Black Sea Export and Bosphorous Oil Transits.

For Turkey the transport of oil and other hazardous cargoes through the congested waters of the narrow Bosphorous Strait as it cuts through Istanbul is an issue of immense political, social, historical, commercial, and environmental importance. This narrow congested channel is 31 km long and 1.5kms wide (700m at its narrowest point). It has several sharp turns and strong currents that constantly change their pattern.

The channel currently handles 50,000 vessel transits a year. This is double the 1988 level. Today oil tankers make up 15% of shipping transits which percentage will decline in the future as conventional black Sea trade continues to increase. But total oil flows through the Bosphorous have grown significantly in recent years.

Between 1998 and 2000 growth was 7% per year, although the 74mty that transited in 2000 is still significantly lower than the peak of 91mty in 1989. A variety of future projections have been made which suggests that on current trends by 2010 the Bosphorous would most likely face a demand for increased oil transit from the Black Sea of some 110 to 120mty.

Therefore the volumes of Black Sea oil transits through the Bosphorous are unlikely to double or treble over the next ten years as predicted by many. But there will be a coeval rapid expansion of non- hazardous cargoes through the Strait.

Some believe that such moderate growth in oil transits through the Bosphorous can continue to be managed both technically and safely. Others believe that the risk of an oil transit catastrophe in the heart of Istanbul is an unacceptable risk and that a Black Sea-Bosphorous by pass pipeline must be built.

Certainly the retrieval costs reputedly associated with the "Exxon Valdez" set at around $10bn suggests a greater exposure would be involved in Istanbul.

Caspian producers are polarised on this issue with those that favour an early by pass (BTC Sponsor Group) and those that currently don't (CPC and Transneft). Turkey has roughly two years in which to reach a common decision.

However if a by pass is selected, and there are at least eight options under consideration, this could reduce potential net-backs for north Caspian oil by perhaps one dollar or more.

Last year the indicative tariff for transporting a Tengiz barrel to the Augusta refinery in Sicily was 4.10/bl. The additional costs involved in using a Bosphorous by pass with double handling of crude in the Black Sea could rise from $4.75 to $5.10 depending on which by pass was built. The comparable indicative tariff to transport a barrel from Baku through BTC to Augusta would be $3.10.

This clearly has a negative impact on the North Caspian barrel as its attempt to displace other competitive sweet crude in the Mediterranean market and beyond.

The BTC transit cost suggests that South Caspian crude will remain highly competitive, but only if indicative tariff levels are maintained.