Gazprom downscales Turkish presence - NGW Magazine

This article is featured in NGW Magazine Volume 2, Issue 14

As the 31.5bn m³/yr TurkStream pipeline begins to take physical shape, Gazprom is changing its strategy in Turkey, exiting the marketing sector. 

Gazprom announced in June that it was selling back to Turkey’s Sen Group its controlling 71% stake in Bosphorus Gaz which it had bought in several blocks between 2004-2012. Sen Group had founded the company and invited Gazprom to enter the import market, and it is buying a total of 2.5bn m³/yr under two contracts.

Now reports in Russia's Kommersant newspaper claim that Gazprom is also planning to sell its stake in a second joint venture Promak, which in turn holds major stakes in two gas importers: Avrasya Gaz and Enerco. Between them they import a further 3bn m³/yr.
All four contracts in which Gazprom is involved are for imports of gas via Turkey's western Transbalkan import line and were concluded under two separate sets of conditions.

One of the two contracts held by Bosphorus, for 750mn m³/yr, along with contracts for 500mn m³/yr held by Avrasya and 2.5bn m³/yr held by Enerco were acquired in 2007 from Turkey's importer Botas as part of a volume transfer from the state to the private sector. Botas auctioned off 4bn m³/yr out of the 8bn m³/yr it was buying from Gazprom via one of the two Transbalkan pipelines.

Those contracts run to 2022 when the 8bn m³/yr contract expires, with no clear indication whether Botas will renew the contract or whether it will be left to the private sector to take on the import volume and to negotiate contracts with Gazprom independently, as is the case with Bosphorus' second contract which runs to 2042.

That contract for 1.75bn m³ /yr was concluded directly with Gazprom in 2012 after Botas declined to renew a contract for 6bn m³/yr through the second TransBalkan pipeline, leaving four private sector companies to conclude their own deals.

While neither Gazprom nor its partner in Promak has yet confirmed the news of its departure it does tally with reports earlier this year that Gazprom deputy CEO Alexander Medvedev was unhappy about both the unpredictability of demand growth in the Turkish market and about the problems caused by the periodic depreciation of the Turkish lira.

Difficult market conditions

Certainly the Turkish gas market has not been without its challenges. While from the 1990s onwards Turkish energy policy was geared towards taking advantage of the huge amount of gas becoming available from Russia, the Caspian states, Iran and the Middle East, increasing dependence on those imports has caused frequent problems. First, as demand growth failed to keep pace with the ramp up of volumes Botas had contracted to take, for many years the state company was left paying for gas it could not use.  

And subsequently after demand rose, when gas prices spiked following record high oil prices, Ankara began to seriously encourage the use of domestic resources for power generation, to reduce the country's current account deficit as well as domestic energy bills.
Those measures saw Turkish gas imports drop from 48.7bn m³ in 2014 to only 46bn m³ last year – a substantial drop given that Turkish power demand continued to grow over the same period.

However with gas demand expected to jump to over 50bn m³  this year, Gazprom, as supplier of 57% of Turkey's 52.2bn m³/yr long-term import contract portfolio, should be in a strong position.  However these figures exclude spot LNG which Turkey has been importing in increasing volumes to meet peak mid-winter demand, with a new floating storage and regasification unit plant commissioned last winter and a second one expected to be commissioned this winter, increasing competition.

And in less than two years in mid-2019 Turkey is due to start receiving another 6bn m³/yr of Azeri gas via the 31bn m³/yr TransAnatolian Pipeline which will boost market competition and so dampen prices.

Against this it is unclear how quickly demand can ramp up. Turkey has for several years been discouraging the development of combined-cycle gas turbines and while many projects have been reported to be at the planning stage it is unclear how many can be developed over what time frame. Also unclear is how much demand there will be for r power from the plant will grow at a sufficient pace to ensure their viability.

This possible oversupply problem will be exacerbated by Gazprom itself with the development of its planned 31.5bn m³ /yr Turkstream Pipeline. Designed in its first phase to replace Turkey's existing 14bn m³/yr capacity western Transbalkan import line, when commissioned in 2021 TurkStream will supply 15.75bn m³/yr.

Even assuming Gazprom fully decommissions Transbalkan – which is far from clear – it will supply an additional 1.75bn m³, on top of the 6bn m³/yr due to arrive from Azerbaijan, suggesting oversupply will be an increasingly serious issue and suggesting that Medvedev's comments may have been referring less to the Turkish gas market over the past few years and more to how he anticipates it developing in the coming few years.

Political problems

Aside from avoiding possible problems from more difficult market conditions, Gazprom's exiting the Turkish gas importation market would also reduce its exposure to any future political fall-out between Ankara and Moscow.

While relations are apparently better than they have been for many years, this might not last. Bilateral energy relations have long been strained with both sides seeking to use unrelated issues to pressure for advantage in other areas.

Turkey long sought to pressure Moscow into reducing the price Gazprom charges for the gas it exports to Turkey by holding back on approving permission for Gazprom to run the now-aborted South Stream gas line through Turkey's exclusive economic zone in the Black Sea as well as delaying on approving the environmental impact assessment for the Akkuyu Nuclear Power plant it had contracted Russia’s Rosatom to develop.

For its part, Moscow in late 2014 arbitrarily reduced gas supplies to Turkey ahead of announcing its plans to turn South Stream into TurkStream, running through Turkey's European province of Thrace.

However these rumbling disputes pale into insignificance compared to disagreements over Syria which culminated 18 months ago with Turkish jets downing a Russian warplane that had strayed into Turkish airspace.

The subsequent cutting of diplomatic relations was only reversed with the failed coup against Turkey’s president, Tayyip Erdogan, in July last year when Russia’s president, Vladimir Putin, was among the first international leaders to offer him support.

Since then relations have warmed sufficiently for Turkey to sign off on TurkStream and to restart the long stalled Akkuyu nuclear power plant. However the potential for future fall outs remains high and removing itself from Turkey's volatile gas import market significantly reduces the risk of buyers boycotting the companies gas in an oversupplied market.

One area that offers significant potential for conflict is Iraqi Kurdistan whose regional government (KRG) plans to hold a referendum on full independence from Baghdad, a move Ankara strongly opposes. Turkish-owned companies have been at the forefront of developing the region's oil and gas reserves and Ankara itself helped facilitate the export of the region's crude oil independent of Baghdad.

However relations had soured noticeably even before the independence move, with Ankara unhappy that the KRG has not taken a stronger line against the Kurdistan Workers party (PKK) which, two years ago, was able to re-launch its insurrection campaign inside Turkey from its bases in northern Iraq.

And as relations between Ankara and Erbil have deteriorated, Russian companies have increased their presence in the region.
Rosneft becoming the first international company to pre-finance crude exports and signing up for $1bn in midstream investment in return for five new exploration blocks, with Gazprom itself also signalling that it wants to increase its presence in the region.

At the same time recent share dealings have raised questions over whether there is an impending battle for the ownership of the region's biggest crude oil producer, the Anglo-Turkish Genel Energy, which also holds the rights to two of the region's most promising gas reserves.

Recent share dealings and an increase in share price have sparked rumours of moves by both Russian, and Turkish and Azeri entities to build up significant stakes in the company. But irrespective of its status Kurdistan has only very limited export options and will remain dependent on Turkey for export of both oil and gas.

However any increased Russian influence over those exports would only strengthen Erbil's hand in any future disputes with Ankara over its putative independence or other regional issues – a prospect which cannot have escaped any of the three governments involved.

David O'Byrne

This article is featured in NGW Magazine Volume 2, Issue 14