Turkey's New Government Faces Tough Energy Security and Pricing Questions
President Erdogan’s success in securing a return to single party government in Turkey should make life a lot easier for Azerbaijan’s Socar and other current and prospective foreign energy investors - so long as the new government genuinely pursues Prime Minister Ahmet Davutoglu’s pledge to work for the good of all Turkey’s 78 million people.
The return of a strong single party government will make it much easier for Turkey to pursue major projects such as the Trans-Anatolian Pipeline which will bring gas from Azerbaijan’s giant Shah Deniz II project to Turkey in 2019 and to Greece, Italy and the Balkans from 2020 onwards.
It will also strengthen Turkey’s hand in tortuous negotiations with Gazprom over the price of Russian gas deliveries to Turkey and the future of the Turkish Stream project for a new pipeline across the Black Sea.
Much will depend on the aftermath of an election campaign conducted amidst a deteriorating internal security situation. When the previous election was held on 7 June, Turkey had enjoyed two years of relative calm as a result of the opening of serious peace talks concerning how best to settle the issue of the role of ethnic Kurds with the Turkish state and society in general. But in July, the truce broke down with the government once again resorting to aerial bombing of positions held by militants of the outlawed PKK inside Turkey and of PKK bases in Kurdish regions of northern Iraq.
One consequence of this renewed warfare was a series of PKK assaults on energy infrastructure, notably two attacks on the line carrying gas from Azerbaijan, one on the line carrying gas from Iran and one on the oil pipeline carrying crude from northern Iraq to the Turkish Mediterranean terminal at Ceyhan.
Davutoglu said that in voting the AK party back into power, “Our nation asked for stability and confidence,” adding: “It has openly displayed that it wants a solution to its problems.” He also said: "Let's work together towards a Turkey where conflict, tension and polarisation are non-existent and everyone salutes each other in peace."
To secure such a goal, Davutoglu has to break the cycle of violence.
This is particularly important for Socar and its partners in developing TANAP. The two attacks on the existing Baku-Tbilisi-Erzurum gas pipeline, as well as an attack on a train carrying pipe sections for TANAP at the end of July, all took place in the Sarikamis district of Kars in northeast Turkey. And Sarikamis lies right on the planned route for TANAP.
TANAP officials have said that the project is proceeding on schedule and that the line will be ready in time to start delivering some 6 bcm of gas a year to Turkey from 2019 onwards and a further 10 bcm/y of gas to the European Union from the start of 2020.
In commercial terms, the most pressing energy problem for the government is the price of gas imports from Russia. Despite several months of negotiations, Turkey has yet to secure a price that it considers to be reasonable. Turkey accepted last February a Russian offer of a 10.25% discount. But there was no agreement on how the discount should be calculated and on 26 October, Turkey’s state gas company, Botaş, formally told Gazprom that it was seeking arbitration of the price issue at the International Chamber of Commerce.
The discount issue is complex. Turkey wants it to be a discount on the original base price; Gazprom wants it to be applied to a lower figure, the current contract price. The situation is further complicated by the fact that there has been no public acknowledgement as to just what constitutes either the original base price or the current contract price. As of early 2014, the base price was thought to be $435 per thousand cubic metres, but since then the actual contract price, and possibly the base price has well, has certainly come down. In May, Gazprom Deputy CEO Alexander Medvedev was saying that the company anticipated an average 2015 price for gas supplies to the EU and Turkey of between $240 and $245 per 1,000 cubic metres.
The failure to conclude a price agreement for gas deliveries to its main Turkish customer almost certainly contributed to Russia’s decision in July to halt immediate implementation of its Turkish Stream project and possibly to the subsequent decision to halve the capacity of the project from 63 bcm/y to 31.5 bcm/y. Indeed, whether Turkish Stream actually does get built may turn out to be one of the key issues that the new government will have to tackle in the months ahead. However, with Turkey leaving the door open for an out-of-court settlement on the pricing issue, the new Turkish government may well conclude that the price Turkey should pay for Russian gas imports is more important than ensuring the swift implementation of Turkish Stream.
John Roberts, Chief Analyst, Natural Gas Europe