Turkey and Europe’s quest for gas:

Turkey and Europe’s quest for gas:

The equilibrium of a bargaining position and its possible consequences

for new gas transport routes

Olgu OKUMUŞ MARİTANOOlgu OKUMUŞ MARİTANO, , Ecole Normale SupérieureEcole Normale Supérieure

Marc-Antoine EYMarc-Antoine EYLL-MAZZEGA-MAZZEGA, , Sciences Po / CERISciences Po / CERI

INGAS NATURAL GAS CONFERENCE-ISTANBUL-INGAS NATURAL GAS CONFERENCE-ISTANBUL-09-10/06/200909-10/06/2009

Three key strategic issues :

How do Turkey’s own energy and political interests, demands and strategies fit with EU’s

demands and needs?

Marc-Antoine EYMarc-Antoine EYLL-MAZZEGA -MAZZEGA

Olgu OKUMUŞ MARITANOOlgu OKUMUŞ MARITANO

Why does Turkey appears to be an important stake and pillar of the European gas supply challenge?

To what extend are Turkey’s demands and interests with regards to gas supplies and transit sustainable

and compatible with its fundamental strategic interests?

Table of content

I / Are Turkey and the EU rivals or partners for gaining access to new gas resources?

1. EU’s increase of external gas demand2. Turkey’s increase of external gas demand3. How much gas is left for the EU once Turkey’s gas demand has been matched ?

II/ To what extend do Turkey's national interests and gas policies contradict EU's interests ?

1. Azerbaijan2. Shipping Turkmen gas through the Caspian or via Iran?3. Adding Gazprom gas to the balance, possibly via a Blue Stream 2 gas pipeline ?

III/ Assessing the strength of Turkey’s bargaining position with regards to alternative routes

1. White Stream2. Novopskov-Bohorodzhany-Uzghorod gas pipeline3. South Stream



EU’s external gas demand

EU’s external gas demand is likely to increase over the two next decades, although to a yet unknown extend: the economic crisis has completely disturbed previous projections which were already quite uncertain.

The only real certitude one can draw regarding EU’s future external demand is the fact that EU’s domestic gas production will be massively decreasing in the coming years.




2008 (in bcma)

2020-2030 (in bcma)

EU’s total gas demand

508 560-650

EU’s external gas demand

315 450-550

EU’s domestic production

202 100

Important increase of total gas demand, massive increase of external gas dependence

Supply gap ? How much?What are additional gas sources?

Gaining access to new gas supplies

Gas pipeline project s of the Southern corridor whereTurkey is at stake

Transcaspian gas pipeline: 10-20 bcma

Nabucco: 33000km, 30 bcma

White Stream gas pipeline : Linking Georgia and Romania through the Black Sea, 30 bcma

The Turkey-Greece-Italy gas pipeline : 11 bcma

Other projects:

South Stream : 30-63 bcma

So far, Russia, Norway and Algeria are key to secure EU’s external gas demand. Russia, the Caspian region and Iran are vital to secure EU’s future, additional gas supplies.

Central and Eastern Europen states have poorly diversified gas supplies while their gas demand will increase = major incentive for gas supply diversification.

The EU has been developing new gas pipeline projects to decrease the dependence on a single supplier and transit route (Gazprom gas shipped via Ukraine) and provide additional gas supplies to match additional gas demand. .




Turkey’s external gas demand

Turkey’s gas demand is raising, but lower than expected:

Current total import capacity: around 65 bcma

Turkey has not any significant natural gas sources.Growth of Turkish economy since 2002 has lead to an important growth of energy consumption. Turkish gas consumption, especially from households, is sensitive to prices, as the last winter 2008 has illustrated.

Current available capacity is largely sufficient to meet current demand and this at least until 2020, provided that sufficient gas volumes are contracted. Total spare import capacity is currently about 22-25 bcma, which is huge

2006 30,5 bcma

2007 35,9 bcma

2008 36,1 bcma

2030 70-75 bcma

Origin of imports Volumes (2008, in bcma)

Total import capacity (bcma)

Russia- Via Ukraine-Balkan - Via Blue Stream

1310

1416

Iran 6,2 14

Azerbaijan 1,3 9,5

LNG Marmara /Aliaga 5,5 6,2 /6

Total 36 65




Future gas export capacities/transit potential of Turkey

Potential gas export capacities/transit capacities of Turkey

Based on available capacities, current extension possibilities of Turkish gas imports in today’s supply structure are significant.

Very important potential for adding additional gas import capacities to Turkey, mostly from Russia, Iran and the Caspian: total available capacity could be up to 110 bcma by 2020-2030,

Gas importing source Potential future import capacity by 2020-2030

Current Capacity

Russia 46 bcma (+16 bcma) 30 bcma

Iran 30 bcma (+ 16 bcma) 14 bcma

Kazakhstan/ TurkmenistanAzerbaijan

20-30 bcma (+9-+19 bcma)

11 bcma

Egypt 5-10 bcma -

Iraq 10 bcma -

New LNG terminals 6 bcma 12 bcma

TOTAL 112-127 bcma 65




Future gas export capacities of Turkey

Additional gas import options for Turkey

- From Gazprom/ Russia: Gazprom is already providing more than 60% of Turkey’s gas demand and Turkey is thus interested in decreasing the share of gas imports from Gazprom

- From Iran: Iran offers a good potential for gas import increase. In July 14, 2007, M. Erdogan signed a preliminary agreement (Memorandum of Understanding) to import 30 bcma. It would require building a 1850 km pipeline from the South Pars field and could also involve Turkmenistan. What does Iran want?

- From Kazakhstan/ Turkmenistan/ Azerbaijan: Turkey has been importing gas from Shah Deniz gas field since end 2007 via the newly operational Baku-Tbilissi-Erzerum gas pipeline. And Turkey has been using its key geographic position to push down Azerbaijan’s gas price expectations

- From Egypt via a linking by Syria: possible gas pipeline link in discussion

- From Iraq: It requires rehabilitating existing pipeline infrastructures

- Reinforce Storage Capacity : builidng new LNG terminals

Based on available capacities, current extension possibilities of Turkish gas imports in today’s supply structure are significant.




How much gas is left for the EU once Turkey’s gas demand has been matched ?

Turkey can play a crucial role for transporting possible additional gas supplies from Iran and the Caspian to the EU. This can only happen at the condition that Turkey’s gas demand is matched. One can make following projections, assuming that additional import capacity is added, that import capacity is matched by additional gas




2008 2020-2030

Turkish gas demand

36 70-75

Turkish gas import capacity

65 112-127

Import gas availability

37,5 100-115

Gas for the EU/ transit potential

1,5 25-45

Optimistic scenario: 45 bcma of gas can be transited to the EU by 2020-2030

Pessimistic scenario: 25 bcma of gas can be transited to the EU by 2020-2030

Possible gas transit potential through Turkey to the EU

1st Conclusions Turkey is no more facing the threat of not having enough external gas available to meet its future domestic demand , provided that import capacity is met by additional gas The potential for extending gas import capacities, as well as gas imports, is tremendous so that Turkey has the potential to gain access to new gas volumes from different sources and become an important gas transit country This will increase the country’s energy security, prosperity and strategic position

So far however, none of all these projects are close to being developed!Turkey / its companies have thus a decisive interest in cooperating with the EU/ its companies, both on the upstream, transport and downstream: there’s a need for common political, economic and financial cooperation as these projects are expensive and bear risks = feasibility through mutually beneficial partnership

. From this, EU and Turkey have a common interest in ensuring the success of new pipeline projects and acceding to additional gas sources which can benefit both entities The key question is now how best to achieve this: the first test is the willingness test




Turkey's and EU’s interests and gas policies

Economic and Political Relations with Gas Exporting Countries Azeri Gas • Export gas availability is limited / competition from Gazprom• Turkey price offer couldn’t satisfy Azerbaijan • Risk that Turkey’s gas transit demands rebuff Azerbaijan

Turkmen Gas• Need to make clear comitment, either in favour of Transcaspian or

transit via Iran (EU/ US are hostile for transit through Iran)• Risk that Turkey’s gas transit demands rebuff Turkmenistan and

investors

Russian Gas Via Blue Stream 2• Turkey’s energy security would be strengthened, • Turkey won’t be just a consumer of Russian gas, but also a transit

country for the EU.• Likely contradiction with initial rationale of Nabucco gas Iranian gas• Turkey key possible partner but poor progress so far• Key interest for Nabucco

Turkey wants to prove its European commitments and credential in making a solid contribution to EU’s energy security

What extend this is the case and what problems lie there?

One can notice that at the same time, Turkey has been also keeping doors open as regards a possible extension of cooperation with Gazprom. The option of building a Blue Stream 2 pipeline remains open.

II / To what extend do Turkey's national interests and gas policies contradict EU's interests ?



Turkey’s conditions for gas transit through its territory

Different options and conditions for gas transit raised by Turkey are :

1° The transportation hub: Turkey would thus import all the gas available through these pipelines, take for its own consumption what is needed, and then resell and reexport what is left.

2° Linking gas transit to EU negotiations: Erdoğan has threatened to back out of the strategic pipeline project if the energy chapter in Turkey's EU accession negotiations remains blocked. Nabucco project could be an opportunity for AKP government to achieve further steps in EU accession negotiations?

3° Conditioning gas transit to gas supply agreements based on net back pricing rather than replacement value/ preferential gas off take right

4° A 15% transit tariff : Turkey would retain 15% of gas in transit for its own consumption in return of allowing transit

Turkey aims :

-To have an access to the same gas resources via the same pipelines to secure additional gas imports-To make sure that it is not paying more than the net back price of gas sold to the final consumer coming from the same supply source. - To maximise the financial and economic benefit it will obtain from transiting this gas to the EU;- To maximise the political gains that can be made.



II/ To what extend do Turkey's national interests and gas policies contradict EU's interests ?

Do Russia and Ukraine provide for a competing route for Caspian gas supplies to the EU ?The Pericaspian pipeline project and the

Novopskov-Bohordzhany- Uzghorod gas pipeline projects (Turkmen/Kazakh gas)

About 250 km shorter than Nabucco Cheap transit possible / partly available infrastructure

The other alternatives:The White Stream gas pipeline

Would avoid Turkey and UkraineExpensive undersea portion but lower operating costs

The South Stream gas pipelineWould avoid Turkey and UkraineLower operating costs as no transit country

The viability of Turkey’s gas transit demands

Turkey has been making strong demands for transit which might end up deterring investments into possible pipeline projects crossing its territory and/or favouring alternative gas pipeline routes

III / Assessing the strength and sustainability of Turkey’s bargaining position with regards to alternative routes

Marc-Antoine ELY-MAZZEGA Marc-Antoine ELY-MAZZEGA


The Novopskov-Bohordzhany-Uzghorod gas pipeline project

Source: Bekker, Master Plan, Brussels international investment conference in Ukraine’s GTS, 23/03




The White Stream gas pipeline project

Source: GUEU Group




So far, all these pipeline projects are at a pre-feasibility study stage:

Prospects for Nabucco’s, White Stream’s, South Stream’sbuilding are rather uncertain on the short to mid term!

The TGI gas pipeline project is the most advanced

Turkey might end up having gas for its own demand, but playing no role or just a minor role for transit

The EU might end up having no additional gas ressources Critical need for cooperative politics!!

The viability and accuracy of Turkey’s bargaining position

Turkey has been making strong demands for transit which might end up deterring investments into possible pipeline projects crossing its territory and/or favouring alternative gas pipeline routes




Recommendations and ConclusionsOn the European Side:

The EU should open the negotiations on energy related chapters while Turkey should pursue its reforms and both parties should make sure that

Turkey quickly joins the Energy Community TreatyEU Commission was wrong in putting Turkey under pressure for the 15%

clauses, because markets are very likely to do this by their own. On the Turkish Side:

Turkey is right to demand that the EU opens energy chapter negotiations but wrong to threaten the EU with blocking gas pipeline projects.

Turkey should continue its efforts to access Iranian and Turkmen gas supplies.

Turkey should build gas storage infrastructure to reduce the need for import capacities and better balance supply and demand over the seasons;

and develop renewable energy sources and alternative electricity generation.



Recommendations and Conclusions

Gas supply security is a shared concern of Turkey and the EU and both are interdependant: if both entities cooperate, then the prospect for the

success of pipeline projects will increase as the trust of producing countries will be strengthened

It’s urgent time to achieve a breakthrough: EU and Turkey should concentrate on realistic, small to medium sized projects

Shipping Shah Deniz 2 gas via the BTE-TGI gas pipeline would be a welcomed step with likely spill over effects

Turkey should now facilitate the success of such a project



Thank you very much for your attention!

[email protected], [email protected]

The Nabucco Project

Source: Nabucco Gas Pipeline Gmbh

Turkey and Europe’s quest for gas:

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