Turkey’s new floating storage and regasification unit (FSRU) will alleviate strain on seasonal imports and enables the country to diversify its sources of supply, writes Anders Norlen
Turkey’s gas consumption is rising fast and sharp seasonal demand swings and limited storage mean supply is tight over winter. Deploying FSRUs offers a solution to Turkey’s problems.
The Turkish gas market has grown over the last 10 years from 27bcm in 2005 to 48bcm in 2016. About 70 per cent of this demand growth has come from increased gas use in power and industry, reflecting the last decade’s robust economic growth and a 30 per cent hike in winter heating demand in the residential and commercial sector.
Increased grid penetration has made gas available to more consumers. And because natural gas has fewer particle pollutants than wood or coal and a lower CO2 footprint than coal and oil, it is an attractive option for residential heating.
However, increasing seasonal swings in gas demand have created a dilemma for policy makers and regulators, as Turkey’s lack of storage forces the country to seek additional imports during the colder months to meet demand spikes.
The difference in demand between peak and through month has grown from 1bcm 10 years ago to almost 3.5bcm last year (see exhibit one). Seasonal supply, in turn, is limited by import capacity. Flows through congested pipelines from Russia, Iran and Azerbaijan are already operating at, or close to, maximum capacity during peak winter months.
Turkey has limited storage largely for geological reasons, and is expected to bring online only limited additional capacity over the next few years.
However, the current developments of the LNG market offer Turkey an opportunity to benefit from the global oversupply expected through 2024 and will diversify the sources from which it imports its gas. This will strengthen Ankara’s hand as it renegotiates the long-term pipeline contracts that will mature in the early 2020s.
Floating imports as a solution to Turkey’s fluctuating demand have attracted interest from the country’s importers and policy makers. In December, the 145,130m³ Höegh-owned, Engie-chartered FSRU Neptune arrived at Aliaga on Turkey’s Aegean coast.
Neptune can provide a buffer for cold winters with an additional 0.6 bcm a month of import capacity. That is sufficient to relieve pressure on an import system that has been running at or above capacity in December of 2016 to supply gas for heating as Turkey experienced a cold snap across the country for an extended period (see exhibit two).
If required, the vessel can supply up to 3.6 million tonnes a year of LNG. And with a project-development time of just over six months, from final investment decision to deployment, Turkey’s Aliaga FSRU also highlights the speed with which floating import units can be put into action.
Aliaga FSRU provides Turkey with additional seasonal import capacity and helps the country to diversify its import sources. In addition, adding import capacity in the form of FSRUs solves another issue closely related to covering seasonal supplies: daily supplies.
In December last year, Turkey experienced supply shortages due to very strong demand, pushing daily consumption to 230-240 mcm, exceeding the country’s system capacity over more than just a couple of days.
Investing in infrastructure to solve that problem is high on the agenda for TSO Botaş and for Turkish regulator Emra. Turkey has recently announced plans to add up to two more FSRUs, in Iskenderun on the south coast and/or Saros close to Istanbul, to build sufficient buffers to cope with very high daily demand.
That additional capacity, with other planned infrastructure investments, should make the Turkish system much more resilient to supply/demand shocks (see exhibit three).
The Aliaga FSRU can accommodate opportunities that arise in the oversupplied LNG market for the next five to ten years. Without contracted volumes, the FSRU can find the best deals in the market, which should lower Turkey’s average gas-import price.
Until December, Turkey imported its gas via pipeline from Russia, Iran and Azerbaijan and under long-term LNG contract from Nigeria, Algeria and Qatar. However, the FSRU will be able to source LNG from anywhere, and could even develop a regular supply from a new source country such as the US.
An FSRU is a flexible option in times of uncertainty, helping mop up the best deals in what’s expected to be an oversupplied market, while adding to supplier diversity.
Turkey sources about 80 per cent of its supplies under long-term oil-linked contracts. Contracts for some 20bcm are due to mature by 2025. The recent example of Lithuania suggests that Aliaga FRSU will boost Turkey’s bargaining power in its contract renegotiations.
A recent report by Interfax suggested that Vilnius has successfully negotiated discounts to its gas contracted price with its key seller by more than 20 per cent.
Anders Norlen is a senior analyst at McKinsey Energy Imports