Energy Negotiations Over Turkish-Russian Line – Analysis

By Hasan Selim Ozertem

The first treaty regarding the natural gas trade between Turkey and the USSR was signed in 1984, proposing that Turkey would buy natural gas from the Soviet Union for a 25-year term from the beginning of 1987. In return, the USSR would buy cotton, meat, corn, and vegetable oil, as well as steel and non-steel products and industrial materials. According to this treaty, natural gas sales would start at a volume of 1.5 billion m3 in 1987 and rise up to 6 billion m3 per year from 1993 until 2011.

The content of the treaty, which seems quite advantageous for the Turkish side, can also be counted as a breakthrough for Turkey. While the agreement provided the opportunity to become acquainted with the Russian market before the Berlin Wall came down, Turkey also got the chance to enter the Russian market. Moreover, this bilateral agreement opened the doors to develop good relations and making business deals with the states which gained their independence after demise of the Soviet Union. On the other hand, cities suffering from air pollution such as Ankara acquired the opportunity for an early meeting with natural gas, the so-called “blue gold.”

Although the treaty signed in 1984 seems profoundly advantageous, in the long term, Turkey’s increasing addiction to natural gas led it to become the second largest customer of Russia following Germany. The underlying reason for this argument, which has been consistently expressed throughout the 2000s, was Turkey’s nearly 65% dependence on Russian gas. Regarding this, Turkey’s attitude of flirting with Turkmenistan while making a deal with Russia for gas sales through the “Blue Stream” has been debated for a long time.

In the second half of the 1990s, Turkey signed treaties regarding the sale of natural gas with various countries such as Nigeria (with LNG) for more than 20 years; then, gas agreements with Iran for the volume of 10 billion m3per year as well as gas deals with Russia were signed in 1997 and 1998, which counted for a total of 24 billion m3. Moreover, a gas deal finally signed with Turkmenistan in 1998 in the wake of the new millennium, proposing an annual 16 billion m3 sale of gas for 30 years but it has become relatively invalid because of both political and economic reasons as well as the fact Turkey is no longer in need of this volume of natural gas.

At this point, natural gas consumption in Turkey is gradually increasing and the negative effects of the financial crisis which emerged in 2008 have remained limited in the consumption of the Turkish market. While Turkey consumed 35.6 billion m3 in 2008 and 35.1 billion m3 in 2009, in 2010, the natural gas consumption increased to 37.4 billion m3. [1] According to BOTAS, its natural gas imports have gradually started to decrease since 2008. While BOTAS imported 37.2 billion m3 of natural gas in 2008, this volume fell to 32 billion m3 in 2010. Additionally, gas imports from Russia remained limited to 14.5 billion m3 in 2010. [2]

Is Turkey Taking a Risk?

The major reason for Turkey’s intense gas consumption is that more than half of its electricity generation is provided by natural gas. Considering consumption, only 20-22% of the gas is consumed in houses, with the other 20% is being used in industry as well. Although it is not easy to expect certain changes in a short period of time, it is a reality that Turkey has guaranteed to buy much more natural gas than it consumes by way of new gas deals. However, Turkey as a country is paying billions of dollars to both Russia and Iran as a result of “buy or pay” clauses in the deals, the possibility of its demand for gas will reduce in the coming periods as some have predicted seems slim.

In 2010, Turkey got totally 24 billion m3 natural gas of which 8 billion m3 came through Western lines and the Blue Stream gas deal worth 16 billion m3. However, considering Russian imports, Ankara has the chance to receive more natural gas from Russia up until 2021 than the volume it consumed in 2010. On the other hand, taking into account that the 23 billion m3 of imports plateaued in 2008 and the inconsistent behaviors of Iran, it is difficult to assume the impacts of those circumstances in the long run. In that context, the Silivri storage facility with its 2.1 billion m3 capacity will quite possibly get a significant role in this respect.

Why Did Turkey Not Extend the Gas Sale Agreement?

One clause of the 1984 agreement is that the parties involved can extend the deals for 5 years unless otherwise stated. However, as Turkey wanted some amendments in the deals, it demanded an extension of the treaty notification date and this demand from the Turkish side was positively responded to by Gazprom.

According to debates in the press, Turkey as being the second largest customer of Gazprom demanded to receive a 15-20% discount in gas prices. Turkey also demanded that the “buy or pay” clause will prevail for the 50% of the guaranteed gas volumes. Officials say the deals were not completed because Gazprom labeled those demands of the Turkish side as unrealistic and rejected them.

According to the Russian press, Russia is already selling cheaper gas to Turkey at nearly 35% lower than European prices and any numbers lower than the current prices will be illogical.[3] It is quite difficult to predict how this argument will be accepted in Turkey because gas deals and pricing are generally carried out in great confidentiality. Moreover, various numbers regarding the gas prices being mentioned and debated in the market and those debated numbers on gas prices are not clear as in the case of oil prices.

On the other hand, Turkey seems to have gained clout through the recent arbitration suits filed against Russia. The Italian Edison Company’s victory in the suit against Promgaz -a jointly owned energy company by Gazprom and ENI- at at the court of arbitration in Stockholm, in which they demanded a price discount citing price reductions in its domestic market, led to other big companies as EoN to pursue such moves. As the lawsuits still continue, in Russia, Putin seems to be quietly constrained regarding the investigations and also, it is said that Putin is closely following the legal process with Alexie Miller, the chairman of Gazprom.

General Directorate of the National Energy Foundation Konstantin Simonov made geopolitical comments on why the parties could not reach a compromise. According to Simonov, Turkey is trying to constrain Russia regarding Samsun-Ceyhan and South Stream cases. Therefore, Ankara is trying to apply pressure to Russia as much as possible. As it is already remembered that this argument was frequently put into words last month, experts interpreted the underlying reason for the Russian decision on suspending the Samsun-Ceyhan oil pipeline project is the position of Turkey on the South Stream project.

What will happen then?

Actually, whether Turkey aims to diminish its long-term dependence on Russia at a state level with such a move or is taking a risk is uncertain. However, another reality is that new legal regulations have brought import limitations to BOTAS. Accordingly, BOTAS has limited options for new import deals until its market stake is down to 20%.[4] One of the significant points that are seen from European cases and are consistently being mentioned in Turkey is that liberalization policies are quite effective in improving bilateral relations with Gazprom. In this respect, this situation offers certain advantages for Turkey. At this point, composing further strategies in the next term seems critical in terms of responding to questions of how Turkey will manage the transition process in the following period while it is trying to eliminate obstacles to liberalization, whether the powerful companies from Turkey will be able to enter the market, or whether BOTAS will achieve becoming an active actor.

Now, following Turkey’s reluctance to sign the treaty, and considering the latest statements of Gazprom Vice President Alexander Medvedev: “according to our observations, natural gas provided by Western lines is generally demanded by commercial and industrial consumers in Turkey. Therefore, we are ready to supply gas to all consumers in the Turkish market including current and new customers as well as the private sector,” it seems quite possible to believe that the negotiations between Turkey and Russia may be conducted through new channels in the upcoming periods.

References
[1] ETKB, Mavi Kitap 2011, http://www.enerji.gov.tr/yayinlar_raporlar/Mavi_Kitap_2011.pdf.
[2] BOTAŞ, 2010 Yılı Sektör Raporu (BOTAŞ Sector Report 2010); http://www.enerji.gov.tr/yayinlar_raporlar/Sektor_Raporu_BOTAS_2010.pdf.
[3] “Turkey and Gazprom fail to agree on price”, The Voice of Russia; http://english.ruvr.ru/2011/10/03/58096783.html.
[4] 4646 Sayılı Doğalgaz Piyasası Kanunu (Natural Gas Market Law No: 4646).

*This piece was translated by Betul Buke Karacin.

Author:
Hasan Selim Ozertem
USAK Center for Energy Studies