Russia & Turkey: Tied by Energy Dependence

Old rivals, new partners

When Ankara and Moscow signed their first natural-gas supply agreement in 1984, some energy experts in Turkey worried that the country would not be able to consume all the gas it had pledged to buy.

These fears proved groundless, but were quickly replaced by concerns about over-dependence as energy-hungry Turkey ramped up its cooperation – and competition – with Russia on oil as well as natural gas.

Turkey’s 1984 commitment to buy 6 billion cubic meters of gas annually from the Soviet Union put an energy expert from the State Planning Department, or DPT, in a panic, one of his colleagues recalled. “He said, ‘We are going to end up paying for gas we won’t be using,’” former DPT energy expert Yurdakul Yiğitgüden told the Hürriyet Daily News & Economic Review.

The gas began flowing in 1987. But rather than lack a use for it, by 1996 Turkey was ready to sign a second agreement for an additional 8 billion cubic meters of gas each year. “In the early 1990s, we kept asking Russia to sell us more gas,” said Yiğitgüden, who is also a former Energy Ministry undersecretary. The increasing demand led the countries to sign the crucial Blue Stream agreement in 1997, aimed at supplying more natural gas via an offshore pipeline under the Black Sea.

“Blue Stream was Russia’s competitive response to the gas pipeline project from Turkmenistan. There was a race to capture the Turkish market,” said Vladimir Socor, a senior analyst at the Washington, D.C.-based Jamestown Foundation, which focuses on Eurasia and China. The agreement was a mistake for Turkey, Socor said, echoing criticisms made at the time that the government had failed to reach a deal that would be advantageous for Turkish consumers. “The terms of the agreement were kept secret and it is known that Turkey paid an extremely high price for natural gas,” Socor told the Daily News.

With the substance of such agreements generally not disclosed to the public, the terms agreed to by Turkey and Russia have been a subject of much speculation. “That the current and previous governments have not protected Turkey’s interests well enough during the negotiations is a generally accepted view among energy circles,” said Necdet Pamir, a Turkish energy expert.

As exploration intensified in new gas and oil fields in ex-Soviet Republics such as Azerbaijan, so did the competition between Turkey and Russia – especially after Turkey became a shareholder, along with British Petroleum and the Azeri firm SOCAR, in the Baku-Tbilisi-Ceyhan, or BTC, pipeline company established in 2002.

Terminating in Ceyhan, on the Turkish Mediterranean, the 1,768-kilometer-long pipeline was completed in 2005; oil started to flow a year later. In a clear sign of its irritation at Turkey’s aspiration to become a transit corridor for energy resources, Russia has turned a cold shoulder to the BTC pipeline, continuing to ship its oil down the Bosphorus on tankers despite Turkey’s warnings about dangerous congestion on the waterway.

In 2009, 51,422 tankers transited the Bosphorus and Dardanelles Straits, according to Turkish official statistics. Eighteen percent of the ships carried potentially dangerous material such as oil and oil products, to the tune of 144.7 million tons. Russia is known to export about a quarter of its crude through the straits.

Energy diversification and a growing rivalry

Over the last decade, Turkey has sought to further position itself as an alternative route for gas deliveries as concerns mounted about Turkey’s and Europe’s increasing dependence on Russia.

In an attempt to reduce reliance on Russian gas, the EU has supported the Nabucco pipeline project, which seeks to make Turkey a key link in accessing Caspian and Middle Eastern gas reserves. The pipeline will link the eastern border of Turkey to Baumgarten in Austria – one of the most important gas hub in Central Europe – via Bulgaria, Romania and Hungary. Planned to be completed by 2014, the 3,300-kilometer pipeline will have an annual capacity of 31 billion cubic meters.

The project has proved to be yet another irritant to Moscow, which has responded by initiating the South Stream project, a planned offshore pipeline between Russia and Bulgaria.

“South Stream is a complete bluff. Russia has no gas resources to fill these pipelines. There is no specific gas earmarked for South Stream,” said Socor of the Jamestown Foundation, who believes the Russian project is intended to plant doubts in the minds of investors about the EU-backed pipeline. “South Stream is intended to kill Nabucco,” he said.

Russian energy giant Gazprom denies claims that it does not have sufficient gas.

Cooperative efforts continue, however, despite the climate of competition. During Russian Prime Minister Vladimir Putin’s visit to Ankara on Aug. 6, 2009, Turkey granted Gazprom permission to carry out feasibility and seismic studies for South Stream in the Turkish part of the Black Sea. The moved surprised many, especially the supporters of Nabucco. But Turkey’s decision was partially based on the conviction that the South Stream project will never be realized due a lack of sufficient funding.

There was also another motivation behind Turkey’s green light. In exchange, Ankara finally got Moscow to commit its oil to the 555-kilometer-long Samsun-Ceyhan pipeline project, which Turkey sees as crucial in easing traffic congestion on the Bosphorus. When completed, the pipeline, which will connect the oil terminal in the Black Sea port of Samsun with the terminal in Ceyhan, will reduce tanker traffic through the straits by up to 50 percent. The project is also crucial for Turkey’s aspirations to make Ceyhan an energy hub.

Though Russia has backed down from its objection to a pipeline that it sees as undermining its dominant position, a final agreement has not yet been signed on the Samsun-Ceyhan project. Because of this, some observers say it was premature for Turkey to ink a deal in May for Russia to help build the first Turkish nuclear-power plant, a contract for which it was the only bidder.

These agreements – along with the merger between Gazprom and a private Turkish company holding the gas-distribution licenses for 23 Turkish cities – are part of a “give and take” package, said Pamir, a member of the World Energy Council’s Turkish National Committee and a fierce critic of Ankara’s energy policies, which he says make Turkey dependent on foreign sources.

Turkey currently imports 98 percent of its gas and around 92 percent of its oil, paying $44.8 billion in 2008 for oil, oil products, and natural gas and liquefied petroleum gas, a level that Pamir said is not sustainable.

“State benefits are given to Russia in exchange for deals with selected companies that are known to be pro-governing party,” Pamir told the Daily News.

The Samsun-Ceyhan project was awarded to a company that counts Prime Minister Recep Tayyip Erdoğan’s son-in-law among its top executives, a move that has been criticized by opposition parties in the Parliament.

Pamir also criticized the government’s line that Turkey lacks indigenous energy sources, saying the country could readily develop solar or wind power, as well as coal and hydroelectric energy. He believes energy relations with Russia, which supplies two thirds of Turkish natural-gas imports, make Turkey dangerously over-dependent on a single source.

“Those talking about dependence on Russia should understand that Russia is also dependent on Turkey. It is mutual dependence,” said Sergei Komlev, the head of Gazprom’s contract-restructuring and price-formation directorate. “Relations are developing to the mutual benefit of both sides.”

According to Komlev, it is only natural for Turkey to buy gas from Russia. “Due to geography, the easiest way to get gas is from Russia,” he told the Daily News, adding that gas deals are part of the countries’ overall energy cooperation. “Turkey is perceived as the most important client of Gazprom. It is the second [biggest] client in terms of volumes,” he said.

Komlev also refuted criticism that Russia uses its energy resources as a political tool. “It would be suicidal for us to use gas as a political tool against Turkey,” he said. “We are not against Turkey trying to diversify its resources.”

According to Gazprom CEO Alexei Miller, Turkey’s other providers of gas – namely Iran and Azerbaijan – are often unable to fulfill delivery promises due to weather conditions. “Each year I get a note of gratitude from my Turkish colleagues that for yet another year, Gazprom supplied more gas to Turkey – more than was envisioned in our formal contracts,” he said.

But as demand security has begun to rival supply security in importance due to the global economic turmoil, consumer countries such as Turkey are gaining influence in the eyes of suppliers such as Russia. This shifting power dynamic may well sway the outcome of the ongoing negotiations for a new gas deal to replace the one that expires in 2011.

Source : Hürriyet Daily News