Turkey’s Energy Security Starts at Home
Turkey’s latest charm offensive in Qatar and Azerbaijan was meant to reassure the population at home that even if Russia were to halt gas supplies following the latest political standoff, Turkey would emerge unscathed.
Alas, that may not be the case!
Any projects that may have been discussed now could take off in at least three to five years, but certainly not this winter when Turkey shivers at the prospect of being left in the cold.
There are three reasons why Turkey will have to hope for goodwill and mild temperatures for now.
Firstly, Turkey’s demand is concentrated in its northwestern Marmara region, which is the most urbanised and industrialised of all the provinces in the country.
Despite this concentration of consumption, the region is fed primarily by Russian gas via the Western Line, which transits Ukraine, Romania and Bulgaria before entering Turkey.
There are also two LNG terminals and a storage facility, but altogether they are not sufficient on their own to respond to a spike in demand if Russian gas via the Western Line were cut.
Non-Russian pipeline imports from Iran or Azerbaijan, on the other hand, cannot be easily pumped west because of technical constraints in the system.
This means that Turkey’s Marmara region remains vulnerable to reductions or total cuts even if pipeline imports were maximized elsewhere.
Secondly, and linked to the infrastructure constraints, although LNG could offer an immediate and easy solution, Turkey cannot import more cargoes than its limited receiving capacity.
It is possible that the Turkish president, Recep Tayyip Erdogan may have negotiated some additional cargoes for delivery this winter during his visit in Qatar last week, although the information has not been officially confirmed.
Assuming that he did, the cargoes would be sufficient if Turkey enjoys a mild winter, similar to the last one. However, if Russian imports are cut and temperatures drop consistently for at least a week, the situation could become difficult.
It is commendable that president Erdogan should have discussed with Qatari investors the possibility of expanding Turkey’s LNG import and storage infrastructure.
However, what guarantee does Turkey have that the Qataris would indeed consider putting their money into a gas project if the Turkish government talks about reducing the share of natural gas in the total energy mix, while expanding that of coal or renewables?
After all, gas-fired generation in Turkey has had a difficult year and many companies are facing mounting debt.
Thirdly, Turkey has turned to Azerbaijan and will probably extend the charm offensive to Turkmenistan and Kazakhstan for extra Caspian volumes.
On closer inspection Azerbaijan itself is struggling to meet its own gas demand and had reportedly indicated it was looking to switch some of its gas-fired generation to fuel oil in order to free up volumes.
Azerbaijan needs investment to start production at other offshore gas fields, but the cash is hard to come by given current oil prices.
Furthermore, Azerbaijan also needs investments in its own networks to curb any transmission losses.
Regionally, Turkey has ramped up its imports from Azerbaijan in recent months.
Thanks to an upgrade to a compressor station in eastern Turkey, the country has been able to increase its imports from Azerbaijan since last year, off-taking volumes almost within its contractual limits of 6.6 billion cubic metres/year.
This meant that an increase in Turkish imports has left neighbouring Georgia, which had been almost entirely supplied by Azerbaijan since 2006 to discuss the resumption of Russian imports.
Whether Azeri gas volumes from the second phase of the Shah Deniz platform will indeed reach Turkey before 2018 as stated by the Turkish Prime Minister Ahmet Davutoglu during his visit last week remains to be seen. For now, however, there is no indication that any additional Caspian gas volumes would be shipped west to Turkey.
Right geography, wrong neighbourhood
As much as Turkey is blessed with an exceptional geographical position, right at the heart of an incredibly rich part of the world, it is also cursed with an unfortunate neighbourhood. The solitude of Turkey is not a myth that many academics have sought to dispel. It is a reality that can be seen here and now.
However, one ought to disagree with the fatalistic view expressed in the Turkish press that ‘Turks are accustomed to suffering.” Turkey’s recent history may have been painful, but that is no benchmark to mould Turkey’s future on.
Neither Turkey, nor Turks must suffer, particularly when there are intelligent solutions within reach.
Although it is highly unlikely that Russia would reduce or cut the gas to Turkey this winter, being completely aware that Turkey is an important source of revenue, if supplies are curtailed nonetheless, Turkey could retaliate by obstructing Russian oil tankers seeking to enter or exit the Straits.
Admittedly, such an escalation would be dangerous, but it would be a reminder that Turkey is not completely vulnerable.
Domestically, the current situation should be a wake-up call against complacency. The Turkish natural gas sector has to be reformed, but in a way that would guarantee Turkey’s security in the long-term.
Pretending to implement reform while retaining a wasteful and completely unnecessary cross-subsidies system, leaving the incumbent BOTAS to struggle without creating a vigorous company spearheaded by young and ambitious talent and refusing to allow the private sector to take an active part in this market would simply make matters worse.
Cross-subsidies should be removed immediately since they are the root cause of Turkey’s gas market ills. It is not fair to subsidise both the rich and the poor.
Reform in the Turkish gas sector needs to go hand-in-hand with welfare reform. Turkey must identify the section of the population that is most at risk and create a special welfare pot to look after those who cannot afford to pay for their electricity and gas consumption. Those who can pay, must pay, and not look to the state for handouts.
Turks are intelligent people who will understand that in time of need, there is no remedy but to sacrifice some comforts.
Turkey must also amend its gas law to allow the introduction of Floating Storage and Regasification Units (FSRUs), which, as their name indicates, can fulfill the dual role of receiving LNG and storing it.
FSRUs could perhaps offer the most immediate solution to Turkey’s gas market challenges.
In recent months both Egypt and Lithuania have been able to secure FSRUs. In Egypt’s case they will help the country to plug rising demand. In Lithuania’s case, the aptly named Independence brings an alternative to Russian gas.
Finally, diversification, a term that has been bandied about almost too much, does not mean to replace molecules of Russian gas with molecules of Azerbaijani, Iraqi or Iranian gas. Real diversification means changing the practices that have so far proved harmful to Turkey.
Ukraine appears to have understood that the only way to break its dependence on Russian gas was to open up its market and western borders to trade.
Such alternatives ensure not only that Ukraine will be better placed in its price negotiations with Russia, but also in terms of securing gas.
Of course, Ukraine is yet to prove its real commitment to reform, but at least there are some indications that it has understood the dual role of liberalisation: guaranteeing security of supply and attracting investment.
The same goes for Turkey.
It is not known what the intentions of the new Turkish government are, or whether it still wishes to continue the reform that the country committed itself to 15 years ago.
However, it is clear that charm offensives abroad are unlikely to change anything for Turkey, at least not for now.
Real change starts at home with as simple a measure as publishing clearly and openly Russian gas flow data via the Western Line and Blue Stream. If Russia cuts the gas to Turkey, at least we shall all know it!
Aura Sabadus is a journalist specialising in Turkey’s energy markets