11 December 2019

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STRATEGIC INVESTMENTS

SOCAR plans to expand its investment portfolio in Turkey

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01.11.2019

Ipsala is a small village in the Turkish city of Edirne, right on the border with Greece with a population of some 30 thousand people. No one could imagine that this miniscule settlement would become strategically important not only for Turkey, but also for all countries participating in the Southern Gas Corridor (SGC). This is where the Trans-Anatolian Gas Pipeline (TANAP), through which Azerbaijani natural gas will be supplied to Europe through the Trans-Adriatic Pipeline (TAP) from Stage 2 of the Shah Deniz field development, ends.

 

Costs and Expected Effects

According to the General Director of the TANAP Pipeline Consortium, Saltuk Duzyol, since July 1, 2019, TANAP has been ready for the supply of Azerbaijani gas to Europe. "We look forward to completing the construction of the Trans-Adriatic Pipeline to begin these supplies. However, before October 2020, the start of commercial gas supplies to Europe is not possible, but for our part, we are able to supply gas even now," Duzyol said during a press tour of Azerbaijani journalists in Edirne.

Commercial supplies of Azerbaijani gas via TANAP to Turkey began on June 30, 2018, and, according to the Minister of Energy of Azerbaijan, Parviz Shahbazov, 3 billion cubic meters of gas from the Shah Deniz field have already been exported. According to minister, the construction of the TAP pipeline, which is the last component of the Southern Gas Corridor project, is 90% complete. Actual filling of the gas pipeline will begin in the coming months. The pipeline will be commissioned in 2020, hence increasing the volume of Azerbaijani gas via TANAP. According to SOCAR's forecasts, TANAP will cover 12% of Turkey's gas demand.

As for Azerbaijan, TANAP is the main link in the energy corridor between Azerbaijan and the EU. The capacity of the Trans-Anatolian gas pipeline is 16 billion cubic meters, of which 10 billion will go to Europe, and 6 billion to the western regions of Turkey. However, in 2023 the throughput capacity of the pipeline can be increased to 24 billion cubic meters of gas annually, and to 31 billion cubic meters in 2026. At the same time, the main source for deliveries via TANAP will be the natural gas from Shah Deniz, and at subsequent stages from other fields in Azerbaijan. According to S. Duzyol, TANAP can also be used to transport gas from Turkmenistan and Northern Iraq. "Iran is also a potential source of gas for TANAP but in the current conditions it is impossible to consider it as a real supplier," Duzyol said.

According to the consortium estimates, the subsequent expansion of TANAP capacities will not require significant costs. To increase the pipeline’s capacity up to 24 billion cubic meters per year, it will be necessary to build two additional compressor stations, and three more for 31 billion cubic meters, which will increase the total number of compressor stations to seven. At this stage, two compressor stations and four gas-measuring stations, two gas outlet points have been constructed.

By the way, the actual cost for the construction of the Trans-Anatolian gas pipeline reached $6.5 billion against the initial estimate of $11.77 billion. At the same time, part of the work was funded by loans from international financial institutions (IBRD, EBRD, MIGA, AIIB for total of $2.65 billion). "At the pipeline construction stage, we could save 45% of costs. This made it possible for SOCAR to reject part of the loan provided under the MIGA guarantee for this project," S. Duzyol said.

As for the commercial activities of the project, the TANAP consortium expects annual revenues from the operation of the gas pipeline reach $1.45bn, of which Azerbaijan will receive 58%. In addition, a tax of $5.95 per 1,000 cubic meters will be paid for gas transportation via TANAP Turkey.

Thus, the TANAP gas pipeline will not only make a significant contribution to the state budget of Azerbaijan but also reduce the country's dependence on a single market, thanks to export of gas to both Turkey and Europe. Attracting third-party gas to TANAP will significantly increase revenues from its transit for participants in this project.

According to SOCAR, the implementation of the project will strengthen cooperation between Azerbaijan and Turkey in the energy sector and will help establish a large and strong economic union in the region.

 

Petkim is a successful acquisition

However, TANAP project is not the only example of successful cooperation between Azerbaijan and Turkey in the energy sector. SOCAR has already invested $15bn in the Turkish economy, including the construction of TANAP, purchase of a controlling stake in the petrochemical complex Petkim Petrokimya Holding, construction of the STAR refinery and the SOCAR Terminal container terminal, a 51MW wind farm, as well as several others projects. In the coming years, SOCAR plans to increase the volume of its investment portfolio to $19.5bn, directing part of the funds to further development of the petrochemical sector in Turkey.

"Currently, the priority areas for SOCAR in terms of investing in the Turkish economy are oil refining, natural gas and petrochemicals. However, after we complete the initial investment of $19.5bn, there may be new investments, and possibly in other areas," Murat LeCompte, SOCAR Turkiye Enerji’s Chief Communications Officer, said.

SOCAR began operations in Turkey in 2008 with the purchase of a 51% stake in Petkim Petrokimya Holding. "After privatisation of the Petkim complex in 2008, SOCAR has annually invested $100 million in the development of the enterprise. The total volume of these additional investments exceed $1bn," Anar Mammadov, General Director of Petkim Petrokimya Holding said.

The complex includes 15 main and 6 auxiliary facilities for the production of 60 types of various products. "Due to the high demand for these products, Petkim ended 2018 with a profit of 872 million Turkish liras (TL) (approximately $151.5mn). According to the results of the first half of 2019, Petkim's revenues amounted to 5.9 billion TL ($1.0bn), net profit - 439 million TL ($76.3mn)," A. Mammadov noted.

According to Mammadov, thanks to the commissioning of the STAR refinery, Petkim is almost fully provided with the necessary local raw materials such as naphtha. By integrating the infrastructure of the refinery with Petkim, the latter plans to increase productivity in the medium term.

 

"Mercury" is getting closer

"Turkish petrochemical market has high potential with an annual growth of 6-7%. Currently, Petkim Petrokimya Holding provides 20% of domestic demand for petrochemicals. However, to ensure the growing demand, large investments are required for new capacities," Mammadov said. In particular, he mentioned the construction of a new "Mercury" petrochemical complex in Izmir's Aliaga region.

The new complex is scheduled for construction next to Petkim and the STAR refinery. Commissioning of the enterprise is planned in 2023-2025.

"The main partners in the Mercury project will be SOCAR and BP. However, Petkim also plans to become a shareholder of this project. I cannot say yet about the equity participation of our company in this complex but it will be small. The implementation of the project is very important for the further development of Petkim. We expect good results from this project," A. Mammadov said.

It is assumed that Petkim will not invest in the new complex but will provide territory, infrastructure and, possibly, raw materials.

According to SOCAR, the cost of the project is estimated at $1.8bn. It is planned to create a joint venture with BP on a parity basis. The project includes the construction in the Aliaga region of a plant for the production of 1.25mn tons of purified terephthalic acid, 840 thousand tons of paraxylene and 340 thousand tons of benzene annually.

According to SOCAR, the construction of Mercury in Izmir will allow Turkey to annually cover the current account deficit of $6bn.

 

Other projects

As part of expanding the scope of activities in Turkey, in January 2019 SOCAR also acquired Turkish assets of the German EWE A.G. The deal includes the purchase of EWE Turkey Holding and its five companies: Bursagaz, Kayserigaz, Enervis, EWE Enerji and Millenicom. According to Turkish media, the deal costs $140-150 million.

With the acquisition of gas distribution companies Burgaz and Kayserigaz, SOCAR Turkiye Enerji expects to cover up to 7% of domestic gas demand in Turkey.

In addition to investment activities, SOCAR Turkey has been involved as a drilling contractor. In particular, SOCAR AQS LLC received a contract for drilling operations under the project to expand the underground gas storage in Tuz Gölü in Turkey.

"SOCAR AQS appreciates the work on this important project together with Chinese CAMC Engineering Co., Ltd. - IC Ictas Construction Industries & Trade Inc. Within the framework of the contract, our company undertakes all obligations related to drilling," Ramin Isayev, CEO of SOCAR AQS said.

The $100 million integrated drilling contract provides for the drilling of 40 wells to expand the Tuz Gölü underground gas storage facility. R. Isayev explained that new wells would be drilled to inject natural gas and its subsequent extraction and delivery to consumers when demand increases.

Meanwhile, IC Ictas CEO Murat Mehmet Kurtulus believes that the signing of the agreement will boost the expansion and cooperation between the two companies and, ultimately, the two countries. "The expansion of the underground gas storage in Tuz Gölü is vital to meet Turkey’s natural gas needs, and SOCAR AQS will contribute to the successful completion of this mission," Kurtulus said.

Following the expansion of the Tuz Gölü UGS by 2024, the gas storage capacity will increase from 1.2 to 5.4 billion cubic meters of gas.

During a short period of operations in Turkey, SOCAR Azerbaijan has significantly expanded its portfolio of foreign projects, making a rather tangible contribution to the economic development of Turkey. Perhaps, in the future SOCAR will also get involved in other sectors of economy to demonstrate its rich experience and performance.



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