The decision of the U.S. government to withdraw from the Joint Comprehensive Plan of Action (JCPOA) in May last year was, to some extent, not surprising for many as U.S. President Donald Trump and his hawkish counselors signaled a hard-line stance against Iran with the goal to thwart its political influence in the region, by squeezing the Tehran regime of its main source of income: energy exports. The reinstallation of sanctions on the Iranian energy sector, however, has left many customers in Asia and Europe with the problem of finding alternative suppliers that come with their own problems.
The decision of the U.S. government to withdraw from the Joint Comprehensive Plan of Action (JCPOA) in May last year was, to some extent, not surprising for many as U.S. President Donald Trump and his hawkish counselors signaled a hard-line stance against Iran with the goal to thwart its political influence in the region, by squeezing the Tehran regime of its main source of income: energy exports. The reinstallation of sanctions on the Iranian energy sector, however, has left many customers in Asia and Europe with the problem to find alternative suppliers that come with their own problems.
Turkey has quickly managed to meet its annual demand for nearly 21 million tons of crude oil by ramping up imports primarily from Russia and Iraq in addition to Kazakhstan and Saudi Arabia. The problems that Russian and Iraqi suppliers face and the liabilities of the Organization of the Petroleum Exporting Countries (OPEC) raise questions over the mid and long-term supply security.
Turkey was one of the eight countries along with Italy, Greece, Japan, South Korea, Taiwan, China and India that received a six-month waiver for oil imports from Iran with a prescribed quota. While the country's main refineries did not purchase any oil from Iran in the same month they got the waiver, they received a moderate amount until May, the due date of the sanctions. Washington's firm decision not to extend the waivers has compelled Turkish refineries to look for and experiment with the Urals grade and Iraqi crude.
According to data from Turkey's energy watchdog Energy Market Regulatory Authority (EMRA), Turkey increased oil imports from Iraq in December 2018 and January, when it bought 798,298 tons and 726,115 tons of crude from its southern neighbor, respectively. In November 2018, when the total crude imports were only 1.13 million tons, the country's top supplier was again Iraq with 321,859 tons. Iraq sold Turkey 528,983 tons of crude in February and 465,338 tons in March.
Oil imports from Russia were relatively lower than purchases from Iraq and Kazakhstan in January, during which imports were recorded at 2.18 million tons. Russia exported 162,441 tons of Urals grade to Turkey in the first month of the year. In February, Turkish refineries began testing the Ural grade by raising the amount to 459,524 tons and the figure surged to 880,317 tons in March.
The data is more meaningful when it was compared to the same periods of last year. In March 2018, Turkey's crude imports from Russia were zero while Iran sold Turkey 858,630 tons of crude in the same month, accounting for roughly 64% of the country's monthly crude imports. In February, crude imports from Iran totaled 643,294 tons, again supplying for nearly 50% of the 1.3 million tons of monthly crude purchases. Iraq only came second with 289,397 tons and Russia ranked last, sending only 79,480 tons of crude to Turkey. In January 2018, Iran was again the conventional supplier with 575,456 tons of crude, making up nearly 40% of Turkey's aggregate oil imports. While Russia exported 193,309 tons of crude to Turkey in January 2018, Iraq sent 138,987 tons of crude in the same period. The comparative data already clearly lays out how Turkey has prepared its refineries for alternative suppliers before it stopped purchasing Iranian crude in May, which was confirmed by the officials of the Foreign Ministry.
Urals grade comes to Turkish refineries
Following the U.S. embargo on the Iranian oil, tanker traffic in the Turkish Straits – Istanbul and Çanakkale – has intensified. The "Iranian Embargo and Turkish Straits" report prepared by Bilkent University's Energy Policy Research Center revealed that the sanctions on the Iranian oil have started impacting tanker traffic in Turkish Straits on Sept. 20, 2018.
Turkey's main crude suppliers
The report prepared by Bilkent Universtiy Energy Policy Research Center Director Pof. Hakan Berument, Oil Research Director of Bilkent Universtiy Energy Policy Research Center Serkan Şahin and Global Energy Partners Emin Emrah Danış stressed that the sanctions on the Iranian oil have made Iran's customers in the Mediterranean vie for the Urals grade, which increased the traffic on the Istanbul and Çanakkale Straits.
The report also showed that it is unlikely that OPEC members are capable of fully compensating for Iranian oil. Saudi oil, which has been increasingly imported to Turkey in the period of December 2018 to March 2019 albeit not enough to compete with Russian and Iraqi crude – has been directed to the Asian market and the Iraqi oil from Basra has been sold to European consumers.
In this market context, Turkey preferred to buy the Urals grade that came from the Black Sea port of Novorossiysk to the Marmara terminals of the country's largest refinery Tüpraş, accounting for 60% of the total petroleum products market and 74% of the current refining capacity in Turkey.
In addition to Tüpraş, other refineries operating in the Aegean province of İzmir by the State Oil Company of Azerbaijan Republic (SOCAR) in Turkey – Petkim and STAR – also used Russian oil to generate petroleum products, the company's top officials previously said but did not elaborate.
Speaking of the advantages of the Urals grade to Turkey, Serkan Şahin told Daily Sabah that transporting Russian oil is much less costly than bringing Iranian oil, considering the shorter route it takes. "However," Şahin cautioned, "The Urals grade receive high demand from Europe and the Mediterranean. There has been a recent hike in the Black Sea port loading of the Urals crude, which climbed over Brent crude while Iranian oil hovers below Brent prices."
The Russian crude exports to Turkey spiked in February and March as opposed to a slump in April, Şahin said and noted that the Turkish refineries made an experiment on Russian oil to observe its compatibility. The preliminary cargo data, he added, shows that crude imports from Russia continue to rise in May.
Şahin drew attention to a very important problem traders' face with the Urals grade, which is reported to be contaminated in the Baltic with chemicals known as organic chloride. The European oil market has been the victim of Russia's unprecedented contaminated crude crisis as chloride can severely damage oil refineries. The Urals grade goes directly to refineries through two separate pipeline spurs and via tankers from the Ust-Luga export terminal in the Baltic. The dirty oil has exacerbated the concerns of traders on how Russia has been able to maintain production, Şahin noted. He went on to emphasize the soaring demand for the Urals grade is likely to increase the price tag.
Julien Mathonniere, the global crude oil deputy editor at ICIS, also explained in correspondence with Daily Sabah that Russian oil is possibly less expensive for Tüpraş than for other Mediterranean refiners, notably, because the cost associated with moving tankers through Turkish Straits is related to bottlenecks and the expensive demurrage that kicks in when delays lengthen.
"One of Tüpraş's two largest refineries in İzmir is located on the Sea of Marmara, not on the Mediterranean Aegean like İzmir, which means that cargoes delivering the Urals to İzmit do not go through the Dardanelles. This probably saves Tüpraş a significant amount of time and money, even if cargoes still have to go through the Bosporus. On top of it, İzmit is Tüpraş's most complex refinery, meaning that they can process a broader variety of crudes, including those with higher sulfur content," Mathonniere said.
When asked whether importing more oil from Russia increases more Turkey's energy dependency on the federation, Mathonniere remarked that Turkey is no more dependent on Russian oil than other European countries.
"Around 30% of the crude volumes imported into the OECD [Organization for the Economic Co-operation and Development] Europe come from Russia. But inversely, Russia has also grown dependent on Europe as a crucial market outlet, with nearly 65% of its crude exports shipping to that area, and 75% of its natural gas exports. If Europe stops buying, then it's a problem for Russia, too," he said.
Infrastructure, political problems of Iraqi oil
In addition to the issues that need to be settled as far as the Russian oil is concerned, Iraqi crude comes with its own problems. David Jalilvand, CEO of Orient Matters – a Berlin-based Middle East consultancy – pointed out. Iraq has both the capacity and the will to increase production and could thus help Ankara to replace Iranian oil. However, Jalilvand remarked, oil-related quarrels between Baghdad and the Kurdish Regional Government (KRG) are ongoing.
"On a practical level, infrastructure problems exist as the Kirkuk-Ceyhan pipeline has not been repaired yet following the damage during the Daesh years. Deliveries by truck, meanwhile, would be inefficient in terms of cost," he explained.
Julien Mathonniere of the ICIS also emphasized that Iraq has been a low-profile producer quietly ramping up production and feeding some medium and heavy sour crude into the global market, helping to relieve some of the current supply tightness.
"The Iraq portion of the Kirkuk to Ceyhan pipeline had been severely damaged after being sabotaged by Daesh terrorists and it has not operated since March 2014. Elsewhere, midstream infrastructure in Iraq has endured several wars and poor maintenance. The only way for neighboring countries like Turkey to boost crude purchases from Iraq would be to boost export capacity in the first place," he said.
Most of Iraq's major crude oil pipelines are located in the north and are currently not operable, the ICIS expert noted. "Their rehabilitation would take years and a large investment. A lot of Western oil companies are rather unwilling to return to Iraq and commit capital until the security context has improved," he added.
Wires reported that Exxon Mobil employees began returning to Iraq's West Qurna 1 oilfield on Sunday after the company received assurances from Iraqi officials that its staff would receive extra security. The oil field is located in 50 kilometers northwest of Basra province.
Turkish officials are also negotiating with American companies to ramp up the export capacity of the oil coming from Kirkuk-Ceyhan pipeline but that depends on the political dialogue between Baghdad and the KRG since the first demands oil in return for the budget allocated for the latter.
"Moreover, when the Kirkuk-Ceyhan pipeline was operating at full capacity with 600,000 to 700,000 barrels of oil per day, the Turkish network would only receive approximately 150,000 barrels via the Ceyhan-Kırıkkale pipeline while the rest used to be exported to the global markets," Serkan Şahin recalled.
The Iraqi government continues to pressure Prime Minister Adel Abdul-Mahdi to push the KRG to deliver the allotted 250,000 barrels of oil per day to the State Organization for Marketing of Oil, per the 2019 federal budget law. Relations between the Iraqi federal government and the KRG had been sourced since September 2017 when the Kurdish community in the north held a referendum on Kurdish regional independence. Baghdad slashed a wide range of sanctions on the Kurdish autonomous government and seized control of the oil-rich Kirkuk province. Oil extraction and pumping from Iraq's northern Kirkuk province was suspended in October 2017 until Nov. 16, 2018, when Iraq's federal government and the KRG reached a tentative agreement to resume oil exports from Kirkuk to Ceyhan.
Şahin, a Thomson Reuters oil expert, highlighted that the current oil market conditions create an unfortunate situation for Turkey in this context. With the Ural crude, which is likely to see price hikes in the face of increasing demand, Iran sanctions and the poor infrastructure quality as well as security and political concerns in the Iraqi market compel Turkey to be more vigilant in sustaining the domestic market dynamics and look for less costly and risky alternatives. "Basra oil is also exported to northwestern Europe and Asia. Therefore, Turkey has to compete with these markets that are huge oil importers," Şahin underscored.
Turkish refineries can accommodate different types of crude
S&P Global Platts reported that earlier before May when the due date of the U.S. waivers on eight largest consumers of Iranian crude expired, producers of heavy and medium-sour crudes including Saudi Arabia, Russia, United Arab Emirates (UEA) and Iraq started to replace Iranian shipments.
Turkish refineries, which are conventionally believed to be operating on heavy Iranian crude, indeed are capable of processing different mixture of crude to reach the optimum level of operation in accordance with the seasonal demands, Şahin explained.
"Turkish refineries are able to change their configurations and operate on oil including different levels of sulfur in accordance with the seasonal demands," he said.
"I believe Tüpraş can accommodate any medium to heavy sour crude that is crude with a medium gravity and higher sulfur content. In general, such crudes command a higher discount or at least a lower premium to their respective benchmarks because sulfur is a nasty component that has to be removed from refined products, especially with International Maritime Organization (IMO) 2020 sulfur limits looming. Grades from the Middle East would probably fit well into Tüpraş's refining crude slate, at least the lighter ones: Saudi Arabia, Kuwait, Abu Dhabi, Qatar," Julien Mathonniere of ICIS remarked.
The annual report from Tüpraş stated that low-sulfur crude oil accounted for 9.3% of total crude procurement last year while heavy and medium-sulfur oil made up 59.3% and 31.4%, respectively. Tüpraş is capable of re-blending lighter oil with its current crude slate. Although the refinery can buy lighter Forties from the North Sea as an alternative to the Urals, it is much costlier compared to heavier grades; Mathonniere said and suggested that CPC Blend, a light grade of crude, would be a better bargain. He also noted that given the giant production volumes at Kazakhstan's Kashagan field, the CPC grade often sells at a large discount, but Turkish refineries would need to change their crude slates.
"While oil markets are well-supplied looking at aggregate numbers, the situation is more complex when it comes to specific oil grades. As for medium and heavy oil, the grades similar to the bulk of Iranian oil, Saudi Arabia is in a position to swiftly increase output so as to offer alternatives," Jalilvand said, but reckoned that the Saudi Arabia option may not be particularly attractive for Ankara due to political reasons, even though some purchases are made. However, Şahin emphatically stated that since private sector companies run Turkish refineries, the decision to choose the optimum supplier falls on these firms as they have liabilities for investors, business partners and shareholders.