TURKEY GAS OPPORTUNITIES
Turkey is moving ahead this year with renewed urgency to develop a hub, as a means of defending itself from Russia's pricing tactics.
What is perceived as the main obstacle, Botas' dominance, is unimportant, argues former Botas expert and now director of Ankara think-tank Eppen, Dr Volkan Ozdemir. In an interview with NGE which also covered Russian pipelines and the southern gas corridor, he compared Botas' 75%-80% in Turkey with GasTerra's similarly dominant position in the Netherlands – home to the Title Transfer Facility, the continent's most liquid hub.
Private companies can import spot LNG into Turkey through a privately-owned terminal; and the gas release program means that private importers supply 10bn m³/yr.
The Turkish balancing point is small; but last month a contract traded for gas for delivery over the balance of the month at the EPIAS energy exchange. EPIAS was set up as part of the Istanbul stock exchange and the government has a good reason now to encourage the development of a domestic hub, he says.
Only then will then Turkish companies be able to renegotiate pricing in their contracts away from oil products to spot market prices in Turkey. In that sense establishing a liquid market domestically would give huge bargaining power externally and would accelerate the integration of the Turkish and the European gas markets in terms of pattern of gas trade. "I think the crisis with Russia will accelerate this development and affords for diversification of supplies," he said.
The gas market law of 2001 envisaged Botas' share of the gas supply market falling from 100% to a fifth and the company being unbundled along European lines, with supply separated from transport and with privatisation.
But neither of those plans materialised, except for a partial gas release programme, and for two reasons, according to Ozemir: first, the Turkish market was not ready for liberal regulation 15 years ago; and second, in the wake of the economic crash in 2008, Turkey's EU accession process ground to a halt.envisaged by 2011. But this was never implemented beyond the gas release programme.
Even the limited auction at was not quite the privatisation that it seemed, as companies buying the gas included Bosphorus Gas, which won the right to import about a quarter of the total on offer. On its website, Bosphorus claims to be the biggest importer after Botas, with 7% of the market and says it is 71% owned by Gazprom. So it was a state-to-state disposal rather than a privatisation of gas sales.
Market developments are not immune from politics, Ozdemir says, and this closeness with Russia meant that Turkey became decoupled from the EU. While European gas importers renegotiated their contracts down, Turkey didn't. Liberalisation was slow, and only a limited amount of LNG was imported on a spot basis by the private sector.
"For now, I think the best solution for Turkey is to balance its economic needs from a market perspective as an importer with its political aims from security perspective as a regional geopolitical player in energy.
Partial, not full liberalisation, is the answer. What I mean by partial liberalization is that creating more competitive market and restructuring Botaş domestically on the one hand and supporting Botas or other state energy companies externally in their mission to become big international players.
This now though needs addressing as the rift has left Turkey vulnerable to Russia, which is using gas as a stick to hit it with for the first time since their co-operation started in 1987. Turkey has started to think about this diversification, as Russia supplies 55% of the gas, which accounts for a third of Turkey's primary energy supply.
Gazprom gave the private companies a 10.25% discount but during the crisis it revoked the discount and began reducing the flow of gas to Turkey. The cuts in gas and the removal of the discount were all symptomatic of the politically poor relations and was unprecedented.
Accounts vary as to how much, if any, of the discount remains, with some saying it has been remove entirely and others that it is still cheaper than Botas' gas. Ozdemir says that it was not totally removed from the second quarter onwards, when the flow of gas returned to normal levels, while Botas and Gazprom have remained locked in arbitration since last October. Turkey has already won one dispute, with Iran, another of its suppliers which uses oil indexation.
Russia and Pipelines
Russia has been developing new pipeline projects such as South Stream, Turk Stream and Nord Stream 2. If one of them were to be realized then transit risk stemming from Ukraine would be severely minimized and Moscow would have important strategic leverage.
Turkish Stream, promoted at the June 2015 World Gas Conference by operator Turk Stream, was presented as the idea of the Russian president, Vladimir Putin. It was Russia's way of winning Turkey's friendship and promoting a hub on the border with Greece – although normally hubs are within networks, not at their junction, as Ozdemir points out.
Moscow is keen to market these projects even though commercial rationality dictates otherwise. So when one becomes enmired in political difficulties, it will find another plan. South Stream was dismissed because of regulatory obstacles from the EU's third energy package – which was also the first to enforce unbundling.
Then the priority shifted to Turkish Stream. That was frozen because of geopolitical tension with Turkey. Moscow pretended to support Turkey's goal of becoming a gas hub though its objective has been to use Turkey only as a corridor and a bargaining tool in its general struggle against Brussels.
Ankara was suspicious about Russian intensions for this project from the beginning, which is why Turkey did not let Russia use its territory as a corridor for strategic purposes. Rather it has already opted to become an energy corridor for Azeri gas, by signing the TransAnatolian Pipeline agreement although this contradicts Ankara's general discourse of being a gas hub. Turkish Stream would give Gazprom more bargaining power with Europe but for Ankara the project is definitely over.
That led Russia to lobby more intensively for the green light for its third attempt, Nord Stream 2. But that faces insuperable difficulties, Ozdemir says: "Energy and politics cannot be disentangled."
Russia wants it to diversify its markets and its routes and since Nord Stream 1 was built, only 40% of Gazprom's exports have gone through Ukraine, compared with 80% before.
But the US does not want Russia to deprive Ukraine of transit fees, even if some EU countries and companies see the benefits of trade with Russia. Some countries like France might undermine EU sanctions against Russia in order to support some energy projects in which their companies are shareholders – such as Total in Yamal LNG or Engie in Nord Stream 2 – he says.
"In my opinion, taking realistic future demand scenarios into account the EU does not need the NS2. It will benefit Germany and Austria however, as it will re-export gas to Slovakia, Ukraine and elsewhere via German hubs and Baumgarten... Turkey has now come round to the US way of thinking. One year ago it viewed Ukraine as a transit risk, now it is co-operating with it and I think there is a lot of room for that. Ukraine has offered Turkey access to its storage facilities – which are now larger than needed thanks to a shrunken economy and greater supply security from the west.
"However one idea, that Odessa becomes an LNG import terminal, is unlikely to get past Turkey which already sees the Bosporus as crowded and an LNG tanker as a hazard," he says.
Southern Gas Corridor
This is also very complicated project: there is no commercial rationale for spending $3bn to produce and transport just 1bn m³/yr, Ozdemir says. The total investment, including the upstream and midstream, cost about $48bn just to produce and bring 16bn m³/yr of Azeri gas to market.
The only way to make it work is to make it much bigger and to feed the pipeline with 15bn m³/yr more gas. "Without more gas, such as Iran's, the southern gas corridor makes no sense," he says.
Israel's gas reserves may be ruled out for the time being owing to the Cyprus problem. Gas from the Kurdish Regional Government needs a pipeline agreement and the Kurdish Workers' party, the PKK, have claimed responsibility for numerous attacks on oil and gas pipelines. This could have negative ramifications forr European energy security in the future. That leaves open the question of supplies from Iran, now that the sanctions have been lifted.
There could also be a swap with Turkmenistan: Turkmenistan would supply gas to Iran and Iran would supply gas to Europe through Turkey. Turkish and Iranian decision-makers could reach a deal. This would be feasible, unlike a Trans-Caspian pipeline involving direct Turkmenistan-Azerbaijan flows, which has got nowhere for the last 20 years.
There is also the question of Azerbaijan: although it has always been keen to treat the West and Russia evenhandedly, Russia wants a friendly government in Baku.
As the Baku government is under economic threat, with the oil price so low, there have been suggestions that the latest war in Armenian-held Azerbaijani territory of Nagorno Karabakh was fomented by Russia to allow Baku the chance to flex its muscles and play on popular feelings.
Russia might expect something in return for this. "What if the state oil company Socar were to fall ultimately under Russian influence? Whose gas would flow through Tanap then?" Ozdemir asks.
Within the general energy triangle between the EU, Turkey and Russia, Turkeys' is now drifting close to Brussels, posing an additional burden for Moscow in its eternal struggle in the European energy arena. The changing realities of international gas markets – and Europe's in particular – where falling prices, the ending of oil-price indexation and new common market regulations, combined with weak demand, will provide little room for new Russian pipeline projects to be realized.
Meanwhile, in terms of energy security, the EU seems to benefit from worsening Turkish-Russian relations. Both Russian and Turkish domestic energy markets will be affected by the developments in Europe that will likely result in full liberalization of exports for Russia and the liberalization of imports for the latter.
Finally, the energy triangle is in a state of flux, politically; and it remains subject to new surprises that could arise from geopolitical developments in regions that lie beyond its confines, he says.
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