Bud Fackrell, President of BP Turkey, provides unique insight into the oil giant’s major projects and multiple activities in the region, including its involvement in some of the largest energy projects in the world, and discusses how having a long-term viewpoint in Turkey gives the company a strategic and competitive edge.
Before we started the interview you said Turkey is facing a difficult time but BP has many reasons to be optimistic about its operations here. What are those reasons?
Turkey has some things to solve, but underneath that, there is a powerful history. Let me tell you about BP’s history in Turkey. We have been in Turkey for over 100 years. We are one of the biggest energy companies here. Turkey is strategic for us, even though it does not have much of its own oil and gas resources.
We have a large downstream business here, which is the face of our company. We have over 650 retail stations. We are trying to open another 40 this year, so we are growing. It’s a challenging environment here because it’s very competitive. The margins are low, but we want to be here because the country and the fuels market are growing. We have a large lubricants business, and our brand name, Castrol, is very popular in Turkey. We also provide aviation fuel at 11 airports here. So our downstream business has a large footprint across the country.
Apart from the downstream, our main business is the pipeline projects. The first one is the Baku-Tbilisi-Ceyhan Pipeline, which was a game-changer when it was built. No one thought this could happen. We are taking crude out of the Caspian waters and bringing it through Turkey. This really was a game-changer because I think many people didn’t think that all these countries could come together. The relationship between Azerbaijan and Turkey is now very strong. Both bring assets to the table. Turkey is bringing technical know-how and energy demand to the table; Azerbaijan is bringing the resources.
We have a large stake in Azerbaijan. No oil and gas will flow out of Azerbaijan now without the BTC Pipeline. And there is also a gas pipeline which brings gas from Azerbaijan to Turkey. We have been working with the Azerbaijan government and the Turkish government to build this dream of a corridor to bring gas from the Caspian to Turkey and then onto Europe. This project is called the Southern Gas Corridor.
In 2013 we made a final investment decision on this $45 billion project. It covers seven countries. It’s the largest energy project in the world at the moment. We have a core set of skills around gas value chains that we bring to the table. If you think of a chain as a series of links, any weak link in that chain could cause the whole thing to fall apart. The gas value chain works in the same way. As BP, we have ownership in every link in that chain. The other big investor is SOCAR from Azerbaijan. We are partners with SOCAR and Turkey in every part of the chain. Part of our role is to make sure that every link of the chain remains strong.
We must give credit to the governments of Turkey and Azerbaijan for having the vision to undertake this project. They allowed us to come and help them support that vision. As part of the Southern Gas Corridor in Turkey, a new pipeline called TANAP, the Trans-Anatolian Pipeline, will be built. We have a 12% stake in it, whereas SOCAR has 58%, so we are minority owner in the project. But it’s very important for us to be in that project and ensure the whole value chain stays together.
Now we are laying pipes in Azerbaijan, Georgia and Turkey. We are going to bring gas into Turkey first and then into Europe. It is a whole sequence of projects. Gas will arrive in Turkey around late 2018.
We have a massive offshore project in Azerbaijan, in the Shah Deniz 2 gas field, which will provide the first gas to the Southern Corridor. We are going to drill 26 very expensive deep wells, and put a new network of pipelines in the sea together with a series of platforms. Then you will have compression stations in Azerbaijan, Georgia and all across Turkey. For us it’s not just a dream but a reality.
The political situation in Turkey is now quite challenging because of the elections and the fact that the peace process has fallen apart recently. Violence has broken out in eastern Turkey where the pipelines are going through. We have to deal with the realities of today but most of our projects take between five to 10 years, so the conditions of today will not be the same as the ones in 2018. You hope they will be much better by then but you don’t know that. We are used to that risk. We haven’t changed our investment profile. We are building the Southern Gas Corridor as planned.
What Azerbaijan and Turkey want is one big, 56-inch pipeline. At first, we said that it was going to be hard to justify that economically today. In the end we agreed to a 56-inch pipeline because they are the sovereign nations, and it’s their gas and territory. We worked out commercially how we can do that. From a physical point of view, we can double the capacity of the pipeline if we see the need. There are multiple sources of gas in the region. BP and SOCAR have additional gas resources; obviously we want to develop BP equity gas in order to expand. But there will be other sources of gas. In the future, there may be gas from the Eastern Mediterranean, for example, or gas from Turkmenistan.
We are focused on first delivering gas to Europe. It’s like the movie, Field of Dreams: “if you build it, they will come”. When you build the infrastructure, the hydrocarbons will get there. Resources in this region and the Caspian have been trapped. Projects like the Southern Gas Corridor open them up. Once we do that, it’s going to level a number of things. This fits into the strategy Turkey has. Turkey does not have many hydrocarbons of its own, and they have a large population and energy needs because they are a developed country. They want additional sources of gas.
What impact will TANAP have on the Turkish domestic gas market?
It will contribute to a portion of the market. Turkey continues to diversify its gas supply. The Turkish vision is not to have just one pipeline, they prefer multiple pipelines. They would like to become a hub. Natural gas is the cleanest fossil fuel. It helps the environment if you convert to national gas.
Turkey has some renewables. They need to continue developing renewables but they are only a small portion of the supply. They can grow renewables by 20-30% and still not meet a significant portion of the demand. Renewables are growing worldwide but the demand is so much larger. If you compare the markets, the demand in Europe is growing. Europe’s indigenous production is declining, and they will have to import more gas from other places. You still have Russian gas which can flow here and in Europe. We have to compete with all that. One of the reasons we move forward with projects like the Southern Corridor is that we have signed contracts. We have markets in which we have long-term contracts, here in Turkey and in Europe.
Will the proposed Turkish Stream bringing Russian gas to Europe through Turkey have any impact on the success of the Southern Gas Corridor?
Turkish Stream will have no impact on the Shah Deniz 2 development. Obviously, if that project becomes a reality, we may be competing with them. We are focusing on moving forward and developing our project. Another thing is that this project would be cheaper than others that were studied. Those ingredients make the project work today, even though the environment has changed. We are preparing ourselves for an environment of $50-$60 per barrel. In several years, the supply-demand balance is going to catch up. By that time, we are going to be moving these projects along together with other mega gas projects.
I think it depends on the vision of the leaders of both countries. Secondly, BTC was very important. If you didn’t have BTC we wouldn’t be doing the Southern Corridor because no one would believe it’s possible. When the BTC was built, the Turkish government wanted to make sure it was built by Turkish contractors. Parts of TANAP and the Southern Corridor are now being built by Turkish contractors.
One of the interesting aspects of BTC was your community engagement initiatives in areas impacted by the pipeline. How will you use those lessons from BTC in the TANAP project?
When BP does projects, we have commitments to the community. That’s one of our values. It’s very important that the citizens get some benefits and support the projects. We are going through their land, so we are very committed with community engagement in BTC, since BP is the operator of the BTC overall. We obviously compensate for any loss to their land, but more than that they got some benefits out of it. We have made $35 million of community investments and BTC is not yet 10 years old.
But remember, TANAP is not a BP project per se. It’s a consortium led by SOCAR. One of the reasons we want to be part of it is that we want the value chain work; but secondly it’s an opportunity to see how TANAP deals with the lands and communities as well. So TANAP itself will have a CSR initiative. We are not operating that project, that’s a very important distinction there. They want to be able to sell Azerbaijan gas in Turkey and in Europe. They want to be known as a reliable supplier of gas. It is not our place to operate for them. They want to operate; we are going to support them. So, in leading TANAP, they would have their own CSR.
We have close relationships with both countries, particularly with the outgoing Energy Minister Taner Yildiz. He has been a tremendous business partner for us. He is a very smart Minister, who has shown vision and a willingness to stand back and recognize we are adding value to the table.
How do you assess Turkey’s potential to develop into a gas trading hub, like, for example, the UK?
Clearly that’s their aspiration. Behind it there is this need to diversify the supply and maintain it for its citizens, and then allow the gas to be traded. There are small gas companies in the business. I think it can happen, but a lot has been done. The pieces are starting to take place. Maybe the conflict in Syria slows that down that a little bit since you have to focus on security first and foremost. Turkey has 2.5 million refugees. We see every day all the European countries trying to decide what to do with the refugees, and then you look at Turkey; they have allowed these people to come across their borders. You have to have a government in place to do that. You will find a lot of opinions, which is what happens in a democracy. The government will have strong support to continue on this path. They don’t want to be just a transit country. They are large consumers.
Turkey has an ambitious export target of $500 billion by 2023. The only way to achieve this is by transitioning more towards high-tech, value-added exports. How are you supporting Turkey’s export goals through your production plant in Gemlik?
Gemlik is at the center of our lubricants business in the region. It’s world class and we supply lubricants from that plant to many countries. It is operated by Turkish nationals. We are very proud of that. As a matter of fact, we exported several of our Turkish nationals to our BP offices worldwide. We don’t produce just ‘normal’ lubricants in Gemlik; we produce the high-tech, leading-edge lubricants, such as Castrol Edge. We don’t have research and development facilities there, those are in the UK. It’s a staging point and testing point for new products. We have a lab in Gemlik where we test the products.
Can you expand on your strategy for growth in the downstream sector in Turkey?
We have a very common system of dealer-owned, dealer-operated stations. It’s been like that for a long time. We sign up dealers and they operate the petrol stations and sell our products. It’s not franchising but we have a strong set of dealers, loyal ones. We have also initiated a new business model, where we own or lease the petrol station, and it is operated on our behalf by an “agent”. Turkey is a very competitive market. There are 70 competitors here. Under the legislation, the dealer contracts are limited to five years.
BP has been operating in Turkey for more than 100 years. What are the foundations of this longstanding and fruitful relationship?
Turks are very well educated and trained. They are entrepreneurial businessmen. They are highly skilled and because of their local knowledge, they have been able to develop the business over the years. We have many experts that come and go. The number one foundation has been the quality of energy and the workforce.