Energy Geopolitics: Implications of the Black Sea Gas for Turkey

By THO Nonresident Fellow, S. Suha Cubukcuoglu

Year 2020 was a major breakthrough for Turkey in the energy arena. The state-owned Turkish Petroleum (TPAO) announced in August 2020 discovery of 320 billion cubic meters (bcm) of natural gas in Tuna-1 field, 83 miles off the coast of Sakarya on the Black Sea coast. An additional discovery of 85 bcm in October 2020 increased the total size of the deposit to 405 bcm, putting Turkey among top European nations in the offshore energy field. At a time of significant setback in global gas exploration and investment due to the Covid-induced economic recession, the Turkish Ministry of Energy’s initiative on expanding its national drilling and seismic vessels has finally seems to have paid off. Fatih Birol, the Executive Director of the International Energy Agency (IEA) estimates the total worth of the field as it stands to be $80 billion, which is about 9% of Turkey’s GDP. The additional amount may increase its value to $100 billion. This is a significant figure for Turkey that runs large trade deficits with developed countries of the West as well as emerging markets of the Asia-Pacific region. Notably, Turkey imports 75% of its total energy demand; it depends on import of natural gas to meet 95% of domestic consumption. By the end of 2019, out of $41 billion paid for energy imports, about $12 billion went towards imported gas, which is sourced from a variety of countries in the region and beyond. For Turkey, energy security means access to affordable, sustainable, and reliable resources to maintain an annual GDP growth rate of 5%+.

Turkey’s Gas Deposits, Location of Tuna-1 Field in the Black Sea

Source: TRT World, 2020

The amount of gas in the Black Sea Tuna-1 deposit is a mid-size discovery and it is larger than most reserves in the East Med. In fact, it is roughly equivalent to Greek Cypriot findings to date all combined. The Tuna-1 field would normally take one or two years to do appraisal runs and determine the exact volume feasibly recoverable from the field. Then, another four to five years would be needed to implement the chosen transport option, taking in total of about six to seven years to monetize the project. Turkey, however, has set an ambitious goal to productionize the field in 2023 by the republic’s centennial anniversary, by then to have completed all the required steps. The net impact would be to reduce Turkey’s energy dependence on Russia. The geopolitical challenge for Turkey in the energy realm is excessive dependence on pipeline gas with unfavorable contract terms from Russia, Iran. Turkey should, first, use buyer’s advantage in an over-supplied gas market to re-negotiate its pipeline contracts in the short-to-mid-term; second, continue to increase the scale and volume of LNG imports to replace inflexible pipeline input; and third, develop off-shore gas in the Black Sea as a priority in the mid-to-long-term for domestic consumption.

To be sure, the economic impact of import-dependence in energy is severe. Turkey’s current account deficit on a 12-month rolling basis is $23 billion, or at 3% of the GDP, which runs down the country’s precious foreign currency reserves, puts pressure on the Lira, raises inflation to double digit figures, and causes budget deficits. Until recently, Turkey’s borrowing cost had been among the highest in the league of developing countries. Monetization of the Black Sea discovery can potentially reduce the current account deficit by $2 billion per year. Connection into the main grid, even if at a three-to-four-year horizon, would provide Turkey with a significant advantage in talks vis-à-vis main pipeline gas and LNG suppliers, namely Russia, Iran, and the US. This is an opportunity for Turkey to negotiate contract renewals on competitive terms that provide flexibility to make necessary adjustments in an increasingly buyer’s market. The US has overtaken Russia in share of gas supply to Turkey recently as LNG spot prices plummeted due to Covid-19 economic downturn, supply glut, and slide in demand. There has been a fine balance between long-term contractual pipeline imports in Turkey’s energy mix and LNG supplies from the US, Middle East, and Africa. As Russia’s weight in the Turkish gas market shrinks, the Black Seas gas gives Turkey additional maneuverability to build the best energy mix in its portfolio, to subsidize renewable energy projects, and to have freer hand in charting the course of its regional foreign policy.

As the share of Russian and Iranian gas in the Turkish market shrinks due to the global oversupply, overcapacity, and low spot LNG prices, there is a window opportunity to improve US-Turkey relations via greater cooperation in energy trade. Indeed, LNG is a vital part of the bilateral trade partnership. Turkey imported 29% of its gas demand via LNG in 2019. This figure is bound to increase dramatically in 2020 as the first half witnessed 45% growth in LNG delivery against 23% drop in pipeline imports. The share of US in the Turkish LNG market increased by a whopping 144% on a year-over-year basis. Lower CO2 emissions compared to coal, market liberalization, and projected demand increase for 15+ years in natural gas are what make this investment an attractive option as a transition solution. Also, relatively globalized, competitive price discovery process places LNG above alternative fuel commodities. Turkey should expand its Floating Storage and Re-Gasification Unit (FSRU) fleet, perhaps with one in the Mediterranean and another in Black Sea region, to make best use of LNG intake. Also, geopolitics of LNG brings Turkey’s relations with the US, Russia, and Qatar in the wider region under the spotlight. Emergence of these three major players will force more interconnectedness and intensify competition in the coming decade. Notably, LNG supply and demand are expected to tighten in the mid-term primarily due to lack of infrastructure investment and uptake. As prices rise and Turkey prepares to monetize the Black Sea gas, the US can keep its share in Turkey’s growing, lucrative gas market and Turkey can benefit from hub-indexed prices through smart contracts with US exporters. Energy trade is a key contributor to the goal to increase US-Trade bilateral trade volume from $19 billion to $100 billion.

Meanwhile, ExxonMobil, Chevron, and Shell announced cutbacks on spending and capital investment for 2020-21 and put high-cost projects with uncertain outlook like Cyprus Aphrodite in Eastern Mediterranean (East Med) Block-12 on delay. By comparison, East Med gas, is expensive to produce. It faces political risk not to mention price risk and market off-take risk. Deep, uneven seabed contours put an epic engineering challenge to extract and export gas via Egypt, Greece, or Cyprus. In the Covid-19 era, projects compete for limited viability, resources, and appraisal while large energy companies are after quick, cheap, and guaranteed returns. As Turkey pushes ahead with the Black Sea gas project, deposits beneath the East Med may remain there indefinitely unless parties reach a comprehensive settlement to resolve their differences over disputed maritime zones and agree on options to monetize gas extracts. Turkey’s self-reliance on gas exploration strengthens its hand to continue unabated with offshore development. It may also consult with US firms to productionize gas deposits in Tuna-1 field as they have capabilities and physical presence to assist the TPAO in this project. In the short-term, Turkey remains import-dependent in energy, but the Black Sea discovery is a key steppingstone, a landmark achievement in the path towards energy independence. 

The economic cost of Covid-19’s disruption to supply chains leads to de-globalization and countries start to give more priority to domestic energy sources to increase their resilience. Natural gas is a cleaner, more critical fuel compared to oil and coal. The supply glut and low prices in the new era require a strategic realignment in Turkey’s gas policy. Clean energy transition on the path to reaching climate goals and net-zero emissions should guide Turkey’s gradual shift towards using higher share of local and renewable resources in power generation. In May 2020, Turkey generated a record 94% of its electricity from local resources. This trend should continue as the Turkish government disincentivizes carbon-intensive fuels, deactivates imported-coal plants, and switches to gas and renewables for industry production and electricity generation in order to reduce carbon emissions. As US shale producers switch from oil to gas exploration due to changing market dynamics, Turkey is set to take advantage of the buyer’s market in the short-to-mid-term and increase its energy trade volume with the US. Expiry of long-term supply contracts with Russia and Iran plus the US State Department’s sanctions on the TurkStream 2 pipeline open up space for growth in Turkey’s LNG trade. This is an important window of opportunity to bridge the gap until Black Sea Tuna-1 field is ready for production and a catalyst to develop US-Turkey bilateral relations. In this regard, off-shore gas development is a capital intensive, mid-to-long-term engagement and it can only complement other measures to balance potential shortages in Turkey’s energy mix. It is, however, a geopolitical breakthrough that Turkey should nevertheless continue to develop to meet domestic gas demand during the transition period to renewable energy.