Turkey Boosts Its Role as Strategic Energy Hub

The opening of a new pipeline to the Caucasus marks the country's soaring importance as a route around potential problems in Iran and Russia

The name of the game for energy-consuming countries these days is risk reduction. To prevent interruptions in the delivery of oil and natural gas, countries and energy companies are looking to diversify their suppliers and delivery routes. And for the U.S. and Europe, that's increasingly translating into finding alternatives to Russia and Iran.

Enter Turkey. The Mideastern country that straddles Europe and Asia is suddenly gaining strategic importance as a safety valve for the West's energy supply. On July 13, a BP-led consortium opened the tap on a long-awaited $4 billion pipeline that runs from the Caspian Sea to the Mediterranean. Bypassing Russian and Iranian territory, the 1,100-mile (1,760 km) pipeline snakes from Baku, Azerbaijan to Tbilisi, Georgia, and across Turkey to the coastal city of Ceyhan.

"This is one of those turning points in history," says Mike Bilbo, director of communications and external affairs for BP (BP) in Turkey. "It changed the picture for Turkey overnight." By his reckoning, existing shipping arrangements through the Bosporus Straits plus the new pipeline mean that 5% of the world's oil now traverses Turkey.


  Now that the pipeline is finally a reality, other suppliers in the region are also angling to use it. In June, oil-rich Kazakhstan became the latest country to sign up, striking a deal to ship 183 million barrels of oil per year through the east-west corridor.

The realization of the controversial project also bolsters Turkey's prospects as a transit hub for natural gas. For instance, Austrian energy giant OMV is leading a consortium of companies set to begin construction of a $5 billion gas pipeline in 2008 that will run from Turkmenistan through Turkey and on to Austria.

Ironically for Turkey, the opening of the pipeline occurs at a time when it is more dependent than ever on Russia for its domestic energy needs. Some 65% of Turkey's natural gas imports now come from Russia through the Blue Stream pipeline which runs under the Black Sea to the Turkish port of Samsun, and via a separate pipeline through Bulgaria. Turkish gas consumption is projected to double by the end of the next decade, from 23 billion cubic meters per year.


  So Turkey is making its own efforts to diversify supplies. It has opened a natural gas pipeline from Iran. And in September the first gas will flow through a new pipeline from Azerbaijan, called the Southern Caucasus Pipeline, which runs through the same corridor as the new trans-Turkey oil line and connects with an existing gas hub in the eastern Anatolian city of Erzurum.

The gas pipeline will draw from the huge Shah Deniz field in the Caspian Sea, 70 km south of Baku, which holds an estimated 400 billion cubic meters of gas and is being developed by BP and partners.

The deal to ship Azeri gas across Turkey was the start of the country's new role in energy transport. When the 15-year contract to buy 6 billion cubic meters of Azeri gas per year was signed in 2001, Turkey actually had more than it needed, so the government passed a special law allowing Shah Deniz gas to be re-exportable. "That was the real beginning of Turkey becoming an energy transit country, for up to then Russian gas was not re-exportable," says BP's Bilbo.


  Now that role is expanding rapidly. The OMV-backed Nabucco gas pipeline, set to be completed in 2011, will carry up to 30 billion cubic meters of natural gas per year from Turkmenistan, Azerbaijan, and Iran through Erzurum, Turkey and on to Baumgarten an der March, Austria.

From there, it will be distributed throughout Western Europe, whose import demands for natural gas are projected to hit 280 billion cubic meters per year by the end of the next decade. The project is considered so vital that the European Union includes it in its Trans-European Energy Networks program, which is intended to ensure energy security via diversification of supplies and routes.

One disappointment for Turkey is the lack of business from Iraq. The oil terminal at Ceyhan was initially built to handle shipments from the Kirkuk fields in northern Iraq, but it has not run at capacity for more than 15 years. After the first Gulf War in 1991, international sanctions limited Iraq's oil exports, and since the overthrow of Saddam Hussein in 2003, output has been constrained by sabotage and other disruptions. If Iraq stabilizes, it too could become a significant user of trans-Turkey oil transit.


  Needless to say, anything having to do with energy comes with a healthy dose of geopolitics. Russian energy giant Gazprom and the member states of the EU, for instance, share an interest in diversifying distribution routes to enhance energy security, and have discussed the possibility of another new pipeline that would carry Russian gas across Turkey to Greece and Italy.

At Gazprom's June 30 shareholders meeting, Chairman Alexey Miller endorsed the appeal of such a route, noting that "it is possible to arrange gas supplies to Greece, South Italy, and Israel across the territory of Turkey."

But U.S. Secretary of State Condoleezza Rice advised Turkey in April against allowing Gazprom to contribute supplies to the pipeline, even though it would bypass the shipping bottlenecks in the environmentally sensitive Bosporus. Some Europeans also aren't convinced.


  Paolo Scaroni, the chief executive officer of Italy's Eni, is a partner with Gazprom in the Blue Stream pipeline. But at an Aspen Institute conference in Florence earlier this month, he voiced concerns that Gazprom could divert supplies from Italy to other markets "where the outlook for growth is better." That's one reason he advocates a growing role for Turkey in sourcing and distributing gas from other countries.

No question, Turkey is making the most of its geographical situation between producer and consumer countries. At the same time, it's protecting its own energy needs by becoming a transit and terminal country for oil and gas. But in the volatile world of energy, geopolitics sometimes trumps practicality in determining winners and losers.

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