The İstanbul Canal: Wishful thinking or realizable project?
by Liam Hardy*

An estimated 2.9 million barrels per day of petroleum flow through the Bosporus, of which over 2.5 million barrels per day is crude, carried on an average 5,500 tankers each year, according to the US Energy Information Administration (EIA).

The Bosporus is difficult to navigate, with fast currents and a narrow channel, and for years the Turkish government has sought means to speed up the traffic while reducing the number of accidents. Between 1953 and 2002, nearly 461 incidents occurred, the majority being collisions, and in the past decade or so, there have been three major collisions that caused oil spills.

Turkey regulates the tanker traffic, and ships must wait 20 days on average to pass through the Bosporus, causing demurrage costs for shipping companies of nearly $50,000 per day. Tankers in the past have also damaged private residences along the Bosporus (yalis), destroying private property and angering İstanbul residents.

Two months before the parliamentary elections, the Turkish administration announced a plan to build an “İstanbul Canal” for oil tankers to bypass the Bosporus. Details of financing the plan are vague, and potential complications with international treaties are not addressed. Is this plan is a realistic proposal or wishful thinking on behalf of the administration? Planners must consider the logistical, environmental and social implications of essentially turning İstanbul into an island before taking the proposal seriously.

The İstanbul Canal could be a very profitable venture if built. Bloomberg cites the İstanbul mayor as saying the canal might cost nearly $10 billion and take eight years to build. While these figures are probably overly optimistic, a cash flow analysis using very general assumptions suggests the project could bring in more than $1 trillion after a lifespan of 20 years -- although the canal would contribute revenues indefinitely. This assumes an average toll fee similar to the Suez Canal’s $205,000.

The social benefits include an end to property and environmental damage on the Bosporus. Companies transporting oil would also likely support the construction of the canal. They would pay a fixed $205,000 toll fee instead of the nearly $1,000,000 in demurrage costs for nearly 20-day waits.

Finding capital for the initial funding of the canal might be difficult in the near future because of uncertainty in international markets and constraints in financing. Policymakers have been worried about a rising inflation level and slower gross domestic product (GDP) growth rate. The cost of the investment must be considered in the context of Turkey’s high current account and budget deficits.

While public sector financing appears constrained, the project might likely need to turn to other creditors and private stakeholders. However, since the sovereign debt crisis in Europe, banks have been less willing to tie up capital in large, long-term projects. These trends point to difficulties in the near future for funding, but this does not imply the project cannot take shape in an improved economic situation in several years’ time. The İstanbul municipality has expressed its desire to fund it, and international development banks should be solicited to provide financing.

Finally, the Montreux Convention currently dictates the travel of ships through the Bosporus. It guarantees the free passage of civilian vessels during peacetime and allows Turkey to restrict the passage of military vessels. This agreement would have to be renegotiated with relevant parties Russia, Ukraine, Georgia and Bulgaria if the new canal is to be realized. Currently, oil tankers do not pay a toll fee, and Russia in particular takes the Montreux Convention seriously and may demand difficult terms during negotiations. If Turkey is serious about completing the canal, it needs to put together an expert diplomatic team to explore the potential for negotiating a new contract.

Given the long-term potential to provide revenues, however, the canal appears commercially viable, and the reduction of risk to property, health and the environment in İstanbul would be great. While the announcement may have initially been used as campaign rhetoric for the administration’s upcoming election, there could be potential long-term benefits to be gained from the canal’s construction. Thus, policymakers and interested business parties have an interest in continuing to plan and promote the project.

*Liam Hardy is a student in the master of international business degree program at the Fletcher School of Law and Diplomacy at Tufts University.