The Fuse

Turkey’s Self-Interest Will Ultimately Shape Global Energy Flows

by Nick Cunningham | August 27, 2015

Turkey sits at the crossroads between east and west. This has been a strategic advantage throughout its history, but even in the modern world, Turkey still sees an enormous benefit from being the gateway between Europe, Central Asia, and the energy-rich Middle East.

The decisions that Turkey makes about pipeline projects in the coming years will shape energy developments and movements across the Eurasian continent.

Right now, Russia is racing against Caspian producers to reach Europe, and vice versa. Iran has remote hopes of doing the same. Kurdistan is looking to Turkey as their best hope to help build an independent state, while Europe is even looking to offshore gas producers in the Eastern Mediterranean for energy resources. Thus, the decisions that Turkey makes about energy projects in the coming years will shape energy developments and movements across the Eurasian continent. In this context, it’s worth exploring how its efforts to diversify its own gas supplies is ultimately shaping international energy flows.

Gas import dependence

Turkey imported 55 percent of its natural gas from Russia in 2014, a heavy dependence that Ankara would like to change. In fact, more than half of the gas consumed in Turkey comes from just two pipelines, the Gas-West Pipeline and the Blue Stream Pipeline, each with a capacity of 16 billion cubic meters (bcm).

To make matters worse, both of those pipelines also travel through Ukraine. The violence between Kiev and Russian-backed separatists, as well as the pricing dispute between Gazprom and Ukraine, raises red flags for the reliability of Turkey’s energy supplies.

Moreover, rising domestic demand and a shortage of gas storage capacity adds to Turkey’s woes.

Nevertheless, Turkey is looking to diversify its sources of natural gas through the construction of several new pipelines, and in doing so, it will become a major transit hub for gas between the Middle East and Europe.

turkey gas supplies

The Black Sea, or the Caspian?

Eager to cut out Ukraine for its own political purposes, Russia has put forth a pipeline proposal to send gas to Turkey beneath the Black Sea. Although still in the early stages, the Turkish Stream Pipeline is an alternative to the now-defunct South Stream Pipeline, which was scrapped amidst European Union pressure for violating antitrust rules.

Turkey is open to the Turkish Stream Pipeline, as it would add 63 bcm of natural gas import capacity that would not have to travel through Ukraine. But Russian and Turkish officials have yet it iron out the details, including pricing. Negotiations have been delayed until after Turkey’s November elections.

Meanwhile, another project that will open up long-distance gas flows is the Trans Anatolian Pipeline (TANAP), which will carry gas from the Caspian Sea in Azerbaijan through Turkey. The 1,150-mile pipeline will link up with the Trans-Adriatic Pipeline (TAP) at the border with Greece and Bulgaria. TAP will then travel through Greece and onto Italy via the Adriatic Sea. When TANAP and TAP are completed (in 2019 and 2020, respectively) Caspian gas will reach Italy, tying into the rest of Western Europe from there.

turkish stream

The Turkish Stream Pipeline. Source: Gazprom

tap and tanap

TAP and TANAP. Source: TAP Consortium

Europe is heavily pushing this “Southern Gas Corridor,” while Russia is pushing for its Turkish Stream. The latter faces tougher odds of actually reaching completion, and the lack of pricing details or information about who will pay for the project cast very large doubts upon its viability.

But from Turkey’s perspective, it is best to simply keep all options open. With demand for gas rising so quickly within Turkey, there is probably room for both projects. At the very least, Turkey can use its strategic location as leverage in negotiations for any and all proposed pipelines with its neighbors. Russia has seen its options dwindle as the EU has not only blocked South Stream, but has also imposed sanctions on Russia and is moving to diversify away from its eastern neighbor.

Fed up with battling over pricing with Kiev, Gazprom’s Deputy CEO Alexander Medvedev said in June that by 2019 his company would no longer export gas to Europe through Ukraine. That bravado could play into Turkey’s hands, as Turkey has suddenly become a vital puzzle piece to Russia’s regional ambitions.

Pipelines for Kurdistan

Turkey’s growing importance for international markets could ultimately determine if Kurdistan is able to separate itself from Iraq as an independent state.

In late July, an oil pipeline that travels across the Iraqi-Turkish border was attacked by PKK (the Kurdistan Workers Party) rebels. The attack interrupted the flow of oil to the Turkish port of Ceyhan on the Mediterranean coast. On August 4, PKK attacked a natural gas pipeline from Azerbaijan to Turkey, disrupting flows.

Turkey’s growing importance for international markets could ultimately determine if Kurdistan is able to separate itself from Iraq as an independent state.

The string of attacks came after air strikes on PKK targets from the Turkish military, which in turn, were retaliation for the killing of Turkish police officers. The series of violent reprisals have reignited a conflict that had been kept at bay for several years.

Although the PKK fighters are Kurdish, the Kurdish Regional Government (KRG) in Iraq was certainly not pleased with the group’s military moves. The principle source of revenue for the semiautonomous region of Kurdistan is oil exports—through Turkey. The KRG estimates that the pipeline attack and the interruption of oil exports has cost it at least US$501 million between July 1 and August 17.

The collapse of oil prices, along with the breakdown of an oil-export arrangement between the KRG and the Iraqi government, has led to an extreme shortage of funds for the Kurdish government in Erbil. The KRG expected to receive 17 percent of national revenues from Baghdad, but that money has failed to materialize. With funding cut off from Baghdad, the KRG has struggled to pay public workers, the Peshmerga (its militia), and even private oil companies operating within its territory.

The fiscal squeeze prompted a bold move by Erbil to begin exporting oil on its own, without the approval by the Iraqi government. The KRG says that it exported about 516,000 barrels per day in July, and only 71,000 barrels per day was sold under the auspices of the Iraqi government. And of course, due to its location, the Turkish port of Ceyhan has become the sole transit route for Kurdistan’s oil exports.

Kurdistan may not achieve full independence from Iraq anytime soon, but it is slowly building the foundation for an independent state. It has its own government, its own security forces, and increasingly, its own economy largely based on oil exports. However, the viability of an independent state hinges on access to the international market via pipelines through Turkey.

Central Asia and the Middle East

Turkey lies at the heart of other energy-related maneuverings, even if some are unlikely to come to fruition.

In addition to the TANAP pipeline mentioned above, any expansion of oil and gas production from the Caspian will likely depend on Turkey. The Baku-Tbilisi-Ceyhan Pipeline (BTC), completed in 2006, transformed Azerbaijan’s energy sector, allowing the country’s oil to reach the Mediterranean via Turkey. The BTC pipeline accounts for about four-fifths of Azerbaijan’s more than 700,000 barrels of oil that is exported.

But there hopes for regional expansion of energy exports. One project that has been on the drawing board since the 1990s is the Trans-Caspian Pipeline, which would connect natural gas from Turkmenistan to Azerbaijan, and ultimately through Turkey to Europe. Russian pressure has kept the project from moving forward. After spending years on the shelf, the European Union is once again taking a look at the pipeline, no doubt fueled by a desire to find alternatives to Russian gas.

However, what could make the Trans-Caspian Pipeline more than just a dream is the completion of TANAP, the project that will run from the Caspian through Turkey. The Trans-Caspian Pipeline could tie into TANAP, allowing Turkmenistan to export gas to Europe. It remains to be seen if opposition from Russia can be overcome.

Iran also opposes the Trans-Caspian Pipeline, and has sought to block the project by citing territorial disputes and potential environmental damage. In reality, Iran is trying to position itself as a major gas supplier to Turkey and the rest of Europe. Iranian officials have dismissed the Trans-Caspian Pipeline as “expensive and uneconomical.” Instead, it said Turkmenistan should export gas through Iran.

Iran wants to build a pipeline that will connect its vast South Pars gas fields to Turkey, allowing for large-scale exports to Europe.

Turkey already imports around 10 bcm of gas from Iran, but with sanctions set to be removed from Iran in the near future, Tehran is thinking bigger. Iran wants to build a pipeline that will connect its vast South Pars gas fields to Turkey, allowing for large-scale exports to Europe. However, due to high-costs, political obstacles, and competition with rival pipeline projects, this idea will likely remain on the drawing board for many years.

To Turkey’s south, in the Mediterranean, is one more pipeline consideration, which faces the longest odds of ever reaching completion. The discovery of natural gas fields off of Israel’s coast has sparked interest from Europe, again, looking for alternative suppliers. The idea would be for a pipeline to run from the offshore gas fields to Turkey, and then on to Europe. But for a variety of reasons, this one looks unlikely.

Turkey as an Energy Hub

The key to all of these competing pipeline projects is Turkey. Turkey has anxious oil and gas producers to its north, east, and south, all racing to build pipelines through Turkey to reach the west.

Turkey literally sits between Europe and Asia, and as such, it is a crucial transit hub for Eurasian oil and gas resources.

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