Risks and Opportunities of Shell’s Turkey Deal

As reported on 23rd November, Royal Dutch Shell signed a major deal with Turkey’s state energy firm TPAO to begin prospecting for gas and oil onshore in southeastern Turkey, and offshore in the southwest. The deal could have major implications for Turkey’s long-term energy security but carries its own risks.

Onshore, Shell and TPAO will focus on shale gas exploration near the city of Diyarbakır. Current EIA estimates place Turkey’s recoverable shale reserves at around 15 trillion cubic feet, mainly in the southeast, far above its proved reserves of ordinary natural gas, at 0.2tcf. Current annual gas consumption is 1.24tcf and is expected to rise sharply in the coming years on the back of strong economic growth. Some forecasts estimate a rise of around 5-6% per year past 2020. Without discovering and developing more domestic resources, Turkey will increase its dependence on imported gas.

Increasing the role of domestic shale gas in Turkey’s energy mix will help to boost energy security, reducing reliance on commercially and politically volatile imports.

Currently, Ankara imports upwards of 90% of its natural gas supplies, and each of its principal suppliers has their own particular challenges. Russia, Turkey’s biggest gas supplier, has repeatedly demonstrated a willingness to politicise energy supplies and Ankara is concerned about being over-dependent on Moscow. Supplies from Azerbaijan and the Caspian region are vulnerable to security threats and political upheaval, as are imports from Iran and Iraq.

In the long term, it will also free up more imported gas for transit on to Europe (rather than being taken off by Turkey). Turkey’s insistence on lifting off up to 15% of gas was a major factor in delaying an agreement with Azerbaijan on gas transit rights, seen as critical for Nabucco.

Shell’s entry into the Turkish market is also a valuable step forward for Turkey’s developing energy industry in general and for TPAO in particular. To date, few oil and gas majors have taken much of an interest in Turkey’s limited hydrocarbon resources but growing interest in both remaining unexplored markets and shale gas have given an impetus to invest in the Turkish market.

Shell’s exploration carries risks, however. Although concerns have been raised that the offshore drilling will drag Shell into the ongoing dispute with Cyprus over maritime borders, currently available data does not suggest that the sites being explored will be in disputed waters.

A more serious concern is the political and security situation onshore in Turkey’s predominantly Kurdish southeast. The insurgency waged by the separatist Kurdistan Workers’ Party (PKK) against the Turkish state has intensified in recent months. Most of the fighting takes place further east, closer to the PKK’s strongholds in northern Iraq.

However, Diyarbakır is a key urban centre for Kurdish nationalists, and the PKK has a strong presence there. The PKK has shown a keen interest in targeting Turkey’s energy infrastructure. Attacks against pipelines crossing the southeast are common, and new pipelines are also likely targets.

Attacks against oil and gas facilities, whilst rarer, are not unheard of. Some oil companies were driven out of the area in the early 1990s (the height of the insurgency) after PKK attacks. In late November, militants killed three at an oilfield run by Transatlantic Petroleum in neighbouring Batman province, in what may have been an advance warning to Shell.

Turkish officials are keen to downplay the risk to investors in the region. “We will increase the security measures and our investments in the region,” said Energy Minister Taner Yıldız. Indeed, the risk should not be overstated: energy companies have been operating in the region for years, and have only sporadically faced serious security risks.

However an upsurge in Kurdish militant activity, occurring at the same time as increased interest in Turkey’s gas and oil resources, could have a serious impact on Shell’s operations in southeastern Turkey.

If the situation stabilises, shale exploration and offshore drilling could be a game-changer for Turkey’s energy security; if the reserves are big enough, it could also have significant effects for European gas supply.