Azeris put the "fraternal" in FDI of Turkey

By bne IntelliNews August 20, 2012

David O'Byrne in Istanbul -

When the Soviet Union collapsed in 1990, Turkish politicians and commentators alike hailed the historic opportunity for Ankara to become the leader of the newly emerged Turkic world and predicted a field day for Turkish companies moving into newly opened markets. In the event, the newly emerged Turkic republics showed no more appetite for being led by Ankara than they had for being ruled by Moscow and relations with some remain at best frosty, with one notable exception - Azerbaijan.

Relations between Turkey and its eastern neighbour Azerbaijan have gone from strength to strength over the past decade on the back of a raft of oil and gas investments, the bulk of which are not by Turkish companies working in Azerbaijan, but rather by Azerbaijan's state oil and gas company Socar, either directly or acting as part of a consortium. These include the Baku-Tblisi-Ceyhan (BTC) oil line that carries Azeri crude to Turkey's Ceyhan Mediterranean oil hub for export to global markets, and the South Caucasus Pipeline that runs parallel to BTC and carries Azeri gas to Turkey and on to Greece. And, most notably, Socar's purchase through privatisation of Turkey's former state petrochemical company, Petkim - the focus for half of the ongoing and planned investment. "If we look at the whole picture of investments currently being made by Socar in Turkey, it will reach $17bn by 2018," says Kenan Yavuz, CEO of Socar's bourgeoning Turkish subsidiary Socar Turkey Enerji. "At the end of the day, Socar and Azerbaijan will be the biggest single investor in Turkey."

That purchase, together with the subsequent upgrade and expansion programmes for Petkim's petrochemical complex on the Aliaga peninsula on Turkey's Aegean coast, total $2.5bn. With $250m already spent, currently ongoing is a further $300m to expand capacity of the plant's ethylene cracker by 13% and production of two other products by 50%.

However, the bulk of slated new investment at Petkim's giant site will be for the planned 10m tonne/year (t/y) Star refinery, being constructed adjacent to the Petkim plant in partnership with Turkish energy group Turcas. "Currently, we're doing site preparation, and we expect to tender for the engineering design and construction by the end of the year, and to start construction in 2014," says Yavuz.

Contrary to expectations, the plant will not just process the Azeri crude already arriving at Ceyhan, but will be configured to process all regional crudes. "Because of price fluctuations we want the flexibility to process all crudes produced in the regions," says Yavuz.

Once completed in 2016, the plant will supply 1.6m t/y of Naphtha feedstock to the adjacent Petkim plant - not to mention a significant boost to margins. In addition, it will produce 6m t/yr of diesel and 500,000 t/yr of jet fuel for sale to local and regional markets, as well as quantities of liquefied petroleum gas and aromatics that may be used locally or exported.

Importantly, the plant will also produce 700,000 t/yr of pet coke, which will be used in another of Socar's investment projects - a 600-megawatt power plant, which will also be constructed adjacent to the Petkim plant. This $1.5bn power plant will provide power for both Petkim and the Star refinery, selling any excess production into the Turkish grid.

Other investments for the site include a wind power plant to take advantage of the peninsula's near constant winds and $400m set aside to upgrade and expand its existing port facilities.

On Tanap

Largest of Socar's planned investments in Turkey is the roughly $8bn it expects to spend on the planned Tanap gas pipeline, which will carry Azeri gas across Turkey to European markets.

The planned pipeline, for which Azerbaijan and Turkey inked three agreements back in June, finally guarantees that Azerbaijan will commit its Caspian gas reserves to European consumers, but details still remain vague. "The three agreements provide a framework for the structure of the operation, but the details have not been defined yet," says Yavuz, explaining that an ongoing feasibility study and a planned detailed engineering study will help finalise the capacity of the planned line and give a clearer idea of how much it will cost to build

Current plans envisage a pipeline running 2,000 kilometres from the Azeri capital Baku to Turkey's European borders with a maximum capacity of upwards of 30bn cubic metres a year (cm/y). Initial throughput will be the 16bn cm/yr of output from Azerbaijan's Shah Deniz gas field, of which 6bn cm/yr will be supplied to Turkey at a discount and the remaining 10bn cm/yr will be exported to Europe.

Plans for the remaining capacity are equally unclear, with the EU lobbying for the line to carry gas from Azerbaijan's Caspian neighbour Turkmenistan, while Azeri officials have indicated a preference for gas from Azerbaijan's other recently discovered gas fields. What is clear is that Socar plans for construction to start next year, with the first gas flow expected in 2018. "It's a difficult timeframe, but that's what we've been asked to do by the Turkish government," smiles Yavuz.

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