Pipeliners

28.11.2005 17:29 Tsvetelia Ilieva - Reuters - The political stakes are high and the financial risks many but the spoils are huge for investors seeking a way to pipe Russian and Caspian oil around the treacherous Turkish straits to the energy-hungry West. Oil producers lost at least $700 million last winter as bad weather and heavy seas kept their tankers stuck for as long as two weeks at the Bosphorus and Dardanelles straits —- the only way for sea-bound crude to exit the Black Sea. Delayed for years by political wrangling and environmental fears, several billion-dollar pipeline projects are finally inching toward start dates, with countries and investors around the vast Black Sea vying for pole position. "An exit-Black Sea pipeline is a necessity, because the oil market requires diversified supplies," said Max Shein, chief equity strategist at Moscow-based Broker Credit Service. For Russia and other Black Sea states, the Turkish straits provide the only outlet to world markets for exports of oil and its products. Oil shipments total about 2.9 million barrels per day. Fueled by the region's booming economies, traffic has tripled since 2001 to more than 150 ships a day through the Bosphorus, a snaking channel that divides Istanbul and is just 700 meters (2,300 ft) wide at its narrowest point. Turkey has set limits on traffic to boost safety: tankers longer than 200 meters or those carrying dangerous cargo are only allowed to enter the waterways during daylight, which, combined with rough seas, creates long delays in winter months. After years of procrastination, investors are pursuing three long-delayed trans-Balkan bypasses to skirt the Turkish straits. Producers may still be reluctant to pay transit fees, but investors such as Rumen Nikolov are bullish. "One day the ships will carry the oil to us," said Nikolov, whose company, the Albanian Macedonian Bulgarian Oil Corporation (AMBO), aims to link the Bulgarian Black Sea port of Bourgas with Vlore, on Albania's Adriatic coast. SHORT IS SWEET The need is clear: already booming oil production in the Urals and the Caspian Sea regions is expected to double crude traffic through the Turkish straits through 2015. Russia has increased exports by 50 percent since 2001 to become the world's second largest oil exporter behind Saudi Arabia, and Kazakhstan expects to more than double its output of 1.3 billion tonnes of crude in the next decade. AMBO hopes to build a 912-km (567-mile) pipeline from Bourgas through Macedonia to Vlore, a deep port accessible to huge tankers. Analysts warn the pipeline's length and political risks in the region continue to hinder the plan, which originally surfaced in 1994, but Nikolov said a deal could be imminent. "I expect the final political accord on the pipeline to be endorsed next year," he said. "No pipeline will ever lose money. But a pipeline is as much economics as it is politics." One thing fuelling investors' optimism is what they describe as an improving political climate as the European Union pushes east and south, increasing hopes of political stability. Alongside the AMBO plan is a project to run a link between Romania's Black Sea port of Constanta to Italy's Trieste, although analysts say this is also dogged by political haggling among the five countries it would cross and hampered by a price tag of up to $6 billion. Perhaps the most promising of the three trans-Balkan projects is the 285-km (178-mile) link from Bourgas to Alexandroupolis on Greece's Aegean coast. After a decade of horse-trading between Greece, Russia and Bulgaria, the three countries said this May that work on the 700 million euro pipeline could begin at the start of 2006. The countries gave a year-end deadline to nine investors to propose a structure for a company that will build the pipeline, expected to have an initial capacity of 15 million tonnes. Analysts said that, with its much shorter length and smaller number of countries involved, the pipeline had a good chance of beating competitors to completion. "The shorter, simpler and les complicated routes are most likely to make it," said Ian Woolen, senior analyst with Wood Mackenzie in London. NORTH AND SOUTH The Balkans, however, do not provide the only possible route to circumvent the Bosphorus and Dardanelles. Turkey is lobbying for a 560-1,000 km (350-620 mile) conduit from its northern Black Sea town of Samsun to its oil hub Ceyhan on the Mediterranean, saying the line could effectively relieve the traffic through the straits by 50 percent. This month, Turkey and Russia decided to carry out separate feasibility studies on the plan. Previously, Russia had been lukewarm, fearing high transit tariffs and competition for buyers in Ceyhan with Middle East members of the Organization of the Petroleum Exporting Countries. "This is so important for Turkey ... Russia is a little suspicious but we're trying to convince them," said a senior Turkish energy official, who did not want to be identified. Another option to ease congestion in Turkish waters would be to extend Ukraine's Odessa-Brody pipeline to Poland's Baltic port of Gdansk. Last week, Ukraine's President Viktor Yushchenko said his country was ready to proceed with the extension and had set up joint structures with Poland and Kazakhstan to work out a plan to complete construction, launching the project in 2006. Kazakhstan has expressed interest in the $600 million plan and the European Union has invested in a feasibility study, which should be ready by the end of the year. Despite the progress, the proposed extension still faces the same drawbacks as the other projects, including the reluctance of producers to pay transit tariffs. They fear this would give competitors an advantage by reducing traffic in crowded but still free Turkish waters. Analysts say that, if oil prices remain high, at least one or two pipeline projects will go through to completion. "If the price of crude stays high and the export volumes across the region increase as expected, at some point the producers will have to commit to a pipeline to guarantee access to international markets," said Wood Mackenzie's Woolen.