Azerbaijan’s Petkim Takeover to Overhaul Turkey’s Petrochemical Industry

Azerbaijan’s State Oil Company (SOCAR) is poised to become the largest direct foreign investor in Turkey. According to company president, Rovnag Abdullayev, and foreign investment department chief Vahit Aliyev, SOCAR plans to invest $17 billion in Turkey in 2012-2017, concentrated on two flagship projects: construction of the Trans-Anatolia Gas Pipeline and expansion of the petrochemicals holding Petkim (Today.Az, Trend, April 4, 10, 12).
 
SOCAR recently acquired the majority of shares in the Izmir-based Petrokimya (Petkim) Holding. This is the sole large producer of plastics of all descriptions, packaging materials, fabrics, dyes and detergents, in Turkey’s market of 80 million people. Petkim currently covers about one quarter of Turkish demand for those chemical products. Dependent on imported oil derivatives for raw materials, Petkim’s production is not among the most competitive. SOCAR’s investment program aims to supply Petkim directly with oil-based raw materials from a refinery of its own, boost Petkim’s output and its competitiveness, increase its internal market share to as much as 70 percent, expand into Near Eastern markets, and turn Petkim’s port near Izmir into Turkey’s largest logistics center (1News.Az, Trend, April 4, 5).
 
Azerbaijan’s state oil company acquired control of Petkim Holding through two competitive bids: 51 percent for $2.04 billion in 2008 (through the SOCAR-Turcas joint venture, renamed SOCAR-Turkey Energy since then); and another 10 percent for $169 million in March 2012, for a total of 61 percent and the operating rights. SOCAR’s subsidiary, SOCAR-Turkey Energy, holds those shares (while 39 percent of the shares remain in free-float) (Anatolia news agency, April 1).
 
Turkish Prime Minister Recep Tayyp Erdogan and Azerbaijani President Ilham Alyiev jointly made the final political decision to launch this project. On October 25, 2011, Alyiev and Erdogan broke ground for construction of the Star Refinery near Izmir. The overall site, Aliaga, is scheduled for development as Turkey’s most modern manufacturing and trading hub on the Aegean-Mediterranean coast.
 
The refinery is designed for a processing capacity of 10 million tons of oil per year; construction of the first stage is planned for completion by 2015. Attached to it, a technical industrial lyceum named after Haydar Aliyev is planned to train a local work force.
 
SOCAR expects to invest approximately $7 billion in the overall project, including $5.5 billion for the two-stage construction of the Star Refinery. Of this amount, Baku plans to raise $2.5 billion from export-crediting banks of countries that will deliver the oil-refining equipment; $1.5 billion from commercial loans; and another $1.5 billion from the shareholders themselves (mainly, SOCAR’s equity capital).  (1News.Az, Trend, April 10).
 
A state-of-the-art port is planned for construction by APM Terminals at this site. In February of this year, Petkim and its fully-owned subsidiary, Petkim Port [Turkish: Petkim Liman (Petlim)], signed a framework agreement with APM Terminals to build and operate this port in Aliaga, a natural deep-water site. A. P. Moller-Maersk (APM) is a Netherlands-based affiliate of the Danish Moller-Maersk, a world leader for port and terminal operations and container transportation.
 
The plan for Aliaga envisages a vertically integrated, refinery-petrochemicals-energy-logistics complex, to become operational by 2015 (with the oil refinery’s first stage). In Turkey, overall, the development of modern port capacities lags behind the country’s rapid industrial development. Petkim’s port is designed to become the largest integrated logistics center in Turkey for petrochemicals, container, and general cargo transportation, under the agreement with APM Terminals (Journal of Commerce, February 13).
 
Azerbaijan’s other flagship investment project in Turkey is the Trans-Anatolia Gas Pipeline (TANAP). The investment is estimated at $5 billion to $6 billion for the first stage of construction and operation. Under the December 26, 2011 inter-governmental memorandum of intent, SOCAR shall hold 80 percent of the shares and the operating rights; Turkey’s state pipeline company Botas, 10 percent; and Turkish Petroleum another 10 percent. SOCAR has the right to sell shares to possible minority partners, out of its 80 percent package; but shall in any case retain the majority of shares and operating rights. SOCAR’s own investment shall be proportionate with its shares in the project. TANAP is designed for a first-stage capacity of 16 billion cubic meters (bcm) of Azerbaijani gas per year from 2017 onward, with possible expansion up to 30 bcm per year in a follow-up stage.
 
With these projects, Azerbaijan is surging to the top of foreign direct investors in Turkey’s high-growth economy. SOCAR’s capacity to invest in projects of Petkim’s and TANAP’s magnitude testifies to its effective use of oil revenues for re-investment in other projects, only four or five years after oil revenues had begun accruing to Baku.
 
Azerbaijan’s west-oriented oil export strategy turned Turkey into an oil transit country, albeit without the means to invest in Turkey at that time. Now emerging as a gas exporter with the same west-oriented strategy, Azerbaijan is turning Turkey into a gas transit country – as well as overhauling Turkey’s petro-chemical sector. Turkey had long aspired to become a transit country for both oil and gas pipelines. Thus far, only Azerbaijan makes this possible. Additionally, Azerbaijan’s investment in the Georgian section of the Kars-Tbilisi-Baku railroad, expected for completion by November 2012, will connect Baku and Ankara within an inter-continental transport system. These developments are apt to reinforce Turkish-Azerbaijani political solidarity on all issues of regional importance.