Weighing up Turkey's gas hub aspirations [Global Gas Perspectives]
Turkey became a transit country for natural gas supplies from Azerbaijan to southeast Europe in late 2020, when the 10bn m3/year Trans-Adriatic Pipeline, the third and final leg of the Southern Gas Corridor (SGC), entered operation. But it was only after Moscow invaded Ukraine in February 2022 that Turkey set its sights on evolving from mere transit route to prominent gas hub, taking advantage of the opportunities that Europe’s desire to eliminate Russian gas imports presented.
Five years ago, Turkey was more concerned with shoring up its own energy security than serving as a hub for the wider region. In order to reduce its energy imports, it was promoting the use of domestic lignite at power plants, by offering subsidies which have since ended. However, the 2020 discovery and subsequent development of the Sakarya gas field in the Black Sea has helped ensure Turkey’s own energy needs can be met. Production at the field is on track to reach almost 15bn m3/yr by 2027, equivalent to nearly a third of Turkey’s current demand. Turkey has also benefitted a boom in renewables deployment, with hydro, wind, solar and other clean energy sources now contributing as much as 40% of electricity.
As such, Ankara has turned its attention to establishing itself as a bridge connecting gas-rich neighbours to its east and European markets scrambling for alternatives to Russian gas.
More gas from Azerbaijan
The EU is eager to ramp up shipments from Azerbaijan to replace its remaining Russian gas imports – which means more gas flowing through Turkey. The European Commission signed a memorandum with the government in Baku in 2022 on doubling Azeri gas supplies to 20bn m3/yr by 2027. This objective will not be reached so quickly, as Azeri President Ilham Aliyev acknowledged in July, when he said volumes were only expected to reach 16bn m3 that year, versus 12bn m3 in 2023.
The problem, as Azeri President Ilham Aliyev has repeatedly stressed, is that these investments will need to be underpinned by long-term gas supply contracts with European customers, along with financing from European banks. Brussels’ expectation that gas demand will decline significantly over the coming years means such contracts are not forthcoming, while European banks have increasingly steered away from fossil fuel financing because of climate considerations.
This could open up an opportunity for Turkey to provide Azerbaijan the necessary long-term guarantees by signing these contracts itself. In turn, it could then sell the gas to Europe at a marked-up price on a shorter-term basis.
Clearly, such a strategy can be profitable. But it also carries risks, as it depends greatly on future European gas demand, which is far from certain, as well as the EU following through on its commitment to phase out remaining Russian gas imports by 2027. But a mitigating factor is that, should Europe not want the gas, Turkey can use more of the fuel itself to support rising energy demand and reduce coal consumption, which as of 2022 still generated 35% of its power.
Tapping Turkmenistan for gas
Turkey’s hub ambitions do not stop there. Ankara signed an agreement in June with the Azeri government on facilitating natural gas deliveries from Turkmenistan to Azerbaijan and onward via Turkey to other countries. But achieving this will not be so easy.
Turkmenistan has long sought to expand its eastward gas exports, which are currently limited to modest sales to Russia and swap volumes around the Caspian Sea with Azerbaijan and Iran. For decades, it has sought to develop a trans-Caspian pipeline, but the project faces numerous challenges – namely strong opposition from Iran and Russia. Delivering gas around the Caspian instead would be a more viable option, and has been demonstrated by recent swap deals with Azerbaijan through Iran, but it is interesting to note that Tehran was not party to the June agreement.
Receiving Turkmen gas would help strengthen Turkey’s hub status further. But arranging these supplies on a stable, long-term basis is likely to prove difficult.
“The Trans-Caspian Pipeline project has gone nowhere since it was first discussed in the 1990s,” Matthew Bryza, managing director of Straife, tells NGW. According to him, any attempts to move the plan forward over the years have been thwarted by pressure from Moscow.
Expanded gas swaps between Turkmenistan, Iran and Azerbaijan are a more viable option. Turkmenistan can help cover the deficit of gas supply in northeast Iran, and Iran can in turn pump gas from giant fields in the south, namely South Pars, up the western part of the country to Azerbaijan. But even these swaps have proved difficult to maintain because of disagreements over terms.
Turkmenistan, Iran and Azerbaijan relaunched gas swaps under a November 2021 deal, but those swaps ground to a halt in January this year. Apparently, Ashgabat was unhappy with the low price of $130-140/1,000 m3 that Baku was offering for its gas, according to sources who spoke with Amsterdam-based outlet Turkmen.news.
Furthermore, the outlet reported that Turkmenistan was having difficulty supplying enough gas. Despite its vast reserves, the country has had problems in the past maintaining output at its fields.
Traditionally, Russia blocked Turkmenistan’s attempts to send gas to Europe as it would challenge its own dominant position on the market. But even now that Gazprom is sending far less gas to Europe than it used to, and with the EU seeking to eliminate remaining imports by 2027, Moscow still wants to avoid Ashgabat forging closer ties with its western neighbours through gas trade, in order to keep Turkmenistan within its own political orbit, Bryza says.
Turkey could also take more Iranian gas than it currently receives and then pass some of that supply onto Europe. But the two countries’ difficulties in negotiations to extend their current supply contract, due to expire in 2026, raises doubt that this could be arranged.
Then there is LNG. Turkey has steadily expanded its LNG import capacity over recent years. In the last decade, the share of LNG in Turkey’s imported gas has doubled to 30%, and the government expects this share to grow further as global supply expands. This month, Turkey’s state energy company BOTAS expanded its LNG portfolio further by striking a deal with Shell to purchase 4bn m3/yr of LNG beginning in 2027. This follows similar deals with ExxonMobil and Oman LNG earlier this year.
Covert Russian supplies
All the while, there is also a prospect for Turkey to resell some of the Russian gas it imports to Europe, contrary to the EU’s desire to end energy trade with Moscow. Turkey is working with Russia on creating an electronic gas trading platform to do this. Russia’s preference is to sell its own gas on this platform, but Turkey is understood to be pushing to create its own “Turkish brand” of natural gas. This would involve state-owned BOTAS buying gas from Russia and Azerbaijan, as well as regasified LNG and potentially Iranian and Turkmen gas, and then selling it on the exchange to domestic and European buyers.
Ultimately, Moscow has little bargaining power to insist it can trade on the exchange directly. Having lost most of its market share in Europe, Russia is scrambling to export gas to wherever it can, at preferable terms to the buyer.
For the time being, Ankara does not seem interested in increasing its gas imports from Russia, which is already the country’s biggest supplier. Russia’s government suggested in 2022 that the capacity of the TurkStream could be doubled, although this appears to have fallen on deaf areas in the Turkish capital. A more likely prospect is that, following the EU ban on Russian LNG transhipments, Turkey could serve as a new place for these transfers to take place, facilitating Russian LNG supplies to Asia. If and when the EU bans Russian LNG imports completely, it could also receive these supplies and re-export them to Europe.
For Turkey to realise its gas hub aspirations, it will also need to invest in more transmission capacity. With SGC reserved for Azeri gas, Turkey’s ability to move more gas to Europe is currently limited by the transmission capacity at its border with Bulgaria. But Ankara and Sofia are in talks to increase this capacity, allowing more “Turkish brand” gas to hit the European market.
Turkey’s ambition to become a gas hub is rational. It can potentially reap huge rewards from positioning itself as a “middle man” for gas trade. The main risk is that it commits to taking too much gas on a long-term basis than there is demand for, but the option of using excess supply domestically to replace coal burning, helps mitigate this risk.