Turkey is positioning itself to become an energy distribution hub for the Middle East, Russia, the Caspian Basin, and Central Asia. The creation of an energy corridor for oil and natural gas will be moved through pipelines, seagoing tankers, and rail tankers.
Turkey itself will also benefit from the increase in oil and gas infrastructure. Since Turkey does not adequately produce enough domestic fossil fuel assets to meet the growing demand, it is forced to import liquid fuels and coal. This could potentially put Turkey in a fiscal deficit if they are not able to control downstream operations to some extent.
One reason for the increase in Turkish energy demand is a growing domestic economy. The population of Turkey grows nearly 2% every year. With that growth will come a greater need for services, which will drive up energy consumption.
A new market for Iraqi Kurds
A new pipeline has been finalized from northern Iraq that will feed into Turkey. The Turkish Energy Company is working with the Kurdistan regional government to expand pipeline operations.
This pipeline will begin in Kirkuk, Iraq and will link up with an existing Turkish pipeline that will terminate in the Mediterranean port of Ceyhan. Bloomberg has reported that the pipeline will initially carry 150,000 barrels per day in December 2013.
The Kurdish regional government is hoping that the 40 km pipeline will have an optimal flow capacity of 300,000 barrels per day. An additional pipeline that will transport oil and gas from the Tawke and Taq Taq fields through Turkey should optimally have a flow capacity of 200,000 barrels per day.
The Kurdish section of Iraq sits on the northern Iraqi oil. This area is known to have light sweet crude and is relatively undeveloped due to the political instability of Iraq. As relations normalize between Kurdish Iraq and Turkey, Baghdad will have to reconsider their positioning with regards to oil and gas exports.
Currently, the primary mode of oil transportation from Iraqi Kurdistan to Turkey has been via truck, which has sustained between 30,000 and 50,000 barrels per day of export. Investors are hoping that once a pipeline is completed and running optimally that by the end of 2015 Iraqi Kurdistan will be able to export 1 million barrels per day. A distant hope is that by 2020 that number will be doubled.
Chevron Corp. (CVX +0.20%) has completed its purchase of the Qara Dagh oilfields of Erbil Iraq. Total (TOT +0.00%) has invested an 80% stake in the Barnan fields located in northern Iraq. These two companies are now positioned strategically to ensure a maximum output of crude that is destined for Turkey in European markets. Both companies have long histories of working in Iraq and will undoubtedly leverage that institutional knowledge toward their success.
There is a growing dissatisfaction among the major oil companies with the bureaucratic politics of Baghdad. Which naturally makes doing business in Iraqi Kurdistan more inviting. Iraq is a whole the not see the postwar oil bonanza that many had predicted. It wasn't until 2011 that ExxonMobil (XOM +0.77%) decided to begin to invest in Kurdistan. Soon after Exxon's reentry into Iraq Chevron, Total, and Gazprom (OGZPY +0.00%) followed. One potential risk that Exxon and Total have from their increased investments in Kurdistan is putting their operations in central and southern Iraq at risk. Baghdad controls those areas and has been reluctant to develop any joint ventures with Iraqi Kurdistan.
The investment and development of exploration and production assets in Turkey and Kurdistan signals that the major oil companies are no longer going to tolerate the capricious politics coming out of Baghdad. Ironically, the nature of Baghdad's relationship with major oil companies has led to an opportunity for Turkey to become the gateway of liquid fuel export to Europe.
Iraq's oil wealth has been underdeveloped and in some cases untouched for nearly two decades. Between the war and embargoes, many of the E&P majors have been reluctant to set up operations within Iraq. There's still a great deal of political instability and a lack of reliable infrastructure to support and sustain E&P operations.
Russian supply to Turkey
Russia remains the primary supplier of liquid fuels to Turkey through the state-owned oil company Rosneft. The near virtual monopoly that Russia has with Turkey also limits pricing flexibility as well as supply. Russia has been polling liquid fuels from Central Asia using pipelines that are owned by Transneft.
The new pipeline from Iraqi Kurdistan will provide Turkey an alternative supply and Russia competition. Iraq is entering another stage in its postwar development. Although sectarian violence has marred southern Iraq the north of Iraq has been relatively stable under Kurdish governance. As political stability grows throughout Iraq, export of oil to neighboring countries will increase. What is being seen in Iraqi Kurdistan will soon be replicated throughout Iraq. This will further lower the reliance on Russian liquid fuel exports.
An increase in infrastructure
The new pipeline from Iraqi Kurdistan is a signal to investors that growth instability in pricing can be expected barring any grey swan events.
