Turkey’s energy dilemma: Brussels or Moscow?

Russia-Turkey Trans-Balkan pipeline gas flows, September-December 2014
Russia cut gas shipments to Turkey through the Trans-Balkan pipeline until Ankara agreed to TurkStream, then brought them back to normal (source: macpixxel for GIS)

Since the failed Turkish coup in July 2016 and the subsequent crackdown by President Recep Tayyip Erdogan, the relationship between Turkey and the European Union has been eroding.

Russia has taken this opportunity to deepen energy and security cooperation with Ankara, increasing its leverage and expanding its role in Syria and the Middle East. Turkey has become increasingly reliant on Russian gas supplies, and while other import options are plausible, they are complicated by various political factors.

Turkey still hopes to diversify its energy mix by tapping other foreign suppliers and using more coal and renewable energy sources. But its growing rapprochement with Russia has ramifications for Europe and the Middle East. The EU needs to consider what it can do to preserve its influence and interests in Turkey.

New pipelines

In October, Turkey cleared Russia’s Gazprom to build the second section of the TurkStream (or Turkish Stream) gas pipeline through its exclusive economic zone in the Black Sea, though the precise route is still undecided. Construction of the first pipe started in May 2017 and is scheduled for completion in March 2018, even though the existing Russian-Turkish Blue Stream pipeline is being used at only 60-70 percent of capacity. TurkStream will provide gas solely for the Turkish market.

The second TurkStream pipe will come online in 2019 as Russia’s gas transit contract with Ukraine ends. It will replace the Trans-Balkan pipeline in supplying the Southern European gas market.

TurkStream could make Turkey and the Balkans even more dependent on Russia

The successor project to the South Stream gas pipeline project, TurkStream could transform the Balkans into a crucial transit corridor for EU gas supply. It could also make Turkey and the Balkans even more dependent on Russia. While Bulgaria, Hungary, Serbia, Greece and Macedonia have supported the project, the European Commission is opposed, particularly to the third and fourth TurkStream pipes.

Russia is also making inroads in Turkey’s nuclear power sector, with Russian state nuclear energy corporation Rosatom leading the development of a $20 billion nuclear power plant in Akkuyu, Turkey. Construction will start next year, and the plant is scheduled to begin generating electricity in 2023.

Russian influence

Since 2016, Russia has taken the opportunity to enhance its energy ties and foreign policy cooperation with Turkey. Afraid of further Kurdish advances in Syria, Ankara has sought a rapprochement with Moscow. Meanwhile, the Kremlin has sought to increase Turkey’s dependence on Russia for gas and nuclear energy to strengthen its overall position in the Middle East.

Mr. Erdogan’s turn to Moscow is surprising, given his country’s historical fears of Russia and its concerns about becoming overly reliant on Russian gas supply. In the months before Turkey agreed to the TurkStream project in December 2014, the Kremlin’s blackmail tactics were on display. Russia decreased its contracted gas exports to Turkey via the Trans-Balkan pipeline without any warning or explanation, only restoring deliveries to previous levels once Turkey’s Botas Petroleum Pipeline Corporation signed a memorandum of understanding with Gazprom to build TurkStream (see image 1). The episode only deepened Turkish distrust.

If Russia builds all four TurkStream pipes, it could threaten Turkey’s own ambitions to become an energy hub. The pipeline could create significant bottlenecks inside the Turkish-Greece gas infrastructure system, as 10 billion cubic meters (bcm) of Azeri gas for Europe is transported through the same network, via the Trans-Anatolian Natural Gas Pipeline (TANAP) and the Trans-Adriatic Pipeline (TAP).

It would also give the Kremlin more influence over Turkey’s energy policies and on Azerbaijan’s supply of gas to Europe. The EU will be concerned about the fate of the Southern Gas Corridor, its prestige project meant to reduce the continent’s dependency on Russian energy.

Growing cooperation

In recent years, Russia has been Turkey’s second-biggest trade partner and its most important gas supplier. Turkey, for its part, has been Gazprom’s second-largest gas export market (after Germany) and is among Russia’s top 10 trade partners.

Various under-construction and abandoned pipeline projects in Europe
Russia’s Turkish Stream pipeline initiative has replaced its previous South Stream project. It could undermine EU attempts to diversify gas supplies (source: macpixxel for GIS)

After Turkey downed a Russian warplane in November 2015, Moscow suspended the TurkStream gas pipeline project, which had been designed to circumvent Ukraine in routes to Europe. The rift also threatened two supply deals with Ankara for 36 bcm of annual gas imports: one through Gazprom’s Western Balkan route gas pipeline, which needs to be renewed in 2021, and another through the Black Sea Blue Stream gas pipeline, which must be renewed in 2025.

Turkey lacks indigenous gas reserves, making it highly dependent on imports. Its national energy mix relies heavily on gas, which accounts for 29 percent of its primary energy consumption and almost 50 percent of electricity generation. Between 2000 and 2015, Turkey’s natural gas consumption tripled from 15 bcm to 47.5 bcm – the second biggest increase in gas demand worldwide (behind China).

Efforts to diversify

In 2016, Turkish consumption declined to 46.16 bcm, of which Russia supplied around 24.37 bcm (53 percent). That was down from 26.62 bcm in 2015. The shrinking imports were the result of a diversification policy outlined in Turkey’s new energy strategy of December 2014 – relying more on indigenous resources such as coal and renewable energy sources.

Turkish gas imports, by supplier (percentage of total), 2016
Russia is by far Turkey’s largest supplier of gas, but Ankara is implementing a policy to move away from dependence on the fuel (source: macpixxel for GIS)

Turkey sees itself as a bridge between gas-producing and gas-consuming countries, and hopes to become a regional energy and gas hub. The country lies close to more than 70 percent of worldwide conventional oil and gas reserves in the greater Middle East. In 2018, surpassing Ukraine, it will become the most important transit state for gas supplies to Europe from Azerbaijan, via the newly built TANAP and TAP gas pipelines.

However, while Turkey can import gas from neighbors like Azerbaijan, Iraq (the Kurdistan Region) and Iran, and LNG from the United States, Qatar and others, each of these options presents challenges.

LNG
In 2014, Turkey signed a memorandum of understanding with Qatar to expand imports to 1 bcm of Qatari LNG. Turkey has only two LNG import terminals, at Marmara Ereglisi (a capacity of 8.2 bcm per year) and Aliaga (5 bcm per year), and LNG storage capacity of just 3 bcm. In 2016 the share of LNG in Turkish gas imports increased to 16.4 percent, from 12.8 percent in 2013.

Floating Storage and Regasification Units can strengthen Turkey’s leverage with Gazprom

Turkey has also signed a charter contract with Mitsui for the world’s largest Floating Storage and Regasification Unit (FSRU), for at least two years. Mitsui has a relatively low gas outflow, but a large storage capability, which can also be used as a hub for smaller LNG import markets in the Eastern Mediterranean. An initial FSRU (the Etki LNG unit) was installed in December 2016, and another with the same capacity of 6.6 bcm will be installed at Iskenderun, west of the Syrian border. These facilities offer better flexibility for managing seasonal peak demand and enhance supply security, which could strengthen Turkey’s leverage with Gazprom.

Botas, the state-owned energy company, also wants to boost the regasification capacity of its Ereglisi LNG terminal from 8 bcm to 12 bcm per year. The average utilization rate for all its LNG terminals is just 55 percent. In 2012, Botas projected a doubling of Turkey’s gas demand to as high as 81 bcm by 2030; it has now lowered that projection to just 50-55 bcm by 2020.

Azerbaijan
Turkey has already agreed with Azerbaijan on completion of the TANAP gas pipeline project, and on an expanded South Caucasus Pipeline to import 16 bcm from Azerbaijan’s Shah Deniz-2 gas field to Turkey and Europe before 2018 – ahead of the original schedule. Both sides are interested in expanding Azeri gas supplies for TANAP.

TANAP’s planned capacity could rise to 23 bcm by 2023, 26 bcm by 2026, and as much as 60 bcm by 2030 and beyond, allowing it to serve other suppliers such as Kurdistan, Turkmenistan and Iran. However, Azerbaijan’s plans to increase exports are threatened by its own growing domestic demand for gas.

Kurdistan
The only other short-term option for importing non-Russian gas to feed TANAP is Iraqi Kurdistan. A bilateral agreement was signed in November 2013 to increase Kurdish gas deliveries to Turkey from 4 bcm per year in 2017 to 10 bcm by 2020. In November 2015, both sides considered a further expansion of that agreement, including construction of a new gas pipeline.

Rosneft declared in September 2017 that it would negotiate with Iraqi Kurdistan’s regional government about building a gas pipeline for the Turkish and European markets. By buying a 30 percent stake in Egypt’s Zohr gas field from the Italian energy company Eni, Rosneft, together with Gazprom, hopes to influence, control and undermine the EU’s diversification into non-Russian gas supplies to Europe.

For the time being, various investment hurdles, security concerns, poor output quality and the Kurdish independence vote have all complicated the expansion of Kurdish gas exports to Turkey.

Israel
Since 2014, discussions have been underway to deliver 7-10 bcm of natural gas from Israel’s Leviathan gas field via a 550-kilometer undersea gas pipeline to Turkey. Its total construction cost is estimated at $2.5-3 billion. Officially, Israel has about 2.2 trillion cubic meters (tcm) of potential gas resources and more than 900 bcm of proven gas reserves. Despite the Mavi Marmara ship confrontation in 2010 and Israel’s incursion into Gaza in the summer of 2014, Turkey’s bilateral trade with Israel has almost doubled from $3 billion in 2010 to $5.6 billion in 2014.

But Egypt, another potential customer for Israeli gas exports, discovered the supergiant Zohr gas field in August 2015. The offshore field is estimated to hold as much as 850 bcm of gas and 5.5 billion barrels of oil. As political, economic, and regulatory challenges have mounted, Israel has faced increasing difficulties with its planned 2019-2020 time frame for beginning production from the Leviathan gas field.

Russia has tried to use its influence over Cyprus to stifle Turkey’s growing role in the region

As a planned Israel-Turkey gas pipeline must cross the Cypriot Exclusive Economic Zone, Russia has tried to use its influence in Nicosia to block a Turkish-Israeli pipeline project and stifle Turkey’s growing role in the region.

Cyprus
The Aphrodite gas field off the coast of Cyprus could join the Leviathan gas field for up to 25 bcm of combined exports to Turkey. The economic interests of both sides have spurred negotiations between the Greek and Turkish Cypriots to resolve their conflict as a precondition for gas exports to Turkey.

Cyprus – like Israel and Greece – has also been interested in an undersea gas pipeline to Europe. But given low oil and gas prices, high investment costs and the uncertainties of future European import demand, such a project appears realistic only with more gas reserves in the Eastern Mediterranean Sea and clearer signals of reviving European demand. Nevertheless, Greece, Israel and Cyprus have set a target date of 2025 for completing construction of the planned EastMed pipeline, after the three countries – together with Italy – signed a preliminary agreement on the project in April.

Iran
According to BP, Iran has the world’s largest proven conventional gas reserves, at 34 tcm – 18 percent of the global total – and is already the third-largest gas producer after the U.S. and Russia. Iran could have a huge impact on efforts by both Turkey and Europe to diversify gas supplies, and could acquire a 10 percent share of the future global gas market.

It is currently exporting around 80 million cubic meters (mcm) per day and hopes to expand this to 300 mcm after 2020 as further international sanctions are lifted. During the first three years of President Hassan Rouhani’s tenure, Iran’s upstream development and gas output increased from 581 mcm per day in August 2013 to 793.7 mcm in March 2016.

Iran is currently Turkey’s second-largest gas supplier, providing 17 percent of imports. The country supplied 9.6 bcm in 2016, under a deal set to expire in 2026. But Iranian gas has been rather expensive, and Iran is considering LNG exports as a cheaper alternative to using Turkey’s pipeline network to supply Europe.

Strategic perspectives

Turkey’s growing energy cooperation with Russia has had a significant impact on the future energy security of both Ankara and the EU. The building of TurkStream’s third and fourth pipelines would undermine the EU’s gas import projects through the Southern Gas Corridor, along with any expanded gas imports via the TANAP-TAP gas network fed by Azerbaijani, Kurdish or even Turkmen gas.

However, for the near future, neither building a third or fourth strand of the TurkStream pipeline nor returning to a warmer Turkey-EU relationship appears realistic. Turkey will be interested in a fully implemented and expanded TANAP-TAP gas pipeline network, depending on future European demand for gas imports. However, Turkey will likely remain dependent on Russian gas, as most other import options are uncertain and complicated by various domestic and geopolitical factors.

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