Autumn 1995 (3.3)
Getting Azerbaijan's Oil to the International Market
The Turkish Perspective
by Necdet Pamir
How will landlocked Azerbaijan get its crude oil to the international market? Through Russia? Through Georgia? Armenia? Iran? or Turkey? The decision will be one of the critical decisions that effects economics and politics, not only for Azerbaijan, but for the entire region in the coming decades.
Determining the route for what has been termed "major oil" which will come from the prolific reserves the Azeri-Chirag-Guneshli fields must be made in 1996 to be on track with the Consortium Contract which went into effect in December 1994. In the meantime, to expedite the production of "major oil", consideration is currently underway to explore a route/routes for export of what is termed, "early oil" which could begin flowing by next year from the deep water fields of Guneshli.
According to the contract, "early oil" regardless of how profitable, is an optional decision in terms of fulfilling the Consortium Contract. However, all parties are hopeful that successful transport can be found. A decision by AIOC and SOCAR (State Oil Company of Azerbaijan) is scheduled for mid-October 1995.
Here is a Turkish perspective on the issue.
Diversification is always the wisest energy policy. This is true regardless of whether you are the buyer or seller. Obviously, Azerbaijan's leadership is thoroughly exploring these various options and may well arrive at a decision to use more than one route. Given the geographic, economic, and political complexities, each option clearly offers advantages as well as disadvantages. However, if each country neighboring Azerbaijan could become involved, such an arrangement would, no doubt, help establish more stability in the region.
The Pan-Caspian region (including Iran and Kazakhstan) is expected to become a global oil province in the next decade. Some equate Azerbaijan's reserves alone to that found in the North Sea. Some compare it to Kuwait. In addition to the Azeri-Chirag-Guneshli (Deep Water) fields for which a contract has already been signed with 10 foreign oil companies, Azerbaijan has other fields of substantial reserves, both offshore and onshore, such as Shakh Deniz, Karabakh, Muradkhanli, Surakhany Sands, and various others. If Kazakhstan oil is combined with Azerbaijan's oil with the current projects, an estimated 100 million tons of additional oil per annum (one ton is seven barrels) needs to considered into the equation for finding transportation to the international market.
Turkey is proposing that one of those options explore the possibility of a pipeline through her territory. We are pushing hard for a pipeline to be constructed, which would entirely bypass the Bosphorus and divert oil to the port of Jeyhan (Turkish spelling, "Ceyhan"), on our southern coast of the Mediterranean.
We think this option is one of the most feasible plans because of the following:
1. Turkey Needs Oil Itself
Turkey needs to buy oil. We're in need and we'll buy. Statistics show that Turkey consumes 30 million tons of oil per year. Of that total, we produce only 15%. By the year 2010, an estimated import volume of 40 million tons will be required. If a pipeline were built connecting Azerbaijan to Turkey, a great percentage of that oil could be marketed directly to us. This would be beneficial to both countries. As next-door neighbors, this obviously means a cheaper supply for us. But it's advantageous to Azerbaijan, too, as we can pay in hard currency. Were Azerbaijan to sell their oil internally, they could not demand the international market prices.
Such an arrangement would enable us to diversify our oil sources and not be so dependent on a few countries. Additionally, as one of the eleven partners of the Consortium in which we have a 6.75% share, purchasing Azeri oil is an added incentive.
2. Financing the Pipeline
We've already said that we are willing to finance the project. However, we don't anticipate that this will be necessary. We believe the Consortium companies are likely to want to invest money both as owners and operators. As well, Chevron may want to get involved in order to get Kazakh oil out. Also, international finance organizations are likely to seek involvement in the investment and could well become equity holders. Financing the pipeline through Turkey doesn't seem to be a problem.
3. Lowest Transmission Fees
Proximity to Azerbaijan enables us to offer the lowest competitive transmission fees. The CPC (Caspian Pipeline Consortium) of Russia which is proposing to bring oil from Kazakhstan to a new loading facility near the Russian Port of Novorossiysk (No-vo-ros-SISK) on the Black Sea has suggested a transmission fee of $3.25 (1992 $US) per barrel. However, if Azerbaijan oil were added to the pipeline, the price is expected to increase. Since Novorossiysk is not an international market, crude oil tankers are likely to have to add a $1-1.50 per barrel tanker transportation fee before they reach Genoa or Rotterdam, the two main centers of the international oil market.
The Bosphorus route is further complicated because of formidable risks to the environment. Much of the "early oil," is likely to pass through the Black Sea, But the Bosphorus can not handle additional crude oil transportation. Routing the 40-50 million tons from the major oil production through the Bosphorus would be impossible.
Because of recent tanker collisions, and in accordance with the International Maritime Organization (IMO), Turkey has put into action a new regulation to control the safe passage under heavy trafficking through the Straits. However, the larger tankers capable of carrying 300 thousand DWT could be loaded at Jeyhan, as compared to the smaller tankers of 100-120 DWT that are permissible through the Straits.
Alternatively, were a southern route from Azerbaijan through Iran to the Persian Gulf be considered, the costs per barrel are still substantial. A feasibility study for Iran has indicated that a transmission fee of $3.67 per barrel would be necessary to cover expenses for oil transported from Kazakhstan.
Turkish Petroleum has studied the issue in detail and estimates that Turkey could offer a transmission fee reasonably below $3.25 (1994 $). This is not an official figure yet since such a decision must be announced by the Turkish government. But it has been established that Turkey can offer a transmission fee below $3.25 without losing money.
Turkey guarantees the operational safety within her own territory. Unfortunately, these days, no one is immune from terrorism. England has the IRA, the U.S. has just witnessed terrorism in Oklahoma which is far from any border. It's a useless discussion to build a case against Turkey because of the possibility of terrorism.
Turkey has promised to guarantee operational safety which means should anything happen-if the pipeline were to be damaged or the flow of oil interrupted, then Turkey would pay to restore the route. In fact, almost all of Turkey's domestic production is being realized in the Southeastern Anatolia and being safely transported.
5. Connecting to Existing Infrastructure
There is widespread misunderstanding that our proposed Caspian-Mediterranean pipeline would be utilizing the existing Iraq-Turkish pipeline through Midyat. Ever since the UN sanctions have been in place against Iraq, Turkey has been losing $250,000 annually. Despite this, we are doing what the UN and the international community expects of us. Our proposed pipeline would carry Kazakh (20 mta) (million tons per annum) and Azeri (25 mta) from our northern border and would connect to a pipeline that would need to be constructed and end in Jeyhan, not to any existing line.
6. Willing to Cooperate with All Countries
Turkey is not placing any stipulations on Azerbaijan as to which country oil must pass through before arriving to Turkey's territory. We're open to all possible alternatives-Georgia, Iran, or Armenia. (At present, the Iranian option is hindered by U.S. government policy against Iran).
We're also open to Armenia. A strip of Armenia, approximately 48 kilometers long, separates mainland Azerbaijan from the non-contiguous Autonomous Republic of Nakhchivan which borders Turkey. Many people have been surprised that we have not made exception to Armenia. But past differences should not hinder attempts to build the future.
If Azerbaijan opts for the pipeline to run through Armenia, which could be the most economic route, and could reclaim her invaded territory via this means, then such a route should be respected and considered viable. Although we have no preference whether the route passes through Armenia or Georgia before it reaches Turkey, we're open to the idea of a "Peace Pipeline". If such a route would facilitate and expedite peace, then it is would be beneficial to the entire region-not just Azerbaijan.
Mr. Necdet Pamir, Petroleum Engineer, is Group Manager for Transportation and Trading at TPAO (Turkish Petroleum Corporation). This division was recently established in parallel with increasing investment and activities in CIS countries and the need for transportation and trading of oil and gas both inside and outside of Turkey. Mr. Pamir is one of the main authors of the policy position stated above that has since been adopted by the Turkish government. He is the TPAO representative for the Oil Expert Subcommittee of the Consortium which has been formed to develop the Azeri, Chirag and Guneshli (deep water) fields of Azerbaijan.
From Azerbaijan International (3.3) Autumn 1995.
© Azerbaijan International 1995. All rights reserved.