Events in Ukraine moved energy security back to the top of foreign policy agenda. Energy diversification and reducing dependence on Russian supplies is essential for Turkey and the EU as well. We discussed with Mr. Mehmet Öğütçü, former Turkish diplomat, chairman of the Global Resources Partnership in UK and The Bosphorus Energy Club in Istanbul, Turkey’s position in the world energy, the role of Russia as an energy giant, the effects of the ongoing war in Iraq, and how the Kurdish oil, Iran’s ambition and newly found Israeli natural gas fields can change the energy picture.
Where does Turkey stand in the world energy?
With energy prices declining, economic slowdown beginning, geopolitical tensions flaring up in Eurasia, the Middle East and East Asia, and investors taking a wait-and-see attitude, we are undoubtedly going through yet another tumultuous time in history that will likely have a bearing on energy security for both Turkey and the broader energy producing, transiting and consuming regions around it.
In this changing world, Turkey is well positioned in flexing its political, military, economic and ‘soft power’ muscles to potentially become a key regional force by virtue of its large energy market, regional trading hub position for cross-border flows and security provider.
Despite Turkey’s emergence as the world’s 16th largest economy, energy is still its soft belly. For a nation with almost one trillion dollar GDP size, aspiring to be among the world’s top ten over the next decades and possessing limited reserves of oil, natural gas and hard coal, energy is not seen only as a matter of supply and demand, import and export, and a major component of its international competitiveness; it is clearly a national security matter.
Indeed, Turkey is energy poor particularly in hydrocarbon resources. At present, domestic resources meet only 30 percent of Turkey’s total energy demand, while the rest comes from a diversified portfolio of imports. Natural gas accounts for an increasing share of the energy mix in Turkey, and it has overtaken oil to become the most important fuel in terms of volume consumed. Although the Turkish government supports developing the country as a natural gas export hub, Turkey is extremely vulnerable to supply disruptions and may have insufficient pipeline and storage capacity to keep up with both greater exports to Europe and increasing domestic demand.
Is Turkey really a regional energy hub?
Turks are not content only to be a simple ‘bridge’ over which energy flows; they aspire to become a regional ‘hub’ that has strategic and commercial overtones. Although it is poor in resource endowment, Turkey enjoys a privileged geographical location (sitting on one of the world’s most valuable real estates) as a neighbor to 71.8 percent of the world’s proven gas and 72.7 percent of oil reserves, in particular those in the Middle East and the Caspian basin. It thus forms a natural energy bridge between the source countries and consumer markets.
In Turkey, four cross-border gas pipelines are in operation with a total import capacity of some 46.6 bcm: the West Gas (16 bcm) and Blue Stream (14 bcm) pipelines from Russia, the Tbilisi- Erzurum (10 bcm) pipeline from Iran and the South Caucasus (6.6 bcm) from Azerbaijan. Yet, being a regional energy hub means not just having pipelines crisscrossing. It requires right volumes of supply and demand, physical infrastructure, adequate legal and institutional framework to assure suppliers and consumers, political stability and financial institutions. Whether the Turkish goal of becoming an energy bridge along east-west and north-south axes (and serving not only as a transit country, but also as an aggregator and center of trade) is a realistic one remains largely unanswered.
In many ways, Turkey already fulfils the role of an energy hub and has the potential to become a critical energy hub in its region. Turkey has been a major transit point for seaborne-traded oil and is becoming more important for pipeline-traded oil and natural gas. Indeed, the main components of the Turkish energy corridor are the Straits, the Baku-Tbilisi-Ceyhan crude oil pipeline, the Shah-Deniz natural gas pipeline (Baku-Tbilisi-Erzurum), the Blue Stream, Iraq and Iran pipelines and the Trans-Caspian/TANAP Gas Pipeline projects.
What should the government do to enhance its energy security?
The high priority of the current Turkish energy policy is to increase the level of energy supply security, as it is the case for almost every net oil and gas importing country. However, Turkey lacks a comprehensive energy management approach encompassing energy, environment, efficiency, taxation, competition, foreign and security policy and investment/trade aspects in an integrated manner.
Given the bleak energy outlook and huge import bill, exploiting domestic resources up to their full potential has come out as an initial response to mitigate the effects of Turkey’s insecurity of supply. It is clear that there is no single solution to this equation. But it is equally obvious that renewable energy such as biomass, hydro and wind, are vital and indispensable parts of the answer. The integration of nuclear energy into the Turkish energy mix is also one of the main tools in responding to the growing electricity demand while avoiding increasing dependence on imported fuels. The Turkish government has taken measures to reduce projected energy spending and how to improve energy efficiency. It is also implementing step-by-step market liberalization measures, starting with the power sector and moving now to the natural gas sector. The government has also intensified efforts to increase the capacity of strategic oil and natural gas underground storage facilities. Turkish energy companies have been encouraged to invest abroad in equity oil, gas, coal, hydro and pipelines, ports and oil tankers. The attention is also on diversifying energy sources to avoid import dependency. The Turkish strategists see the turning of their country into an east-west and north-south energy corridor as part of a broader plan aimed at enhancing Ankara’s geopolitical role in the region and gaining added value from the value chain.
Events in Ukraine moved energy security back to the top of foreign policy agenda. Energy diversification and reducing dependence on Russian supplies is essential. But with the instability in the MENA region, it is hard to find reliable and cost effective alternatives. What will be Turkey’s energy policy to confront this challenge? How Turkey reassess its energy policies toward Russia?
Turkey is not naive in its assumptions and has learned the game for an effective play on the crowded chessboard with Russia, EU, US, and other major energy powers. Ankara is confident that it can handle both the challenges and opportunities associated with Russia's position as an energy power. Russia's importance to Turkey is not new. It has traditionally been the biggest player in the region and it figures prominently in almost all of Turkey's energy designs and geopolitical calculations.
Russia wants to play a lead role in Turkey's energy sector, not only selling oil, gas, and coal. Gazprom is keen on bidding for major city distribution projects and gas-fired power plants, while Rosatom is moving ahead with a Russian-built nuclear power plant. Last but not least, Moscow managed to get Ankara's permission for its South Stream pipeline to Italy to pass through Turkish waters in the Black Sea. As a quid pro quo, Moscow has offered to support and supply the Samsun-Ceyhan oil pipeline, which will connect Turkey's Black Sea port at Samsun and an oil terminal at Ceyhan. But this project is stalled.
The Turkish government lobbied to compel Gazprom to eliminate or relax its take-or-pay provision, which requires Turkey, like other customers, to import a minimum amount of gas at fixed prices, regardless of possible shortfalls in demand, or pay certain penalties. Turkey also wants Russia to give Ankara more flexibility on the size of its purchases, the price Turkey pays, and the right to re-sell gas purchased above Turkish domestic needs on third markets.
The latest events in Ukraine and in particular Russia's seizure of Crimea have undoubtedly stranded Turkey with regard to its northern neighborhood policy. Despite their sharp disagreements over the civil war in Syria, Russia and Turkey have managed to strengthen bilateral ties, primarily through top-level diplomacy executed by President Putin and President Erdoğan.
For both Russia and Turkey, oil and natural gas have greater meaning than just supply and demand, export revenues, and transit fees. They saw energy flows as a major advantage for their respective geopolitical positions, most prominently in relations with the EU, and are taken by surprise by the disappearance of this advantage in the course of the fast-moving global revolution in energy affairs.
What can we say about the situation in Iraq, a country with one of the world’s biggest proven oil reserve?
The Kurdistan Regional Government in Iraq (KRG) already enjoys good relations with Turkey, to the extent that the Kurdish authorities have been able to directly export their oil via a pipeline to Ceyhan. The KRG recently made an opportunistic move by taking control of Kirkuk, which is now the major center for Iraqi Kurds, and declared that it would ‘hold a referendum’ on independence and be bound by its results. Although nothing can be taken for granted, an independent Kurdistan is no longer viewed just as a distant pipedream.
The Kurds are in the process of establishing their ability to export their oil through Turkey – without the acquiescence of Baghdad. If successful, they will likely feel that they have grounds for a viable, independent Kurdistan, which many Kurds have held as a long-standing goal. This objective has taken on greater urgency as the relationship with Baghdad has deteriorated and as Iraq looks closer to collapse. At a minimum, the Kurds’ continued relationship with Iraq depends upon a number of political conditions being met, many of which relate to greater control over oil resources.
Is a new Turkey-EU gas partnership possible?
Although there is a long way to go before or if Turkey can join the European Union as a full member, the EU acquis influences the way Turkey’s energy policy is being made. Energy is too pressing an issue to wait for the Turkey accession talks to make progress.
The transportation of energy from main suppliers of energy to the EU such as the Middle East, Russia, the Caspian Basin, the Central Asia and North Africa is a vital issue for Europe to tackle with. In this context, Turkey occupies a very important, if not vital or crucial, role in being an energy transit corridor to the EU. A new “EU-Turkey Natural Gas Initiative” could thus represent a new way to rebuild the much-needed trust between the EU and Turkey, the fundamental prerequisite not only for the energy cooperation between the two players, but also for the overall EU-Turkey political, economic and social relations. The EU would gain a reliable alternative supply route to further diversify its imports from Russia. Turkey, as a hub, would benefit from transit fees and other energy-generated revenues.
The ongoing game-changers in energy and geopolitics will likely force Ankara and Brussels to ponder a joint strategy over how to secure gas supply security, particularly in view of what’s happening in the Black Sea region, the Western sanctions against Russia and the re-opening of the Pandora’s Box in the Middle East.
Jean-Claude Juncker and his new energy team (particularly the former Slovene prime-minister Alenka Bratušek, charged with a resilient European Energy Union) should sit down, sooner than later, with Turkey’s Minister of Energy and Natural Resources, Taner Yıldız, to forge a new EU-Turkey gas initiative as an integral part of the broader European gas security that should help drive down costs for citizens and businesses and boost growth and global competitiveness.
Where do we place Iran in this picture?
The EU is quietly increasing the urgency of a plan to import natural gas from Iran, as relations with Tehran thaw while those with top gas supplier Russia grow chillier. The most feasible route for Iranian gas to Europe would be via Turkey, already a customer. Independent feasibility studies show that, if sanctions were to be eased and investments started soon, Iran could supply 10-20 bcm of gas a year to Turkey and Europe by the early 2020s.
Iran has already lost out on lucrative liquefied natural gas exports in Asia, where customers pay the highest prices, to Gulf rival Qatar, so Tehran has to look to Europe. Parts of Iran's economic and political elite as well as Western companies are preparing for an end of the sanctions. Iran’s new attitude has the great advantage of bringing the country in the market as a more reliable gas giant, especially if the prices can be negotiated downwards. Iran has so far dismissed Turkish demands to drop the price of gas under the current agreement, saying that Iran could sell more natural gas to its energy-hungry neighbor if a new agreement was signed. Turkey could double the amount of natural gas it imports from Iran if the two countries could agree on a price.
What about Turkmenistan’s gas?
Turkmenistan’s willingness to supply 20-30 bcm of gas to Europe is of great importance to Turkey. The Trans-Caspian project is expected to provide Turkey with additional natural gas resources (as Turkey’s gas demand will increase by up to 77 percent by 2030) and also help it achieve its goal of developing into a regional energy hub between Central Asia and Europe. Turkmen gas transported via the TANAP pipeline will make the project more cost-effective and financially viable.
Russia opposes a gas pipeline from Turkmenistan running under the Caspian Sea, arguing that the agreement of each Caspian littoral state is needed for the Trans-Caspian project. Echoing Russia, Iran also claims that the export of Turkmen gas via the Caspian Sea is impossible, offering Iranian territory as a transit route to Turkey. However, Turkmenistan and Azerbaijan have said they will come to an agreement with each other, as they believe they have the combined right to lay pipes under the Caspian Sea -- territory the legal status of which is yet to be defined. It is unlikely that Turkmenistan’s gas will find its way to Turkey in the foreseeable future. Rather, it will continue to flow to China, Iran and Russia as well as to TAPI (Turkmenistan–Afghanistan–Pakistan–India natural gas pipeline project) one day.
Is a ‘peace pipeline’ possible between Turkey and Israel? Does economics trump political differences? Is there a possibility that the leaders can act less political, emotional and more focused on mutual benefits that this pipeline may bring?
Ongoing political, diplomatic and corporate developments with regards to Eastern Mediterranean natural gas reserves are taking yet another turn. The prospects for a new LNG hub in the eastern Mediterranean are now dim. Instead, Israel looks likely to emerge at the center of a regional pipeline network, using its abundant offshore gas reserves to build strategic and economic ties with its neighbors that were unthinkable just four years ago. Woodside Petroleum’s decision in May to scrap plans to buy a stake in the Noble Energy- led consortium developing the 540 bcm Leviathan field has killed -- for now -- the idea of an Israeli LNG export business.
Although it has signed an agreement with BG Group on the use of Egyptian LNG facilities, Tel Aviv has not entirely excluded the possibility of a pipeline eventually connecting Leviathan and other new reserves to Turkey, seen certainly as the least expensive way for gas to flow into international markets. This would, however, contradict earlier statements and guarantees made by the Israeli Cabinet, both to Greek and Cypriot governments.
Turkey does not recognize Cyprus’ EEZ agreements with Egypt, Lebanon, and Israel based on its claims to the part of the continental shelf in that area. Turkey has warned international oil companies, under the threat of exclusion from business operation in Turkey, not to conduct exploration and production activities in the disputed zones. The reserves of Cyprus alone are not sufficient to justify massive investment.
Although the long-standing Cyprus problem seems like a stumbling block for the development of natural gas reserves surrounding the Island, this should rather be seen as an important opportunity and catalyst for a solution, which would positively contribute to economic development in both northern and southern Cyprus.
As the ongoing negotiations between Iran, the US and the EU unfold, the Israeli gas may not be necessary for a “Nabucco West” redux, since there is potentially more than enough of this commodity in the Iranian reserves for decades long supply to certain EU states. If this is the case, the proposed East Med pipeline plan is also effectively scraped since no additional gas volumes will be needed until then.
Lebanon’s great offshore prospects should not be forgotten, and should emerge on the market in the mid-term. Should this be the case, a variety of scenarios could be formed that will include entities such as Hezbollah, the battered Assad regime and/or Saudi Arabia through various individual but influential local players.
Karel Valansi Şalom Gazetesi 12 November 2014