Turkey and Unconventional Production in the Golden Age of Natural Gas
Several things make natural gas one of the chief priorities for the 21st century—its reserves, the infrastructure developing around it, a steadily growing industry, and above all environmental issues. Its importance is steadily increasing and it possesses a market and geopolitical structure peculiar to it alone. If unconventional forms of natural gas production, led by rock gas, are added to the existing structure, gas looks set to have an important impact on markets and geopolitics.
How extensive is the geopolitical significance of technology for energy markets in the 21st century? The answer which would have been given to this question in the final quarter of the 20th century was along the lines that a set of new high technologies would be developed, going as far as cold fusion from hydrogen, and that the actors who successfully did this would secure great advantages not only as regards costs, but also in the geopolitical arena. When the 2000’s began, it became clear that the development and implementation of a technological revolution of this kind would take at least a further 50 years. However at the same time the discovery of new reserves, the development of improved infrastructure, and the growth of the gas industry and above all environmental factors steadily boosted the importance of natural gas in many respects as a priority for the 21st century.
Europe’s most important partner in the natural gas trade is currently Russia, while Iran has not get been able to boost its sales of gas to significant levels. The issue of the particular strategic initiatives that both these countries are going to use in order to reinforce their regional and global positions by means of natural gas is not only important for the USA. It is also a high priority for Turkey which is both a neighbor of both countries and also has a steadily rising volume of energy trade with them. Gazprom of Russia has expanded the scope of its initial initiatives as a supplier company from Central Asia to the Middle East, Africa, and North America. This is not just the result of its corporate vision. It is at the same time a bid to support Russia’s strategic priorities. And, as far as demand is concerned, Gazprom attaches strategic importance to cooperative deals in the European markets. Indeed although some problems have been experienced, there has been a striking increase in the degree to which advocates of basing EU-Russian relations on a model of integration through energy sales have grown. During the same period Iran has sought to gain access to world markets by investing in the development of its natural gas infrastructure with the support of its IGAT project. The likely effects of this are extremely important. Iran can set up natural gas projects with Turkey and also with Pakistan, India, and China, it has the potential to have a great influence on regional and global political structures
Consequences of the growth of demand
The figures for the growth of demand for natural gas are an indicator that the likely impact of the issues mentioned above could increase. This view is confirmed by the fact that in 1990 global demand for natural gas was 2,039 billion cubic metres. By 2010, it had risen to 3,307 billion cubic metres and if conditions remain stable, it will rise to 4,610 billion cubic by 2030.
Current events are having the effect of accelerating the way in which natural gas is become one of the most sought-after resources on the market. Most importantly the natural gas lobby has been relatively strengthened, vis-à-vis the nuclear energy lobby in the wake of the Fukushima nuclear power station accident in March 2011. In the wake of the global financial crisis of 2008 a growing number of states is beginning to question the cost of subsidies to renewal energy. Ultimately natural gas, with its high standards for carbon pricing and security of supply, is gaining credibility on the market and this is an entirely natural outcome.
Suppliers’ front in the natural gas markets
Technological innovation has led to a rapid increase in the production of natural gas through unconventional means: rock gas, coal methane, frozen gas, and shale gas at a time when demand for gas is rising. This looks like to have radical economic and geopolitical consequences. Despite the slackening pace seen in 2013, there has been a positive trend in output of rock gas over the last ten years and the rate of growth is maintained or even increases, it will have both economic and strategic importance – (1) economic in proportion to its ability to meet demand, and (2) strategic in so far as it will prevent a few producers dominating the market.
The economic and strategic significance of rock gas
Viewed in economic terms, and assuming that there is no radical change in supply and demand, the increased supply of rock gas will create flexibility in the spot LNG (liquid natural gas) market but in the longer term it will generate pressures on the terms of contract favouring the purchaser. Looked at in terms of geopolitics, it appears possible that the increase in production of natural gas by unconventional means, chiefly in the United States of America will lead to significant changes. In this connection should Russia, skilled at using natural gas as an instrument of its strategy, revise its calculations, the requirement for Iranian gas in Europe would fall, So some countries, notably Qatar, adept at converting the income they receive from natural gas and LNG for investments in the international arena and prestigious initiatives, might now review their own market positioning.
In exactly this way, the increase obtained in the supply of rock gas by means of unconventional production caused prices to slacken in 2008, affecting both the LNG market and the long term gas contracts, above all those of Russia. Together with this, it is also correct to regard 2008, when the financial crisis was having adverse affects, as a sort of base. In that case, provided the effect on the spot market is put on one side increases and reductions in natural gas production should not be expected to have a radical effect in the short term as happened in 2008 but rather to trigger a cause and effect process spread over time as far as contract gas is concerned, insofar as it is possible to make projections.
Whereas the long term effect on geopolitics has to be separately assessed. When the additional volume of gas generated by unconventional production reaches levels which are sufficient to ensure the diversification of gas supplies in Turkey and the EU member states, countries which possess large reserves may be less capable of using natural gas as a strategic instrument. This supposition implies that investments, just as much as production costs, in the electrical market cannot be made sense of independently of the situation for conventional gas production. It may therefore be expected, that although the strategic priorities of major producers like Russia include natural gas, they will also turn to electricity markets based on resources other than gas.
Where does Turkey stand in the picture?
So, within this general framework, what are likely to be Turkey’s gains and losses? The answer to this question must be sought in aspects such as the natural gas and electricity markets, Turkey’s goal of boosting its transit capacity for natural gas, and finally in Turkey’s own rock gas reserves. Any increase in output, whether through conventional or unconventional means will of course work in Turkey’s favour.
Prof. Mert Bilgin, Head of Department of Political Science and International Relations at Bahcesehir University
This article was first published in Analist Monthly Journal