Could Turkey become a gas benchmark for the Eastern Mediterranean?

Turkey’s recent natural gas discovery could have a huge impact on the country’s future energy needs beyond just having a 320 billion cubic meter gas reserve.

The discovery could be a turning point for Turkey’s aspiration to establish itself as a virtual gas trading hub (VTP) for the spot gas market, utilising its location between Europe and the Middle East, and now in the middle of newly found gas reserves.

As the only country in the Eastern Mediterranean where hub-based spot natural gas is available, Turkey is also drawing closer towards its ambition of creating a robust free trade mechanism on natural gas.

Yet, any possible natural gas bonanza in the Black Sea is not the only condition to accomplish such a complex goal.

The country has a few obstacles to overcome before fulfilling this ambition.

Many of the oil-indexed, “take-or-pay” contracts signed with Russia, Iran and Azerbaijan will end between 2021 and 2026 and amount to more than 35 billion cubic meters (bcm) per year. Yet Turkey is working on a formula to get the United States’ and many other countries’ natural gas priced as “Istanbul Benchmark” and sold through Turkey. An ambitious goal, indeed.

Gazprom in Europe

“The US does not need to be against Nord Stream 2 or any Russian gas sold to Europe because Gazprom bows down to the European Union by accepting their rules,” said a senior analyst to me who works with the Turkish government on energy policy.

At the end of 2018, Gazprom had to reform its pricing structure and allow clients to demand lower prices when these diverge from benchmarks such as in Western European gas market hubs.

“More Russian gas sold in Europe doesn’t mean Russia has a bigger influence or Russia makes more money. Competitive gas market prevents this,” the analyst said.

Meeting Point

Turkey now needs to do more to capitalise on its recent energy discovery.

“Now, when Russia sells more gas to Europe, it does not necessarily mean that it dominates the market. They lifted the lengthy, oil-indexed ‘take or pay’ contracts and accepted re-exports which were necessary for a free and competitive market. Russia’s gas contracts with Turkey are coming to an end, starting from next year.”

Turkey's new gas reserves, while not sufficient to meet the country's needs by itself, strengthen its bargaining position when it comes to negotiating new contracts with Russia, Iran and Azerbaijan.

“If Turkey gets Russia to sign a different contract like the European Union, then Turkey can be an energy hub in the region in which Turkish, American, Russian, Azerbaijani, Egyptian, Algerian and possibly Israel's gas meets and gets delivered to the market.”

The analyst said it would be a significant positive side effect of the newly found gas reserves. Turkey aims to develop its trade hub under management through the Turkish Energy Stock Market (EPIAS).

Dr Sohbet Karbuz, the director of the Mediterranean Observatory for Energy (OME) told me recently, “even if all the requirements are met for Turkey to become a regional gas hub, selling the American Liquified Natural Gas (LNG) would not be viable."

The biggest challenge for Turkey, he said, is "to stick with liberal, competitive and free-market rules in order to become a regional gas hub."

The biggest challenge for Turkey, he said, is "to stick with liberal, competitive and free-market rules in order to become a regional gas hub."

The country has been consistently increasing its LNG imports based on its energy diversification policy. 

According to Turkey’s Energy Market Regulatory Authority reports, the share of LNG exports rose to 28 percent in 2019, which is an all-time high after signing long-term contracts with Russia, Iran and Azerbaijan. 

It was 13 percent in 2013 and 22 in 2018. Thanks to recent investments in gas infrastructure, especially in LNG, Turkey’s daily gas entry capacity to the grid reached 320 million cubic meters (mcm). The goal is to increase this capacity to 400 mcm per day.

Luckily for Turkey, no natural gas trading hub exists near the Eastern Mediterranean and the Black Sea. The nearest liquid hub is the TTF (Title Transfer Facility) based in the Netherlands. It allows Dutch gas to be traded through a virtual trading point, an example Turkey may take as a model.

Similarly, the UK’s NBP (National Balancing Point) runs Europe’s second-most liquid gas trading point in Europe without any actual physical location for deliveries. If more reserves are proven in the Black Sea and possibly in the Eastern Mediterranean, it would mean a boost for Turkey’s plans.

Re-exporting Russian Gas

The real challenges lie in the content of the long-term deals signed with Russia, Iran and Azerbaijan as well as redefining the local energy regulations, according to Eser Ozdil, the founder and manager of the Glocal Group.

“Turkey has a very sturdy infrastructure to become the region’s trading hub. It has a huge pipeline grid, good LNG infrastructure and sufficient supply. It has been investing a lot in the infrastructure. But take-or-pay contracts with respective are against the building of an internationally strong trading hub since Russian gas can’t be re-exported and the price of the gas depends on oil, which causes a huge uncertainty on the market.”

Discovering new natural gas fields would not be enough to turn Turkey into a trading hub in and of itself, according to Ozdil. 

“Look at Russia, Iran and Qatar. They have huge gas reserves, but none of them has a natural gas trading hub. Further liberalising the gas industry would be a boost for the efforts to develop EPIAS. The trading hub needs free trade without much involvement from the state.”

He claimed that redefining the role of state-owned Petroleum Pipeline Company (BOTAS) and cutting state subsidies would help Turkey to get closer to its aims, namely the one and only trading hub in the region.

Although Natural Gas Law No. 4646, accepted in 2001, principally accepts that BOTAS’s role should be diminished in order to give private companies a wider place just as is the case for the electricity sector, this has never been realised. He says the Turkish state has so far been cautious about controlling the gas industry which is considered critical for domestic energy prices.

Last year, in an article published in Foreign Policy, professor Michael Tanchum, a senior fellow at the Austrian Institute for European and Security Studies (AIES), mentioned EPIAS as a platform on which the regional gas trade can be built.

While suggesting the creation of a virtual trading exchange in Cyprus’s neutral zone, Tanchum says “the trading of contracts could be conducted, at least in part, through Turkey’s Energy Exchange Istanbul, which is managed by EPIAS. A leading institution of its kind in the Eastern Mediterranean, EPIAS is at the forefront of liberalizing Turkey’s energy market and has established an excellent track record in operating an electricity trading market, ensuring transparent and reliable market conditions and equal access for all market participants.”

Turkey’s energy ambitions look promising. Like the Netherlands, who spent years to establish TTF, Turkey may have to spend a considerable amount of time to negotiate new contracts with Russia, Iran and Azerbaijan and apply free-market rules on her natural gas market.