Turkey and Azerbaijan - rising STARS

By bne IntelliNews June 13, 2014

David O'Byrne in Istanbul -



Two signing ceremonies a week apart have served as concrete evidence of the oft-quoted maxim of the late Azeri president Haydar Aliyev, that the relationship between Turkey and Azerbaijan is one of, "One nation, two states".

Aliyev was referring to not just the geographical proximity of the two countries, but the ethnic and linguistic ties, which bind the two: the two languages, Azeri and Turkish being largely mutually comprehensible, and Azeri and Turkish cultures being particularly close. But arguably nowadays it is the economic ties between the two that bind the most strongly.

The first ceremony on May 30 saw Turkey's state upstream operator TPAO buy up Total's 10% stake in Azerbaijan's Shah Deniz gasfield, taking its holding to 19%, while Turkey's state gas transit company Botas took a 30% stake in the Azeri-backed Trans Anatolian gas Pipeline (TANAP) – a project that will carry that Shah Deniz gas to Europe by 2018.

The second saw Azeri state oil company Socar sign a credit agreement with 23 international finance institutions including the Exim banks of the US, Canada, Japan, Spain and Italy for $3.29bn towards the $5.6bn cost of its planned 10m tonne a year (t/y) STAR oil refinery to be built on Turkey's Aegean coast. This deal is not only the biggest project finance deal in Turkish history, but at 18 years also boasts the longest maturity.

It will have huge economic consequences for Turkey. Once operational in 2018, the plant will produce 4.95m t/y of low sulphur diesel, knocking an estimated $2.5bn off Turkey's current account deficit. In addition, it will supply an annual 1.3m t/y of Naphtha and 455,000 t/y of Xylenes as feedstock for the adjacent Petkim petrochemical plant, which is 61% owned by Socar. "This is the biggest real sector project in Turkey for the past 30 years," said Socar Turkey's head, Kenan Yavuz, at the signing ceremony, explaining that sourcing feedstock from the new STAR refinery would save Petkim as much as $100m a year and greatly enhance the company's ability to compete with imports.

According to Socar president Rovnag Abdullayev, the STAR plant is only one facet of a total $10bn investment in the Petkim site, which will also see the creation of a dedicated chemical industry park and logistics complex.

Azeri Energy Minister Natig Aliyev noted that the STAR refinery and Petkim investments coupled with the TANAP pipeline will see Azerbaijan investing over $20bn in Turkey over the next five years. "From the first days of independence, our road (to market) was through Turkey," he said. "We used to receive assistance from other countries, now we invest in other countries."

Pipeline to Europe

Arguably the most important part of that investment is in the 31bn cubic metre a year (cm/y) TANAP pipeline, planned to carry Azeri gas to Europe via Turkey. The $7bn pipeline will be developed by a consortium in which Azerbaijan holds 58%, Turkey through Botas 30%, and BP having agreed to take a 12% stake.

Speaking to bne at the recent TANAP and Shah Deniz signings, BP Turkey president Bud Fackrell said that with Turkey's TPAO having taken over Total's stake in the Shah Deniz gasfield, the two projects now have greater alignment and will be able to progress much faster.

The BP-led consortium developing Shah Deniz made its final investment decision on the second phase of the field late last year and will now push ahead with development to produce an annual 16bn cm/y of gas by 2018, which will be delivered to Turkey via the existing South Caucasus gas line. From there, it will be transited across Turkey through the planned TANAP line.

Turkey will take 6bn cm/y to meet growing local demand in the west of the country, with the gas being taken off close to the western city of Eskisehir. The remaining 10bn cm/y will be transited to the Turkey-Greece border where it will pass into the planned 20bn cm/y Trans Adriatic (TAP) Pipeline.

TAP, which is being developed by a consortium led by Socar (20%), which last year bought 66% of Greek transit pipeline operator DESFA, will run through Greece and Albania and then across the Adriatic Sea to Italy, from where existing transit lines can carry the gas to markets in central and northern Europe.

Other TAP consortium members are currently BP (20%), Statoil (20%), Fluxys (16%), Total (10%), E.ON (9%) and Axpo (5%). That though may be set to change with Socar officials telling reporters that both Total and E.ON are planning to leave the TAP consortium. Neither company has yet commented on the reports, but if correct it would offer an interesting opportunity for Turkey's Botas to take a stake in a gas pipeline downstream from Turkey, further cementing ties with Azerbaijan. And, in the process also further cementing relations with neighbouring Greece, to which Turkey has for the past seven years been exporting volumes of the Azeri gas it has been importing via the South Caucasus pipeline, and further contributing to much-needed stability on Turkey's western borders.


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