CBS Weekly Review: BTC goes boom

Just a short note this week on yesterday's news from Turkey, which has regional significance: the explosion that has halted operations of the Baku-Tbilisi-Ceyhan [BTC] oil pipeline, which brings Azerbaijani (and in the future Kazakh) crude oil to the Mediterranean Sea.

The explosion occurred in the early morning yesterday, 6 August, about 70 km west of the city of Erzincan in northeastern Anatolia. Yesterday when I read the early reports – which in typical fashion downplayed what had happened – I assumed that this had been an accident caused by illegal line-tapping. However today the military arm of the PKK, the Kurdish terrorist group, has put a statement on their website claiming responsibility.

Yesterday’s statements from BP and the Turkish government suggested that the pipeline would be down only for a few days, and that tanker loadings at the Mediterranean port of Ceyhan would not be affected. Today’s information, which seems to be more credible, paints a different picture. Today one official from the Turkish pipeline company Botas – which operates the Turkish part of the line – was quoted anonymously saying that the pipeline would be shut for "about 15 days." But more recently today a Botas spokesman has characterized two weeks as a minimum estimate and said that the shutdown "could last five weeks."

My experience in circumstances like this is that one should assume that the most pessimistic estimates in the public domain are closer to the truth.

Short-term impact

According to the August lifting schedule at the pipeline terminus of Ceyhan, it was planned that 28.15 million barrels of crude would be lifted over the course of the month. BP and the Azerbaijani state oil company SOCAR have already declared force majeure on upcoming cargos and the final liftings of BTC crude oil will take place today or tomorrow, on the basis of oil already in storage at Ceyhan as of 5 August.

SOCAR, BP and the other partners in the Azerbaijani oil consortium which uses the BTC pipeline will now move to maximize their use of other export routes during the BTC shutdown period. There are three options.

1. The small pipeline from Baku to Supsa (on the Georgian Black Sea coast) reopened in June after a lengthy shutdown; depending on precisely how much it was already shipping before yesterday it could probably accomodate an additional volume of somewhere between 50 and 80 thousand barrels per day [kbd].

2. Second, it should be possible to start exporting 80 to 100 kbd in rail cars to the Georgian port of Batumi; those arrangements are already being made.

3. Finally, if SOCAR can reach terms with the Russian pipeline monopoly Transneft to give it access to the Baku-Novorossisyk pipeline – which as of February 2008 is no longer being used for Azerbaijani oil – that could provide another 80 to 100 kbd of capacity.

Thus out of the 900 kbd that has recently been flowing through the BTC pipeline, perhaps 250 kbd should find its way to the market using these other routes, meaning that the BP-operated consortium in Azerbaijan will need to shut in about 650 kbd worth of production for at least two weeks and perhaps up to five weeks.

This is less than 1 per cent of world oil supply, which is small but certainly not insignificant, particularly because Azeri crude is relatively light and extremely low in sulphur. As of this writing Dated Brent is up by less than 2 per cent on the day, which in the context of oil market behaviour in the past year is actually a rather restrained reaction, and perhaps a sign of the strength of the downdraft in oil prices.

Longer-term impact

In a sense I am surprised this did not happen sooner. Long-distance pipelines are by their very nature highly vulnerable and impossible to secure. And because of the high political profile that the Baku-Tbilisi-Ceyhan has because of its political character – in a sense it is a "celebrity pipeline" – it is an ideal target for terrorists seeking to make a major PR impact.

If yesterday's bombing was a one-off incident, then its long-term impact will be minimal. The danger is that the PKK will see the operation as having been a huge success in terms of achieving its goals (causing disruption with not just domestic but also international effect) without much difficulty, at what appears to have been a low cost – and decide to repeat it.

If yesterday’s blast turns out to be the first of several, it will have a significant impact in a number of ways. Obviously it would contribute to heightened tensions in eastern Anatolia as the Turkish military and gendarmerie step up their efforts to do something that is ultimately impossible – to protect hundreds of kilometers of pipeline. It would also cause Azerbaijan and its partners to put a higher priority on alternative export routes for Azerbaijani oil, a factor that would work in Georgia's favour by increasing the importance of Baku-Supsa as well as rail routes to the Black Sea.

This blast comes just weeks before the Kazakhstan’s largest oil producer, Tengizchevroil, was set to begin exports through BTC via the Caspian Sea – the first Kazakh barrels through a pipeline which is expected in the long run to become a major export route for Kazakh oil. This startup is not threatened although it may now be delayed. But if the impression that BTC is not secure begins to spread, it would inevitably lead to subtle changes in the Kazakh export strategy, with more weight being placed on the Russian and Chinese export options which are in any case also important components of its long-term strategy.

Best regards,
Laurent Ruseckas
Director, Eurasia Research
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