Dimitar Bechev
Jun 01 2018

The Turkey-Russia Gas Saga Continues

Another week, another big announcement on the Russia-Turkey energy front. On Sunday, President Tayyip Erdoğan broke the news that Gazprom has agreed to grant Turkey’s national oil and gas pipeline company BOTAŞ a discount of 10.25% on deliveries through the so-called Transbalkan Pipeline.  

In return, Ankara gave green light for the construction of the land section of TurkStream 2, which is projected to run under the Black Sea. Unlike TurkStream’s first string bound for Turkey (which has now reached the Turkish shore), the second leg is intended for the EU market. If completed in time, it might start supplying European consumers as early as 2020. Thanks to Turkey, Russia will have an alternative route replacing transit through Ukraine, similar to Nord Stream 2 currently implemented with Germany.  

The deal ends a key episode in a long-lasting saga. Ankara has been trying to wrestle a price reduction ever since President Vladimir Putin unveiled, to the surprise of many including in Gazprom itself, the plan to build TurkStream during a visit to Turkey in December 2014.

BOTAŞ requested a 15% markdown, settled for 10.25% but then, in the autumn of 2015, plunged into a dispute with Gazprom. The Russians insisted the discount would be activated only if TurkStream got a go-ahead by Turkish authorities. BOTAŞ argued that these were two separate issues and launched arbitration proceedings against Gazprom in October 2015.

Still, the Russians granted the discount to several Turkish private companies importing gas (Enerco Enerji, Bosphorus Gaz, Avrasya Gaz, Shell, Batı Hattı, and Kibar Enerji). But then, after relations between Moscow and Ankara soured over Syria, this decision was rescinded. The intergovernmental agreement on TurkStream, signed in Putin’s presence at the World Energy Congress in Istanbul a year later (the Russian president’s first Turkey trip following the rapprochement with Erdoğan), broke the stalemate. But negotiations dragged on for a year-and-a-half more.

Though it looks like a win-win, the agreement actually benefits Turkey more that it does Russia. Erdoğan is already making mileage out of it. At an election rally in Erzurum, he told supporters that a payment of $1 billion would be made to Turkey as a rebate for surcharges in 2015 and 2016. That is more than welcome given that the country’s energy bill is rising. 

Oil prices have recovered after hitting historic lows in 2015-7 and gas is indexed to the price of oil. In the meantime, the Turkish lira has been depreciating rapidly against the U.S. dollar used for paying for hydrocarbon imports. More expensive energy then drives up inflation. On top of it, demand in Turkey for Russian gas has soared, on the back of solid growth. It reached nearly 29 billion cubic metres, an all-time record, in 2017.  

In other words, the Turkish government needs to act on energy prices as part of an overall strategy to curb inflation and restore stability. Russia has offered Erdoğan a helping hand.

Moscow’s payback from the deal is more long-term. The prospects for extending TurkStream into the EU are far from clear. The regulatory dispute with the EU with over the application of the so-called Third Energy Package remains unresolved.

Gazprom would need to work out a compromise with the European Commission over anti-monopoly rules that prescribe that its competitors should be given access to transit infrastructure. The Russian gas company is in conciliatory mode. Last week it reached a settlement with Brussels over a long-standing legal case over unfair commercial practices.

To be sure, EU governments are courting the Russians too. German Chancellor Angela Merkel is defending Nord Stream 2. French President Emmanuel Macron’s visit to St Petersburg yielded a 2-billion euro gas deal for France’s Total. Bulgarian Prime Minister Boyko Borisov is heading to Moscow on June 30 for talks with Putin to advocate connecting TurkStream 2 to a “Balkan Gas Hub” he has been championing. But it is too early to speculate whether a transit route through Southeast Europe is viable. Gazprom vows it will complete the undersea portion of TurkStream 2 by the end of this year. That, too, might prove a tall order.

The agreement with Russia does not cancel Turkey’s ambitions to diversify its gas imports. In June, the Transanatolian Pipeline (TANAP) will come onstream bringing additional volumes from Azerbaijan. Once linked to the future Transadriatic Pipeline (TAP), this new piece of infrastructure will inaugurate the much-debated Southern Gas Corridor connecting the hydrocarbon-rich Caspian to the European markets.  

Turkey is investing heavily in storage capacity and liquefied natural gas (LNG) facilities. A floating regasification unit was commissioned recently off the shores of Hatay. Such infrastructure enables imports from traditional suppliers such as Algeria and Nigeria as well as new ones like Qatar, a Turkish ally in the Middle East.

Despite the growth of Gazprom deliveries in absolute terms in 2017, Russia’s share  of the Turkish market shrank by 1.1 percent over the same period. Experts and business agrees that Turkey has huge potential in the area renewable energy that, in time, might reduce the role gas. The same is true of nuclear energy, with the Akkuyu power plant’s first unit scheduled to come online in 2023.

Energy provides a strong bond between Russia and Turkey, but the relationship is not problem-free. Ankara will continue to pursue a two-pronged strategy: cooperating with Moscow while looking for long-term alternatives.