Caspian oil: Where does it go?

Apr 07, 2007 02:00 AM

by Maria Beat

That is a question puzzling many. The construction of regional pipelines has experienced a real boost recently:

The fuss around the signature on March 15 in Athens of the Burgas-Alexandroupolis pipeline construction had not died away yet, when the news came of the Constanta-Trieste pipeline construction. This long-awaited development took place on April 3 in the Croatian capital of Zagreb, where five South-European countries signed a pledge to construct a 1,300-km-long pan-European oil pipeline (PEOP). This pipeline will run from Constanta on the Black Sea in Romania to the Mediterranean port of Trieste in Italy.
The pipeline will run through Serbia, Croatia and Slovenia at an estimated cost of around $ 2.5 bn, and its construction is expected to be completed by 2012. It is to deliver up to 100 mm tons of crude oil from the Caspian oil fields to Western Europe bypassing congested Turkish straits and establishing a link of supply for refineries in northern Italy and Central Europe from the post-Soviet Caspian democracies of Kazakhstan and Azerbaijan.

It is a good idea to establish links of delivery from the young post-Soviet democracies to the West which bypass the Russia-controlled oil pipeline network. Still it needs to be mentioned that in the near future crude deliveries from Kazakhstan and Azerbaijan, to be transported by tankers, will have to go through Novorossiysk in Russia, which has the only oil terminal on the Black Sea suitable for this operation.
The regional transportation opportunities are limited, and the construction of export oil and gas pipelines does not solve all the problems. Modern rail roads and highways, as well as storage facilities and sea terminals, not to mention loading equipment, require major upgrading. Infrastructure refurbishment and development as a whole remains a major issue for the Caspian and Black Sea countries.

A surprise development
The Zagreb signature ceremony by the energy ministers of the five countries came as asurprise development. During the past years, the signing of the PEOP memorandum of understanding was delayed several times, and the issue remained open as late as last autumn. An agreement was expected to be reached in April 2007, though of an unclear nature: whether a memorandum of understanding, or a less concrete statement of support by the countries involved.
Until quite recently, the government of Slovenia remained uncertain about the project, being concerned about the ecologically vulnerable Karst terrain, which the pipeline was supposed to travel through for 29 km. The national governments of Serbia, Croatia and Romania in particular were favourable towards the project from the very outset. Romania has estimated the benefits of the projected 20 years of operation as ranging between $ 2.2 and $ 4.3 bn.

Apparently the process gained extra speed after the signing of the agreement for the trans-Balkan pipeline in Athens earlier. Planned to become operational in less than a year, the Trans-Balkan pipeline aims at establishing an alternative route for crude deliveries from the Black Sea to Mediterranean ports, bypassing the congested Bosporus Straits. The pipeline will start from the Burgas sea port on the Black Sea coast of Bulgaria, in close proximity to Constanta in Romania, where from the PEOP is planned to start travelling south 1,400 km to Trieste. The PEOP’s construction is expected to cost Romania around EUR 2 bn and last for three years. When commissioned the PEOP will pump 90 mm tons of crude annually.
The Trans-Balkan will have to travel less than 300 km from Burgas to Alexandroupolis on the Mediterranean coast of Greece, and its estimated cost will not exceed EUR 1 bn. Its operational capacity will be 30 mm tpy, with a potential expansion of up to 50 mm tons.

Both of the projected pipelines will target southern Europe envisaging, besides this, Caspian crude as a prime source of supply. Still, both of them depend upon the operational capacity of the Caspian Pipeline Consortium (CPC) to deliver Caspian crude to the Black Sea terminal in Novorossiysk. As of now the CPC’s capacity is kept low, but expected to be substantially increased in the near future. When that happens certain energy analysts believe that the CPC’s main stakeholder Russia would rather direct the newly increased volumes to the Russia-controlled Trans-Balkan rather than to the Europe-supported PEOP.
The PEOP enjoys unambiguous support from Europe: EU Energy Commissioner Andris Piebalgs joined ministers from Italy, Croatia, Slovenia, Serbia and Romania at a signing ceremony in the Croatian capital Zagreb. He said the pipeline was needed to bypass congestion on the traditional Black Sea route.

The Caspian region is the world’s third wealthiest for energy resources, as estimated by US energy experts. Still the extraction and transportation of its hidden wealth remains an issue, largely due to the lack of oil and gas pipelines. Until recently the only export route went to the West through the Russia-controlled pipelinetransportation networks. The July 2006 commissioning of the Baku-Tbilisi-Ceyhan Pipeline (BTC) terminated the previous Russian monopoly over Caspian crude deliveries to the West and established an alternative southern export route to Western markets.
The BTC full-operational capacity is 50 mm tons of oil per year. Still its successful operation over the long-term largely depends upon the availability of Kazakh crude from the enormous Kashagan oil field. After that happens, it will become commercially operational in full. Nevertheless the start of commercial extraction at Kashagan has already been delayed several times and the exact date still remains tentative.

Kazakhstan joined the BTC shortly before its inauguration and began major development to secure the commercial viability of the pipeline, which many expect to transform the remote sea port of Ceyhan into the region’s largest oil terminal. The construction of a refinery in Ceyhan is expected to cost up to $ 4 bn, while the oil terminal will exceed by its capacity, Europe’s biggest terminal in Rotterdam: the terminal is expected to pump 1 mm barrels of crude oil into tankers everyday.
To assist in this high-profile transformation of Ceyhan, the Samsun-Ceyhan pipeline is planned to carry crude from the Black Sea to Mediterranean, again bypassing the congested Bosporus Straits. Besides supplying Ceyhan with extra volumes of crude to be refined locally, as well as dispatched further by tankers from around the world, the Samsun-Ceyhan project would offer relief to the traffic-heavy Bosporus Straits.

Nevertheless, those ambitious and brave plans received a sudden blow in mid-March, when after 14 years of effort, Russia finally managed to secure the signatures for Trans-Balkan pipeline to undermine the Samsun-Ceyhan pipeline’s commercial viability. Russia was strongly against the BTC construction back in the 90s, but later on stopped opposing it, though it never decided about joining the project. The recent launch of the BTC has terminated the previous Russian monopoly over oil exports to the West from the post-Soviet countries.
Nevertheless, Russia has not considered stepping aside or losing its dominant position in transportation of Caspian energy resources to the West. In parallel to the BTC-provided independent southern export link of supply to southern Europe, Russia has been working on the construction of oil and gas transportation routes from the Caspian to the West, to be controllable by Russia and bypassing the overloaded Bosporus Straits. By going around the Bosporus Straits, it also escapes dependence on Turkey’s maritime limitations for the straits.

The newly signed construction of the Constanta-Trieste pipeline aggravates the future for the Samsun-Ceyhan pipeline even more: besides the Trans-Balkan, the planned pipeline now has to face potential competition on the PEOP side as well. Russia is the mastermind and the principal stakeholder in the Trans-Balkan pipeline project. As such, Russia receives control over direct deliveriesof its crude oil from the Novorossiysk terminal on the Black Sea to the lucrative clients in the West. By this it secures its leading position in oil deliveries to the world markets.
The newly signed PEOP is aimed at reducing European energy dependence on crude exports from Russia and the Middle East. As such, it enjoys equivocal support from the European Commission, and according to Commissioner Piebalgs, the pipeline falls in line with the EU policy of diversification and energy supplies security. The PEOP declaration signing in Zagreb is largely taken for a start of the EU practical implementation of the PEOP project to take Kazakh and Azeri oil to the West.

The PEOP is of major importance for Europe in striving to diversify its energy sources. At the moment the EU countries receive almost half of their crude oil and natural gas deliveries from Russia, and their consumption is expected to reach 70 % by 2030. The EU countries have been traditional consumers of Russian oil and gas for a number of decades by now, and it hardly generated concern until December 2005, when Russia and Ukraine became caught in a row which almost provoked a crisis over Russian gas deliveries to EU consumers.
The situation started looking still more alarming in January 2007, when angered Belarus temporary stopped oil deliveries to the West through the Drujba pipeline. In pursuit of ensuring security for its energy supply, the EU is paying increasing attention to the Central Asian and Caucasian energy resources.

The Caspian’s enormous energy wealth
Still despite the Caspian countries’ continuous declarations about the enormous oil and gas wealth they possess, the market competition toughens with every year, largely due to the emergence of new and competing projects for oil and gas transportation and delivery. The matters of supply and delivery increasingly gain political connotations, due to the positions of their national governments. It would be enough to recall the ongoing conflict of interest between Russia and Georgia, which resulted in the overpriced Russian natural gas deliveries to impoverished and once-brotherly Georgia.
On its part, the present government of Kazakhstan is pursuing a policy of balanced and multilateral co-operation with both Russia and the West. Enjoying stable and fiduciary relations with Russia; Kazakhstan has nevertheless joined the pro-Western BTC, and does not see problems with using miscellaneous export transportation networks -- both Russian and others.

As for Azerbaijan, it does not envisage employing the Russian transportation networks for exporting its gas and oil. Two main oil pipelines start in the vicinity of Baku, being BTC and Supsa. The commissioning of the first natural gas exporting pipeline from the Shah Deniz off-shore gas field near Baku to Erzurum in Turkey is expected in the near future.
The EU countries consume around 700 mm tons of oil annually, and 70 % of it is imported. A quarter of its imported oil is provided by Russia, while the rest largely comes from Saudi Arabia, Libya, Iran and Algiers. Presently, crude extraction in Azerbaijan is at 26 mm tpy and Kazakhstan annually produces 63 mm tons of oil. The envisaged operation capacity of the PEOP is up to 90 mm tons, the Trans-Balkan will pump up to 50 mm tons, and the BTC has a capacity for 50 mm tpy.

Maria Beat is an international journalist and writer who specializes in CIS countries.

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