Bulgaria’s Deputy Prime Minister is scheduled to lead a delegation to Moscow this week to discuss Russian proposals to try and get agreement for the long delayed construction of the Burgas-Alexandroupolis oil pipeline. The pipeline is one of two planned to take most oil tankers out of the congested Bosphorus. Freeing the Bosphorus from oil tankers, while providing sufficient alternative routes, is a critical element of Russia’s plans to expand external trade beyond extractive industries and to allow it remain a key player in the Central Asian energy sector. It is also a necessary pre-condition for the planned expansion of the CPC pipeline that carries Caspian oil via Novorossiisk.
In market terms, the best way to play the bypass of the Bosphorus is via Novorossiisk Seaport (
NCSP.LI N/R), albeit longer-term.
- Almost 2 million barrels of oil transit the Bosphorus each day. Most of that is Russian oil but there is also a significant volume of Caspian oil transiting via Russian ports.
- Russia cannot grow the volume of other exports via Novorosiisk – required as part of the plan to create a more diversified economic base - and other Black Sea ports, without removing the bulk of the oil traffic
- Russia also wants to accommodate significantly more Caspian oil via Novorosiisk but cannot do so until the bypass pipes are built. If it does not accommodate the extra oil volume from the Caspian then Moscow’s position of influence in the region will be further undermined
- The Burgas-Alexandroupolis pipe has a planned capacity of 1.0 million barrels per day and the second pipe, via a Turkish route, has a planned capacity of 1.5 million barrels. In aggregate, both pipes would take all the existing oil and most of the planned Caspian (CPC) expansion
- Greece is just as keen to build the pipeline, as it needs the transit fees and the economic boost from building the oil-loading terminal.
- Bulgaria’s stated objection is because of environmental concerns. In reality, its objection has more to do with the government’s wish not to increase economic ties with Russia as it looks to build stronger ties with the EU. The economic crisis across the EU, and the solvency problems in Eastern Europe in particular, has reduced the possibility of the latter while making the former economic pragmatism.
- Moscow has a better chance of pushing forward with the by-pass pipeline now than at anytime in the past. In mid 2009, the Bulgarian delegation wouldn’t have even considered coming to Moscow.
The Problem
The Bosphorus is the only way for ships from Russia’s Black Sea ports (plus those from Ukraine, Georgia, Romania and Bulgaria) to exit into the Mediterranean Sea. Currently the channel accommodates over three times the number of vessels transiting the Suez Canal. But, unlike Suez and the Panama Canal, Turkey cannot charge transit fees. The use of the Bosphorus is governed by the 1936 Montraux Convention, which set free passage for all commercial vessels. Turkey can, however, control the flow of vessels for safety reasons.
The big problem is the almost 2.0 million barrels of oil carried through the channel each day, most of which is from Russia’s Novorossiisk Seaport. In the past, Turkey has regularly held up the oil tankers for weeks citing safety factors. The political relationship between Moscow and Ankara is clearly much improved under Erdogan’s government but the environment issue about oil tankers using the Bosphorus is very sensitive and needs to be resolved. The oil tankers need to be removed from the channel. That is partly because of the risk of an accident that could block Russia’s Black Sea exit route for a very long time and partly because Russia wants to send more non oil traffic through the route. It cannot do that until the oil tankers are removed or, at least significantly reduced in number.
Burgas-Alexandroupolis
The proposed project is to construct an oil pipeline from Burgas, on Bulgaria’s Black Sea coast, to Alexandroupolis, on Greece’s Mediterranean coast. The total length of the proposed pipe is 280 kms. The planned initial capacity is for 700,000 barrels per day, rising eventually to 1.0 million barrels per day. The project was agreed between Russia, Bulgaria and Greece in 2007 and a deal to construct the pipe was signed in 2008. Construction was due to start in October 2009 and with a scheduled completion date in 2011.
The project never started. The proposed terminal and pipeline quickly became a contentious issue in Bulgaria and local governments on Bulgaria’s Black Sea voted against it. The current Center-Right government in Bulgaria won the July 2009 election and one of its promises was to review the proposed, and very unpopular, pipeline. In June of this year, Bulgaria’s prime minister unexpectedly said that his government was “giving up” on the project. Some phone calls later (from Brussels and Moscow for sure) and the government quietly backed off from this comment.
Since then, there has been a flurry of political activity. The Greek Prime Minister visited Sofia in mid July to push for the project and PM Putin spoke with both his Greek and Bulgarian counterparts concerning “energy projects” in late July. Transneft then invited the Bulgarian delegation to Moscow for the talks that are scheduled for this week.
Turkish Options
In addition to the proposed Burgas-Alexandroupolis route, Russia has also agreed to supply oil to a second by-pass pipeline. This route will take oil across Turkey from the Black Sea town of Unye (previously it was to have come via Samsung but the terminal has been moved) to the country’s main oil terminal at Ceyhan on the Mediterranean. This pipeline will be 550 kms long and has a planned capacity of 1.5 million barrels per day. The main partners in the project are ENI and local company Calik Enerji. Last October, the leaders of Italy, Turkey and Russia signed a memorandum to allow Transneft and Rosneft join the project. According to media reports, the work has already started and the expected completion date is in 2012. Full capacity can then be reached by 2015.
Why Russia wants both pipelines
While the Unye-Ceyhan pipeline – at full capacity - would take the bulk of the current oil volume out of the Bosphorus, it would not allow for any additional oil volume. Russia wants to remain a key transit country for Caspian oil and that means it has to allow for the planned doubling of the CPC pipeline capacity. Otherwise that oil might go either along a new pipe built in parallel to the existing Baku-Ceyhan pipeline or across a new pipeline to China.
The shareholders of CPC recently announced that the current 700,000-barrel per day capacity is to be doubled to 1.4 million barrels by 2014. For that to happen, both the Burgas-Alexandroupolis and the Unye-Ceyhan pipes will have to be operational. Otherwise the Bosphorus will be even more congested; delays longer and greatly limit Russia’s ambition to grow other exports from Novorosiisk.
Chris Weafer is the Chief Strategist at Uralsib Group
