Turkey: A Hub In The EU’s Future Gas Supply Architecture?

By - Simone Tagliapietra*

Heightened EU-Russia tension has again focused attention on Europe’s security of gas supplies, and in particular its reliance on Russia. Could EU efforts to diversify supplies boost long-mooted cross-Turkey routes?

In recent years Turkey has been associated with concepts such as “energy corridor” and “energy hub,” mainly due to its unique geographical position at the crossroads of the Caspian region, the Middle East and Europe. International discussions have particularly focused on natural gas. This latest trend has been led by the EU’s quest for a new “Silk Road” to diversify natural gas imports, and in particular diversify away from Russia.

A NEW ‘SILK ROAD’?

In January 2006, after a long disagreement over gas prices, Russia cut off supplies to Ukraine for three days, and Ukraine halted onward shipments to Europe, leaving some central European countries with gas shortages. This led the European Commission to adopt a double strategy to enhance the EU’s security of natural gas supply. The EU would strengthen its internal energy market to facilitate natural gas flows between member states whilst, at the same time, further diversifying natural gas sources. This would be acdieved by the construction of LNG receiving terminals in central and southeast Europe, but also the pursuit of a ‘Southern Gas Corridor’ to bring natural gas from the Caspian and Middle East to Europe. Nabucco, a 3,800km, 31 bcm/year pipeline to carry natural gas from Azerbaijan, Turkmenistan, Iraq and Egypt to southeast and central Europe via Turkey, soon became the flagship project of the Southern Gas Corridor.

The implementation of this strategy was accelerated after a second major Russia-Ukraine natural gas crisis in January 2009. The consequences of this crisis were even worse than the previous one: the transit of Russian gas through Ukraine was completely cut for two weeks, causing humanitarian crises in several Central and Eastern European countries.

But despite the EU’s strong political support, Nabucco displayed a number of weaknesses: the highly uncertain EU natural gas demand outlook, potential competition from Russia’s alternate South Stream pipeline, and the project’s uncertain financing. Taking into account the insurmountable commercial and financial barriers faced by Nabucco, other players started to propose alternatives: the South East Europe Pipeline (SEEP), the Azerbaijan-Georgia-Romania Interconnector (AGRI), White Stream, Nabucco West, the Interconnector Turkey-Greece-Italy (ITGI) and the Trans Anatolian Pipeline (TAP).

Of potential suppliers, Azerbaijan was the most interested in quick development of the Southern Gas Corridor, due to investments already made on its Shah Deniz natural gas field and to the need to reach a final investment decision (FID) for Shah Deniz Phase II (a decision finally taken on 17 December 2013). For this reason, Azerbaijan sped up the process and rapidly conceptualized the TANAP project to carry future Shah Deniz Phase II gas to Turkey. In December 2011 Azerbaijan and Turkey signed an MOU to establish a consortium to build and operate the pipeline. This initial step was followed by a binding intergovernmental agreement on TANAP between Azerbaijan’s President Aliyev and Turkey’s Prime Minister Erdo─čan in June 2012. Moreover, in June 2013 the Shah Deniz consortium chose the TAP project to fill the gap between TANAP and the European market. TAP will thus constitute, together with TANAP, the first materialization of the Southern Gas Corridor.

The debate on the various infrastructural options of the Southern Gas Corridor has brought Turkey to the forefront of international natural gas markets, further enhancing its relevance in terms of future regional energy transit. But is Turkey really likely to become a regional natural gas hub? In order to fully answer this question, it is necessary to provide a comprehensive overview on the future prospects of natural gas cooperation in the region, particularly focusing on the prospects for the Southern Gas Corridor beyond TANAP and TAP.

The first materialization of the Southern Gas Corridor will be represented by the pipeline-tandem TANAP/TAP. In short, the 16 bcm/year of gas that will be produced in Shah Deniz Phase II will flow through a new parallel of the South Caucasus Pipeline (SCP) across Azerbaijan and Georgia to the Turkish border. From here, the gas will flow through Turkey via TANAP, to reach the Turkey-Greece border. At this point, the 10 bcm/year of Shah Deniz Phase II gas devoted to the European market will flow via TAP through Greece and Albania to Italy, its final destination. The target date for the first gas exports from Shah Deniz Phase II to Turkey is 2018, while the one to Europe is 2019.

TURKMENISTAN: LOOKING EAST

Besides Azerbaijan, the Southern Gas Corridor has been generally expected to carry natural gas to the EU from Turkmenistan, Iraq, and – in the longer term – Iran. But what should we expect regarding its potential development?

A special natural gas relationship is being established between Turkmenistan and China, and this liaison is likely to consolidate further in the future. However, given its world-class natural gas reserves, Turkmenistan could well be in the position to supply natural gas to Turkey and to the EU – in addition to the major volumes targeting the Chinese market. But two major barriers will likely make such a development unfeasible, at least in the medium-term: the first is the current lack of interest of the EU gas market due to its stagnant gas demand, and the second is the infrastructural problem related to the divergences existing between Russia, Iran, and Turkmenistan on the legal status of the Caspian Sea, and therefore on the construction of the proposed Trans-Caspian Pipeline which would be needed to link Turkmenistan with the Azerbaijan-Turkey-Europe route.

In order to try to bypass this problem, in 2010 Eni proposed to Azerbaijan and Turkmenistan a CNG (compressed natural gas) project that would permit the transport and transit of considerable volumes of Turkmen gas across the Caspian Sea to Azerbaijan, from where it would be transported by pipeline to other destinations. At the time, this project was halted by Azerbaijan, as it did not want Turkmen gas to compete with its resource development. Such a project could be revived in the future if Azerbaijan temporarily needed additional volumes to fill TANAP, while waiting for additional Shah Deniz production. However, this solution would likely be very costly and very limited in both time and volumes.

For these reasons, the aspiration of the EU to bring major volumes of Turkmen gas into the Southern Gas Corridor will likely need to be shelved, at least until the dispute over the legal status of the Caspian Sea is finally resolved and the EU’s natural gas demand fully recovered, leading the EU to seek substantial volumes of additional gas imports.

IRAQ: KRG TAKES THE LEAD

Iraq’s natural gas scenario is radically changing because of the enormous natural gas reserves being discovered in the country’s semi-autonomous Kurdistan region. This northern region is actually paving the way to the emergence of Iraq as world-class natural gas province.

The development of Iraqi Kurdistan’s natural gas reserves will first target the domestic market. In fact, the Kurdistan Regional Government (KRG) has already more than tripled its target for installed natural gas-fired power generation capacity.

In a second phase the KRG will export part of its natural gas to Turkey. In November 2013 Ankara and the KRG signed a Gas Sales Agreement governing the export of KRG gas to Turkey. The deal calls for an initial 4 bcm/year of natural gas exports from 2017, rising to 10 bcm/year by 2020 and the option of increasing to 20 bcm/year thereafter.

Considering the major amount of natural gas reserves being discovered in the KRG, gas exports from the region to the EU could also materialize after 2020. However, such a development will require a strong commitment on the EU natural gas demand side, at least at a sufficient level to justify the development of a dedicated infrastructure to evacuate Iraqi natural gas to Europe.

IRAN: UNFULFILLED POTENTIAL

Iran is the perennial “elephant in the room” of the international gas trade, a country that could, one day, become a major game changer of international gas markets, but whose potential still remains fundamentally untapped due to a number of geopolitical and commercial reasons. The main reason for the current under-exploitation of Iran’s natural gas resources is clearly linked to the difficult political relations that have evolved over the last decades with the West. The initial nuclear deal reached last November in Geneva between Iran and six world powers represents just a first step toward a truly complete resolution of the Iranian nuclear issue, but it could be seen as a positive sign for the future. If a further thawing of relations follows great opportunities could open up in Iran, including the natural gas sector.

Considering the geographical location of Iran’s natural gas reserves (predominantly concentrated in the Southern part of the country, offshore the Persian Gulf), such a development will likely first interest the global LNG market before tapping the EU market via pipeline is considered. Furthermore, the first international pipeline that the country will likely develop will not target the European market, but the Asian market. Iran is already working on a pipeline to Pakistan with a view to also targeting India, whilst Chinese interest in Iran’s natural gas reserves is also very strong. For these reasons it seems that in the medium-term Iran would hardly fit into the Southern Gas Corridor concept, as it will first target the global LNG market and Asian markets via pipeline.

Moreover, even a full resolution of the nuclear issue will not automatically change the Iranian natural gas outlook in a short period of time, as a number of commercial barriers will likely remain on the table. In fact, in the energy industry there is a general awareness of the difficulty in developing energy projects in Iran, a difficulty mainly due to the complex institutional and regulatory environment of the country. In particular, the struggle for economic independence desired by Iran since the 1979 revolution has led to very restrictive opportunities for participation by foreign companies, notably under the so-called buyback scheme. A process of revision of the country’s petroleum legal framework is currently ongoing and its eventual success will be a crucial factor in shaping the country’s future oil and gas sector.

TURKEY A HUB? NOT ANYTIME SOON

So does Turkey have the potential to become a regional natural gas hub?

Looking at the medium-term horizon (up to 2020) the answer is no. In fact, looking at the numbers characterizing the Southern Gas Corridor, within this timeframe it will not be possible to expect more than 10 bcm (from Shah Deniz Phase II) to flow through Turkey to the EU. This amount certainly represents a historical step – as it will be the first concretization of the long-lasting Southern Gas Corridor odyssey – but it will not radically change the EU’s natural gas security of supply architecture. In fact, 10 bcm by 2020 represents less than 3% of the EU’s natural gas import needs: a level equal to the one currently covered by Nigeria.

Looking at the long-term horizon (after 2020), the answer to this question is highly uncertain. In this time frame, Azerbaijan could be able to supply more volumes of natural gas to the EU, and Iraq could also be in the position to supply some natural gas volumes to the EU from the KRG. Furthermore, Turkmenistan could be in the position to supply a considerable amount of natural gas (20-40 bcm/year) to Turkey and to the EU and Iran could well have the potential to improve its natural gas supply to Turkey.

In short, as indicated by the hypothetical tone of these sentences, a number of factors will determine whether Turkey becomes a regional natural gas hub in the long-term. What seems to be certain is that the real underlying force of this development will not come from the supply side, but instead from the demand side. In the long-term, natural gas producing countries located around Turkey will likely have the potential to export significant volumes of gas to the EU, but this potential will ultimately become a reality – overcoming current infrastructural, commercial, and political barriers – only if the EU actually requires substantial volumes of natural gas supplies. After all, energy security has two mutually supportive sides – security of supply and security of demand; one cannot exist without the other.

* Simone Tagliapietra is a Researcher at the Fondazione Eni Enrico Mattei (FEEM) and Visiting Researcher at the Istanbul Policy Center (IPC). The views expressed are his alone. Comments and feedback may be sent to [email protected]