Sharp & Sound points to an fascinating piece on Turkey by Stratfor, which indicates that the world has woken up to the instability and unreliability of Russia and is looking for, and finding, substitute energy conduits, including Turkey. Click through on the link to see a good regional map.

Turkey: An Emerging Global Energy Hub
August 15, 2006 14 37 GMT

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.