the pipeline will relieve exporters from losses for delays in the order of tankers at passage via the Bosphorus - up to $12 per ton. Moreover, in the Aegean Sea petroleum may be loaded to the ocean tankers of 300,000 tons tonnage, which is impossible in the Black Sea. The more capacious tankers will allow cutting expenditures at oil delivery to distant markets, for ex. USA. The Igneada-Saros project is advanced by the offshore company Thrace Development Co. linked with Turkish capital. The company's reps assert that they have already received preliminary approvals of their plans in governmental agencies of Turkey. The company wants to be owner of the pipeline, or at least, owner of the control package of shares at the head consortium. Judging by everything, not enjoying the state support of Kazakhstan, Thrace Development has to face such a powerful rival as the Transneft JSC, which is backed by the biggest Russian oil manufacturers, possesses many-year experience of export to Europe, and what is more, Kazakhstan exports own petroleum by the Transneft system in three directions - to Orenburg, Orsk and Samara.

Therefore, for now the Igneada-Saros project looks even not like the weightiest argument in negotiations on coordination of transit tariffs with Baku-Tbilisi-Ceyhan owners. Kazakh oil is planned to pump from the mega-field Kashagan to BTC in 2008. At the best Igneada-Saros is a project of medium-term outlook - 2015 - the period of full-scale development of Kazakhstan sector of the Caspian.

The Fig. 1,2 shows expected production in Kazakhstan and major production fields. Since 2010 production in the Kashagan and Tengiz fields will dominate.

The main obstacle on the way of increasing oil production in Kazakhstan, by everything, is the restrictions on gas usage. The limited internal demand for production of associated gas under such main projects as Tengiz, Karachaganak and Kashagan, can delay the rates and scales of the fields' development.

Partners in Kashagan have already announced that the following phase of expansion cannot start before organization of a safe option of gas marketing. Only this may exclude 6-8 mln t/y from the production forecast for 2006-2011.

The last information on creation of JV on the basis of the Orenburg gas refinery with participation of Gazprom and KazMunayGaz, is encouraging. In accordance with Gazprom's proposal, construction of three new devices in Orenburg will allow receiving additional 8 bn c.m. of Kazakh gas from the Karachaganak field, declared KMG president Uzakbay Karabalin in July.

Moreover, the possibility of such discussions between the operators and government as in Tengiz and Kashagan, may cause additional cut of oil production and delays.

Azerbaijan and Kazakhstan have long been negotiating on employment of the BTC pipeline and in September 2003 the protocol was signed following the round-table negotiations in Baku. Kazakhstan can export 200000-400000 b/d to Azerbaijan by tankers. Total shares of Total, Eni, ConocoPhillips, and Inpex Corp. in the Kashagan project make 59% and in the BTC pipeline project - 15%. However currently there is no official agreement on transportation from the Kashagan field via BTC yet. Some oil volumes exported from Georgia and Turkmenistan may as well be pumped via the BTC pipeline, however these volumes are much less than export from Azerbaijan and Kazakhstan.

Fig. 3 illustrates the actual capacities of Kazakhstan till 2020.

CPC pipeline connects the Tengiz field with the dedicated offshore terminal in South Ozereyka near Novorossisk, the Black Sea, its length is 1580 km. The route follows through Atirau in Kazakhstan to Astrakhan, Komsomolsk and Kropotkin in Russia.

In 2003 about 16 mln tons of oil was pumped via the CPC pipeline, which is by 33% more than the figures of 2002.

CPC stockholders are obliged to fill their throughput capacities, or pay for refusal. The throughput of 2001-2003 was less than expected, however this year it increased distinctly due to the Karachaganak oil. Crude supplies of Karachaganak to CPC were to commence in September 2003, however they were delayed for presence of pollutants (caustic soda) in the oil.

Karachaganak will be the seventh consignor for CPC.

In November 2002 KazTransOil declared about the project costing $200 mln on reconstruction and expansion of the Atirau-Samara portion of the given pipeline into three stages:

1st Stage. Addition of substances reducing hydraulic friction into the oil (2004) caused increase of the throughput capacity up to 17.7 mln t/y.

2nd Stage. Reconstruction of the existing system (pipelines and pump stations) would increase throughout up to 19.7 mln t/y.

3rd Stage. Addition of the pipeline's new portions will increase throughput up to 26 mln tons.

In addition to these main export pipelines of Kazakhstan, there are capacities of the Kenkiyak-Orsk and Karachaganak-Orenburg pipelines.

Completion of the Kenkiyak-Atirau pipeline construction led to pumping into the Kenkiyak-Orsk pipeline, and completion of the Karachaganak-Atirau connecting portion to the CPC pipeline will probably retarget the volumes from the Karachaganak-Orenburg pipeline to CPC.

Moreover, the Omsk-Chardjou pipeline of 22 mln t/y capacity will be loaded only in case its northern portion is reversed towards the oil refinery in Omsk.

Fig. 4 reflects capacities of Azerbaijan export pipelines. The republic's export capacities' forecast says that the BTC pipeline has reserve capacities for the possible future transportation from Kazakhstan, despite of that the deadline is defined as 2008-2011, while ACG reaches the peak level.