Turkey's pipe dreams

Arabian Business       Lionel Mok

Turkey has continued to make the headlines in the Middle East’s oil and gas industry over the last several months due to a number of factors which include the growing divide between the Kurdistan Regional Government (KRG) and the Federal Government of Iraq (FGI); and the recent signing of the Trans-Adriatic Pipeiline (TAP) and Trans-Anatolian Pipelines (TANAP).

Despite its unremarkable national oil production industry that produces, on average, 50,000 barrels per day (bpd) from reserves that total approximately 270 million barrels of oil, the country has made itself critical to the world’s energy market, while also managing to satisfy growing domestic consumption of over 700,000 bpd.

Turkey owes its gravitational pull in the energy market to its physical geography. As the only landmass standing between the Middle East and Europe, and also the Black and Mediterranean Seas, Turkey is well positioned to become an energy hub and a transit point.

The country is in proximity to 71.8% of the world’s proven gas reserves and 72.7% of the world’s proven oil reserves. It neighbors Iran, Iraq the recently discovered Eastern Mediterranean reserves near Lebanon; and it is less than 250 kilometers away from the Caspian Sea, home of the world’s largest oil discovery in the last thirty years.

By 2004, the Turkish straits of the Bosphorus and the Dardanalles, had the capacity to transit 3.4 million barrels of oil to European markets every day. At the same time, a terminal on Turkey’s Mediterranean coast at Ceyhan, facilitates oil exports from northern Iraq via a pipeline from Kirkuk and from Azerbaijan through the Baku-Tbilisi-Ceyhan pipeline. The Kirkuk-Ceyhan pipeline is Turkey’s largest, with a capacity of 1.65 million bpd.

The planned TANAP will include a natural gas pipeline system running from the Georgia-Turkey border to the Turkey-Greece border, while the TAP, will transport the same natural gas from Greece via Albania and the Adriatic Sea to Italy and further to markets throughout Western Europe.

With the energy-hungry markets to the West and bountiful supplies of oil and gas to the North and to the East, it would seem, from the onset that Turkey, will find it quite easy to secure its position in the global energy industry and profit handsomely from transit revenues, but the oil and gas industry is never so simple.

Only one of the twin Kirkuk-Ceyhan pipelines, is operational, bringing the actual maximum available capacity down to 600,000 bpd, according to the International Energy Administration. Regional instability has given way to frequent attacks on the pipeline which results in operational disruptions, and actual flows fell to just over 300,000 bpd in 2012. The pipeline was attacked at least five times between April and September 2012.

Turkey is certainly no stranger to the pros and cons of having Iran and Iraq as its neighbors. Sharing a border with some of the world’s largest producers of oil and gas has its benefits.

In 2011, crude oil from Iran accounted for 51% of total imports into Turkey, allowing the country to meet its energy needs.

The country also continues to be the largest importer of natural gas from Iran, despite U.S. sanctions. Instead of working towards minimising trade, Cevdet Yilmaz, Turkey’s Minister of Development has called for the expansion of economic ties with Iran, which currently measured at $22 billion,

according to Olgu Okumus, an affiliated lecturer in energy diplomacy at Sciences Po, Paris, in an article published by Al Monitor. Despite foreign pressure, Turkey cannot simply turn its back on Iran and is unlikely to halt imports entirely, especially as domestic energy demand continues to increase.
The ongoing dispute over oil revenues in Iraq between the KRG and the FGI have also left Turkey in a very precarious place.

Last year, the Kurdish government halted exports through the Kirkuk-Ceyhan pipeline through which the Iraqi government extracted fees-for-barrels, after a revenue dispute soured relationships between Baghdad and Erbil. Earlier this year, in spite of warnings from Baghdad, Genel Energy delivered a cargo of crude oil from the Taq Taq field via truck to Turkey’s Ceyhan port on the Mediterranean to be sold on the international market.

While the delivery and the KRG’s export targets are practically marginal, (between 5,000 to 10,000 bpd) the move has revealed how wide the divisions between Erbil and Baghdad have grown and raised even more concerns that the KRG will move to secure more independence and threaten the already fragile Iraqi state. Kurdistan could hold around one third of Iraq’s proven oil reserves, and splitting up the state would not bode in Baghdad.

To make matters worse, in, Turkey’s Prime Minister Recep Tayyip Erdogan recently announced plans to build a separate pipeline with the KRG. While the move makes logistical sense for both Kurdistan and Turkey, (increasing transport capacity between the two countries and circumventing Baghdad’s unwieldy regulations), it would sideline Baghdad even more.

It remains to be seen how Turkey will act towards the growing animosity between Baghdad and Erbil, but it will certainly need to proceed with caution or risk compromising relations with the Western-backed FGI while keeping in mind easy access to imports from the KRG.

For now, the country will need to continue finding a balance between its energy needs and plans to become a regional hydrocarbon transport hub. Securing the TAP and TANAP are a step in the right direction but there is still a long way for the country to go.

Source: http://www.arabianbusiness.com/turkey-s-pipe-dreams-520069.html?page=0#.UkL1QJ1rOUk