Oil Flows and Export Capacity in the Caspian Sea and Black Sea Regions

Oil Flows and Export Capacity

Yana Kamchatka Peninsular in theNorwegian Novaya Zemlya Sea Barents UK Dikson Sea

Pechenga Kara

Belokamenka Vankor-Dikson pipeline. Lena Murmansk To be built by Rosneft. Sea 750 km, 12 mn T/yr (240,000 bpd). (This project has now been abandoned in favour of a pipeline to link up with the Transneft system at Purpe). Sea of Okhotsk

ek Olen aspian ea andNORWAY SWEDENlack ea C S B SKandalaksha North Vitino Kolguyev oshore Noril'sk Sakha Republic Dudinka Sea Kolguyev (Yakutia) Island Ko Gulf of Vankor tuy Indiga Varandey Bothnia FINLAND Sredne-Viluyskoye Yakutsk Khabarovsk Kray Yamburg Skagerrak Yuzhno- Khylchulskoye White Kharyaga Okha Odoptu-More Novyy Port Vilyuy Baltic Pipeline System (BPS) Sea Pil'tun-Astokhskoye Capacity 74 mn T/yr (1.48 mbpd) Moskal'vo

Sabo at end-2006. Belomorsk 5

3 32 55 Plans have been put forward to 6 2 Mukhto Chaivo Kattegat increase capacity to 2.5-2.6 mbpd Vozhyeskaya 4 DENMARK with a new line from Unecha and Lena possibly to expand it further to 3 mbpd. Lunskoye 720 720 Dagi egions Urengoy Arkhangel'sk Nikolayevsk 508 Ob -na-Amur 0 R 53 530 Usa Urengoy Aldan Mongi Irelyakh Olekminsk East Siberia - Paci c Ocean pi BELGIUM Nizhnyaya Tunguska East Siberia - Paci c Ocean pipeline Pogibi peline Phase 1: Taishet - Skovorodino Lazarevo NETHERLANDS Nadym Aldan 30 mn T/yr. 1220 / 1067 mm. 6 pumping stations Sa HELSINKI Karpogory Synya Construction to commence late-2005.

k 610 Completion scheduled for 2008. 6 h Baltic Verkhnechonsk-Talakan pipeline. Lena Chikshino Pechora VerkhnechonskNefteGaz plans to lay a permanent pipeline from the (onward deliveries to China and the Paci c coast by rail) 42 a 520 l Muuga Verkhnechonsk eld to Surgutneftegaz's Talakanskaya eld. It is intended in Sea Gulf of Porvoo 30 720 that the two companies then build a 120-km line to link to the ESPO pipeline. Chayandinskoye 5 De Kastri Is Stepenoborskaya 720 Komsomolskaya Tarasovskaya l Finland Vysotsk a Poronaysk TALLINN Planned capacity 60-80 mn T/yr (1.2-1.6 mbpd) Krasnoyarsk n Rostock Primorsk Lake Lake d 720 Novopurpe 720 Tartar Strait Batareniya 720 Purpe Kray 426 Ladoga Onega Talakanskoye r Karampur Terpeniya Sestroretsk Barsukovskoye Makarov Amu Uglegorsk Ventspils ESTONIA Proposed by Lukoil. Vetlosyan Gulf Ukhta Yenisey Chona Tebuk 720 Gulf of St. Petersburg Shlisselburg 530 Muravlenkovskoye 720 Vengayakha 530 325 530 ESPO pipeline (Ust-Kut - Talakan) Pashnya Tyumen Krasnogorsk 720 Yarayner Until Phase 1 of the ESPO pipeline from Taishet to Skovorodino is completed, Riga Dzh'er Sutorminskoye Khanemye Firsovo the Ust-Kut - Talakanskoye section will carry oil in the reverse direction Il'inskiy GERMANY 820 Sindor Oblast Neryungri Liepaja 1020 from the eld to a rail terminal at Ust-Kut. Dzukste Verkhnechonsk Schwedt unguska Prigorodnoye Butinge Voy Vozh 426 Yuzhno- Konosha Troitsko- Vanino Mikun Pogranich Sovetskaya Sakhalinsk RIGA Kirishi Pechorsk Kholmogory Vyngapur Podkamennaya T Vitim Komsomolsk Gavan Kholmsk Korsakov Gdansk Mazeikiai Kholmogory Klaipeda 720 Vyngapur Bakhilovskaya BAM - (Baikal-Amur Magistral) -na-Amur Karlsruhe Leuna Pervomaiskaya Aniva Kotlas Urdoma Novgorod Kaliningrad Gulf 720 720 Privodino 530 Tynda LATVIA Pes Aprelskaya Zeitz Varyegan Sergino Povkhov Vitim Birzhai Rail terminal to be Ob Mokhovaya 1220 RUSSIA 820 Vostochnaya Kokhryakovo Kokhryakov Proposed Pogoryelovo Nyuksenitsa built by Rosneft for 'Western Pipeline System' 820 Nyagan Alekhin East Siberia - Paci c Ocean pipeline shipments to Arkhangelsk Varyegan 530 now abandoned 60,000 bpd (TNK-BP) Phase 2: Taishet - Paci c Ocean Bykovo [to serve crude oil exprts via the CPC pipeline] Pokachi Yurubchensk No dates. Surgut Tyumenskaya Amur Oblast Krasnoleninsk Pipeline to be extended to the coast at an unspeci ed date and Talynskoye Samotlor Litvinov/ Permyakov expanded to a capacity of 80 mn T/yr. Skrudaliyena Lyantoskoye Urevskiye Dulisma Pilyudinskoye Zaluzi Yershov The second phase of the ESPO pipeline is linked to Kuchiminiskaya 1020 720Samotlor Boguchany Skovorodino Strazky Krasnoleninskoye BAM - (Baikal-Amur Magistral) Pomeranian pipeline LITHUANIA Surgut Belozherski the opening up of oil elds in East Siberia. 720 720 Khabarovsk Gryazovets 1220 IKL pipeline Kralupy 720 Satarino Ostrov 1220 Vatinskaya 1020 Ingolstadt Karkatyev Megion 720 Gezhokoye 820 Khanty Mansiysk Aleksandrovskoye (Strezhevo') 530 Plock 1220 Salym 1020 Chita 1020 1020 1020 Yugan Orekhov Neustadt POLAND Pravdino 820 RUSSIA Ozernaya Mamontovo 820 Yuzhny Balyk Medvedevo Druzhba pipeline Velikiye-Luki Andreapol Yermakov Angara Oblast Trans-Siberian railway CZECH Nevel 1020 Tuchyevo Vohburg Polotsk Borisovo S. Priobskoye Salym Amur Torzhok Palkino Kluchevskaya Novopokur Chalayevka Ust-Kut 1020 Shaim Inyakino 1220 REPUBLIC Uglich 820 Kaimanovo Yaroslavl' 530 Shilka 820 Irtyshkaya Mugen Novoyeniseysk 530 Ilyichevka Raskino Blagoveshchensk 325 Kedrovaya Tomsk Heihe Pardubiche Senno 1220 Kirov 1220 1020 530 Ob Chashzhino Yagodnyy 1220 1220 Oblast Adamova Berezovoye Mezhdurechenskiy Kovykta Trzebina Brest 720 Demyanskoye 530 Zavyalovo Primorsk Yenisey Bratsk ay 820 Krutoye1220 Nizhny Katysh Sredne Zastava Minsk Zapes'ye Belyy Yar M 2008 820 Smolensk 530 Vasyugan Vasyugan 30 Sos'va TAL pipeline Kobrin Kray Glinsk Mariampolski 5 Parabel AUSTRIA Sosnovka 1020 BELARUS Uvat Vasyugan Sredne Bratislava - Schwechat Schwechat 820 630 Krasnokamsk ITALY Czechowice Gorky Dolina Moscow B. Sosnova 273 Nyurilskoye Proposed by Yukos Kuma Luginet 530 Pinsk Filino Debessy Kammeny Log Platina Pervomaika (2.5 mn T/yr, expandable to 5 mn T/yr) Kilemary Arlety Poyma 530 426 1220 Biser Arbatskoye Krasnoyarsk (due for completion late-2005, but 820 Dubniki Luginetskaya 530 1220 Bratislava Norsi Melkovka Syumsi 1220 Molchanovo Tayshet delayed until end-2006 by 720 1020 Aremzyan Bryansk Nizhniy Novgorod MostovayaLys'va Kemchug environmental concerns) 720 1220 Tobolsk Starolikeyevo 377 530 720 Stepanikovo Prudki Perm 720 1020 SLOVAKIA Jaslo/Jedlicze Makarievo 1020 Kiengop 530 Mishkino 530 426 Achinsk Boguchany Trieste SLOVENIA 1020 Gerasimovskaya Orlovka Kolomna 325 1020 Zamzor Levice Kostyukovichi Lazarevo Druzhba pipeline Turov Rechitsa Gorky 1020 1220 Setovo Vagay Igolskoye

Zvolen 1020 Nozhovka Drogobych Osa 1220 Irtysh Uyar Rybinskoye Kaluga Vorotynets 1020 530 630 Balakhonikha Bachkun 426 Kedrovy Mariinsk Gomel Ryazan 530 530 Tomsk Zalaegerszeg Mozyr 820 1220 Kimel'tey Tula 377 Rijeka L'vov Kashgan Nizhneudinsk Irkutsk Brody 820 Bimeri Izhevsk 1020 720 1020 Torgili Verkhne-Tarskoye Tulun 720 Lendava Tiszaojvaros Tin'grovatovo Kazan Chita Borislav 720 1020 530 377 Yekaterinburg 530 530 Unecha 1220 Tyumen Novopetrovska Oblast Orov Naberezhniye Chelny Chernushki Lake Baikal Buryat Republic Kurovichi 720 Noviny Zashchyebiye Bodovichi Plavsk Yermish' Lyutkino Sarapul Anzhero-Sudzhensk Szazhalombatta 720 Omisalj Uzhgorod Zhulino Chizhovka CHINA Novozybkov Desna Druzhba pipeline Novograd-Volynskiy720 Kovali 720 720 Pleshchevka Shilovo Sviyaga 1220 720 Kambarka Kemerovsk Dolina Aksinino Novocelovo Knyazhevo Sisak Adria pipeline Karpaty Kalush Nizhnekamsk Kaltasy Vozhnesenka Oblast Kutulik Solochino Orel Belaya Verkhov'ye 1220 HUNGARY Feneshlitkye 1020 1020 820 1220 Studyenech 720 Isetskoye Abatskiy 1020 720 325 Kemerovo Zabaykal'sk 1220 530 720 Poncevo Telepanovo Medvedskoye 720 y Harbin Nadvornaya Stanovaya Mikhailovka 1020 Khakasskaya a Kozmino 377 Muslyumovo Na Lubna Saransk Chumanovka Irkutsk Slavonski Brod Nikolskoya P khodka CROATIA 530 Angarsk e Vla 530 Sokur Oblast Ulan-Ude Golovashevka 377 Chashi re Chop 1020 Malinovka Tagay Kaleikino Aznakayevo Kanashi Yurgamysh voznaya d Druzhba - Adria KIEV Talalayevskoye Yelets Ul'yanovsk 530 ChekmagushKushkul ivostock Sosedka Nurli 325 Berdyaush (5 mn T/yr, expandable to 15 mn T/yr) Kursk 1220 Almetyevsk 5th Promysel 720 Chelyabinsk 720 Verbinovo YelizavetinkaMinnibayevo Karabash Kurgan Bekishevo Priluki Manturovo Rostovka Urussu no 720 Novosibirsk (due for completion late-2005, but UKRAINE 1220 Vargashi Syspovo Barcau Chulym Trans-Siberian railw Daqing 1220 820 Asha Transneft's proposal to terminate the ESPO pipeline delayed inde nitely by Tambov 1220 530 720 530 Tartarsk 720 Penza Kalinovy Klyuch Mishkino 530 Barabinsk Vinnitsa Gnedinchy 377 720 Serniye 1220 720 at Perevoznaya was rejected by Russia's environmental concerns) 1020 Ufa Cherkassi Omsk Kizhevatovo Gubino RomashkinoBavly Pechersk Vody Subkhanku Ulya-Tyelyak ecological supervision service. The terminal may now Sumy Kastornoye 820 Kropachevo 530 Peterfel'd 1020 530 Naryshevo377 Bulayevo Moskalenki 720 be moved to Kozmino, in Nakhodka Bay. JAPAN Novi Sad Fedorovka Glinsko- Repievka Syzran 530 Odessa-Brody pipeline Pogarshchin Kuznetsk Baitugan 100,000 bpd (TNK-BP) Rozhbyshevsk 1220 1220 Yetkul Tobol Polovka 377 l Leninsk Travniki [to serve crude oil exprts to China] Zolnoye Klyavlino 530 ovo Petropavlovsk 1020 Klin Voronezh 530 325 530 Pancevo Samara Irtysh Akhtyrka 377 Tokyo ROMANIA 530 530 Buguruslan BOSNIA - 1020 Krotovka Tuymazy 530 M. Pavlovka Klin 426 Pokhvistnevo Ishim Naushki Belgorod Saratov Syzran 530 Komelevskoye Liski Yerzovka Shkapovo (TNK-BP) 820 KrasnoslekyNovo-Kyubishev Lopatino Mukhanovo 530 Ishimbay Barnaul Changchun [to serve crude oil exprts HERZEGOVINA Kotovsk 720 Pokhrovka Komsomolech Kremenchug Sokolovay Gora via the CPC pipeline] 720 Kharkov Samara 530 Kokhnovka 530 1220 1220 530 Salavat Priyrt'shysk SERBIA Darmanesti Saratov Pokhrovka 820 Lyubechkaya Biysk 1020 Sovkhozhnaya 1380 km Kulyeshovka Zhirinovsk Tuvinsk Onseti Magnetogorsk Kustany Propetarskay Pereshchepino 250 Grach Kokchetav MONTENEGRO CHISINAU 1220 820

Krasnyy Yar Borodaevka Mrakovo Aysary Kachiry Republic 720 Bol. Chernigovka Cimpina 377 Adriatic MOLDOVA Chikalovka 1020 Ternovka Tavolzhan Krasnoarmeysk Mashtakovo Nikolayevska 720 Lisichansk 1220 Amankaragay 720 530 Pitesti Dyagovka Novoaydar Belokochk 1220 Shirokoye 1220 Sukhodolnaya Sea 720 Astakhov 377 Ploesti Pivdenne Andreevka 820 Pavlodar 720 720 E movka Novomlinovskaya Ural ULAN BATOR Odessa Snigirevka Satarovskaya Karachaganak Orenburg Ishim Andreanovka Yermak NORTH ALBANIA Lugansk 1220 Zenzevatka Bol. Chagan Cërrik Pleven Kherson Vlore Ekibastuz KOREA Kuçove FYROM Orsk 820 820 Ballsh 530 Midia 530 Ruse Atyrau-Samara pipeline Shenyang ASTANA MONGOLIA Stepnoye BULGARIA Berdyansk Baranovka Irtysh Rostov Rodionovskaya Don Constanta on Don Karachaganak-CPC pipeline Volgograd Semipalatinsk P'YONGYANG Don Built by Karachaganak partners Commissioned mid-2003 Sakharniya Thessaloniki Volga-Don 720 NPS No. 7 Trydovoye Canal The Ulan Bator railway has the capacity 720 Karaichevska Volga Antonovo 720 Temirtan to carry 8 mn T/yr of Russian oil to China. GREECE Kushchevskaya 820 NPS No. 6 Karaganda There are plans to increase this to 10 mn T/yr Zimovnik 820 Burgas Link from Volgograd re nery to Temir between Naushki and Ulan Bator and 12 mn T/yr Zamyn-Ude CPC pipeline proposed by Lukoil. Built by Nelson Resources/Kazmunaigaz Saryepta Feasibility study completed Dec-03. Inderborskiy Yekaterinovka Completed - 3Q02 Karagayly between Ulan Bator and Zamyn-Ude. SEOULSOUTH Peschanokopskoye Kenkiyak Novovelichkovskaya820 Alexandroupolis KrymskPS8 Kenkiyak Yuzhnaya Tikhoretsk TURKEY 820PS7 Karmanovo KOREA Ozereyevka Dossor Atasu Krasnodar Kropotkin (PS6) Elista Alibekmola Dalian B l a c k S e a Getmanovskaya BEIJING Astrakhan Novorossiysk 325 Ladozhskaya Zhanazhol PS5 A-NPS4A KAZAKHSTAN 530 Astrakhan A-NPS3A Karskay 219 325 Progress Makat 273 PS4 1020 1020 Psekup Pshekhskaya Armavir NPS 9 Smolenskay A-NPS5A Martyshi 530 Kzyl-Dzhar Atyrau Iskine Komsomolk'skiy Aktogay Zarecheye Khadyizhensk A-NPS4 Istanbul Konakovo Stavropol Trusovo 530 1020 PS3 Raz. Sayak No. 6 / Ilyinka Kul'sary PS2 Koschagyl Built by CNPC Birlestik Tuapse Kashagan 273 Balkhash 720 1020 Velichayevskoye Completed late-2002 Vodorazhdyev Ulan Khol Munayly Izmit 1020 273 Cherkessk Karaton Komsomolsk (PS1)

Zimmnaya Stavka 325 Alashankou (Druzhba) 530 Aliaga 530 Opornyy Georgiyevsk N. Buzachi 720 Kamysh-Burun Sarykamys Aegean Tengiz 1020 Russkiy Khutor Kalamkaz Built by PetroKazakhstan (Hurricane Samsun Hydrocarbons) - Commissioned - 2Q03 Lake Balkhash Ishcherskaya Karazhanbas Unye GEORGIA 530 Karakoin Boznyesyenskaya Karazhanbas400 Dushanzi Sea TURKEY 530 Khayan-Kort Kalamkas 720 Urumchi ANKARA 426 530 720 Malgobek 273 Beyneu

Kirikkale Karabulak 325 Grozny Kumkol Poti Tauchik Supsa Samtredia Dzhinchirayeli Dolinskaya 400 Khasavyurt Dzhusaly 820 CRETE Usakhyelo Aral Didi Plyevi Aktau 112 km Zhetybay Say-Utes Batumi Khashuri Akshabulak Sivas 219 Makhachkala 1020 Baku-Tbilisi-Ceyhan pipeline Akhaltsikhe 530 45 km 80 km Sea Tasty 91 km 530 Possof (PS-T1) Izberbash 22 km Zhetybay Kzyl-Orda Çayirli (PS-T3) TBILISI Tenge Almaty Altinyayla (PS-T4) Teritskharo Gyedzhukhskaya Kuryk Garbadani Samgori Tenge Brlik Erzincan Pasinler (PS-T2) Suzak OIL PIPELINES MAP Tsiteli- ARMENIA Tskaro Erzurum C a s p i a n Chulak-Kurgan BISHKEK Leninakan Akstafa 720 PROJECTS AS OF OCTOBER 2007 Kagizman Kayseri Commissioned July 2006. S e a YEREVAN Kungrad Shamkhor Mersin Andirin (PS-T4) UZBEKISTAN Chayan Dzhambul International boundary Gyandzha 820 AZERBAIJANYevlakh River Ceyhan Uchkuduk Railway Shymkent Baku-Tbilisi-Ceyhan Eastern Siberia - Pacific Ocean 720 MashtagiDyubendi

Dortyol 630 Dolina Artem Ostrov Oil eld Nakhichevan BAKU KYRGYZSTAN Batman 530 Sangachaly 820 Ali Bayramli CYPRUS Namangan Baltic Pipeline System II Kazakhstan Caspian Transportation System Pipeline (existing) Chardara Turkmenbashi TASHKENT 820 Dzhalal-Abad CHINA Pipeline (planned / proposed) 377 Unused Chimkent - Chardzhou 630 Fergana Assake Tabriz Belek Kharabek Burgas-Alexandroupolis Kazakhstan-China M e d i t e r r a n e a n Nurata PUMP STATIONS Kanibadam Sev. Sokh Bastan 630 Andizhan Primary (existing) Barsa-Gelmes 273 259 Palvantash Cheleken (26 Baku Commisars) Primary (under construction) S e a Kotur-Tepe Bukhara Chimion 325 Burun / Nebit Dag TURKMENISTAN SYRIA Karagel' Burgas-Vlore (AMBO) Intermediate (existing) Kum-Dag Samsun-Ceyhan Kotur-Tepe Intermediate (under construction) Samarkand ENERGY CHARTER

Intermediate (planned / proposed) Korpedzhe Mubarek Pressure reduction station (planned / proposed) Seidi Constanta-Trieste (PEOP) Odessa-Brody-Plock LEBANON 325 Oil heating station Kashkadariya based on maps from: Okarem TAJIKISTAN

DUSHANBE Measuring station ASHKHABAD Druzhba-Adria Kerki

Storage tanks (existing) ISRAEL Bayram Ali Storage tanks (under construction) JORDAN Neka Mary EGYPT IRAQ Neka Oil re nery Sari 203

TEHRAN Oil export / import port (existing) 305 Lajim Oil export / import port (proposed / planned) SAUDI 820 IRAN PAKISTAN recently finished / under construction planned Rail trans-shipment terminal ARABIA AFGHANISTAN

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Information contained in this work has been obtained from sources believed to be reliable. However, neither the Energy Charter Secretariat nor its authors guarantee the accuracy or completeness of any information published herein, and neither the Energy Charter Secretariat nor its authors shall be responsible for any losses or damages arising from the use of this information or from any errors or omissions therein. This work is published with the understanding that the Energy Charter Secretariat and its authors are supplying the information, but are not attempting to render legal or other professional services.

ISBN: 978-905948-069-8 (PDF)

Reproduction of this work, save where otherwise stated, is authorised, provided the source is acknowledged. All rights otherwise reserved. Oil flows and export capacity in the Caspian Sea and Black Sea regions

FOREWORD

The Caspian region holds substantial oil reserves, which are larger then the reserves of the North Sea or the US. However, most of these reserves are landlocked and need transit to access international markets. In addition, oil transported to the Black Sea then has to pass the increasingly congested Turkish Straits and add to the risks linked to tanker traffic through this highly frequented waterway.

Several pipeline projects are under consideration to bring the Caspian oil to the markets. This report is a detailed review of various oil production scenarios for the Caspian region and their comparison with the export capacity that would be created by various pipeline projects in the Caspian and Black Sea regions.

This report is a valuable contribution to a comprehensive, fact-based understanding of the various export options under discussion in the region.

The report was prepared by Baurzhan Valiyev, during his secondment from KazMunayGas to the Energy Charter Secretariat from May 2007 to April 2008, under the supervision of Ralf Dickel, Director for Trade and Transit. It benefited from a discussion with the representatives of the Energy Charter member governments during the Trade and Transit Group meeting in February 2008.

This report is made publicly available under my authority as Secretary General of the Energy Charter Secretariat and without prejudice to the positions of Contracting Parties or to their rights or obligations under the Energy Charter Treaty or the WTO agreements.

André Mernier Secretary General Brussels, May 2008

-3- Oil flows and export capacity in the Caspian Sea and Black Sea regions

TABLE OF CONTENTS

FOREWORD...... 3

EXECUTIVE SUMMARY ...... 6

1. INTRODUCTION ...... 7

2. RESERVE BASE...... 8

3. OIL PRODUCTION AND EXPORTS...... 10

3.1. ESTIMATES FOR 2007 ...... 10

3.2. FORECASTS FOR 2010 AND 2015...... 14

4. CASPIAN SEA REGION ...... 16

4.1. EXPORT CAPACITY...... 16

4.2. ALLOCATION OF FLOWS...... 19

5. BLACK SEA REGION...... 22

5.1. EXPORT CAPACITY...... 22

5.2. ALLOCATION OF FLOWS...... 26

6. TURKISH STRAITS BYPASS PROJECTS ...... 28

7. CONCLUSION ...... 31

REFERENCES...... 32

ACRONYMS AND ABBREVIATIONS ...... 33

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LIST OF FIGURES AND TABLES

Figure 1. Total oil production and exports by country in 2006 ...... 10 Figure 2. Oil exports from the Caspian region vs. total oil exports from Caspian region countries in 2006 ...... 11 Figure 3. Estimated total oil exports and oil exports from the Caspian Basin by selected country in 2007...... 12 Figure 4. Oil flows from the Caspian Basin in 2007 (estimation) ...... 13 Figure 5. Estimation of Caspian Basin oil exports for 2007 and forecasts for 2010, 2015 ...... 14 Figure 6. Oil export options for Caspian oil ...... 16 Figure 7. Caspian Sea region estimates: oil flows vs. available capacity...... 18 Figure 8. Estimated allocation of oil from the Caspian region ...... 22 Figure 9. Black Sea region: oil inflow routes ...... 23 Figure 10. Estimated Caspian oil inflow and total inflow capacity in the Black Sea region...... 25 Figure 11. Estimated total oil inflow and inflow capacity to the Black Sea...... 25 Figure 12. Estimated oil allocation in the Black Sea region...... 27 Figure 13. Turkish Straits bypass projects...... 28 Figure 14. Turkish Straits bypass projects: pipeline capacity vs. flows ...... 29

Table 1. Total proven oil reserves of Caspian region countries and proven oil reserves of the Caspian Basin...... 8 Table 2. Assumed capacity changes along Caspian oil export routes ...... 17 Table 3. Shares in selected upstream and westward pipeline projects in the Caspian region...... 20 Table 4. Shares in selected upstream and eastward pipeline projects in the Caspian region...... 21 Table 5. Assumptions on available inflow capacity changes in the Black Sea region.... 24 Table 6. Share of selected oil producing companies in the refineries of the Black Sea region...... 26 Table 7. Main parameters of Turkish Straits bypass projects...... 29

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EXECUTIVE SUMMARY

This study focuses on oil flows in the Caspian Sea region and their influence on oil flows in the Black Sea.

Increasing exploration and development in the region lead to more oil production, and the large amount of oil available for export from the Caspian countries is increasing.

The landlocked nature of the Caspian region makes transportation of oil from the region to the world markets a major challenge, which requires the use of existing oil pipelines and building new transportation infrastructure.

The lack of an adequate export infrastructure and sufficient throughput capacity has been and still is probably the most difficult problem facing the Caspian region countries. In this relation, expansions of existing pipelines and building of new pipelines have been proposed and planned, and some have already been constructed.

The expected increase in oil exports from the Caspian region will strongly influence oil flows in the Black Sea region and will also lead to an increase in tanker traffic through the shallow and congested Bosporus Strait. There are a number of proposed and planned pipelines to bypass the Turkish straits of which the most prominent projects are also reviewed in the study.

In general, the main issue looked into in this report is how Caspian oil can find its way to export markets. This report considers the impact that the increased oil production in this region should have on oil flows across the Black Sea and the Turkish straits depending on various existing and envisaged oil transportation routes.

This paper also provides estimates of the existing and potential oil flows up to 2015. It examines the options for oil pipelines expansion, and looks at the competition between different pipeline projects in the Black Sea area.

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1. INTRODUCTION

Much of the world’s interests focus on the huge oil reserves onshore and offshore of the Caspian Sea region. Contracts worth billions of dollars were signed and many joint ventures were formed to develop the region’s oil fields. The break-up of the Soviet Union brought initial instability in some countries, but by the late 1990s the region was relatively stable politically, and a number of countries made significant progress in attracting investments into their oil and gas sectors.

The littoral countries of the Caspian Sea are Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan. However, in the context of developing oil reserves, it is important to consider the region’s geological structure: the North Caspian, Middle Caspian, South Caspian and North Ustyurt Basins spread through Azerbaijan, Turkmenistan, northern Iran, western Kazakhstan, the Caspian region of Russia and the western part of Uzbekistan. And it is in this sense (rather than in the strictly geographical sense) that the terms ‘Caspian region’ and ‘Caspian Basin’ are used in this report for the analysis of oil production and exports.

Sizeable oil production growth has come primarily from the north Caspian states of Kazakhstan and Azerbaijan. Development of the Caspian oil resources has been led by three major projects: Tengiz and Karachaganak in Kazakhstan, and Azeri, Chirag, and deepwater Guneshli field in Azerbaijan. Expected oil production growth in the region is mainly caused by the development of Kashagan oil field in Kazakhstan.

Caspian oil presents a lot of opportunities for world oil markets and for the region itself:

− The emergence of new production sources would diversify world oil supplies. Significant quantities of Caspian oil would ease the pressure on the Persian Gulf production capacity and provide an additional hedge against oil supply disruptions.

− Profits from oil exports could stimulate economic growth and improve the standard of living in the Caspian energy-producing states. The availability of Caspian energy supplies in world markets will likewise enhance the prospects for economic growth and political stability in the key countries surrounding the region.

Nevertheless, the importance of Caspian energy resources to global energy supplies and energy security should not be overstated. Caspian oil will be expensive and technologically difficult to find and develop. Indeed, there are numerous obstacles that must be overcome if these countries are to transport their oil to external markets.

This paper investigates how Caspian oil can find its way to international markets, and what influence it should have on the Black Sea region – a transit crossroads between a major oil supply area and some important export markets. The report also outlines some basic information on the most prominent considered pipeline projects for bypassing the Turkish Straits.

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2. RESERVE BASE

The prospect of potentially enormous hydrocarbon reserves is part of the allure of the Caspian Sea region which includes Azerbaijan, Kazakhstan, Uzbekistan, Turkmenistan, and the regions of Iran and Russia that are near the Caspian Sea.

Although the Caspian region is unlikely to become ‘another Middle East’, most observers consider that its resources will be of the same order of magnitude as those of the United States or the North Sea. The recent estimates by the Oil and Gas Journal of total proven reserves1 of the countries which have a ‘share’ in the Caspian Basin, amount to 32 billion tons2 (235 billion barrels). The Energy Information Administration’s estimates of proven oil reserves in the Caspian Basin itself vary between 2,356 and 6,807 million tons (17 to 50 billion barrels).

Based on the analysis of this data, the estimates of proven oil reserves of the Caspian Sea region assumed in this paper are shown in Table 1.

Table 1. Total proven oil reserves of Caspian region countries3 and proven oil reserves of the Caspian Basin million tons Proven reserves of Countries’ Author’s the Caspian region** Country total proven estimates for the reserves* Caspian region Low High

Azerbaijan 959 959 959

Iran 18,667 14 14

Kazakhstan 4,110 1,232 5,479 1,232÷4,110

Russia 8,129 41 41

Turkmenistan 82 75 233 75÷82

Uzbekistan 81 41 81 41÷81

Total 32,028 2,362 6,807 2,362÷5,287

* Source: Oil and Gas Journal, World Proven Reserves of Oil, January 2007 ** Source: EIA, Caspian Sea region, Survey of Key Oil and Gas Statistics and Forecasts, July 2006

As we see, proven oil reserves for the Caspian region are estimated in the range of 2.4÷5.3 billion tons. Most of Azerbaijan’s oil resources (proven, as well as possible reserves) are located offshore, and perhaps 30-40% of the total oil resources of

1 Proven reserves are defined by the Energy Information Administration of the US Department of Energy (EIA) as those volumes of oil that geological and engineering data show with reasonable certainty to be economically recoverable under existing economic and operating conditions. 2 Assumed conversion coefficient from barrels to tons is equal to 7.3. 3 Hereinafter, total proven oil reserves of Caspian region countries include the reserves of the Caspian Basin and in all other parts of these countries.

-8- Oil flows and export capacity in the Caspian Sea and Black Sea regions

Kazakhstan and Turkmenistan are offshore as well. Uzbekistan’s oil resources of are located onshore.

However, it is important to note that while the amount of proven reserves certainly plays a role in estimating a region’s production and export potential, the determining factor is the development, production and export plans and strategies actually in place.

Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan have all ratified the Energy Charter Treaty (ECT), which came into force in April 1998. Russia has signed but not ratified the Treaty, it applies the ECT on a provisional basis. Part III of the Energy Charter Treaty covers the promotion and protection of investment by companies from other member states, which include most OECD countries (except New Zealand, the Republic of Korea, the US and Canada) and many non-OECD countries. The Treaty applies to all investments in ‘exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing or sale of energy materials or products’. It requires the Treaty members to treat investors from other member states no less favourably than its own investors and the investors of any other country. In this regard, Azerbaijan and Kazakhstan have made significant strides in creating an attractive investment climate.

-9- Oil flows and export capacity in the Caspian Sea and Black Sea regions

3. OIL PRODUCTION AND EXPORTS

3.1. ESTIMATES FOR 2007 Oil production of countries in the Caspian Basin in 2006 was more than 800 million tons. All countries except Uzbekistan exported oil. During that year, total net oil exports from these countries amounted to more than 450 million tons, while Uzbekistan had imported 0.5 million tons.

Figure 1. Total oil production and exports by country in 2006 million tons/year

600

500 480.5

400

300 248.4 209.8

million tons/year 200

125.0

100 64.7 52.1 32.3 22.4 8.5 1.9 5.4 (0.5) 0 Azerbaijan Iran Kazakhstan Russia* Turkmenistan Uzbekistan

production net export

* In calculating Russia’s exports of Caspian oil, approximately 7 million tons were estimated based on the difference between reported CPC4 flows and actual flows from Kazakhstan Source: RPI, BP Statistical Review 2007

The largest exporter of oil is Russia, whose exports in 2006 amounted to more than 248 million tons. The largest exporter in relative terms is Kazakhstan, whose 2006 exports of more than 52 million tons of oil constituted more than 80% of its production. In this paper the term ‘oil’ includes crude oil and gas condensate, but in the case of Kazakhstan oil export figures do not include the gas condensate exported to the Orenburg gas processing plant in Russia (2.4 million tons), since it is used for the production of gas and is delivered through the gas transportation infrastructure.

Azerbaijan produced 32.3 million tons and exported more than 22 million tons of oil in 2006. Oil production in Iran during the same year amounted to almost 210 million tons, and oil exports – around 125 million tons.

Figure 2 compares the amount of oil exported from the Caspian Basin to total oil exports from the Caspian region countries in 2006.

4 CPC – Caspian Pipeline Consortium.

-10- Oil flows and export capacity in the Caspian Sea and Black Sea regions

Figure 2. Oil exports from the Caspian region vs. total oil exports from Caspian region countries in 2006 million tons/year

300

248.4 250

200

150 125.0

million tons/year 100

52.1 49.9 50 22.4 22.4 6.7 1.9 1.9 (0.5) -0.5 0 Azerbaijan Iran Kazakhstan Russia* Turkmenistan Uzbekistan

total export export from the Caspian Sea Region

* In calculating Russia’s exports of Caspian oil, approximately 7 million tons were estimated based on the difference between reported CPC flows and actual flows from Kazakhstan Source: RPI, KazMunayGas, CPC

The largest exporter of Caspian oil is Kazakhstan, whose exports have exceeded 52 million tons in 2006. This amounted to 96% of total Kazakh oil exports, only 4% came from the Turgay Basin (this oil was delivered to China). The second largest Caspian oil exporter is Azerbaijan – its exports in 2006 have exceeded 22 million tons.

When calculating Russia’s exports of Caspian oil, approximately 7 million tons were estimated based on the difference between reported CPC flows and actual flows from Kazakhstan. Even if these volumes originated from other parts of Russia (basically, Siberia), they were shipped through the CPC pipeline according to the shareholders’ commitments. As these are effectively Russia’s commitments, either these or other volumes are shipped together with the Caspian oil and directly influence the Caspian oil flows. Therefore, these volumes were also assumed as flows from the Caspian Sea region.

Iran did not export oil from its Caspian region in 2006, while Uzbekistan ended up importing some volumes. Currently it is difficult to expect that these two countries should become large producers of Caspian oil in the near future. At the same time, there was no reliable publicly available information on the prospects of Caspian oil production in these countries, so they were excluded from further analyses in this report.

At the time of writing, 2007 data was not yet available for all Caspian region countries, therefore, the Caspian oil export volumes demonstrated in Figure 3 are estimates based on various publications.

-11- Oil flows and export capacity in the Caspian Sea and Black Sea regions

Figure 3. Estimated total oil exports and oil exports from the Caspian Basin by selected country in 2007 million tons/year

250 227.6

200

150

100 million tons/year

56.5 51.8 50 34.3 34.3

7.0 3.5 3.5 0 Azerbaijan Kazakhstan Russia* Turkmenistan

total export export from the Caspian Sea Region

For 2007, the calculation of Russia’s Caspian oil exports also includes 7 million tons estimated based on the difference between reported CPC flows and actual flows from Kazakhstan.

Kazakh oil exports in 2007 amounted to more than 56 million tons, of which almost 52 million tons came from its Caspian reserves.

Azerbaijan sent abroad over 34 million tons,5 while Turkmenistan’s oil exports stood at 3.5 million tons in 2007.

In general, there are no significant changes compared to 2006: Russia remains the total largest oil exporter, and the largest exporter of Caspian oil is Kazakhstan.

Figure 4 illustrates the estimated breakdown of Caspian oil exports by route in 2007. These estimates are based on the information from the Argus CIS Crude Report, the CPC and KazMunayGas.

5 Different sources report different volumes of exported Azeri oil: from 30 to 35 million tons in 2007.

-12- Oil flows and export capacity in the Caspian Sea and Black Sea regions

Figure 4. Oil flows from the Caspian Basin in 2007 (estimation)* million tons/year

16.0

32.6 7.0 6.3

25.6

6.6 4.2 9.2

1.6 4.7 3.4 2.1 27.5 3.5 0.3

3.2

Atyrau-Samara Baku-Novorossiysk Baku-Tbilisi-Ceyhan 6.6 CPC Baku-Batumi railroad

* Based on maps provided by the Centre of Global Energy Studies (CGES)

The largest volumes of crude oil – almost 33 million tons – were transported via the CPC pipeline. Around 26 million tons came from Kazakhstan and 7 million tons – from Russia.

The second most utilised route was the Baku-Tbilisi-Ceyhan pipeline, which transported more than 27 million tones of crude that consisted only of Azeri oil.

In third place in terms of exported volumes was the Atyrau-Samara pipeline, which delivered 16 million tons of Kazakh oil to Russia’s Transneft pipeline system.

Kazakhstan exported 9.2 million tons through the Caspian Sea port of Aktau. Then these volumes were split in three directions: 4.2 million tons went to Makhachkala (Russia), 1.6 million tons – to Baku (Azerbaijan) and 3.4 million tons – to Neka (Iran).

-13- Oil flows and export capacity in the Caspian Sea and Black Sea regions

Turkmenistan also split its oil export volumes: 3.2 million tons was transported to Neka (Iran) and some 0.3 million tons were shipped to Baku (Azerbaijan).

In 2007, the Baku-Supsa pipeline was not operational due to technical reasons related to a landslide in the Caucasus Mountains. The pipeline is expected to resume operations in the second quarter of 2008 according to SOCAR6 officials, and some 7 million tons of oil will be transported through this pipeline annually.

3.2. FORECASTS FOR 2010 AND 2015 Oil production and exports will depend on a number of factors, including the development of additional transportation routes.

Nevertheless, all the countries of the Caspian region have ambitious plans for increasing oil exports. Figure 5 compares the 2007 oil export estimates for the Caspian Basin with the forecasts for 2010 and 2015.

Figure 5. Estimation of Caspian Basin oil exports for 2007 and forecasts for 2010, 2015 million tons/year

250 195÷237

42 200 6 17 128÷157

150 30 4 6 96.6 120 100 3.5 million tons/year 7.0 68

51.8 50

50 52 34.3 0 2007 2010 2015 Azerbaijan Kazakhstan Russia* Turkmenistan * Russian volumes were estimated as a difference between Kazakh plans to transport oil through the CPC pipeline and expected pipeline capacity changes Source: RPI, EIA, KazMunayGas, Ministry of Oil and Gas Industry of Turkmenistan

Russian volumes were estimated as a difference between Kazakh plans to transport oil through the CPC pipeline and expected pipeline capacity changes.

The forecast figures for Turkmenistan used in Figure 5 date back to 2004, when the Turkmen Oil and Gas Industry Ministry announced its official plans to increase the country’s oil exports to 34 million tons by 2010 and to 48 million tons by 2015.

6 SOCAR – State Oil Company of the Azerbaijan Republic.

-14- Oil flows and export capacity in the Caspian Sea and Black Sea regions

At the same time, the historical data and the current level of oil production and exports from Turkmenistan suggest lower forecast volumes. The EIA oil production forecasts for the country are 10.5 and 13 million tons per year (0.21 and 0.26 barrels/day) for 2010 and 2015 respectively.7 Assuming that the oil processing level at domestic refineries will at least remain at the current level of 7 million tons/year, Turkmenistan’s export volumes could be around 4 and 6 million tons in 2010 and 2015 respectively.

This report took both forecasts into consideration and used them as a basis for a low and a high case scenario for Turkmenistan’s Caspian oil outflows: in 2010 – from 4 to 34 million tons, in 2015 – from 6 to 48 million tons. A likely scenario will be somewhere below the average of this range, from the author’s point of view.

Thus, total oil exports from the Caspian region in 2010 are estimated with the range of 128 to 157 million tons, and in 2015 – 195 to 237 million tons. These figures represent a 33 to 63% increase by 2010, and a 102 to 145% increase by 2015, compared to the 2007 oil export level of 97 million tons.

7 US-Turkmenistan Energy Roundtable of September 24, 2007.

-15- Oil flows and export capacity in the Caspian Sea and Black Sea regions

4. CASPIAN SEA REGION

4.1. EXPORT CAPACITY The original oil pipeline system to transport oil from the Caspian region was designed and established during the Soviet era as part of the overall system to serve the energy needs of the Soviet Union. All these pipelines inherited from the Soviet Union passed through the Russian territory. After gaining independence and having undergone important economic and political changes, the former Soviet countries turned to developing a new oil export infrastructure with a focus on increasing throughput capacity and reaching new markets. Only two oil pipelines existed for Caspian oil in the Soviet Union: Atyrau-Samara and Baku-Novorossiysk. The current pipeline infrastructure for Caspian oil exports was built comparatively recently and now also includes the following pipelines:

− Baku-Supsa – 1999; − Caspian Pipeline Consortium (CPC) – 2003;8 − Baku-Tbilisi-Ceyhan (BTC) – 2006. Among the different modes of transportation currently used by the Caspian countries for exporting oil, the pipeline system is of primary importance since it is both the most economical and the most efficient. Figure 6 demonstrates the existing capacity and planned options for exporting oil from the Caspian region to mature and rapidly developing energy markets.

Figure 6. Oil export options for Caspian oil* million tons/year

Samara

Novorossiysk 32 (67) 10 (20) Atyrau

Alashankou 7 Supsa 7 Aktau

50 (62/80) ) 3 6 2 15 /5 5 Ceyhan (3

Baku

8 (20)

Neka (50)

existing * 50 (62/80) means existing capacity 50, expansion planned for 62 or 80 planned * Based on maps provided by the CGES

8 First oil was loaded onto a tanker in 2001, but the first phase of the project became fully operational in 2003.

-16- Oil flows and export capacity in the Caspian Sea and Black Sea regions

This picture should slightly change if the KCTS (Kazakhstan Caspian Transportation System) is implemented across the Caspian Sea and if Kazakhstan and Turkmenistan increase their oil swap operations with Iran.

Table 2 illustrates our assumptions concerning the changes to Caspian oil transportation capacity over time.

Table 2. Assumed capacity changes along Caspian oil export routes million tons/year Before Beyond 2007 2010-2015 2010 2015

Existing:

Atyrau-Samara 16 16 16 16

Baku-Novorossiysk 7 7 7 7

BTC 28 50/62 50/62 50/62/80

Baku-Supsa - 7 7 7

CPC 32 32 40÷67 67

Iran Oil Swap 8 10 10 10/20

Baku-Batumi rail 15 15 15 15

Planned:

KCTS - - 23/35 35/56

Kazakhstan-China (phase II) - -/20 20 20

Proposed:

Kazakhstan-Turkmenistan-Iran - - - 50

Central Asian (Kazakhstan- - - - 50 Turkmenistan-Afghanistan-Pakistan)

Source: KazMunayGas, Transneft, CPC

Currently, the designed capacity of the BTC pipeline is 50 million tons/year, and in 2007 its available capacity was at approximately 28 million tons/year. The BTC pipeline capacity could increase to 62 million tons/year by 2009 and to 80 million tons/year by 2012-2013 according to the statement of BTC Turkey management in March 2008 and earlier statements of the President of Azerbaijan. Our assumptions include optimistic and conservative plans for such increases over time.

-17- Oil flows and export capacity in the Caspian Sea and Black Sea regions

Even if there is no final decision to expand the CPC pipeline, we assume that it could increase to 40÷45 and 67 million tons/year by 2012 and 2015 respectively, as there is a joint interest of all the participants of the Consortium to increase the pipeline’s throughput capacity.

Iran intends to play an important role in the transportation of Caspian oil. According to statements by Iranian officials, Iran will be ready to transfer up to 10 million tons/year by 2010 and 20 million tons/year by 2015.

As for other transportation routes, there is no available information on possible capacity changes. There were certain plans to expand the throughput capacity of the Atyrau- Samara pipeline, some upgrades were even done by Kaztransoil. But negotiations between Kaztransoil and Transneft were suspended and there is no information on the development of such plans.

In addition, Kazakhstan is working on two major export projects which involve building new transportation routes: KCTS (23 to 56 million tons/year) and phase II of the Kazakhstan-China pipeline (20 million tons/year).

KCTS is intended to link the oil fields in Western Kazakhstan to the BTC pipeline, and in fact it will be considered more as a regional oil redistribution system, rather than as an export route for Caspian oil. At the same time, phase II of the Kazakhstan-China pipeline is certainly a new export option for Kazakhstan’s Caspian oil and it will definitely play an important role in the allocation of Caspian resources.

Figure 7 compares forecasted Caspian oil flows with the transport capacity which should be available according to our estimations.

Figure 7. Caspian Sea region estimates: oil flows vs. available capacity million tons/year

250 237 232 15 195 7 200 190 20 169 15 135 157 7 15 8 150 7 80 128 10 50 106 15 97 7 8 62 100 15 15 20 20 88 77 million tons/year 50 16 16 28 28 20 50 77 77 16 16 16 16 67 67 32 32 32 32 0 a c t u a llo hi lo hi 2007 2010 2015

CPC Atyrau-Samara Baku-Novorossiysk Kazakhstan-China (phase II) BTC Iran # export (high scenario) Baku-Supsa Baku-Batumi & others rail # export (low scenario) # transport capacity Export LO Export HI

The bars on the left represent low scenarios, while the bars on the right represent a high scenario of the expansion of export capacity.

-18- Oil flows and export capacity in the Caspian Sea and Black Sea regions

The green line in the chart represents a low export scenario, and the red line – a high export scenario.

As we see, in 2007 the Caspian oil export capacity was used at 92%. In 2010 and 2015, the high scenario of export capacity expansion should cover both low and high export scenarios, while the low capacity expansion scenario fits only with the low export scenario.

However, creating new export capacity for Caspian oil, especially through expanding the existing pipelines (except for phase II of Kazakhstan-China pipeline), could be done relatively quickly.

Thus, export capacity in 2010-2015 could meet the Caspian region’s oil export needs: - 135 to 169 million tons/year of export capacity for volumes of 128 to 157 million tons/year in 2010, and - 190 to 232 million tons/year of export capacity for 195 to 237 million tons/year in 2015 (designed pipeline capacity can be easily increased to accommodate small surpluses, such as 5 million tons/year, by adjusting the oil transportation technology).

4.2. ALLOCATION OF FLOWS Even if the available capacity should be sufficient for exporting increased volumes of oil, pipelines will be not used equally as they are not equally attractive for oil producers. There are a number of factors that could influence the producers’ choice: - Commercial interests: transportation costs (transportation tariffs, loading/unloading, dispatching, blending, storage, etc.), quality bank and a quality premium, market price at the place of destination; - Political factors: country’s policy, company’s policy; - Risks: access and reliability of routes, predictability of scheduling and safety.

The Caspian oil flows from Azerbaijan, Turkmenistan and Russia could be predicted to a certain extent, namely: - Azeri oil would use the Baku-Tbilisi-Ceyhan pipeline and then the Baku-Supsa link if available, and then – Baku-Novorossiysk; - Russian oil would be transported by the CPC; - Turkmen oil could go to Iran and Azerbaijan.

However, Kazakhstan’s oil export flows from the Caspian region are much more complicated and their allocation will also be related to the participation of oil producers in the transportation projects.

Table 3 represents the shares of major oil producers in Kazakhstan’s upstream projects and their shares in westward pipelines.

-19- Oil flows and export capacity in the Caspian Sea and Black Sea regions

Table 3. Shares in selected upstream and westward pipeline projects in the Caspian region

Shareholder Kashagan Karachaganak Tengiz BTC CPC

BG 32.50 2.00

1 ExxonMobil 16.81 25.00 7.50

2 2 LukOil 15.00 2.70 6.75

1 3 Shell 16.81 3.68

1 Total 16.81 5.00

1 ConocoPhillips 8.40 2.50

1 Inpex 7.55 2.50

2 2 BP 2.30 30.10 5.75

4 Chevron 20.00 50.00 8.90 15.00

1 5 Eni 16.81 32.50 5.00 2.00

KazMunayGas or 1 20.00 19.00 its shareholders 16.81

Total 100.00 100.00 100.00 54.00 61.68

1 as Agip KCO 2 as LukArco 3 as Shell/Rosneft 4 as former Unocal 5 as Agip International Source: CPC, Agip KCO, LukOil, Kaztransoil

Highlighted in orange are the oil producers that participate in the CPC, BTC pipeline participants are highlighted in green. BP, Chevron and Eni participate both in the CPC and BTC pipeline. KazMunayGas participates only in the CPC, but it is also working on the KCTS, which should be linked to the BTC pipeline. Also through its subsidiary Kaztransoil, KazMunayGas has a 100% share in the Batumi oil terminal and, therefore, would be interested in transporting oil via the Baku-Batumi railroad.

Thus, oil transported through the CPC pipeline, the Baku-Supsa pipeline and via the Baku-Batumi railroad would come to the Black Sea region, while volumes allocated to the BTC pipeline would get directly to the Mediterranean Sea.

At the same time, some oil producers, which have Chinese participation, may be interested in an eastward direction of oil flows (Table 4).

-20- Oil flows and export capacity in the Caspian Sea and Black Sea regions

Table 4. Shares in selected upstream and eastward pipeline projects in the Caspian region

Production company Shareholder Share,% Aktobemunaygas CNPC 88 North Buzachi CNPC 50 Karazhanbasmunay CITIC Group 50 SazanKurak Sinopec 85 Source: CERA

In addition to respecting China’s political considerations, CNPC also has a commercial interest in Caspian oil projects as it owns 49% of the Kenkiyak-Atyrau pipeline and 50% of the Atasu-Alashankou pipeline.

In 2007, the total oil production of companies with the participation of CNPC, CITIC Group and Sinopec was 10.2 million tons, of which the Chinese companies’ share was 7.5 million tons. Therefore, it can be concluded that the volumes of oil that would probably be allocated for the eastward direction should be quite significant.

-21- Oil flows and export capacity in the Caspian Sea and Black Sea regions

5. BLACK SEA REGION

5.1. EXPORT CAPACITY As the world’s attention is focused on oil transportation through the Turkish Straits, and because of the importance of the Black Sea region’s location between a major oil supply area and a large market, oil outflows to the Black Sea area are analysed in more detail.

Figure 8 illustrates the estimated Caspian oil outflow to the Black Sea area to 2015.

Figure 8. Estimated allocation of oil from the Caspian region million tons/year

250 237

195 200 115 157 150 83 128 79 97 100 56

million tons/year 34 34

112 122 50 78 63 63 72

0 a c t u a l lo hilo hi 2007 2010 2015

to Black Sea to other regions # total flow

In this estimation, ‘Caspian oil’ includes all oil of Caspian origin, counting shipments through the Transneft system to Novorossiysk and Odessa, as well as the Kazakh volumes shipped to Primorsk that are, in fact, internal swap operations within the Transneft system.

As we can see, in 2007, 63 million tons (65%) of Caspian oil was allocated to the Black Sea region. In 2010 and 2015 this ratio should change to 50 to 57% respectively. This is due to the planned implementation of phase II of the Kazakhstan-China pipeline, the proposed expansion of the BTC pipeline and swap operations with Iran.

It should be noted that currently there are no plans to expand the capacity of transportation routes from the Caspian Sea to the Black Sea, except for the CPC pipeline. If Turkmen oil production volumes increase significantly, Turkmenistan will face problems with exporting its oil as it doesn’t have transportation agreements with Russia or Azerbaijan for such volumes. The main solution in this case would be swap arrangements

-22- Oil flows and export capacity in the Caspian Sea and Black Sea regions

with Iran. This would use up to 60 to 80% of the capacity of the Iranian Caspian Sea port in 2010, and 75 to 90% in 2015 according to the low and high scenarios respectively.

Figure 9 illustrates the oil flow routes to the Black Sea area from the Caspian as well as other regions, namely other regions of Russia.

Figure 9. Black Sea region: oil inflow routes*

Odessa

Novorossiysk

Tuapse

Poti Supsa Batumi

* Based on maps provided by the CGES

As we can see, the main oil inflow ports are: − Novorossiysk (Transneft system and CPC); − Odessa (Odessa-Brody9 and the Ukrtransnafta system linked to the Transneft system); − Tuapse (Transneft system); − Supsa; − ports linked to the Baku-Batumi railroad.

The available inflow capacity and our assumptions on its expansion are presented in Table 5.

9 Initially, the Odessa-Brody pipeline was designed to transport oil from Odessa to Brody. However, currently the pipeline works in reverse mode and brings oil from Brody to Odessa. There are plans to use the pipeline in the designed flow direction from 2012 as agreed between Azerbaijan, Georgia, Lithuania, Poland and Ukraine.

-23- Oil flows and export capacity in the Caspian Sea and Black Sea regions

Table 5. Assumptions on available inflow capacity changes in the Black Sea region million tons/year 2007 Before 2010 2010-2015 Beyond 2015

Novorossiysk 50 50 50 50

Novorossiysk (CPC) 32 32 40÷67 67

Odessa 12 12 12 12/15

Odessa (OBP)9 9 9 9 9

Tuapse 6 6 6 6

Supsa - 7 7 7

Baku-Batumi rail 15 15 15 15

Total 139÷166 166/169 124 131 130÷1579 1579/1609

The administration of the Odessa port also has plans to expand the terminal’s capacity to 15 million tons/year some time in the future.

It should also be noted that currently there are no official expansion plans for the Odessa (OBP) port (Pivdenny), while the designed capacity of the Odessa-Brody pipeline is 14.5 million tons/year.

As we see, the total inflow capacity in the Black Sea region in 2007 was equal to 124 million tons/year. By 2010 it could reach 131 million tons/year, and by 2015 it could rise to 166 million tons/year if the Odessa-Brody pipeline continues working in its current direction, or to 157 million tons/year if it ends up delivering oil from the Black Sea to far inland areas.

Figure 10 graphically illustrates the low and high scenarios of the discussed capacity expansion estimates to 2015.

-24- Oil flows and export capacity in the Caspian Sea and Black Sea regions

Figure 10. Estimated Caspian oil inflow and total inflow capacity in the Black Sea region million tons/year

180 160/169* 157/166* 9 160 9 6 6 12 15 140 131 131 124 99 120 99 66 66 12 12 50 50 100 12 12

80 50 50 15 15 50 50 77

million tons/year 60 15 15 40 15 15 77 67 67

20 32 32 32 32

0 a c t u a llo hi lo hi 2007 2010 2015

Novorossiysk (CPC) Supsa Batumi & others Novorossiysk Odessa Tuapse Odessa (OBP)

Figure 11 compares the estimated oil flows and the inflow capacity in the Black Sea region to 2015.

Figure 11. Estimated total oil inflow and inflow capacity to the Black Sea million tons/year

180 160/169* 157/166* 9* 160

140 131 131 38 124 38 120

53 100 58

45 45 80

million tons/year million 122 60 112

40 72 78 63 63 20

0 a c t u a llo hi lo hi

2007 2010 2015

Caspian Oil Oil from other regions Odessa (OBP) Total inflow capacities

The bars on the left represent the low scenario, the bars on the right are for the high scenario of oil inflow and the red line represents the inflow capacity in the Black Sea region.

-25- Oil flows and export capacity in the Caspian Sea and Black Sea regions

As was mentioned earlier, ‘Caspian oil’ accounts for all oil of Caspian origin, which is transported through dedicated pipelines, while ‘oil from other regions’ is mainly oil from various regions of Russia not related with the Caspian region.

The total flows for 2007 were estimated based on reported volumes from the ports of Novorossiysk, Tuapse and Odessa, and from reports made by Argus Petroleum. The figures for 2010 and 2015 are based on a forecast made by BAPLine JV, except for where the BAPLine JV oil flow estimates exceed the author’s estimates concerning available export capacity for the respective period. In such cases the author limits the forecast to available capacity estimates.

As we can observe, in 2007 total inflows amounted to 108 million tons/year and used 87% of available capacity (124 million tons/year). In 2010-2015 inflow capacity should be fully or almost fully used except in case of a low 2015 scenario where the utilisation rate could be around 90%.

5.2. ALLOCATION OF FLOWS As was mentioned earlier, the oil producers’ choice of export route depends on a number of considerations, including the factor of their participation in other projects. Table 6 demonstrates the share of selected oil producers in the refineries located in the Black Sea area, and the crude oil capacity of these refineries as of end 2007.

Table 6. Share of selected oil producing companies in the refineries of the Black Sea region

Share, Capacity, Black Sea Port Shareholder Refinery % mln tons/year Burgas (Bulgaria) LukOil LukOil Neftochim 93.16 8.8 Burgas Constanta (Romania) KazMunayGas Rompetrol Group 75.00 5.3 Constanta / Midia LukOil Petrotel LukOil 93.00 2.4 (Romania) Total 16.2 Source: LukOil, KazMunayGas

Therefore, we can assume that these producers would be interested in transporting a certain portion of their oil to these refineries. Both LukOil and KazMunayGas produce various crudes of differing quality, and they are also able to swap oil with other producers. Therefore, the refineries’ oil quality requirements should not be a major issue. LukOil has a 100% share in the Odessa refinery, with a capacity of 2.8 million tons/year, and in case the direction of the Odessa-Brody pipeline changes, some volumes of LokOil’s oil could be redirected to its refinery located on the Black Sea coast.

Total oil consumption in the Black Sea region according to the estimates of the Balkan and Black Sea Petroleum Association (BBSPA) and LukOil, should rise from 15 million tons/year in 2007 to 19 and 22 million tons/year in 2010 and 2015 respectively.

-26- Oil flows and export capacity in the Caspian Sea and Black Sea regions

Figure 12 illustrates oil allocation estimates in the Black Sea region to 2015.

Figure 12. Estimated oil allocation in the Black Sea region million tons/year

180 160/169*

160 150 22

131 9 140 130 22

19 19 120 108 100 15 15

80 138 128 million tons/year million 60 111 112 93 93 40

0 a c t u a l lo hi lo hi

2007 2010 2015

Outflow from the Black Sea region Consumption in the Black Sea region

As we can see, in 2007, 14% of oil coming to the Black Sea was consumed within the region, and the outflow amounted to 93 million tons. In 2010, the outflow is expected to be in the range of 111 to 112 million tons, and in 2015 – 128 to 138 million tons should there be a change in the direction of the Odessa-Brody pipeline, and 128 to 147 million tons if the Odessa-Brody pipeline continues to operate as today.

-27- Oil flows and export capacity in the Caspian Sea and Black Sea regions

6. TURKISH STRAITS BYPASS PROJECTS

As can be observed, the expected increase in oil exports from the Caspian region would also influence oil flows in the Black Sea region. The growing traffic of container ships leads to massive congestions and increased waiting time to pass through the Bosporus. This also increases the danger of accidents, which would have a severe impact on the Turkish population and environment, as well as on other areas of the Mediterranean. The expected rise in oil tanker traffic due to the greater inflow of oil into the Black Sea region from the Caspian, without any additional pipeline capacity to bypass the Bosporus, would further increase such a risk.

There exist several projects aimed at bypassing the Bosporus. The most prominent projects are illustrated in Figure 13.

Figure 13. Turkish Straits bypass projects*

Gdansk

Plock

Trieste Brody

Omisalj

Odessa Vlore Constanta Burgas Alexandroupolis Novorossiysk Tuapse Samsun Poti Supsa Batumi

inflow planned / Ceyhan proposed outflow

* Based on maps provided by the CGES

-28- Oil flows and export capacity in the Caspian Sea and Black Sea regions

Table 7 is an overview of the main parameters of the selected bypass projects.

Table 7. Main parameters of Turkish Straits bypass projects

Capacity, Project Length, km Estimated costs mln tons/year Burgas-Alexandroupolis pipeline 15/24/35/50 285 €1 billion10 (BAP) Burgas-Vlore pipeline (AMBO) 35 894 $1.5 billion Constanta-Trieste/TAL-Genova 40/60/90 1,856 €3 billion11 pipeline (PEOP) Odessa-Brody-Plock pipeline 9 49012 $400-500 million12 Samsun-Ceyhan pipeline 50/70 555 $2 billion (Trans-Anatolian, TAP) Source: Transneft, KazMunayGas, Çalık Enerji

It should be noted that Slovenia has officially reported that it “has no national interests in the PEOP project and that it supports this project only within the framework of the common European energy policy.”13

The comparison between the estimated oil flows from the Black Sea region to the Mediterranean and the designed pipeline capacity to 2015 is illustrated in Figure 14.

Figure 14. Turkish Straits bypass projects: pipeline capacity vs. flows

300

250

50/70 200 9 138/147 150 112 40/60/90 128 million tons/year 100 93 111

35 50 50 35/50 15/24/35 0 2007 2010 2015 Burgas-Alexandroupolis Burgas-Vlore Constanta-Trieste/TAL-Genoa Odessa-Brody-Plock Samsun-Ceyhan Export LO Export HI

10 Costs are estimated for the capacity of 35 million tons/year. 11 Costs are estimated for the capacity of 60 million tons/year. 12 For the Brody-Plock section. 13 Official website of the Ministry of Economy of the Republic of Slovenia: http://www.mg.gov.si/nc/en/splosno/novice/cns/news/article/11987/5549/.

-29- Oil flows and export capacity in the Caspian Sea and Black Sea regions

Figure 14 illustrates only pipeline capacity, and as in 2007 there was no available pipeline, the whole amount of 93 million tons of oil was transported through the Turkish Straits by tanker.

The first two expected Bosporus bypasses – the Burgas-Alexandroupolis pipeline (BAP) and the Trans-Anatolian pipeline (TAP) between Samsun and Ceyhan – are supposed to become operational by 2010 with a combined capacity of between 65 and 85 million tons/year as compared to the expected outflow from the Black Sea of 111 to 112 million tons/year. This would leave a flow of between 26 and 47 million tons/year to pass the Turkish Straits by tanker.

By 2015 the total Bosporus bypass capacity could rise up to 254 million tons/year if all planned projects are realised, while the projected oil flow from the Black Sea region will be in the range of 128-147 million tons/year.

These comparisons highlight the upcoming competition between planned pipeline projects, which will lead to strong competition for resources, i.e., for oil producers.

-30- Oil flows and export capacity in the Caspian Sea and Black Sea regions

7. CONCLUSION

The transport capacity in the Caspian Sea area should allow to export all planned crude oil volumes from the region and should be fully used for the period up to 2015.

Total oil inflows to the Black Sea region are likely to use almost all available capacity, and the share of Caspian oil in the Black Sea area should rise from 60% to 70-75% by 2015.

Total oil outflows from the Black Sea are estimated to be in the range of 111 to 112 million tons in 2010 and 128 to 147 million tons in 2015, of which 2/3 should be Caspian oil originating from Kazakhstan.

If all the Bosporus bypass projects are be realised, their combined capacity will exceed the volumes to be transported from the Black Sea further on to international markets.

Therefore, there is competition between various pipeline projects for sufficient throughput commitments. The success of particular pipeline projects will, therefore, mainly depend on their backing by oil producers.

-31- Oil flows and export capacity in the Caspian Sea and Black Sea regions

REFERENCES

1. Argus, CIS Crude Report, November 2007

2. Balkan and Black Sea Petroleum Association, Black Sea Crude Oil Market Development and Transportation Routes, Oil Logistics Conference, Dubai, May 2007

3. Balkan and Black Sea Petroleum Association Conference, Introduction to the Status of Balkan and Black Sea Oil and Gas Supply Options, Sofia, 20-21 April 2006

4. BAPLine JV, DEP S.A.-Thraki S.A., Why the Burgas-Alexandroupolis Pipeline? Emerging Europe Energy Summit, Vienna, November 2005

5. CERA, Caspian Energy Watch, June 2007

6. ECS, From Wellhead to Market: Oil Pipeline Tariffs and Tariff Methodologies in Selected Energy Charter Member Countries, January 2007

7. EIA, Country Analysis Briefs, Caspian Sea, January 2007

8. EIA, US and Central Asian Roles in Global Energy Markets: US-Turkmenistan Energy Roundtable, Washington, DC, USA, September 24, 2007

9. IEA in cooperation with ECS, Caspian Oil and Gas: the Supply Potential of Central Asia and Transcaucasia, 1998

10. RPI, FSU Oil and Gas Statistic Yearbook Oil and Gas Journal, May 2007

11. RPI, Oil and Gas Exports from the Caspian Region, 2005

12. Sokolsky Richard, NATO and Caspian Security: A Mission Too Far? 1999

-32- Oil flows and export capacity in the Caspian Sea and Black Sea regions

ACRONYMS AND ABBREVIATIONS

AMBO Albania-Macedonia-Bulgaria Oil pipeline, also known as Burgas-Vlore pipeline

BAP Burgas-Alexandroupolis oil pipeline

BBSPA Balkan and Black Sea Petroleum Association

BTC Baku-Tbilisi-Ceyhan oil pipeline

CERA Cambridge Energy Research Associates

CGES Centre for Global Energy Studies

CPC Caspian Pipeline Consortium

ECS Energy Charter Secretariat

EIA Energy Information Administration of the United States Department of Energy

FSU Former Soviet Union

IEA International Energy Agency

PEOP Constanta-Trieste/TAL-Genova pipeline, also known as Pan-European pipeline

TAP Trans-Anatolian pipeline, also known as Samsun-Ceyhan oil pipeline

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