Role of Sea Freight in the Turkey-Europe Oil Trade

Abstract

            Turkey, a Middle East country in the middle of the Mediterranean and Central Asia, is a subject of envy in the region due to its favourable strategic geographical position.  It is through this position that Turkey was able to improve their economic status.  Despite being short of oil reserves compared to other Middle East countries, Turkey still managed to earn money with oil.  Turkey centres on oil trade and they are considered as the world’s major oil distributor from Middle East to Europe and other parts of Asia.  They were able to capitalise on the said industry not only because of their strategic geographical location but also because of the number of ports present in the country.

            The country makes use of pipelines for transporting oil despite the fact that pipeline transportation of oil is tremendously expensive.  However, Turkey disregards this reality just as long as they earn huge amount of profits and revenues; thus, they also ensure that pipelines would continue to be the chief means of transportation for oil.  On the other hand, Turkey also has its tank shipping industry – another major industry in Turkey.  The tank shipping industry is slowly rising up and Turkey have been capitalising on it as well.  This means is believed to be a more cost-friendly, practical and environment-friendly way of transporting goods in the international market.  Moreover, almost in the whole of Middle East, tanker shipping is still used the primary mode of transportation, thus, it is still a valued industry with a promise of improvement and enhancement.

This paper will centre on comparing pipelines to sea freights on the following aspects: the cost of oil transport in sea and in pipelines, needed investments and capital funding, delivery times and speed, customer demands, and regulatory requirements and maritime policy.  The said aspects will be evaluated in order to answer the question of is sea freight a better method in terms of international oil and gas exports of Turkey? In addition, is there foreseeable growth and stability for sea freight oil transport?  The study will try to prove its hypothesis that sea freight is an efficient alternative for pipelines in transporting oil from Turkey to Europe and the rest of Asia.

This study gathered all the information needed about Turkey’s oil trade, the oil markets, Europe and the Caspian oil, the US Pipeline Policy, the Caspian oil reserve, the freight and pipeline industry of Turkey, the significance of the BTC Oil Pipeline and how was oil exportation in Turkey before its existence, the costs of oil transit, Turkey’s relations with EU, their rivalry against Russia, and their relationship with Iran.  The provided information and data were gathered from different books, articles and other published sources and was analyse to arrive at a certain conclusion.

The review of related literature contains the facts about the shortage of Turkey’s oil reserve, thus, making them shift their focus on oil trading instead.  Turkey used the other countries’ (in the Caspian region) abundance in oil and their its own strategic location to their own advantage, therefore, Turkey serves as the bridge between Europe and the Middle East.  However, the role was not granted to Turkey that easily since Russia was also buying to be the world’s leading energy coordinator (this is one of the reason why they resolve to using pipelines – to avoid the Russians).

This paper also discussed Turkey’s sea freight and pipeline industry; it is here where Turkey’s problem about their tanker shipping shows – Turkey’s major straits are prone to accidents due to the volume of the ships passing through it, thus, Turkey resolved to pipeline transportation to prevent any damages and accidents.  Moreover, their relation with EU and with other countries was also due to their pipelines since they are assured of the safety of the oil’s transportation (EU also supports one of the major pipelines that is being constructed at present – the AGP).

Thus, as the conclusion, based through the information that was gathered, the pipeline is still the most effective means of transporting oil from Middle East to the western countries.  Pipelines, though expensive, carry along a number of advantages that enables Turkey to get back the money they have spent in constructing the pipelines that sea freight cannot provide.  Henceforth, the hypothesis stated at the beginning of the study was not proven since sea freights, though less expensive, are not the best choice to entrust oil transportation especially due to Turkey’s problem with their straits.

Introduction

Turkey has been a unique county with a strategic geographical position in the Middle East amid the Mediterranean and Central Asia. Its pivotal placement on the map allows it to be a military and transport hub. Given this location advantage, Turkey especially provides pipeline routes for oil from the Caspian basin bypassing Russian pipelines. Moreover, despite of its predominantly Islamic tradition, Turkey remains to adhere to democracy and is considered a secular state that is allied to the West and thus part of the free market system (Bates and Walker, 1998).

Given these, Turkey draws its significance in the European and global landscape from its strategic location on the globe. Being home to a number of ports, it is important to take a look at the country’s oil trade and shipping services to understand the crucial role Turkey’s transport and shipping industry play in its oil trade dealings with Europe.

Turkey’s oil trade and tanker shipping serves as one of the major sources of the country’s revenues; which stemmed out from its role as a distributor of oil coming from the Middle East and Russia (Business Monitor B, 2008).  Oil shipping from Turkey is very vital in the international oil market as the country serves as the energy bridge between Asia, Middle East and Europe (Business Monitor E, 2008).  The role of shipping in Turkey is very important most especially in bulk transactions.  The Turkish government through out the times has been privatizing the operational rights of seaports that have been perceived to be strengthening the shipping industry.  The act of privatizing sea ports has been viewed by the government as very vital in terms of further developing the logistics capability of Turkey.

            Catering to the resource rich Caspian states of Azerbaijan, Georgia, Iran, Turkmenistan, Kazakhstan and Russia, Turkey has been considered as main export route for oil and gas of Baku in Azerbaijan specifically through the Turkish port of Ceyhan. As such, the United States favored investments to be directed to that route attesting to the vital significance of the Turkish pipeline (Miles, 1999). Apart from this, the possibility of transit in countries other than the Caspian states, from which Turkey is included, is very high as they provide territorial space for the transport of oil. Aside from Turkey, Georgia, Armenia, Bulgaria, Greece and quite possibly China are among the states that are being explored to be oil routes across Europe and Asia (Feller, 1996).

            Nonetheless, the cost of transporting oil through pipelines has been very high. In a study conducted by the Baker Institute of Public Policy of Rice University, the planned Baku-Ceyhan pipeline could be pricier than earlier estimated. The research revealed that the transportation of oil using the Baku-Ceyhan pipeline is the most expensive means of delivering oil to the market with a price of more or less a dollar per barrel greater than other alternatives transport methods thought of. As for the actual construction of the pipeline, the study approximated that $3 billion to $4 billion. It has also been computed that the cost of transport via the Baku-Ceyhan pipeline to Italian ports is $2.80 given that the pipeline has a capacity of 800,000 barrels per day. Overall, pipelines as illustrated by this example proves to be more costly that sea freight transport of oil.

            It is clear that from the prospective pipeline, Turkey aspires for economic benefits from the construction of such together with the two other states covered in the construction of the pipeline: Azerbaijan and Georgia. Thus, the drive for the construction of pipelines as transport routes for oil is motivated by financial benefits despite the also large investment needed for the construction of such. It is in this regard that pipelines remain to be the predominant method of transporting oil to the West and Europe through Turkey.

            Meanwhile, shipping rates have been on a rising trend globally since 2002 and as such, freight services have known to be sources of revenues and profits for companies. As a matter of fact, Hariharan (2003) cited that freight rates on the Baltic Dry Index have surged to approximately 140% and alongside this is the rise on the average earnings for very large crude carriers (VLCC). Most notably, the growth could be seen significantly from the outbound trades from Asia, which Turkey caters to. Thus, Turkey is a country that leverages and capitalizes on the shipping industry.

            From this, the Turkish transport sector for energy includes eight transport modes of four transportation subsectors. This involves hard coal, lignite, oil and electricity for railways, oil for seaways and airways and oil and natural gas for highways (Ediger and Camdali, 2007). Given these, the focus of this study, shall be on the transport of oil and gas for seaways or that using sea freight services.

            The focus on waterways and sea freight is based on the fact that in Turkey, vast amounts of petroleum are transported by tankers and pipelines through waterways. Turkey’s marine environment is drawn is bordered by the Mediterranean Sea on the south, the Aegean Sea on the west, and the Black Sea on the north. The Turkish Straits System (TSS), which includes: the Istanbul Strait, Marmara Sea, and Canakkale Strait (Dardanelles) is the only waterway in the middle of the Mediterranean and Black Seas. As such, since the TSS joins two basins, maritime traffic is especially heavy and hence subject to a variety of threats such as accidents, pollution, oil spills, ship wastes, ballast and bilge water discharge (Dogan and Burak, 2007).

            According the CIA World Factbook (2008), Turkey’s waterways span a total of 1,200 kilometers. Meanwhile, the country’s merchant marines, which includes all ships engaged in the carriage of goods, or all commercial vessels shows that it has 565 ships which when broken down is as follows: 96 bulk carriers, 262 cargo, 58 chemical tankers, 1 combination of ore/oil, 30 containers, 7 liquefied gas, 4 passenger, 48 passenger/cargo, 1 refrigerated cargo, 25, roll on/roll off, 1 specialized tanker and of course 32 petroleum tankers. With this, Turkey also has the following ports and terminals operational for the carriage and transport of goods and oil: Aliaga, Diliskelesi, Izmir, Kocaeli (Izmit), Mersin Limani, and Nemrut Limani. Thus, Turkey’s freight industry is seen as booming especially for oil and gas transport services.

The shipping of bulk goods, most especially of oil and gas remains to be the most cost efficient, viable and eco-friendly way of transporting for international markets as stated by the International Maritime Organisation (IMO) (Business Monitor International Ltd F, 2008).  In addition to this, tanker shipping remains to be one of the most important modes of transportation not only in Turkey but also in the Middle East due to the nature of their major hydrocarbon exports.  Sea fright remains to be the one of the highest valued industry in the country hence promising a more improved infrastructure and systems.  The table below shows the summary of the competitive landscape projected in the shipping sector in Turkey.

Competitive Landscape: Maritime

            As of 2007, Port of Izmir in Turkey is now being managed by Hutchison Port Holdings (HPH) which will provide Turkey a more competitive advantage in terms of its trade in Asia. The joint venture of the country to Singapore’s PSA International and Akfen Holding is also expected to competitively manage the ports of Turkey hence further strengthening the opening of the country to Asian markets. These specific occurrences in the maritime sector most especially the focus on furthering the opportunity in the Asian market proves to be an advantage in improving the profit and revenues of the Turking Oil Tanker shipping industry.

However, it could be considered that Turkey does not have full sovereignty to its straits and waterways. Following the 1936 Montreux Convention, Turkish Straits was given the status of an international waterway, which permits passage of commercial traffic with restrictions on military vessels. Moreover, due to the high risk associated with the straits as evidenced by a number of accidents and environmental disasters that have occurred in the said waterways, Turkey has established a safety and regulatory regime for passage through the straights that was submitted to the International Maritime Organisation for Review (IMO).

            Differing from oil, Turkey has more concerns for the transport of natural gas. Turkey is considered to be the fastest growing gas market in Europe. Because of this, it has had difficulties in providing supply given the raging demand. As for obvious reasons, the transport of natural gas is typically through pipelines as delivering it through tankers is a more expensive and complicated process. Because of this, Turkey has adopted the pursuit policies for gas pipelines driven more by economic than political reasons. Turkey remains to be a promising target market for gas and suppliers are more eager to supply it through Turkey. As such, suppliers have been busy building pipelines to take advantage on this golden opportunity (Ruseckas, 2000).

            Given this, there seems to be two major routes for the transport of oil and gas; through pipelines and through tankers and ship freights. Both means present their own advantages and disadvantages. From this, it is significant to evaluate the potential of sea freight in terms of Turkish oil trade to Europe.

Problem Statement

            Albeit even if tanker shipping has been significantly growing in its own right, another aspect of transporting oil from one region to another has also been  viewed by the industry as cost-effective and efficient more than the aforementioned.  The use of pipelines appears to be very favorable for the industry as it is expected to grow by 10.1% every year within the 2007-2011 timeframe (Business Monitor E, 2008).  Turkey has also been perceived more recently as the pipeline hub for Europe in which the BTC and Nabucco projects are in the process of being completed in order to cater to the growing demand of oil supply from Turkey.  In effect of this, sea freight has been viewed by Business Monitor E (2008) to only come next to pipelines in terms of transportation of oil.

                      Given these areas, this study shall focus on answering this research question:

Is sea freight a better method in terms of international oil and gas exports of Turkey? Moreover, given the current preventive and safety-oriented maritime policy of Turkey, is there foreseeable growth and stability for sea freight oil transport?

Using             qualitative research methods of evaluating various literatures from which facts and information will be derived, this research shall seek to prove the hypothesis that: Sea freight method of transporting oil outside of Turkey is a major contributor to the economy and provides a beneficial alternative to pipelines.

Review of Related Literature

Sea Freight versus Pipeline

International Patterns of Oil Trade

            International oil trade is higher than anything else either in terms of volume or value. This section critically examines the two different modes of oil transportation in the world: pipeline and oil tankers, and analyzes both modes in terms of a number of related issues from geographical conditions to cost estimation

            If we look at the transportation of oil around the world, it is noted that pipeline and oil tankers both have their own significance globally. However, oil tankers have an edge over oil pipeline supply in that it is oil tankers that have made the international oil supply possible today. If pipelines are transcontinental, then oil tankers’ supply is intercontinental. However, it is more important to examine under which conditions and circumstances either of these two modes of oil transportation is preferable over the other. This is so because by this way a clear understanding about both the modes can be obtained for further discussion about the main topic of the dissertation. Although different oil trade routes have tankers of different size, usually one route has one size because of economic purposes and feasibility of voyage and port channels, etc. For instance, from the Middle East, Very Large Crude Carriers (VLCC) usually carry massive volumes of oil (over 2 million barrels each voyage). Now these VLCC’s outweigh the port constraints of the US because they are too large to enter US ports (except Louisiana port). They transport their oil to smaller vessels either by lightering or by transshipment. However, in the Caribbean and South America, ships are smaller and routinely enter US ports. On per barrel basis, both these conditions of ship sizes and routes can result in cheaper oil supply (eia.doe.gov, 2008). Although at a number of places war-caused pipelines (of bigger diameter) are said to be more economical than tankers, the oil industry today is skeptical about the use of such big oil pipelines spread anywhere in the world because of fears of impositions and sanctions and fees incurred by the governments that own such pipelines. The other issue that gives the oil industry the fears of rising pipeline cost as compared to oil tankers is that of the issue of terrorism or any other act of disturbing the peace for oil supply through pipelines. This makes one prominent observation in the present oil industry that new projects, especially those that have an inter-regional range, are finding much debate in scholarly circles and facing immediate opposition regarding the issues noted above. On the other hand, oil tanker supply is seen safer and without much worry about governmental forced fees and terrorist activities; thus it is estimated that in the times to come, the world is more likely to experience a growing competition in terms of increasing oil tanker fleets across the planet despite the fact that pipeline construction might also continue to make its way (time.com, 2009).

            On the other side, pipelines are not only critical for landlocked crude oil supply but they also complement oil tankers at some particular geographical locations. They primarily serve for mitigating bottleneck passes and also provide shortcuts. Russia-Europe is the only inter-regional oil pipeline trade in the world, as of now, that is solely through pipelines. The complex issues about pipelines construction and oil trade are spread around the world; however, the greatest of negative debates about pipeline trade is found in production from the Caspian Sea territory. Commercial and political pressures about pipelines are highest in this region. It is the intra-regional trade that pipeline oil trade comes into play as the primary option for oil trade. This is because between two nations, it is less likely that different issues (from politics to commerce) would exist. As such, pipelines play cheaper, as well as more stable, route than any alternatives like by road supply, via barges, or rails, etc. Between US and Canada, pipelines play a major oil transportation mode; mainland Europe is another example, although pipelines in this region cover shorter distances. It was during World War II that the development of pipelines of larger diameter was materialized. Vast pipeline networks in North America to Canada and vice versa move massive crude oil supply. In the US, “200,000 miles of pipelines account for about two-thirds of all the oil shipments, when adjusted for volume and distance”. California, West Texas, and the Rockies, oil producing areas of the US, depend on pipelines oil supply to refining places in the US. They also receive oil from ports through pipelines. Moreover, the United States of America makes great use of oil supply pipelines to transport oil products from one region to another, say, from Gulf Coast – the center of oil refining processes – to East Coast, the consuming region. However, today, as more and more environmental mandates make their way into the oil trade, and different batching requirements of oil storage and segregation have taken place, pipeline oil supply is also facing a number of challenges (eia.doe.gov, 2008).

            Taking further the example of the US, the largest consumer of oil in the world, it seems possible to suggest that shuttle tankers are a very convenient mode of oil transportation being considered at place of oil pipelines, reported in the oil transportation in deepwater like the Gulf of Mexico. This very much tells us of the importance shuttle tankers carry with them. The development of Floating Production, Storage and Offloading (FPSO), proscribed until recently, in the Gulf of Mexico is seen as promising. This option is seen as a vital step because of the rising costs of pipelines in proportion to the rising depth of waters; whereas, shuttle tankers are an option which is insensitive to the depth of water or (to a certain degree) to longer distances, as well. For the Lower Tertiary play, Wood Mackenzie undertook an in-depth analysis of oil transportation option (either pipeline of tankers). The central focus was of hypothetical discovery of oil in a remote place of the Lower Tertiary. This research relates interesting findings about both the modes of oil transportation. The report compared tariff to pipelines and costs of shuttle tankers. The findings demonstrate that shuttle tankers win over pipeline oil transportation when it comes to oil and “considering the full life of the field”; none the less, the benefit is intense in the starting half of the entire life of the field: “Once production declines, unit costs skyrocket in late life since the shuttle tanker is a dedicated vessel. These high latelife costs could be defrayed by sharing the shuttle tanker with another FPSO operation” (Oildom Inc., 2008).

            There are a number of other benefits that shuttle tankers hold over oil supply through pipelines “not least of which is the lower risk incurred with an FPSO and shuttle tanker operation in a frontier play” because both containers can be reorganized if there is any indication of developmental disappointment. Jones Act is another hindrance to FPSO entry. This acts, brought into effect in the depression days, holds that all ships, along with building and sailing staff must be from the US. This means that any shuttle tankers being built have to be built in the three shipyards that remain in the US. Timescale and cost implications for tankers lie in this Act, as such. All is needed then is the development goal of oil tankers’ fleet that is seen as a vital source for future growth and frugality with regard to oil transportation via tankers and not pipelines. Another reason for opting for shuttle tankers is the uncertainly that surrounds the issue of reservoirs in Lower Tertiary finding of oil. If in any case the performance of reservoirs is not up to the mark, simply the oil tankers can be used somewhere else keeping the basic costs of operations to a minimum: whereas, once the massive costs put to build pipeline network, it would be complete loss in this case (Oildom Inc., 2008).

            Wood Mackenzie also took an analysis of hypothetical finding of oil in the distant region of Walker Ridge area. The hypothetical finding of oil has a size of 200 million barrels; it was also at least something 60 miles away from the deepwater base as well as it was 170 miles away from coast. The analysis took into consideration five different alternatives for pipelines that would be used to transport oil were analyzed in terms of payable fees joined with available infrastructure. What was clearly observed in the analysis was the fact that the shuttle tankers carried a distinct advantage over pipelines over the entire span of field life. Although this distinct advantage does change by the passage of time, shuttle tankers seem to be vessels with dedicated status, unlike oil pipelines. Major reason here was also that the shuttle tanker has an advantage of being used at another place when it comes to some emergency or issues in terms of fees and other expenses. However, pipelines do not carry such advantage. When the comparison of fee rate was done for both pipeline and shuttle tanker oil transportation, it was analyzed that the shuttle tankers “maintains its annual cost advantage over the pipeline until year 11 of the field’s life”. This is so because at this stage there is per unit cost increase due to diminishing oil production in the field. However, these per unit cost estimates were reported to be highly dependent on the overall production profile of the field. This analysis then shows that late-life transportation could be uneconomic and would have to be abandoned early in the operation face to avoid incurring costs and expenses. Unlike the hypothetical status of oil field discovery, the costs estimates in the initial phase of production are higher and are deemed to carry fruitful gains with regard to oil transportation via shuttle tankers; the chart below shows statistical situation of both these modes (Oildom Inc., 2008).

            In ultra-deep waters, it was clearly pointed out in the report, shuttle oil tankers bear a number of other advantages, in terms of operation, over pipeline oil supply. The first issue put forth was the impact that hurricane have on oil supply. A shuttle tanker is clearly at an edge in times of a hurricane and can move out of it; whereas, “Pipeline and facility damage during the 2005 hurricane season led to production shutdowns, expenditures running into the hundreds of millions of dollars, and production that was lost due to destruction of platforms”. This way, today pipeline construction is seen quite suspicious with regard to occurring hurricane of any other calamity that would cause massive if damage is done. The other area of critical attention was that of maintenance and repair. The report related that cost of pipeline repair especially in the ultra-deep water would mount to massive funds. One reason for this is the limited availability of the vessels duly equipped with necessary maintenance and report capability. On the other hand, repair and or maintenance of shuttle tankers were reportedly straightforward “requiring simply dock space”. There are a number of complexities when it comes to oil or gas supply through pipelines because of changing temperatures, increasing distance variations, and water behavior. All these would mean the operators have to use a number of different additional technologies so that stable flow of oil supply is maintained. It might become highly cumbersome in certain situations where even simple oil supply might become a nightmare. Conversely, a shuttle tanker is simply without these issues of temperatures and increasing distance complexities with regard to oil supply hence having a clear edge over pipelines supply. Another critical area was that of the flexibility of destination which was analyzed in both these modes of oil transportation. A shuttle tanker, theoretically, is capable of making direct oil deliveries to a number of destinations “enabling the operator to take advantage of any price differentials or arbitrage opportunities”. However, at this place the report does point out the well developed pipeline networks in the Gulf of Mexico which might have an edge over shuttle tankers; and the other dark portion is reported to be lack of port where a shuttle tanker can directly discharge oil. These conditions anywhere in the world might prove pipeline supply fruitful if issues of infrastructure, nature’s suitability, and other issues do not prevail to a great extent. Another point mentioned especially in the connection of Gulf Coast was that the pipeline oil delivery gives a price precedence of crude because it is co-mingled in a well known blend. However, a shuttle tanker might not have this advantage and its delivery might suffer for right price. Another major disadvantage related to pipeline construction, particularly in the global context, was that of the limitation that pipeline construction brought with it; after its construction at a certain location, it would not be possible to bring in further projects of this kind which either fall near it or bypass it. If this gives a competitive edge to the operator, it does, on the other hand, causes limitations for any developmental projects that would require physical activities around the pipeline site. The matter of millions of dollars required to build such a pipeline is another critical area that received great attention with two major issues: the first is that at once pipeline construction needs to be backed up with millions of dollars; the other was that once build a pipeline would just lay there stationary. In contrast, a shuttle tanker fleet can be built over a long period of time, but in unfavorable conditions, funds might be halted to keep any further losses or fund drainage. The report ends with open remark that shuttle tanker is a very vital alternative to pipelines anywhere in the world (Oildom Inc., 2008).

            Looking at global statistics of oil demand and tankers building with relation to this demand tells us that a report prepared by Opec shows that the future growth of oil demand globally would increase at a slow rate of 1.7% annually. Attached to this demand the demand for oil tankers building would be slow but it would increase at the rate of 3% in 2007 and 2008; however, the recent activities on part of ship owners shows that they have continued to order for new tankers and this trend is likely to continue well into 2010. Crude tanker capacity (as a fleet) is likely to increase by 19.4 MMdwt and would continue to grow in the future which tells of the demand and efficiency of oil tankers versus pipeline projects. Many of the latter receive server debate over a number of issues from geographical constraints to political rivalry. Estimates show that the deliveries made via crude oil tankers in the year 2009 is “now approximately 50% greater than scheduled deliveries for either 2007 or 2008”. However, according to a study conducted by Jefferies equity research states that in the present scenario it is possible that the future market would see a saturation of oil tankers because of two obvious reasons. One is the slow demand of oil worldwide by large oil consuming countries; the other reason is that the tankers would not find enough space to move into the market due to this slow demand and would experience a sudden decline in the productivity and profitability. As such the owners of tankers worldwide must keep in mind this aspect and play careful moves keeping in mind the future trends of the oil market (Remo-Listana, 2007).

            Currently oil supply via pipelines and oil tankers also suggest what is the preferred mode of oil transportation. At present, the world pipelines are estimated to supply 38% of crude oil; whereas, oil tankers take 62% of crude oil supply to their credit. The obvious reason is the ease of movement of oil tankers not only to distant regions but also in diverse climates and waters. There are a number of positive points with pipeline contraction but this remains mainly the issue of one country or countries with close ties. This is the reason why pipeline projects that are aimed to spread across regions meet severe opposition from any of the parties involved. It is expected that if a pipeline is build across wider regions, the future is not certain about its continuous operations; these reasons still make the use of oil tankers (Shell oil, 2007).

Turkey’s Oil Trade

Turkey serves as one of the major drop-offs of oil in the international market; albeit the country itself has a relatively low supply of oil despite various exploration attempts and studies within the aforementioned.  It is expected that Turkey will be providing 5.99% of Middle Easterns and Africans’ supply of oil until 2012; albeit the country will fail to provide a significant contribution to the overall international oil supply due to its uncompetitive oil and gas source (Business Monitor International Ltd, 2008).  The current study conducted by Business Monitor International Ltd (BMI)  in 2008, revealed that the country ranks very low (i.e. 13th place) in terms of Upstream Business Environment rating due owing to the country’s poor oil and gas resource base.  According to BMI, this occurrence could be primarily tagged as the result of the state’s lower level of ownership plus the emerging strength of privatization and licensing practices that further encourages risk factors in the industry.

            One of the major weaknesses of Turkey in relation to its overall business environment is its lack of meaningful oil and gas resources.  The oil reserves of the country is estimated to be around 30mm bl and is expected more to dwindle to 215mm bbl as time passes.  The gas reserves of the country also face the same scenario as the current 8.5bcm.  In addition to this, Turkey’s dependency on imported oil and gas for its domestic supplies are also weakening hence a possible threat (Business Monitor International Ltd, 2008).  The table below presents the country’s oil production, consumption and imports since 2000 and its projected disposition until 2012.

Figure 1: Turkish Oil Production, Consumption and Imports

Source: Business Monitor International Ltd A (2008)

            The figure above shows that oil production of Turkey goes down as years passes while its oil consumption continues to increase.  Corollary with this is its increasing oil imports as well.  On the other hand, the gas sector also faces the same fate, as presented by the figure below.

Source: Business Monitor International Ltd A (2008)

            This figure tells that Turkey is experiencing and will further experience increased demands for gas, hence also increasing its imports.  Ninety percent of the oil supplies of the country are imported from Middle East and Russia.  Its port, Ceyhan is one of the major outlets of Iraq’s oil exports; but due to the emerging terrorist activities in the Middle East, such also has been frequently disrupted.  In terms of the country’s primary energy demand (PED), the country is reliant to its oil, gas and coal reserves.  The country has neither nuclear capability nor the hydro-electric power that could somehow provide them a competitive advantage.  As of 2007, the country’s share in the energy market is estimated to be 6.87% (Business Monitor International Ltd B, 2008).

            Albeit, even if Turkey has been perceived to have a poor supply of oil and gas, the country serving as a middleman for oil exports in the Middle East provides a competitive advantage. For instance, Turkey’s relationship with Iran and the use of pipelines to bring gas to the country and eventually provide its supply to Europe is strategically important as its role as an “energy bridge” within Asia, Middle East and Europe (Business Monitor International Ltd E, 2008).  The main exports of Turkey of oil and gas that is enhanced through its role as a middleman in the international energy market in the Middle East, is further made competitive by its transport mechanism through tanker shipping.

Oil Markets, Europe and Caspian Oil

The Caspian Sea region has assumed the status of being an oil industry hotspot due to its abundant resources particularly that of oil and natural gas. Approximations put the region to second in terms of oil reserves (next to the Persian Gulf), which amount to around 100 billion barrels of oil. Turkey, being in a strategic location near such a teeming energy reservoir, holds the position of being the transport point of the said resources to Europe, Asia and the rest of the world.

Moreover, the Caspian region possesses massive amounts of mineral resources specifically natural gas. Hence, the region is said to be a significant supplier of energy resources to Asia and Europe. Looking into the particularities, Azerbaijan and Kazakhstan harbor majority of the oil reserves. Because of its geographical proximity and orientation to the West, Azerbaijan is more likely to export oil to the Western European market. Meanwhile, Kazakhstan would probably choose to cater to the Eastern market particularly that of Asia, where competition is relatively lesser. On the other hand, Turkmenistan and Kazakhstan keep majority of gas reserves in the region with estimates running to more than 50%. (Yergin and Gustafson, 1997; Feller, 1996).

Thus, for purposes of this study, the energy-rich region of the Caspian Sea is the driving force that highlights Turkey’s role as bridge between Europe and Asia in terms of the transit and distribution of these resources. Europe is believed to be dependent on oil and Asia is said to be the one abundant with such resource (Bird, 1997).

Given that the source has been identified to be primarily the Caspian region and the destinations are Europe, Asia and practically the rest of the world, the next key aspect that needs to be focused on is the transport for such resources. As caution, the current geopolitical unrest in Iran, Afghanistan and of course Iraq has led to the utilization of the following routes which are currently employed:

From the pipeline to the Georgian Black Sea Port of Supsa and the existing Soviet pipelines to the Russian Black Sea port of Novorossiysk, shipping tankers travel through the Turkish straits to the Mediterranean to the world markets.
Railroad shipment is also used for the transport of oil from Azerbaijan and Kazakhstan.

Source: Sinnott, P. 1997. Central Asia’s Geographic Moment, Central Asia Monitor.

The said routes were mentioned in the study of Dyoulgerov (2001) and have since evolved to actual new projects. Whatever routes proposed then are now becoming a reality. Among the routes suggested in the study were:

The extension of the existing Soviet network to establish a connection between the Tengiz oil field in Kazakhstan to Novorossiyk
Construction of new pipeline from Georgia to Turkey and to the Turkish port of Ceyhan with the aim of bypassing the straits.

Thus, the propositions for the construction and extension of routes to include Turkey present a twofold benefit: (1) The lessening of load on the Straits, which was estimated to not handle the additional forecasted volume of 500 round trip tankers per year. (Bird, 1997).   (2) Increased in domestic consumption without bearing the higher costs and greater risks of having oil traverse the Bosphorus waterways (Gulek, 1997).

It is important to note that the choice of route and the subsequent investments in projects that will be poured on such is heavily dependent on political events. The current issues that may alter such outcomes are if there will be lifting of sanctions to Iraq Iran or the softening attitude of the US to Iran, there could be an increase in exports from these nations. Similarly, if Russia fails to address its internal conflicts such as those of Chechnya, Transcaucasia, companies undertaking projects in the Caspian basin might be swayed otherwise. (Feller, 1996).

At the forefront, there exists an undoubted rivalry between Turkey and Russia in terms of gaining access and control to the rich resources of the Caspian Region. Both countries realize the importance of the region in terms of solidifying their own positions as energy power to the world. As such, the two countries also maximize their influence in securing deals and launching campaigns that would favor their bid for the said resources. Diplomacy has been utilized by Turkey and Russia to achieve political and economic gains.

Dyoulgerov (2001) explored the escalating rivalry of Russia and Turkey in terms of securing control on the Caspian oil region. There have been a number of assassination attempts that were attributed to Russian oil interests including that directed to Georgian President Eduard Sheverdnadze in the 1990s since Georgia was viewed as an impediment in securing Kazakh oil access. Russia also employed strict bargaining sanctions such as cutting off Turmenistan’s gas pipeline access. Russia has also utilized black propaganda in its battle against Turkey as it linked Ankara to atrocities in Chechnya.

Meanwhile, Turkey has managed to attain several diplomatic milestones. Among them include the signing of 11 major oil players in the Caspian states on who will take involvement in the Baku-Ceyhan pipeline construction. Moreover, the 1998 Ankara Declaration achieved re-affirmation from the heads of states of Azerbaijan, Kazakhstan, Georgia, Turkey and Uzbekistan that the flow of oil will go to the Baku-Ceyhan pipeline.

Looking at the dynamics of Russian-Turkey rivalry of oil sources, it could be observed that Turkey has been assuming its position and it has been assuming it strongly. It could be argued that Moscow is threatened by Turkey due to its more strategic positioning. Moreover, Turkey provides a more friendly energy hub than Russia as the latter is perceived to have been monopolizing energy for its own geopolitical and economic interests. The US backing of Turkey has placed the country into a more advantageous position. Turkey’s fate as the next energy coordinator and hub seems to be already sealed as the US has been extending support for Turkey’s claim for control of the Caspian region.

The US stance towards Turkey and Russia is reflected in its “Pipeline Policy,” that started from the Clinton administration. The US wields strong influence in the Caspian region and its policy is centered on preventing the flow of resources to Iran and limiting Russia’s monopoly. Washington has been accomplishing this through supporting Turkey’s bid for control of energy resources in the region. The US has been very evident in getting their preference for Turkey known which in turn benefits them by appeasing Turkish sentiments from the Cold War. (Dyoulgerov, 2001).

The pipeline dispute has to its very core, the Straits as the only working route for Caspian oil to the West. Whether oil is loaded through the pipelines or not the Straits route through tanker shipping provide a traditional transport mechanism for oil to the West.

      However, in 1994, Turkey has implemented a policy to reduce traffic to its already congested straits. The ’94 Regulations cited that the reduction in the traffic and passage of oil Tankers is aimed at the protection of the Turkish people in Istanbul against environmental and navigational dangers present in the waterways (Newman, 1994).

US Pipeline Policy toward the Caspian Region

Conflicting ideas surround the pipeline policy of the U.S. administration toward the Caspian region. Following the collapse of the Soviet Union in 1991, the U.S. pipeline policy was revised to ensure that the Russians would take greater control of the Caspian region (Turkey: The key to Caspian Oil and Gas, 2001). Geared towards the development of Russia, the U.S. pipeline policy did not support those pipelines that would bypass or offset Russia. However, the control of pipelines in the Caspian region would not be entrusted to the Russians for a long time. It was in 1995 when the U.S. administration started to support and promotes the idea of “multiple pipelines” in the Caspian region. By allowing foreign pipelines to be establish in the region, the U.S. administration would contradict its former pipeline policy, thus allowing entry of competitors that would lessen the control of Russia in the Region.

On the other hand, the “multiple pipelines” approach was equivalent with the pipeline proposals of Turkey. The proposals would consist of oil pipelines and gas pipelines. The oil pipelines would start from Baku-Ceyhan oil pipeline and would be directed towards the Azeri and Kazakh crude pipeline.  The gas pipelines on the other hand would start from TransCaspian gas pipeline and will be directed towards Turkmen and Azeri gas and finally to Turkey. Although the proposals would be parallel with the “multiple pipelines” approach of the U.S., the only development that took place was speeches and signature ceremonies, thus implying the idea that the U.S. pipeline policy still remain in favour of Russia.

The establishment of the Baku-Ceyhan pipeline in the Caspian region would endanger other commercial groups who seek to control the flow of Caspian energy (Turkey: The key to Caspian Oil and Gas, 2001). In order to prevent the establishment of Baku-Ceyhan, commercial figures like Carnegie and Cato advise the U.S. administration to improve its relationship with Russia when it comes to the Caspian region. If the U.S. pipeline policy would be in favour of Russia again, it could be possible that the control of Central Asia, Caspian region and Caucasus area would be in the hands of Russian federation (Turkey: The key to Caspian Oil and Gas, 2001). Such scenario would have a drastic effect to the famous East-West corridor strategy.

Caspian Sea Oil Reserve

Proven recoverable oil reserve in the Caspian region amounted to 18.4-34.9 billion barrels that represents the 1.8-3.4 percent of world oil reserves (Turkey: The key to Caspian Oil and Gas, 2001). But the probable Caspian reserves are estimated to be 253-270 million barrels which amount to 24-26 percent of the total world oil reserve. There are still 26 undrilled probable oil-bearing sites present in the Caspian region. Oil reserves are still considered as untapped resources and only oil exploration would make these resources useful. Unfortunately, exploration and at the same time production of this resources would take huge amount of investment and time.

Another possible reason why the region oil and gas reserves remain untapped is because of the region’s geographical position. The landlocked region does not allow access to maritime drilling, world-scale industries, construction equipments and other oil exploration equipments (Turkey: The key to Caspian Oil and Gas, 2001). Therefore development of the oil and gas reserve of the region would take more time than other oil and gas reserves found in the world..

Source: Source: Turkey: The Key to Caspian Oil and Gas

Another problem that comes with the geographic structure of the Caspian region is the lack of alternative export route. In order to lessen the control of Russia in the region and the cost of oil products being transported, an alternative route that would not cross Russia is needed. There are two ways, through Iran or Turkey but the most rational one would be Turkey since Iran is already exporting its own oil. The Baku-Tbilisi-Ceyhan oil pipeline is consider as the best logical solution in the export route problem. The pipeline would give direct access to the oils of the Caspian region thus minimizing the cost of transporting of oil.

Turkish Freight Industry

            The discovery and subsequent development of the Caspian Sea region as oil and gas sources led to the transformation of Turkey to an energy hub providing significant routes for the transport of oil and gas to the world market. The transport of oil to the world markets is primarily accomplished through oil tanker shipments which pass through the Turkish Straits System. This Straits system contains the two constricted straits of Istanbul and Dardanelles, which is linked by the Sea of Marmara. These two straits bear the bulk of traffic and are projected to continue on with this within the next years. (Ors & Yilmaz, 2004).

            To understand the complex business of shipping oil to the world market, a look at the Turkish Strait systems will provide insight and rationale about the existing trade and shipment in Turkey’s waterways.

            Turkey prides itself of two straits: the Strait of Istanbul (Bosporus) and the Strait of Canakkale (Dardanelles), which converge connect through the Sea of Marmara the Black Sea, Aegean Sea in the northeaster part of the Mediterranean. A total of 160 nautical miles (NM) is the length of the passageway available for navigation. This stretches from Cape Rumilli at the opening of the Strait of Istanbul from the Black Sea to Cape Hellea and the end of the Strait of Canakkale towards the Aegean Sea.

            Both straits present challenges for navigation. The characteristics of the straits are unique to Turkey. In fact, the official Turkish description of the straits to the International Maritime Organization (IMO) is as follows: the straits possess “unique physical, geographical, hydrological, meteorological, and oceanographic characteristics and complicated navigational conditions.” (Dyoulgerov, 2001).

            Comparing the two straits, the Strait of Istanbul is probably more perilous. Its narrowness is apparent with a length of around 16.7 nautical miles and a width of 0.8 nautical miles. Its most narrow point is near Istanbul at about a meager 700 meters. The presence of curvatures and sharp turns in the Strait provides risks for ships navigating through them. Moreover, mighty currents and counter currents are natural in the area presenting more difficulty to passersby. On the other hand, the Strait of Canakkale is approximately 38 nautical miles long with a mean width of one nautical mile. Its narrowest point, set at 0.7 nautical miles contains a sharp turn greater than 90 degrees.

            Further complications of the straits include weather disturbances specifically, strong winds coming from the Black Sea entrance, rain and snow during winter which hampers visibility. Apart from this, traffic in the forms of boats and ferries transporting around half a million people from the Asian to European parts of Istanbul 2000 times a day take up the space for navigation.

            The busyness of the straits is undoubted and it is reported that around 50,000 foreign and Turkish vessels passed through the Strait of Istanbul while more than 36,000 navigated through the Canakkale Strait in 1996. Due to this large volume of vessels transiting through the straits, maritime accidents are inevitable. Moreover, among the number of ships traversing the straits are oil and chemical carriers, which carry hazardous chemicals and thus putting marine and human safety at risk.

Realizing these concerns, Turkey has instituted several maritime policies to prevent and combat this known reality. The heaviest push to establishing such policies came after the great 1994 collision among two Greek Cypriot vessels,  an empty cargo ship and the tanker “Nassia,” which contains around 19 million gallons of crude oil. The tanker drifted burning for almost a week and several crew members died.  Following this, the government of Turkey publicized the “Maritime Traffic Regulations for the Turkish Straits and the Marmara Region” in January 1994. These regulations are spread in seven parts with 58 Articles providing for technical and administrative requirements towards a more restrictive management of traffic in the Straits. Apart from the general provisions for both straits, the regulations also contain parts for navigating through each of the straits.

Furthermore, Turkey’s response to this predicament is through the institution of new controls for oil tankers. A traffic scheme has already been in effect since October 2002. The scheme targets bigger ships, which could only pass through the 18-mile route during the day while suspending traffic for the other direction. Apart from this, the Turkish government has put up a new network of radars and surveillance cameras not to monitor traffic but to ensure that the regulations set are being implemented. (Slaney, 2004).

In generally, Turkey’s solution to the straits congestion problem is the promotion and exploration of pipeline routes particularly that of BTC. These pipelines enable the bypassing of the straits. However, the main problem with pipelines is that their current capacities may not be enough to solve the problem given the projected growth in crude oil production and output.

Meanwhile, Russia deems the construction of the BTC pipeline as an economic nightmare. As such, Moscow has led to the belief that the Turkish imposed restrictions on the oil tanker traffic passing through its Straits are but justifications for the construction of the said pipeline.

The US-Turkey attempts to create the formal BTC agreement missed a very important event. Oil producers from the Caspian Sea region reportedly utilized the oil tankers through the Black Sea via the Bosporus strait to deliver oil to European markets. Turkish figures revealed that in the year 1996, 60.1 million tons of oil was transported through the straits. In 2003, the numbers reached 134 million. It is forecasted that oil shipments were to increase further by 50% prior to 2010 (Slaney, 2004).

The straits’ geo-political location accounts for the apparent heavy traffic in them. The network of waterways from the former territory of the Soviet Union which connects the Black and the Baltic Seas together with the entrance of the canal linking the rivers Danube and Main allow the straits to accommodate the natural flow of commodity to the entire European continent. Moreover, the straits are the only sea route to and from the European markets of Bulgaria, Georgia, Romania, Russia, and Ukraine. Stretching this further includes the Caspian Sea and the markets of Central Asia such as Armenia, Azerbaijan, Kazakhstan, Uzbekistan and Turkmenistan.

Moreover, the most significant factor in the regime of navigation in the straits at the moment is related to the ever increasing growth of oil shipments. The surge in Black Sea-bound shipments resulted to the increased traffic following the desire of the riparian states to source oil from alternative sources other than Russia. In relation to this, there is also a doubling in the westbound flow of oil from Russia and Georgia (Bosphorus Straits Regulation and Central Asia Oil).

Turkish Pipeline Industry

Looking into the outlook of the importance of Turkey as the middleman for the European and international energy markets, OxResearch (2007) confirms the limited hydrocarbon reserves of Turkey and contends that overall, the country is on its way to becoming an ‘energy corridor’ due to the number of oil and natural gas pipelines being constructed in its territory. The most important pipeline of which is the Baku-Tbilisi-Ceyhan (BTC) pipeline which is considered to be the world’s second longest transporting approximately 80 billion barrels of oil from Azerbaijan to beyond. Its construction was pioneered and ran by the British Petroleum headed consortium in 2002-2006, in which Botas, Turkey’s state pipeline oil and gas company, is the representative of the country.

The pipeline was conceptualized around 14 years ago motivated by the United States’ geopolitical interests. The US preferred oil exports coming from the Caspian Sea to not pass through Russia or Iran to prevent monopoly of the former and the latter from gaining leverage. Included in the objectives of the US is for Turkey to be absorbed more in the North Atlantic Treaty Organization (NATO). For the Turkish end, the vision of the United States was favorable in the sense that it will provide an alternative means of oil transport other than through tankers passing through the already congested Bosporus Strait. The Bosporus strait is the only available route between the Black Sea and the Mediterranean. According to Turkish Prime Minister Tayyip Erdoga, the oil transports through the BTC pipeline, which when looked into its 1 million barrels/day capacity would replace the otherwise 400 vessels transiting through the straits annually. (Energy Compass, 2006).

Moreover, according to a recent report by BBC Monitoring European (2008), Turkey has earned around 2.5 billion US dollars following the transit of oil through the BTC pipeline. This revenue comes from a calculated 385,100,000 barrels of oil shipped from the Caspian region to the world market via the pipeline from the period June 2, 2006 to June 4, 2008. This fact reflects the economic benefits derived from being an oil transport hub utilizing established pipelines. Thus, the construction of the said pipelines spelled economic success to Turkey and from this, it could be assumed that Turkey will continue to utilize and leverage on pipelines. As such the possibilities of expansion deals for pipelines seem to be at the moment as a reachable and imminent reality.

Apart from the BTC pipeline, a number of other projects are underway solidifying Turkey’s imminent assumption as energy hub and coordinator. Among this is the pipeline from the Black Sea port of Samsun to the Ceyhan port, which is set to transport at a capacity of 1.4 billion b/d.  This proposal, initiated by Italy’s ENI and the Turkish Calik,         is also one of the bypass routes that would hopefully unburden tankers passing through straits to carry oil and gas. (OxResearch, 2007 and Energy Compass, 2006).

Furthermore, the Turkish port of Ceyhan also serves as collection and transit point for Iraqi oil specifically from its northern Kirkuk fields. There is an existing pipeline which stretches to the Yumurtalik terminal with an approximated capacity of 800,000 b/d. However, due to the threat of terrorism and the rise of insurgencies in the area, the pipeline has been non-operational for the last three years.

            Back in 2005, Iraq reportedly resumed transmitting oil through the northern pipeline. The pipeline terminates in Ceyhan. As such, oil tankers docked in the said seaport were estimated to carry around 900,000 barrels following the resumption of oil transport through the pipeline. (BBC Monitoring Middle East, 2005).

Despite this, it could be observed that the Turkish pipeline industry stretches across Asia, the Middle East and Europe. In terms of transporting oil, Turkey has become a strategic hotspot for oil through these pipelines. As such Turkey remains to have a crucial role in this respect.

Looking at Figure 5, in terms of gas pipelines, the South Caucasus pipeline was constructed following the establishment of the BTC pipeline as it opened areas for the transit of gas. Also known as the Baku-Tbilisi-Erzurum pipeline, it has become operational in 2007. As for the agreements it is bound to deliver 3.3 billion cubic metres (bcm) annually to Turkey which is set to increase to 6.6 bcm in 2009.

Apart from these constructions, the Nabucco pipeline project is deemed as the most massive with it supplying Caspian and Middle Eastern gas through Turkey at a capacity of 32 bcm annually. The countries involved in such a large scale project include Bulgaria, Romania, Hungary and ending in Austria. Austria’s OMV leads the investment. The rationale behind such an ambitious project is that Europe is seeing itself as increasing its demand for energy specifically gas. The dilemma comes in as most of the countries with rather large production and reserves are situated in the east of Turkey. Hence, Turkey seems to be the only logical course for transporting energy.

The $5.8 billion Nabucco project aims to open a new corridor to Europe for the transit of Caspian and Middle Eastern gas. The said pipeline is planned to be 3,400 kilometers that would transport Caspian gas to Austria through Turkey. Thus, the approval of prominent European ministers on the proposed project signifies the European interest to diversify its gas suppliers. This renewed interest came after Russia cut off supplies to Ukraine adversely affecting European supplies. As such, it is the demand of the European markets to increase its gas imports from the Caspian Region to 10-15%. Meanwhile, Russia’s Gazprom is currently supply 26% of the European needs. (NEFTE Compass, 2006).

As for the sources of gas to Turkey, Egypt and Syria are in line with the proposed extension of the Egypt-Jordan-Lebanon-Syria pipeline to Turkey. Should this happen, an estimated 8 bcm of gas could be supplied to Turkey from Egypt and possibly Syria. These supplies are then for re-exports.

Other projects are seen in relation to Turkish exports of gas to other parts of Europe. The Turkish-Greece interconnector pipeline, between Bursa in Western Turkey and Komotini, is set to bring Greece and Italy roughly 11 bcm of Gas annually following the planned extension of the pipeline to Italy within the 2008-2011 time frame.

In terms of the gas market, Turkey has expressed its role as a major player in European gas supply. Following doubts manifested by Azerbaijan on Turkey as not willing to act as a transit country for gas of other countries, a trilateral agreement was signed by Italy, Greece and Turkey in 2007 to dispel the said doubts. The agreement supported the transport of gas from the Caspian and Middle East Regions via a pipeline to Italy crossing Turkey and Greece. Implicitly, the consensus signifies Turkey’s permission to play itself as a transit hub for oil. Moreover, this debunks the perceived notions that Turkey is unwilling to play such role but instead insists on buying gas to be transported for resale.  Being such, Turkey assumes the status of a transit country with transactions based on tariffs. (NEFTE Compass, 2007).

Moreover, the decision of Turkey to re-assert itself as an energy player came after a deal has been made by Russian gas giant Gazprom with Eni South Stream that would skip turkey and go directly to Bulgaria. Aside from this, the Russian decision to focus instead on South Stream rather than the expansion of the Blue Stream pipeline to Turkey could be attributable to Russia’s impression that Turkey wanted to reap profits from the resale of gas passing through its territory.

Europe has expressed sentiments of deepening its energy cooperation with Turkey and the Mashreq countries of Egypt, Jordan, Lebanon and Syria plus Iraq in a meeting represented by European Commissioner for External Relations and European Neighborhood Policy Benita Ferrero-Waldner and European Commission for Energy Andris Pielbags in May 2008. The necessity for establishing and maintaining a comprehensive and coherent energy policy in Europe is driven by rising oil and gas prices. This is to ensure energy security within the region. One implication that could be drawn from here is the increasing dependency EU has on importing energy resources. As such, this signifies the importance of Turkey to the European market having been recognized as an energy partner that needs to be engaged with. (Syrquin, 2008).

There has been a growing number of concern towards Turkish straits as they have become increasing congested with sea freight traffic which might cause serious damages should accidents occur. Moreover, environmental concerns were also raised such as the risk of oil spills which if happens, will cause adverse impacts to the marine life as well as the human community living in the Istanbul strait.

Importance of the BTC Oil Pipeline Project in the Caspian Region

Starting from Baku, Azerbaijan up to the coast of Ceyhan in Turkey, this pipeline was created to transport crude oil being produced in the Caspian region and to transport it to a marine terminal located in the coast of Mediterranean and distributing it in the international market through Oil tankers and other ship vessels. The cost for the construction of the pipeline will amount to $3.6 billion which seventy percent of it will be funded by credit while the length is measured to be 1,100 miles or 1,770 km (Babali, 2005). The project was approved in 1998 after completing the requirements and was planned to be completed in 2005. One million barrels per day is expected upon the completion of the Baku-Tbilisi-Ceyhan project.

Below is a map that shows the Baku-Tbilisi-Ceyhan oil pipeline. Starting from the coast of Baku, Azerbaijan up to the coast of Ceyhan, Turkey, the pipeline would serve as a direct link of Caspian oil towards the world market.

Figure 6: The Baku-Tbilisi-Ceyhan oil pipeline.

Source: Robb, John 2005. SCENARIO: The Fate of the BTC Pipeline. Global Guerillas, November 9, 2005.

The BTC pipeline is regarded as the silk road of 21st century since its creation will open an East-West corridor in which a direct access to the Caspian oil will be available. With a capacity of one million barrel per day and fifty million tons a year, a secure and steady flow of Caspian oil into the world market will be the most significant characteristic of the BTC pipeline (Babali, 2005). Furthermore, given the fact that economic growth and stability is determine by a steady supply of energy and that a 60% increase in world energy is expected in the near future, the creation BTC will determine the stability and economic development of the region (Babali, 2005).

Turkey’s Oil Imports before the Completion of BTC

In the year 2000, Turkey has imports 88 percent of its oil consumption and paid $5.6 billion for crude oil. The table below represents a list of import sources for Turkey’s oil.

Source: Turkey: The Key to Caspian Oil and Gas

As it is shown above, Turkey’s supply list is dominated by unstable and hostile regime plus Iraq is included which is considered as the biggest threat to Turkey. The above list signifies that, the stability of Turkey’s oil industry might be easily shaken or disrupt by civil unrest and local problems brought by unstable regimes. Furthermore, it also connotes the idea of market expansion for the Turkish Oil Industry. The Baku-Tbilisi-Ceyhan oil pipeline would play an important role if the Turkish Oil Industry wanted to expand successfully.  Upon the completion of the BTC pipeline project, the ports of Ceyhan, serving as the last stop of Caspian oil, will become a major energy supplier to the world (Babali, 2005). With a direct access to the Caspian Oil Reserve, the targeted market for the expansion of Turkish Oil industry could easily be acquired.  Given its importance in the world market, various pipelines are now in planning stages that would make Ceyhan into an even bigger and “price setter” as a world energy supplier. Furthermore, in line with EU’s effort to diversify energy, Turkey along with Russia, Norway and Algeria, Turkey would become major supply arteries to EU (Babali, 2005).

Costs of Oil Transit

Despite the high esteem directed to the construction of the Baku-Ceyhan pipeline route, Dorsey (1999) showed a recent study by the Baker Institute for Public Policy of Rice University revealed that transporting oil through the said pipeline is the most expensive way to bring oil to the markets. With estimated costs of around $3 to $4 billion and with a capacity of 800,000 barrels/day, the study showed that an approximate $2.80 per barrel will be incurred to ship from Baku through the Ceyhan port to corresponding ports in Italy.

To establish comparison, the study also computed for the cost of shipping from Baku to Supsa and then linking it to a pipeline whose capacity is at 800,000 barrels/day bypassing the Bosphorus Strait to cross Thrace from Kiyikoy on the Black Sea to Ibrikbana on the Aegean Sea. This route only costs $1.90 per barrel, which is significantly lower by $0.90 than the Baku-Ceyhan route.

Among the findings of the study include that by increasing pipeline capacity to 1.5 million barrels/day, the cost difference will also increase by one dollar per barrel. This entails that by increasing pipeline capacity, the costs will significantly be reduced compared to the Baku-Ceyhan route.

The cheapest route for the transport of Caspian crude remain to be the transit through the Bosphorus Strait, which only costs $1.40, which is $0.50 lower than the Kiyikoy-Ibrikbana path and $1.40 less than the Baku-Ceyhan pipeline. In terms of price, shipping through the straits remains to be the most cost-effective way.

Inspite of this, the Turkish government expressed disapproval of both the Kiyikoy-Ibrikbana route and the one through the Strait. Turkey believes that using the Kiyikoy-Ibrikbana route is more prone to Russian influence and might lead to it being a subsidiary of the Russian Black Sea ports. Meanwhile, the disagreement on the Bosphorus pipeline is self-explanatory as the Turkish government would not want to risk the lives of the 11 million inhabitants of Istanbul because of the high risks for the environment and personal safety.

            Looking into the global shipping rates, Hariharan (2003) showed that shipping rates are on steady increases as global trade rises. To illustrate this, the Baltic Dry Index for bulk freight rates has risen above 140% within the past year (2002). In line with this, the index went to a record-high of 4560 to the close of October 2003.

            Year on year, the mean revenues of very large crude carriers (VLCC) on 2003 was reported to have tripled from its 2002 amounts. As a matter of fact the lowest point in the early of 2003 was significantly twice as that of its 2002 levels.

            The same positive trend could be observed of the container shipping division as a study of the Drewry Shipping Consultants showed that the mean revenue per teu (20 ft equivalent unit) rose 20-50% compared to 2002 with the most notable increases in outbound trades from Asia.

            Moving on to the specifics for shipments towards Europe, rates were up to 75% since January 2003 with rates revolving around US$ 175/tonne from Southeast Asia to Northwest Europe.

           Relations with EU

            In recent years, Turkey’s European Union membership has gained momentum and has seen major improvements. Aras and Bicakci (2006), looked into the relations of Turkey, Europe and the Middle East and attempted to draw similarities in attitudes and foreign policy stances. Turkey has been an increasing regional actor. The Turkish government realizes its significance of involvement in influencing the Middle East as their ties have been closer. As such, the Middle East favors Turkey’s EU membership bid. Moreover, the appointment of Prof. Dr. Ekmeleddin İhsanoğlu, a Turkish national, as the president of the Organization of Islamic Conference (OIC) placed Turkey at the forefront of effecting European attempts towards the Middle East. Historically, the gaps that may have been present in the EU and Turkish policies have been gradually closed.

            Turkey’s Palestinian policy is more similar to the European attitudes. The leadership role of Turkey in the Iraqi neighborhood forum is parallel to the European neighborhood policy that aims to develop social, political and economic cooperation to achieve peace and stability within the region. In line with this, Turkey is also seen as a peacekeeper and mediator for the Israeli-Palestinian conflict. As such, Turkey’s EU membership could spell a vital and mutually beneficial relationship especially in the influencing of Middle Eastern behaviors and policies. Aras and Bicakci (2006) believed that even before Turkey could fully realize its EU membership; it has already been playing a complimentary role in implementing and enhancing foreign policy.

            Being a democratic Muslim state, Turkey’s EU accession is perceived to be a vital partnership not only in terms of handling and managing Middle Eastern Issues. The pivotal economic and geographic role of Turkey in terms of oil trade could foster better relations with the entire European community.

Kaloudis (2007) is within similar lines arguing that the EU cannot ignore Turkey due to its location at the edge of Europe. Such positioning enables the realization of geo-political and strategic advantages which include the country’s role is providing stability in the conflict-lade Middle-East and delivering greater EU clout in regional and world affairs plus giving overall regional stability.

            Moreover, a number of landmark agreements have tightened Turkish and EU relations over the past years. The initial agreement is known as the EC – Turkey Association Agreement, which went operational in 1964. The agreement provided for the legal basis for the relationship between the European Community and Turkey which would eventually lead to its recognition as EU member. Apart from this, the Additional Protocol of 1970, which laid the groundwork for a Customs Union that would break tariff and quota barriers from EU’s imports from Turkey and achieving economic harmonization to its policies.

            Economic gains have been achieved since the implementation of the Protocol. In 1999, there was a marked increase in the Turkish share for the overall exports of the EC to 2.7 percent from 2.5 in 1995. Imports also rose to 1.9 percent from 1.7 percent in 1995. Moreover, in terms of exports and imports, Turkey attained leaps becoming the seventh largest export destination of the EC and the thirteenth biggest exporter to the EU.

            It could be noted that part of such exports include oil transiting through Turkish pipelines and being shipped through its oil tankers.

            The current situation of the EU is that it is projected that its energy demands will be increasing within the next years. As the European demands surge, Smith (2008) sees the vital role of the Arab and Turkish pipelines to address this growing need. The author particularly noted the demand for natural gas. According to the EU, a prospective EU-Iraq partnership is looming following a visit by EU energy representative Faouzi Bensarsa to Baghdad to discuss a strategic partnership. As part of the deal, it has been reported that the EU will help Iraq rebuild its infrastructures and energy sector by providing financial aid once Iraq has made its commitment to supply the EU its petroleum and energy needs specifically that of Natural gas. The demand for gas is expected to shoot up following recent campaigns for climate change. Thus, it is forecasted that the EU’s consumption of gas will jump to 800bn cubic meters in the next 2 decades from its current 500bn cubic meters annually.

            Because of the EU’s stand to reduce Russian oil dependence, it seeks significant partnerships to the Middle East and Turkey, The newfound partnership with Iraq puts Turkey as a participant and major player in energy negotiations. This is especially evident in the new Arab Gas Pipeline (AGP), which is currently undergoing construction from Egypt to Turkey through Jordan, Syria and Lebanon. The project is set to be operational of 2010.

            The birth of the AGP will provide a linkage from Turkey to the massive pipeline of Nabucco stretching across the Caspian Sea and the Caucasus to the central part of Europe through Austria, Romania, Bulgaria and Turkey. Apart from this territorial control, Turkey is also set to gain economically from the construction of AGP’s linkage to Nabucco. The economic benefits posted by such projects include revenues from transit fees and the supply of Turkey’s own growing demand by having access to a more stable and secure supply of gas.

            Overall, Turkey’s relationship with Europe could be characterized as developing and improving. Significant developments have been made in terms of economic status and promotion of EU-inclined policies. In recent times, Turkey has become a major investor in Iraq. Moreover, Turkey has been a vital player in the North Atlantic Treaty Organization (NATO) with its involvement in Afghanistan. Energy security is promoted and ensured by Turkey given that it has become a crucial transit route for both oil and natural gas. In fact around 10% of the world’s oil flow through the Bosphorus Strait. (Milband, 2007).

Russian Competition

            While Turkey, has been the preferred transit route for oil especially that of its Straits, its nationally imposed limitations to safeguard the safety of its people prevents it from utilizing the most cost effective route through the Bosphorus strait. Given this, Russia, Turkey’s known competitor in terms of accessing and gaining control over Caspian Sea energy resources, has been developing its own strategies to be at par in competition and to safeguard its own interests without just handing it over to the Turks.

            In fact, Aneja (2007)  believes that Russia is dedicated to reducing its dependence on the Turkish Straits of Dardanelles and Bosphorus for the transport of Russian oil from the Black Sea port of Novorossiysk. Given this and as discussed earlier, the two camps are not necessarily in good terms with regards to the transport of these resources.

            Russia’s strategy is to ensure that majority of its trade goods, including that of oil transits in its territory. Because of this, it has dedicated major investments to rebuild its domestic transport infrastructure and the ports within its jurisdiction in the coast of the Caspian Sea. For the particularities, Russia has been focused on developing the following ports strategically located within the Caspian Sea region: (1) Makhachkala, (2) Lagan and (3) Olya.

            Makhachkala provides connection to the Central Asian nations of Turkmenistan and Tajikistan. Moreover, the said port is also serves as a vital terminal for transporting oil from the Caspian region to Novorossiysk in the Black Sea.

            To sort of rival the BTC, Russia implemented its own large-scale project known as the Tengiz-Novorossyik oil pipeline. This pipeline is set to bring Kazakh crude to Russia’s principal Black Sea port terminal. However, the significance of Turkey plays from here on as the Turkish straits is the only way for which the oil could be delivered to its markets. Moreover, the fastest way to transit oil by sea is through the Bosphorus and Dardanelles straits. Despite this marked advantage, the Turkish government is keen on its stand to regulate and if necessary reject any more volumes of transits to the straits (Gorvett, 2001). Thus, looking into this line or argument, the Turkish freight industry seems to have reached a plateau in terms of allowing oil to pass by its straits.

            Not to mention, Russia has been aggressive in opposing and leveraging on it s large production capacities to strike deals with other oil companies from its market countries to ensure trade relations and preference. Given the importance of Russia and its power of influence in Europe and Asia, Turkey faces competition in its sea freight services for oil trade. With both countries having their share of pipelines and transit routes, each caters to Europe’s growing demand.  However, Turkey’s advantage lies on the US backing and its position as a NATO member. Coupled with the growing dislike for countries to be subjected to Russian monopolies, Turkey is seen as the preferred trading energy partner. Apart from this, Turkey possesses its most strategic assets, its straits. Majority of shipping vessels passing through the straits are from Russia. The inevitability of transit through the said straits brings power to Turkey as an important global energy hub.

Relationship with Iran

Historical and geopolitical reasons have turned Turkey and Iran into bitter rivals and in the recent years, the competition in the Caspian region greatly increase rivalry of these two countries. The flow of Caspian oil towards the international market ,multi-million dollar investment and the existence of export route passing in through Turkey have resulted in decrease revenue for Iran (Turkey: The key to Caspian Oil and Gas, 2001). The radical regime of Iran was not comfortable with these events since it pose as a national problem that could drag down their country’s revenues. Turkey on the other hand indirectly enjoys the benefits of U.S. sanctions to Iran. By limiting cash flows and access to high-tech equipments required for oil and gas explorations, Turkey economy develop while Iran’s slowly decline (Turkey: The key to Caspian Oil and Gas, 2001).

Iran and Turkey relationship was further emphasize when both country signed an agreement that would make Turkey a consumer of Iranian gas. The agreement would make Turkey a consumer of 10 bcm per year of Iranian gas being purchased at the country’s border (Turkey: The key to Caspian Oil and Gas, 2001).  Although the agreement was signed in 1966 and was revised in 1997, the project was delay because of technical and financial problems and the operation only began after 2001. The Iranian use this delay as a leverage for a bi-lateral relationship but this leverage could be thwarted if the Caspian oil and gas began to flow from east to west (starting to Kazakhstan, Azerbaijan and Turkmenistan via Georgia).

In order to prevent this from happening, The Iranian government has announced to reduce its transit fees cost in order to attract other Caspian oil pipelines in its territory (Recknagle, 2001). This would not only prevent Iran to lose their leverage but also could increase their revenues. Support of the “multiple oil pipelines” approach from the Azerbaijan government was also announced. Such scenario would become a hurdle for the East-West pipeline through Turkey thus forcing the U.S. and Turkish administration to take concrete actions toward the establishment of the Baku-Ceyhan oil pipeline (Turkey: The key to Caspian Oil and Gas, 2001).

Conclusion

            Fortunate for being placed in a location with a strategic geographical position, Turkey is highly capable of being a centre of military and transportation, its location also enables Turkey to offer pipeline routes for oil.  Fortunately for Western countries, Turkey sides on them as it remain democratic in nature despite being highly Islam.  Therefore, due to Turkey’s favourable location and temperament, Turkey highly focuses on their oil trade and tanker shipping services which became very significant with their relationship with Europe with whom they are providing shipping services for their oil dealings.

            Furthermore, Turkey does not only centre its attention on their oil trade and tanker shipping services because they are capable, but also because the said two industries serve as the country’s major industries due to their ability to bring in huge revenues for the country.  It is not only Turkey that benefits from their oil trade and tanker shipping services, other regions – most specifically Asia, Middle East and Europe – and the international oil market in general also profit from Turkey’s major industries because the country function as the connecting medium between regions.  Turkey’s government has also found the courage to privatise the operational rights of seaports since this highly contributed to the strengthening of their shipping industry.

            Turkey is being regarded as main export route for oil and gas for Baku, Azerbaijan and Ceyhan – a Turkish port – as it serves most of the Caspian states since their pipelines are mostly originated from the Caspian basin.  Henceforth, due to the significance of Turkey’s pipeline, the US wanted most investments to be given unswerving to it.

However, even though oil shipping brings in huge amount of money to Turkey, the government still spends a lot for it.  As mentioned beforehand, the Baku-Ceyhan pipeline was concluded to be the most costly means of delivering oil to the market since each barrel is more than a dollar compared to other transport mediums that is in existence.  The Baku-Ceyhan pipeline construction could be around $3 billion to $4 billion while oil transportation via the said pipeline which directly heads to the Italian ports $2.80 per barrel.

            Nonetheless, it is seems that Turkey only wanted to acquire economic and financial benefits that they disregard the fact that constructing pipelines are very expensive.  Unfortunately, as said earlier and is known to many, the rates of oil shipping has been going up ever since 2002.

Another known alternative means of oil transporting is through sea freights which are said to be much cheaper than pipelines.  Sea freights have helped many companies and VLCC – most of them are from the countries Turkey provides services to – to raise revenues and profits.  Nonetheless, sea freight is a now-rising industry in Turkey despite the fact that tanker shipping is still the most essential mode of transportation.  Moreover, Turkey also sees pipelines are more of better alternative, thus, Turkey is being perceive as a pipeline centre for most European countries.

            However, Turkey is now the fastest growing gas market in Europe when it comes to producing natural gas causing Turkey to struggle on keeping up with the raising market demands since transporting natural gas is very costly and problematical as it make use of the pipeline.  In addition, it is not only Europe whose eyes are on Turkey but other regions as well, thus, Turkey is losing huge amount of money from constructing more pipelines in order to live up with the expectations of other countries.  Hence, it is just proper to study if shifting from pipelines to sea freights, which only just comes in as second option behind pipelines when it comes to oil transportation, is more effective, advantageous and practical for Turkey.

            This study evaluated the similarities and differences, and the advantages and disadvantages of pipelines and sea freights according to the following: cost of oil transport via pipelines and via sea freights, investments and needed capital funding, delivery time and speed, demands of customers, and regulatory requirements and maritime policy.  Based on the following dynamics, the study at hand aimed to answer the question regarding whether or not sea freight is a better method in terms of international oil and gas exports of Turkey and, furthermore, if there is a possible growth and stability regarding sea freight oil transport.

            For the hypothesis, the research claimed that sea freight transportation of oil is the foremost economic contributor in Turkey and that it is competent enough to be an alternative for pipelines.  In order to support this hypothesis, the researcher made use of qualitative research, gathering a variety of literatures that can provide substantial and accurate information on the topic.

            Turkey’s oil industry is not as competitive as the other countries – to begin with, the country has very low supply of oil, thus, the source of its oil and gas is considered as incompetent causing for Turkey to be put on the 13th spot in terms of Upstream Business Environment.  However, other factors that could be considered why Turkey has low rankings and why its oil industry is a shaky position are the country’s low level of ownership and the sudden privatization and licensing practices.

 As time goes by, Turkey’s oil and gas production has been decreasing while oil imports and demands are rising.  Another obstruction for Turkey’s oil industry is the growing terrorist activities which usually disrupts economic activities in its major ports.  Nonetheless, their sole advantage is their role as a middleman when it comes to exporting oil for the Middle East.  Turkey has learned all what they have to learn to be a competitive middleman because of their transport mechanism through their tanker shipping.

            Turkey, due to its lack of significant oil and gas resources, mainly serves as the transport point or a “bridge” for the Caspian region – which is the second largest region which has oil reserves – oil exports to the rest of the world.  Again, due to Turkey’s favourable geographical location, the Caspian region is capable of exporting oil to Europe on the west and to Asia on the east.

As for the transportation of oil, there were new routes that were created due to the tension and unresolved conflicts in Afghanistan, Iran and Iraq – the new routes gave Turkey a couple of benefits.  However, the use of the routes still depends on the political climates of Iran, Iraq and even Russia.

            Russia is one Turkey’s major competition when it comes to taking hold of the Caspian region.  This competition triggered both countries to strengthen their influence over the region in order to gain their favour.  Unfortunately, this rivalry also caused brutal murders, coercion and the use of black propaganda especially of Russia towards Turkey.

Most of the Caspian region favours Turkey over Russia because of its location which is more accessible and convenient, also, because of Russia’s tendency to monopolize energy for its own pursuits.  Moreover, to put a close in the competition, Turkey’s status as the world’s energy coordinator have been finalised especially when the US sided to Turkey as using the Pipeline Policy to put a stop to the entering of resources to Iran and restricting Russia’s monopoly.

            Oil transportation is done through TSS – Istanbul and Dardanelles – which carries the volume of tanker shipments.  TSS, however, serves as a struggle when it comes to navigation due to their dangerous physical form, narrowness, strong currents, weather disturbances and thick traffic caused by numerous boats and ferries.

Numerous maritime accidents have occurred due to the incapability of the TSS to keep up with the large number of ships.  Turkey created a number of maritime policies to avoid accidents since the said accidents are extremely hazardous due to the chemicals that the ships carry.  One of the solutions was the construction of the pipelines, however, until now, the number of pipelines that were created are still not enough to solve the dilemma.

The BTC is considered the most important pipeline – it lifted the load that the Bosporus Strait is dealing with.  Turkey’s pipeline industry, which covered Asia, Middle East and Europe, nonetheless, helped the country sustain its position as the world’s leading energy coordinator and centre.

Aside from the BTC, other existing pipelines are the Yumurtalik pipeline which is no longer operating due massive terrorist activities in the area, and South Caucasus pipeline or Baku-Tbilisi-Erzurum pipeline which is a gas pipeline.  There were also proposed pipeline project such as the Samsun-Ceyhan pipeline, Nabucco pipeline, Egypt-Jordan-Lebanon-Syria pipeline and Turkish-Greece interconnect or pipeline.

Oil transportation through the BTC has been regarded as the most expensive means of hauling oil to the market compare to normal shipping since the most inexpensive means of transporting oil is through the Bosporus Strait.  However, the Turkish government disregard the said fact and the rising shipping industry since they are prioritising more on avoiding the Russian influence.

Turkey’s membership in the EU has somehow garnered positive feedbacks – the Middle East has nothing against the said membership – it even benefited Turkey in various ways.  Turkey gained more understanding of their role when it comes to influencing the Middle East especially when a Turkish national was selected as a president of the OIC.

Turkey and the EU shared similar sentiments, attitudes and foreign policy stances.  This is evident most specifically when it comes to the Palestinian Policy which is similar in nature with the European attitudes, and the leadership of Turkey in the Iraqi neighbourhood forum which centres on developing social, political and economic cooperation to attain harmony and stability which is also in correspondence to the European neighbourhood policy.   Turkey’s integration to EU signified a fundamental partnership particularly when it comes to enhancing relations to the rest of the European community.

The Turkey-EU relations have been growing stronger especially since the issuing of the EC-Turkey Association Agreement and the Additional Protocol of 1970.  Through these agreements, economic gains have been attained.  Nonetheless, the Turkey-EU relation is still on the stage of developing and improving.  EU has been campaigning to diminish Russia’s oil dependence and in order to solidify this campaign, EU looked for major partnership with Turkey and the Middle East.  This resulted to the construction of the AGP which is set to be done on 2010.

Therefore, taking everything into account it seems that Turkey will still favour the use of pipelines when it comes to transporting oil to Europe.  Though pipelines are more expensive than sea freights, there are valid reasons why Turkey chose to prefer pipelines.  Sea freights are more prone to unexpected accidents due to the nature of the TSS, thus, if ships carrying oil and gas products got into a catastrophe, huge amount of money that corresponds to the amount of the oil and gas that got wasted will also be gone.  In addition, there major objective to avoid Russian influence, thus, pipelines are more capable of securing the transactions and process than through sea freights.  Other countries who exports oil through Turkey also prefers the pipelines, thus, even though Turkey releases a huge amount of money in constructing pipelines, the money that they have spend are being returned to them since their trading partners highly utilise the use of their pipelines.

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