A Bosporus Bypass? Maybe.

Implications: 1. A Bosporus pipeline bypass would alleviate the congestion in the crowded straits, provide access to a deepwater port, and potentially allow more crude oil shipments from Russia and Central Asia.

2.  Similar proposals for a direct bypass have been discussed for more than a decade and none has come to fruition, with the exception of the BTC pipeline (Baku-Tbilisi-Ceyhan pipeline) transporting crude oil from the Caspian Sea directly to the Mediterranean Turkish port of Ceyhan.

3.  The big question whether the economics and politics are sufficient for the latest proposal and whether the pipeline actually will built.

Analysis: On March 15, 2007, the President of Russia, and Prime Ministers of Bulgaria and Greece signed an agreement to build a pipeline linking the Black Sea with the Mediterranean bypassing the crowded Bosporus straits.  This deal has been fourteen years in the making with similar agreements signed in past years. 

The agreement calls for Russia to own 51 percent of the International Project, the company that will own the pipeline.  Russia will be represented by Transneft (Russia's crude oil pipeline monopoly), and state controlled Rosneft and Gazprom.  Bulgaria and Greece each will hold 24.5 percent.
 
A Bosporus pipeline bypass has been discussed for more than a decade since the congestion in the Bosporus is increasing.  Delays can occur for weeks on end in the Bosporus due to bad weather with tankers backing up in the Black Sea.  Delays can add significant cost to the shipment of crude oil with each day a tanker has to wait to enter and transit the Bosporus.  Moreover, as the size of the tankers through the Bosporus increases, the limitations of the waterway require that only one ship at a time can pass through the Straits adn only during daylight hours, again increasing the cost of shipments.  Finally, the Bosporus only can accommodate tankers of 150,000 deadweight tons, limiting the economical distribution of the crude oil to nearby destinations in the Mediterranean or Europe.  

Pipelines now are available for crude oil shipments that could bypass the Bosporus.  In Russia, rather than shipping crude oil in Transneft to Novorossiysk on the Black Sea, the oil could flow north through the Transneft system to the Baltics or through pipelines into Central Europe.  These options limit where the crude oil can go and these destinations are already quite saturated with Russian crude oil.  Market expansion would require new routes.  Another option would be to ship oil through the Ukrainian owned Odessa-Brody pipeline.  This option, however, has even more limitations than the Russian options since the oil can get only as far as the Russian owned Druzhba pipeline and the oil would have to interconnect with several other pipelines before arriving at a suitable refinery destination in Central Europe.  This pipeline has not been economically viable for Russian or Caspian shipments.  In fact, today this pipeline is carrying Russian crude oil supplied by TNK-BP south from Brody to Odessa.  Ukraine is working to reverse the flow again, with limited success.  Finally, the new Baku-Tblisi-Ceyhan pipeline, built by a private consortium led by BP, is shipping oil directly from the Caspian (Baku in Azerbaijan) through Georgia and Turkey to the deepwater port of Ceyhan on the Mediterranean.  At Ceyhan, the crude can be put into large tankers (very large crude carriers -- VLCCs) for economical shipment to any destination in the world.

For Russia, a bypass makes economic sense.  Novorossiysk has been Russia's largest port until recently.  With the development of the Baltic Pipeline System and the port at Primorsk on the Bay Finland, this port is now Russia's largest port.  But it, too, is limited since the straits exiting the Baltic Sea have tanker size restrictions of 150,000 deadweight tons, again limiting shipments to European markets.  A bypass from Burgas in Bulgaria to Alexandroupolis in Greece would permit oil to loaded onto VLCCs in Alexandroupolis expanding the potential markets for Russian crude oil. 

The question always has been the economics behind the pipeline or any other pipeline since several options have been proposed in the past.  These options included the Ukrainian Odessa-Brody pipeline with an extension to Plock and Gdansk in Poland; a Romanian-Italian pipeline with shipments from Constantza in Romania with a terminus in Trieste in Italy; a pipeline from Burgas that would terminate in Vlore in Albania; and an all Turkish pipeline bypassing the Bosporus.  Even though these pipelines seem sensible, their economics has been questioned since there are so many additional steps in shipping the crude oil with additional costs.  For example, crude oil loaded in Novorossiysk and transiting the Bosporus to its final destination is loaded only once and offloaded once.  If a pipeline bypass is involved, then the crude is loaded in Novorossiysk, then offloaded at another terminal on the Black Sea (Burgas, for example) with the consequent charges for offloading and storage and the additional risk of oil spillage.  Then the oil has to transit the pipeline paying the transit fee.  At the pipeline's terminus, there would be the cost of storage and again loading the oil onto another tanker again with the risk of oil spillage.  All these extra costs add up and have prevented a bypass pipeline from being built.

The economics of this pipeline bypass depend upon its being full.  Initial capacity for the pipeline will be 35 million tons (700,000 barrels per day), with an option to expand it to 50 million tons (1 million barrels per day).  There are doubts whether Rosneft and Gazpromneft (the two Russian oil company owners) will have enough oil to fill the pipeline.  Private oil companies in Russia and Kazakhstan could be interested.  These Russian companies include Lukoil and TNK-BP.  A question is whether the state controlled companies will be willing to work with the privately owned Russian companies and let them ship their oil economically.  Interest from Kazakhstan producers will depend upon how the pipeline is operated and whether the more valuable Kazakh crude will be segregated from the lower value Russian Urals crude or price differentials will be paid through a quality bank.  Chevron and other Kazakhstan oil producers have not used other Transneft pipelines due to this large quality differences in their crude oils.  Thus, it is uncertain whether Kazakh crude will be available to fill the pipeline. 

All of this leads to uncertainty on the timing of all agreements needed to finalize the plans for the bypass pipeline and whether the economics are sufficient to support the pipeline.  With high crude oil prices, it is more than likely that the pipeline could be built.  With volatile oil prices, additional uncertainty enters the picture.  Future Russian crude oil production also is crucial to supporting the pipeline.  Thus, the conclusion is that while the pipeline bypass makes sense, many factors exist that create uncertainty and raise the ultimate question of whether this pipeline will be built.  We will have to wait and see.