Costs and Capacity Hinder Turkish Gas Sector

Watching the Turkish gas sector can give a strong sense of déjà vu. While grand plans for accessing Eastern Mediterranean gas creep along, and hopes continue to rise for domestic shale, Turkey remains dependent on gas imports from Russia, Iran and Azerbaijan. Not only are those imports expensive, but capacity in the pipelines is fast running out.

The topline economic cost of imported energy is clear. Turkey’s current-account deficit is expected to reach $60 billion or more by the end of the year, with energy imports cited as a leading culprit. Although much of that is down to jumps in the global oil price, the structural weaknesses in Turkish gas imports are also to blame.

And the prices of that gas have come into the spotlight again recently. On 11 October Turkey’s Taraf newspaper reported [subscription only] that Ankara was paying $570/thousand cubic metres of gas from Iran, the highest price which Turkey has ever paid – earlier this year media reports cited Iranian prices at $507/tcm. The price of Iranian gas quoted in the Taraf report suggests that Turkish attempts to get a better price – including international arbitration – have failed.

Prices of Azerbaijani gas, by contrast, were reportedly $380/tcm. Russian gas sat in the middle at $406/tcm, according to another report, following earlier gas discounts negotiated by Turkey. Back in June supplies from Russia had been about $430, which itself was a significant reduction from the earlier price of $500 (which Turkey paid before getting a cut in exchange for acquiescence on South Stream crossing its territorial waters).

This year, according to an official from gas market regulator EPDK Turkey is expected to consume around 47.6 billion cubic metres, of which only 2% is from domestic production. Russia will provide about 57%; Iran, 18%; Azerbaijan, 9%, and 14% from LNG and spot purchases. Assuming those figures hold for the end of the year, this would mark almost no change from 2011 (2012 figures are unavailable but are not believed to be much different).

There are some discrepancies in the figures, which might be explained by the different time periods under review. The table below indicates the volumes and prices of Turkey’s gas imports, using the volume figures cited by EPDK and the prices cited in the Haberler report.

The figures only provide a rough guide, since they do not account for price fluctuations over the year or any issues surrounding back payments. Nonetheless the table gives a rough indication of the total breakdown for Turkey’s gas imports.

There are two main takeaways from these figures. Firstly, that Russian gas prices are, given their scale, good value for money. Despite constituting nearly 60% of Turkish consumption, they account for just 48% of import costs. Turkey would no doubt be keen to increase this further, but imports are now coming close to the maximum capacity of 30bcm. The Blue Stream pipeline across the Black Sea has annual capacity of 16bcm, and the West line can carry about 14bcm. The Turkish government has in the past expressed concerns about its over-dependence on Russian gas, but this reliance is capped by the fact that there simply isn’t much physical capacity left. There has been talk about a new Blue Stream pipeline but nothing much has happened for years.

The second takeaway is that Iranian gas is indeed extremely expensive, responsible for over 20% of Turkey’s import bill for just 18% of overall consumption. If Turkey is planning to increase imports to 10bcm this year, as Energy Minister Taner Yıldız has claimed, and working on the assumption that other volumes remained stable, Iranian gas would provide around 21% of Turkish consumption for a full 25% of the import bill. Take-or-pay clauses cannot account for the extra cost since, Turkey buys more than the 70% take-or-pay level.

Importing 10bcm as planned would constitute the maximum capacity of the pipeline; however, at the end of 2012 it was quietly announced that Iran and Turkey are constructing a second gas pipeline. The new project is very murky but – if and when it gets built – it could be a significant boost to Turkey’s available import capacity. Given the high cost of Iranian gas, however, the financial impact would be heavy, and the total cost of Iranian imports would rise sharply. 

But such are the constraints on its energy imports, Ankara has not been shy in acknowledging that Tehran remains indispensable and that imports of gas and oil would continue despite US-led sanctions. As the table indicates, Turkey simply does not have another choice, even if its paying a heavy price.

Imports from Azerbaijan, although much better value, also remain constrained by pipeline capacity. Even when the Trans-Anatolian Pipeline comes onstream in about 2018, it will only provide Turkey with another 6bcm in the initial phase, not much – especially given the rapid increase of domestic gas demand. Azerbaijani gas is welcome but can only ever fulfil a small fraction of Turkey’s requirements. Yıldız’s claim that TANAP will cut domestic gas prices seems therefore optimistic.

Iraqi gas is another source of hope. In September the energy watchdog granted the first gas import licence to construction firm Siyah Kalem; a sales agreement between Ankara and the Kurdistan Regional Government is also expected in early 2014. Gas from Iraqi Kurdistan is, according to Natural Gas Europe contributor Olgu Okumus, expected to be three times cheaper than other sources although the costs aren’t yet clear. But as in the case of Azerbaijan, volumes will be small for some time and won’t realistically have much impact on the gas picture within Turkey (although they might improve supply in the south-east).

Meanwhile East Med gas continues to be the topic du jour but again, the problems facing it are so complex, and the timescale so long, that for now it is not a realistic solution to Turkey’s gas challenges. The same goes for domestic shale gas, around which serious questions remain. Turkey could boost LNG imports and spot purchases in a crisis but as the table shows, these are prohibitively expensive and LNG terminal capacity remains limited.

Whilst these challenges remain, Turkey will continue to depend on Russia and Iran for its gas. But even aside from the high costs of relying on these two suppliers, there is simply not much capacity left in the pipelines. A drastic fix is needed.

Alex Jackson is an analyst of political, energy and security issues in the Caspian region. He is based in London and can be contacted at ajackson320@gmail.com.