January 14th, 2016
With the downing of the Russian war plane on October 24, 2015, Turkey found itself in an unenviable position on the energy front, more particularly natural gas. Not only is the country’s ability to meet its daily energy needs on a precariously thin line but the options to replace Russian gas in the short term are virtually non-existent.
In the meantime, with the plane incident now receding in memory, and gas shipments from Russia still continuing unimpeded, Turkey has lapsed into complacency on energy supply for daily needs. But complacency may turn into a rude awakening. The specter of a debilitating energy shortage in Turkey, while appearing unlikely at present, remains a serious risk.
The Turkish Stream project aimed to bring Russian gas to Thrace, Turkey and onward to Europe across the Black Sea is now frozen – at least officially. But this is the least of Turkey’s concerns.
The critical connection
A look at the gas scene in the country says it all. Turkey’s energy needs are heavily dependent on imports. According to 2014 statistics, some 99% of its natural gas consumption is met by imports, with 27bn m³/year, or 55%, coming from Russia. The volume of Russian gas for 2015 is expected to be higher. Russian gas is delivered through the 14bn m³/yr West Route over the Balkans, and the 16bn m³/yr Blue Stream across the Black Sea. The gas purchase contracts on these two routes will terminate in 2021 and 2025, respectively.
Of gas consumed in Turkey, 48% is used for electricity generation, 25% in the industry, and 20% for residential needs including heating and cooking. According to 2013 data, the share of natural gas in installed power capacity is 36%. Gas is used in all 81 provinces, in half of the homes.
What that means is that, should the Russian gas stop coming, some 20% of electricity generation in the country will be cut off, and the industry and residents will be widely affected. Industry will be partly paralyzed. The area most affected will be Istanbul and the Marmara region, where the power generators and industry are concentrated.
Gas storage capacity is woefully inadequate. The facility near Silivri, off Istanbul, has a withdrawal capacity of 25mn m³/day, not enough to meet even a single day’s of imported Russian gas. The facility at Tuz Gölü, in the interior, will come into operation at the end of 2017. Another facility is planned at Mersin, on the Mediterranean coast.
The Nabucco project, which was dropped in late 2011 in favor of the TransAnatolian Pipeline (Tanap) project, had a proposed provision for reverse gas flow from Europe to met Turkey’s needs in case of emergency. Tanap has no such provision.
New gas sources
The assurances given and suggestions made by Turkish authorities that the country’s gas needs will be met, or shortages mitigated, if Russian gas is cut off, are far from comforting.
One solution that has been brought up, to expedite Tanap (due onstream 2018) and increase Turkey’s share from 6bn m³/year, is hardly convincing. Tanap’s throughput is committed to customers, and accelerating production will be at the expense of project optimization. No significant relief in the short term can be expected from Tanap.
Qatari gas is another possible solution/ Right after the plane incident, the government approached Qatar, and a provisional agreement was signed. But Qatari gas can only come after four or five years and the relief provided will be limited. The North Field, which feeds Qatar’s gas exports, has been on plateau since 2012 and new development on the field is frozen. The back-up Barzan project at a green-field site is not onstream yet.
Besides, the Qatari gas will come as LNG, and Turkey does not have sufficient storage and regasification capacity to handle new imports. Building new LNG facilities will take time and require major investment.
Another suggested source is gas from the Kurdistan Regional Government (KRG) in northern Iraq. The “Kurdish gas,” as it is called, is also four or five years away and will probably come at a rate of 10bn m³/year. Other than a cooperative agreement signed in 2013, there is no commercial agreement or commitment on gas sales to Turkey, and the Turkey-Iraq border area is riven with violence.
Separate from security concerns, in today’s low gas prices the investment needed for development and monetization of “Kurdish gas” resources will be hard to come by. Any development will also require the consent of the Iraq central government – a thorny issue. Turkey-Iraq relations are strained.
The Israeli gas in the eastern Mediterranean could have been a good alternative for Turkey; but the Davos and “Mavi Marmara” incidents have blocked progress on this front. Stung with the prospect of a gas shortage, the Turkish government is now trying to normalize relations with Israel. Despite denials by the authorities, Israeli gas is no doubt in the government’s mind.
Relations between Turkey and the Cyprus government are even shakier. In addition to the Northern Cyprus question, there is also a territorial dispute over an exclusive economic zone, in the area to the south of Cyprus where the Aphrodite field is [Note: One-sided claim by Turkey with no legal basis under UNCLOS]. It is also the area through which a pipeline carrying Israel’s gas to Turkey would normally pass.
Qatari gas is another possible solution/ Right after the plane incident, the government approached Qatar, and a provisional agreement was signed. But Qatari gas can only come after four or five years and the relief provided will be limited. The North Field, which feeds Qatar’s gas exports, has been on plateau since 2012 and new development on the field is frozen. The back-up Barzan project at a green-field site is not onstream yet.
Besides, the Qatari gas will come as LNG, and Turkey does not have sufficient storage and regasification capacity to handle new imports. Building new LNG facilities will take time and require major investment.
Another suggested source is gas from the Kurdistan Regional Government (KRG) in northern Iraq. The “Kurdish gas,” as it is called, is also four or five years away and will probably come at a rate of 10bn m³/year. Other than a cooperative agreement signed in 2013, there is no commercial agreement or commitment on gas sales to Turkey, and the Turkey-Iraq border area is riven with violence.
Separate from security concerns, in today’s low gas prices the investment needed for development and monetization of “Kurdish gas” resources will be hard to come by. Any development will also require the consent of the Iraq central government – a thorny issue. Turkey-Iraq relations are strained.
The Israeli gas in the eastern Mediterranean could have been a good alternative for Turkey; but the Davos and “Mavi Marmara” incidents have blocked progress on this front. Stung with the prospect of a gas shortage, the Turkish government is now trying to normalize relations with Israel. Despite denials by the authorities, Israeli gas is no doubt in the government’s mind.
Relations between Turkey and the Cyprus government are even shakier. In addition to the Northern Cyprus question, there is also a territorial dispute over an exclusive economic zone, in the area to the south of Cyprus where the Aphrodite field is [Note: One-sided claim by Turkey with no legal basis under UNCLOS]. It is also the area through which a pipeline carrying Israel’s gas to Turkey would normally pass.
The irony of the conundrum in the east Mediterranean gas scene is that, Turkey, with its relative proximity to the gas fields, its geographical location for gas transit to the EU, and with its burgeoning energy consumption – 7% growth/year – is the economically logical landing-point for east Mediterrnean gas.
The discovery of the Zohr gas field, the largest so far in the region, by the Italian major Eni in the Egyptian waters in August 2015, has effectively removed Egypt as an export outlet for the Israeli and Cyprus gas, making Turkey even a more attractive market for such gas. On a fast track-development, Zohr will come onstream in 2017-18, and the production will be used initialy for Egypt’s own use.
But considering Zohr’s resources – 850bn m³ gas-in-place and likely to go up – Egypt will probably become a gas exporter again, to compete with Israel and Cyprus. Zohr gas will probably be sold as LNG using Egypt’s export terminals at Idku and Damietta on the Mediterranean coast.
It remains to be seen how the negotiations between Turkey and Israel will transpire. Cyprus should be included in the negotiations. All parties need to consider that, with shared goals, and given good will and vision, the solution of energy problems can lead to better geopolitical relations too. The Israeli and Cyprus gas projects should ideally be integrated, with first gas in 4-5 years and export volumes reaching a potential 10-15bn m³/yr.
The foregoing discussion makes it clear that the suggestions made by the Turkish government for replacing the Russan gas, while feasible, are nonetheless unrealistic in the short term.
Cool-headed decision by Russia
The plane incident caused a deep division in Turkish-Russian relations. Russia, however, decided not to cut the gas flow. Russia obviously did not want to give up a lucrative gas export market, especially in today’s low oil-price environment. Turkey is Gazprom’s largest customer after Germany. Russia also did not want to be seen as an unreliable gas supplier in the world market.
Turkey could also appeal to international arbitration and seek compensation for failure to fulfill contractual obligation.
The Russian government must have also taken into consideration that the Turkey-Russia trade balance is decidedly in Russia’s favour. According to one report, since 1990, but in particular after 2003 when Blue Stream became operational, Turkey had a consistent trade deficit vis-a-vis Russia. The deficit in 2004 alone was $10bn.
Russia may also have wanted to revive the now-frozen Turkish Stream. In fact, there are signs that the project may be put back on track. Should the project be shelved for good, Turkey will forego some benefits from this project, but by losing a gas export route to reach central and southeastern Europe, Russia’s loss will be greater.
The unsettling geopolitical fact for Turkey is that, Russia’s future behavior cannot be predicted. Should relations between Turkey and Russia further deteriorate, Russia’s president Vladimir Putin may well put economic considerations aside and turn off the gas valve to Turkey as a punitive measure. That will cripple part of the industry in Turkey, and millions of Turkish people will suffer. On top of that, the country is trying to deal with more than 2 million refugees.
Turkey’s president Tayyip Erdogan has tried to patch up relations with Putin after the plane incident but this met with no reciprocity from Putin. In sombre reality, Turkey’s energy security is at risk.
Separate from the natural gas issue, Russia has put into effect boycott of Turkish imports and businesses and discouraged Russian tourism to Turkey. According to one report, the boycott will cost Turkey between $8.5bn and $12bn/yr.
So, gas flow or not, Turkey is in no-win situation. The Russian plane incident has been a bitter reminder for Turkish energy planners of the need to diversify foreign energy sources and routes. Turkey has long enjoyed, as it should have, good trade exchange with its neighbor Russia, and it was natural that energy was one of the components in such relation. The mistake was to put so many of the eggs in one basket.
Ferruh Demirmen is an independent petroleum consultant based in Houston, Texas. He previously worked at Royal Dutch Shell as corporate advisor in production geology, including technology and new business opportunities, for Europe, Southeast Asia and South America.
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