Is Turkish Stream a Potential “Iceberg” for Eastern Producers?

With all of the recent references to Turkey’s energy policy, it appears that most people and even specialists, are not well aware of what constitutes to a “gas hub”. In a nutshell, a region might become a physical gas hub when it creates an intensive network facilitating a financial, spot and transportation market for natural gas that would be utilized by many players in and out of that specific region for their trade and businesses. In this respect, it is unlikely Turkey would become such a place, as it is neither located in a region with a free gas market with non-oil-indexed pricing, nor does it have a favourable position for becoming an LNG trade centre.

However, due to its geographic location, Turkey indeed merits and attempts to become a pipeline transit network in the region, linking the Eastern and Northern energy sources to Europe. Neighbouring gas-rich countries naturally have interests to transfer their gas through Turkey which is also enjoying noticeable growth in gas demand. Azerbaijan is in most favourably positioned with its SCP and TANAP-TAP projects in terms of using its closest neighbour as a transit to Europe.

However, recent events may radically change the picture in the region with Russia withdrawing its South Stream project and entering into a preliminary agreement with Turkey for “Turkish Stream,” a pipeline to export the same amount (63 bcm) of gas through its territory to Europe via Black Sea.  Although the probability of the deal is not definite, it has come as a surprise to a West endeavoring to dislodge Russia in the energy field. It can be treated as a stalemate position put by Russia ‘against’ Europe, which was seeking to have Turkey facilitate as much non-Russian gas supply as possible.  Whom does this manoeuvre impact in the East? Quite big players...

One of the large proposed projects of interest to Turkey is the Trans Caspian Pipeline (TCP), which aims to pump Turkmen gas to Europe through Azerbaijan.  Although the status of the proposal has been weakening due to political disagreement between the Caspian states, the draft project itself is huge and intends to diversify Turkmen gas the major part of which is sold to a single buyer – China. TCP would present very high benefits for all participants in the value chain and would definitely be welcomed by the West as a non-Russian supply opportunity. Despite the disagreement with Russia and Iran on the geographical status of the Caspian Sea, which otherwise could have propelled the project, it is still under consideration. TCP could also be realized by routing the line through Iran, rather than Caspian and Azerbaijan. The question may be “why would Iran be happy with transiting Turkmen gas whilst it can export its own?” This might happen because, Turkmenistan has more chance, albeit not too much, to involve Western IOCs in the deal.  However, the Turkish Stream plan to transit 50 bcm gas to Europe and deliver 13 bcm for domestic consumption, would probably make the Turkish market mature even in the longer term and unlikely leave any incentive for TCP to be realized in the next decade or two.

Another loser will be Iran. Home to the world’s largest natural gas reserves (according to BP’s recent report), Iran had just started to hope for the redux of Nabucco via which it could sell substantial amount of gas to Europe. The Ukraine crisis sparked a re-examination of Iran as a possible supplier to Europe.  Several months ago some talks even took place between Turkey and Iran regarding exporting Iranian gas to Europe, potentially through the Nabucco route that was withdrawn by Azerbaijan to the favour of TAP.

While Iran has it own immediate challenges in dealing with domestic demands, Turkish Stream does impact hopes for such a game-changing project or at least postpone it to the far future.  The chance Iran still holds is to win the rally on TAP by filling the remaining capacity, albeit not much, before others.  The option of a totally new route doesn’t sound to be realistic in this stage.  Turkish Stream doesn’t nip Iran’s opportunities in the bud, but is does place them under a bigger question.

Turkey’s unexpected deal with the Kurdish government to import 4 bcm of gas by 2017, increasing to 10 bcm by 2020, also adds to the supply sources.

Another strike might have been on Eastern Mediterranean – Cyprus and Israel – the region where the largest gas discoveries of the last five years have taken place. One of the considered options for commercializing the gas from Aphrodite field of Cyprus as well as from Leviathan and Tamar fields offshore Israel was to pump it though Turkey.  Although the likelihood of this route was low anyway due to Cyprus’s continuing tension with Turkey and Israel’s complicated energy strategy and political posturing, the odds further drop with Turkish Stream.

Even Azerbaijan is not guaranteed to stay unaffected by this new wave coming from the North.  Most observers are keen to see what the implications of Turkish Stream for the Turkish-Azeri partnership. There are already some rumours saying that the planned expansion of TANAP to 20 bcm has been put on hold by Turkey due to the new offers from the disgruntled Bear.

So, why should the maturity in Turkish market hinder all these proposals? As a transit nation, Turkey usually benefits from buying a certain portion of the volume passing though usually with some discount. Therefore, if there is no requirement for domestic consumption, it could logically levy higher fees on land use only for transporting gas to Europe, accordingly reducing the incentive for all these projects.

Hence, the Russian strategic tactics can conspicuously be treated a high potential freezer for so many gas players in the region including both sellers and buyers. However, on the other hand, considering Turkey’s penchant to become a network country for energy exports, it can be assumed that Ankara might still be interested in the abovementioned project proposals even without local demand and the Turkish Stream may not impede their realization. Adding the European ardour to secure non-Russian gas supplies may present even more optimistic view of the future of these pipelines, if Moscow of course doesn’t exert any political or manipulative influence on Turkey to avoid them.

While some players (e.g. Cyprus and Israel) have the LNG option as an alternative, others do not due to their geographical position as well as technological capabilities or financial dilemmas. They can, however, be eliminated by some strategic choices.

Say, if the Turk Stream takes FID, then rather than insisting in exporting to Europe which might be a feckless effort, Iran, Iraq and Turkmenistan could better focus on more promising Asian markets, may be by jointly developing a liquefaction project somewhere at the Gulf coasts of Iran or Iraq. Taking into account (1) low production costs, (2) the plain landscape of the most part of all three countries making favourable pipeline conditions and (3) Asian gas prices, such a singular proposal might be commercially feasible and attractive for both host countries and companies. A long (1,800-2,000 km) distance from Turkmenistan to the Gulf may be double costing and sound unattractive, but not totally unjustifiable.  Building a liquefaction plant at a narrow Iraqi coast of the Gulf would relatively favour more chance to involve foreign funding and IOCs some of which are already present mainly in Basra region. The developer may be able to benefit from Islamic project financing opportunities increasingly utilized for LNG plants during the last decade. In this case Iran would have to pump its gas to Iraqi coast located about 500 km away from its major reserves and share some capacity. Considering much better relations with Iraq’s Shia government, it may not be challenging. Due to sanctions restricting funding and technology, Iran would unlikely solely complete its half-built four train Tombak project. Together they could even outstrip the LNG leaders - Qatar and Australia – by the mid-20’s. Nonetheless, for this, a range of barriers such as political, legal, infrastructural and commercial ones should be overcome. Plus, both current oil and gas prices do not promise positive future and impose higher risks for high capex projects.

In summary, restrictions and challenges may create new opportunities. Turkish Stream may force some players to explore alternative options.  Turkey’s exuberance to be a ‘hub’ may compel some of Russia’s Eastern competitors to coalesce and become bigger global players together primarily owing to LNG opportunities. Accelerating concern for oil indexation and decoupling of oil-indexed prices with hub prices in Europe particularly after the global financial crisis also suggests that focusing on Asian markets with LNG would be a better strategy for these countries. Even in case of maturity in Asia and rising weight of spot market in the future, much more flexible LNG can be rerouted to European regas stations still operating well under capacity. Doubtlessly, prices in the highly dynamic, volatile and politicized natural gas markets will be a deterministic factor for the future of the industry.

Elchin Hasan is an independent researcher of gas markets. He graduated from The University of Liverpool in International Oil & Gas Management. Email: elcinhasan@gmail.com