The Syria- Turkey conflict and Oil

Syria-Turkey conflict puts key pipeline at risk

Conflict between Turkey and Syria escalated Thursday, providing additional support to rising oil futures prices and stoking fears of a supply crunch.

Marketwatch,

11 October, 2012

But just how worried should the world be about the tensions? Hint: it’s not about crude production but it could impact BP Plc. BP +0.79%

Turkey and Syria pump little oil. Turkey, however, is a key player in the transit of oil and gas from Russia and former Soviet republics surrounding the Caspian Sea.

Syria accused Turkey of air piracy after Turkey forced a Syrian civilian airliner to land in Ankara. Meanwhile, the U.S. sent troops to Jordan's border with Syria.

That Eurasian oil has become even more important to the global market since July, when the European Union and United States slapped an embargo on oil imports from Iran in response to Tehran’s refusal to abandon its nuclear program.

Tensions between Turkey and Syria flared Thursday after Turkey intercepted a Syrian passenger plane and seized what it alleged was a cargo of arms supplied by Russia.

Tensions in the Middle East have boosted oil prices several times this year. Border skirmishes between Syria and neighboring Turkey, which is sheltering Syrian refugees from the bloody uprising against President Bashar Assad, are merely the latest.

But they threaten a Turkish oil-export terminal and port and its accompanying pipeline.

The Energy Information Administration in Washington estimates Turkish oil output at about 50,000 barrels a day. Syria produced 400,000 a day in 2010. Analysts at J.P. Morgan estimate Syria’s daily production has since dropped to less than 150,000 a barrels. Loss of supply from these two countries, if it happens, would hardly be noticed by oil traders.

Oil storage terminals near the southern Turkish city of Ceyhan and the pipelines feeding them are another story. Analysts at J.P. Morgan estimate crude exports from the port at about a million barrels a day.

The Mediterranean port of Ceyhan is only about 50 miles from the Syrian border. It is also the end of the line for the Baku-Tbilisi-Ceyhan, or BTC, pipeline, which carries mostly oil from Azerbaijan, and for another oil line from northern Iraq.

Syria is unlikely to have the military capabilities to hit Ceyhan, said Sarah Emerson, a managing director with Energy Security Analysis, or ESAI, in Massachusetts.

An attack on Ceyhan would likely bring a swift NATO response, as Turkey is a member of the alliance, an unwelcome reaction for the embattled Syrian government.

The most recent disruption to the BTC pipeline was in August 2008 during the brief Russian-Georgian war. Oil futures were coming down from their record $145 a barrel hit on July 3 of that year, and didn’t feel much of a squeeze from the interruption, said Andrew Reed, a principal with ESAI.

BP leads a consortium of oil companies operating in Azerbaijan’s Caspian Sea fields, and uses the BTC pipeline to get that oil out.

Late Wednesday, Azerbaijan’s president criticized BP’s handling of the fields, threatening it with action and blaming the declining production on “grave mistakes” by the UK-based company, according to media reports.

The take-home lesson? “The perception and reality of military-conflict risk in the Middle East is changing, forcing oil markets to reevaluate potential geopolitical scenarios beyond” a Israeli military strike against Iran, the analysts at J.P. Morgan said.

Israelis go to the polls in early 2013, which could defer the escalation of tensions between the two countries.

“Events in Syria, Turkey, and Lebanon may bring a whole new set of oil supply and demand risks,” they said