Turkey’s $12 Billion Bosporus Bypass Speeds Oil Tankers: Freight Markets

Turkish Prime Minister Recep Tayyip Erdogan’s plan to divert tankers from the Bosporus to a new canal may unclog one of the worst chokepoints for energy carriers such as A.P. Moller-Maersk A/S of Denmark and Greece’s Tsakos Energy Navigation Ltd. (TNP)

It may also change the shape of oil shipping from Russia, Ukraine, Georgia and Kazakhstan to the Mediterranean, diverting business onto the world’s largest tankers from the smaller ships that now transit the strait.

At the same time, the plan would generate a building bonanza for Turkish real estate investors and developers, including Inanlar Insaat, Kiler Gayrimenkul Ortakligi AS and Agaoglu Group. They are jostling for a piece of what Erdogan calls one of the biggest development projects in the world: the construction of a new population center on the canal’s banks.

“We’re talking about building not just a canal, but a city right next to Istanbul of three million people,” Serdar Inan, chairman of Inanlar Insaat, said in an interview at the company’s Istanbul offices. Erdogan has praised Inan’s offer to spend $30 billion to construct the project; Inan predicted total revenue from building it and nearby facilities will exceed $300 billion in 15 years.

Most of the money would be made from building, selling and managing apartment buildings, hotels and other facilities on the banks of the canal, Inan said. Erdogan said the project also will include a new airport, Turkey’s largest, and two new cities, one on each side of the Bosporus, to allow people to move out of crowded, earthquake-prone parts of Istanbul.

Istanbul Canal

Kiler Holding AS, which opened Istanbul’s tallest building this year and then sold shares in its real estate unit on April 20, applied for rights to the “Istanbul Canal” name within five hours after Erdogan announced the plan. Billionaire developer Ali Agaoglu, who’s erecting towers on London’s Canary Wharf, also supports it.

“It’s not a crazy project,” Agaoglu said after Erdogan’s April 27 announcement. “Turkey is strong enough to do this.”

To be sure, big-money plans have a history of falling through in Turkey. Last year, the state got $15.9 billion in bids from businessmen for the privatization of power grids, with winners refusing comment on how they’d get the financing.

Two of them have fallen through in the past month: Aksu Enerji & Ticaret AS failed to raise $56.1 million by its deadline and MMEKA, controlled by Mehmet Kazanci and former Turkcell Iletisim Hizmetleri AS chairman Mehmet Emin Karamehmet, failed to come up with $1.2 billion.

Sultan’s Idea

It’s not the first time a Turkey canal project has been discussed: Ottoman Sultan Suleiman the Magnificent explored joining the Black Sea to the Gulf of Izmit in the 1500s, only to abandon it as too expensive while the empire was dragged into war. Former Prime Minister Bulent Ecevit announced a similar plan for a “second Bosporus” in 1994 that went nowhere.

The success of Erdogan’s pledge to “end tanker traffic” through the Bosporus hinges on overcoming the channel’s biggest advantage: It’s almost free. The Montreux Treaty of 1936 limits Turkey to charging carriers only for costs incurred when they transit the Turkish Straits.

To make the Istanbul Canal commercially viable -- it will cost at least $12 billion, Erdogan says -- builders will design it for the world’s biggest tankers, which the Bosporus can’t handle. Known as very large crude carriers, or VLCCs, they sit as much as 23 meters (75 feet) deep when full of cargo.

Lower Costs

“We definitely hope this project becomes a reality,” said Amit Agaelli, a manager in the ship-chartering unit of Palmali Holding Co., owned by Turkish-Azeri billionaire Mubariz Mansimov and one of the primary owner-operators of tankers through the Bosporus. “Especially for VLCC owners, it lowers transportation costs a lot, 20 to 25 percent, maybe more.”

About 8 percent of the price per barrel of oil is due to transportation costs, according to the Robert S. Strauss Center for International Law and Security at the University of Texas in Austin.

VLCCs are most commonly used for oil deliveries between continents, where they offer the greatest savings compared with smaller vessels, according to Nikos Varvaropoulos, an official at Optima Shipbrokers Ltd. in Athens.

Bosporus delays rise in winter, when shorter days and poor weather conditions constrain how many vessels can transit the link between the Black Sea and the Mediterranean. An average of 848,000 barrels of crude a day were shipped from Russia’s Black Sea port of Novorossiysk in 2010, according to loading data gathered by Bloomberg.

More Economical

“If it happens, we will have to adjust like everyone else,” said George Saroglou, chief operating officer of Tsakos Energy Shipping in Athens. “It’s more economical to move 2 million barrels on a VLCC than splitting it into smaller cargoes.”

Tsakos has 51 tankers, of which three are VLCCs; 11 of the others regularly transit the Bosporus. Palmali sends about 200 vessels through the straits each year and 85 percent of them are tankers, Agaelli said.

Building a canal that handles VLCCs could encourage oil exporters from Russia that currently ship from northern ports to “move some volumes to the southern route” through Turkish waterways, said Henrik Ramskov, chief operating officer of Maersk Tankers, which owns or operates more than 250 tankers.

The world’s largest VLCC operator is Mitsui O.S.K Lines Ltd., according to Clarkson Research, a unit of Clarkson Plc (CKN), the world’s biggest shipbroker. Second is Frontline Ltd., led by Norway-born billionaire John Fredriksen.

Russia-China

OAO Sovcomflot, Russia’s largest shipping company, signed an agreement with China National Petroleum Corp. in November to purchase its first pair of VLCCs for delivery in 2013.

Diverting shipping traffic to a new canal outside Istanbul’s center would lessen the danger of an accident or spill for the millions who live on the Bosporus’s shores. According to the Turkish Coast Guard, 51,422 ships passed through the Bosporus in 2009, 9,299 of them tankers. A total of 145 million tons of “dangerous cargo” slipped through the waterway that divides a city of more than 13 million people.

Delays in crossing the Bosporus, which the U.S. Department of Energy calls one of the world’s busiest and most difficult “energy chokepoints,” cost transporters $1.4 billion a year, Erdogan said.

“With the Istanbul Canal we’ll reduce tanker and cargo traffic through the Bosporus to zero,” Erdogan said. He said planning for the canal would take two years and it would be opened by the 100th anniversary of the Turkish Republic in 2023.

Black Sea

Handling the biggest tankers would require a reconfiguration of Black Sea ports, said Luis Mateus, an analyst at Riverlake Shipping SA in Geneva. The Sheskharis Oil Harbor at the port of Novorossiysk, the main Russian export facility for Urals crude in the Black Sea, has a draft of 19 meters, meaning that VLCCs wouldn’t be able to load in full there yet, according to data provider IHS Inc. in Englewood, Colorado.

The Suez, which would link Russian supplies to Asia, also can’t handle VLCCs when they are fully loaded, said Clarkson Research Managing Director Martin Stopford.

“The Turkish government cannot force shippers to use a new canal, and it’s not rational to use it when you have the right to use an international strait for free,” said Savas Inandioglu, an Istanbul-based maritime lawyer at the Topdemir Inandioglu Komuc law office.

Turkey would consider raising Bosporus fees, Transportation Minister Habib Soluk said May 5, adding that they had been “discounted” since 1980. Foreign Ministry spokesman Selcuk Unal said all aspects of the plan would be discussed with Montreux Convention signatories during the planning process.

“From a legal perspective, this plan can only be achieved through commercial terms,” said Fehmi Ulgener, an attorney whose clients include the Turkish Chamber of Shipping. “You have to make passage through the canal more attractive than through the Bosporus. You can’t close the Bosporus because of obligations under international law.”

To contact the reporters on this story: Benjamin Harvey in Ankara at bharvey11@bloomberg.net Alaric Nightingale in London at Anightingal1@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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