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Deal Signed on Burgas-Alexandroupolis Pipeline; Construction to Begin in 2008

Published: 3/16/2007 by Roger Goodman, Robert Ineson, Daniel Mahoney, and Robert LaCount
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Russia, Greece, and Bulgaria have signed off on the construction of a new pipeline to deliver oil supplies from the Black Sea to the Aegean Sea.

Global Insight Perspective

 

Significance

Agreement to proceed with construction of the Burgas-Alexandroupolis pipeline follows more than a decade of investigation, discussion, and negotiation over the project's feasibility and over which country would take the controlling stake.

Implications

The new pipeline is designed to alleviate tanker pressure on the congested Bosphorus Straits and, according to its proponents, reduce the risk of environmental accidents.

Outlook

The heavy involvement of Russian President Vladimir Putin in finalising the deal indicates that the pipeline may also have some political motivation behind it, although ultimately it is likely to be welcomed by Europe as a means of diversifying the region's supply routes.

A Long Time Coming

Russian President Vladimir Putin, Greek Prime Minister Costas Karamanlis, and Bulgarian Prime Minister Sergei Stanishev attended a ceremony yesterday to sign off on construction of the Burgas-Alexandroupolis pipeline. Final approval to move forward with the project ends almost 15 years of negotiations between the countries that, at various times, looked on the brink of collapse. Uncertainty over the economics of the project and disagreement over sharing out stakes between the countries involved have led to arduous negotiations. However, progress over the last six months has been rapid, with higher oil prices improving the project's viability and Putin, in particular, driving the conclusion of a deal.

The pipeline has been top of the President's agenda in recent meetings with Greece and Bulgaria (see Greece: 23 August 2006: Russian PM to Visit Greece in Early September to Lobby for Oil, Gas Routes). Such pressure appeared to assist with settling the issue of control of the pipeline, with Russian companies Transneft, Rosneft, and Gazprom awarded a joint 51% stake in November, leaving Greece and Bulgaria to share the remaining 49% (see Russia: 1 November 2006: Three Russian Oil Companies to Split 51% Stake in Balkan Pipeline). Putin gave a final hurry-along to the process this year by threatening to abandon the project if agreement was not reached soon (see Russia: 2 February 2007: Putin Pressures Bulgaria, Greece to Agree on New Oil Pipeline).

Construction is now set to begin in 2008 with total development costs estimated at US$1.25 billion. The 279-km pipeline will connect Bulgaria's Black Sea Port of Burgas with Greece's Aegean Sea port of Alexandroupolis. First flows are expected in 2009, with the pipeline to pump 700,000 barrels of oil per day, or 35 million tonnes per annum (MMtpa), possibly rising to 50 MMtpa in the future.

The Energy Security and Environmental Arguments

The pipeline has been hailed by its proponents as a significant contribution to European and global energy security. Putin commented at the signing ceremony: "The step we make today is dictated not only by the interests of our two countries, but by those of the global economy. Energy security and cooperation…is one of the most important concerns worldwide”.

The potential security benefits of the pipeline are rooted in bypassing Turkey's busy Bosphorus Straits. The narrow shipping channel is currently the only means of delivering oil from the Black Sea through to the Aegean Sea, the Mediterranean Sea and on to world markets. As such, the Straits act as something of a bottleneck: a ship is estimated to pass through every minute and tanker delays in the Bosphorus Straits have been reported as costing oil companies up to US$1 billion per year. Certainly, the new pipeline should contribute to alleviating this pressure. Questions remain, however, over its overall impact on transport congestion in the area. The pipeline will see less traffic through the Bosphorus Straits, put potentially greater traffic within the Black Sea and Aegean Sea areas as more tankers are called on to deliver oil to Burgas and pick it up from Alexandroupolis. Maritime traffic within the enclosed Black Sea area is itself relatively dense: the Burgas-Alexandroupolis pipeline could therefore give rise to its own set of issues in terms of tanker congestion.

European Union Energy Commissioner Andris Piebalgs has drawn attention to the potential environmental benefits that the pipeline might bring. "In the oil sector, increasing international concern is being expressed over the threat of maritime accidents and the ensuing significant environmental damage caused by the resulting oil spills…It is of the utmost importance to give a higher priority to the alternative of transporting oil by pipelines”, he said in a statement. As with the security argument, however, decreased congestion in the Bosphorus Straits could be offset by increased traffic in the Black and Aegean Seas, leaving the net impact on the potential for environmental accidents also up in the air.

Outlooks and Implications

The inordinate political interest in the development of the Burgas-Alexandroupolis pipeline, particularly from Russia, may cast suspicions on a further rationale behind the project's development. Importantly, the pipeline will allow for the transportation of Russian and Caspian oil to Europe without passing through Turkey. Russia and Turkey share a historically tense relationship, although trade and commercial relations have improved of late. With Russia experiencing several recent conflicts with transit states in the delivery of its oil and gas supplies to Europe, the new pipeline could possibly be viewed as an attempt to reduce reliance on Turkey as a thoroughfare for oil supplies. Certainly, Russia's recent push to progress the development of the pipeline has coincided with recent disputes with transit states (albeit also with an increase in oil prices).

Questions over whether Russia really has Europe's security interests at heart might also be raised by the fact that the pipeline will deliver oil to Alexandroupolis and onto tankers for wider distribution rather than taking supplies up through South-Eastern Europe and directly to European markets. While acknowledging that the pipeline will be of benefit in diversifying European supply routes, Russia is clearly also focused on ensuring its own supplies are able to be delivered to diverse global markets.

Ultimately, it is likely to be a combination of all these factors that has driven the long-awaited agreement to construct the Burgas-Alexandroupolis pipeline. Overall, the project is likely to be welcomed in Europe as a contribution to the region's efforts to diversify its supply routes. Certainly for Greece and Bulgaria, the pipeline is set to provide them with an important strategic role in the Russian and European energy systems.

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