LNG imports competitive for Turkey, but barriers persist

Author: Aura Sabadus


Aura Sabadus and Patrick Sykes

LONDON (ICIS)--Spot LNG could undercut Russian pipeline gas flowing into Turkey as LNG prices become more competitive globally.

However, onerous take-or-pay conditions and restrictive regulations are blocking companies from taking advantage of the opportunities that are opening up.

Data shows that LNG prices are set to drop below estimated Russian pipeline prices to Turkey between March and September of this year, with the LNG price set to drop to $6.44/MMBTu, widening the discount to a maximum $1.07/MMBTu in July.

But the spread could flip back from October when LNG prices are forecast to hover above Russian pipeline values.

Turkish LNG imports

Contract and spot LNG import volumes have been on a rising trend in Turkey in recent years, increasing by as much as 39% year on year in 2017, according to regulator EPDK data.

Volumes then rose further, by 13% year on year in the first ten months of 2018, but the figure is expected to be much higher for the full year as Turkey ramped up its imports throughout the cold season.

The most recent increase comes despite a milder winter in Turkey so far this year, suggesting BOTAS either overestimated domestic consumption or favoured LNG for its flexibility.

In contrast, overall pipeline imports in 2017 fell by 17% year on year, and by 14% in the first ten months of 2018, according to EPDK.

If spot LNG prices were to remain competitive against pipeline imports, Turkey should continue to turn to the fuel to meet demand, particularly at a time when its economy is underperforming and would benefit from cheaper LNG to make its energy sector more competitive.

The country has doubled its send-out capacity to 110mcm/day over the last two years and therefore enjoys sufficient flexibility to import volumes.

Nevertheless, several obstacles are blocking it from taking full advantage of the opportunities that are opening up.


A first barrier relates to a contractual take-or-pay requirement embedded in long-term contracts with Gazprom, which requires Turkey’s state company BOTAS and independent importers to off-take a minimum of 80% of their contracted pipeline gas.

As Turkey’s gas demand fell by 9% year on year in the first 10 months of 2018 and is likely to remain on that trend at least into the first half of 2019, companies will barely be able to meet their take-or-pay requirement.

In a functional market, the take-or-pay condition should not create a problem, as companies would be allowed to resell the surplus. In Turkey, however, that is not possible as companies are blocked from re-exporting the gas under conditions embedded in their supply contracts.

Sources at two private Turkish companies with licenses to import spot LNG told ICIS they did not expect to use them in the near future despite the favourable price dynamics.

“It’s not possible now to import LNG in the current market,” said one. “Consumption isn’t getting higher, weather conditions are warmer and BOTAS is supplying LNG, so we can’t compete with them.”

Both sources said minimum offtake requirements in their pipeline import contracts with Gazprom mean they are unlikely to enter the LNG market later in the year even as prices fall further.

“The pipeline contract has some obligations in summer. We can’t just cut that and replace it with LNG,” one said.

Restrictive regulations and tariffs

Furthermore, the Turkish government itself is blocking the export of gas.

Under the country’s natural gas market law 4646 of 2001, companies need to obtain separate licences for any imported or exported volumes, providing proof of bilateral contracts and informing the regulator EPDK of the terms of the contracts.

Policy-makers previously sought to scrap the requirements and allow spot trading on the border, but the process stalled and no more progress is expected.

Thirdly, even if take-or-pay and re-export restrictions were lifted, Turkish companies would still be cautious to enter the global LNG market. This is because the price of gas to domestic consumers is regulated and therefore buying LNG is competitive only if global prices are cheaper than the domestic tariff.

But they are expected to get there: In recent years, the spread had been negative as the Turkish government failed to raise the tariff for fear of alienating consumers ahead of elections.

However according to the current forward curve, if the benchmark regulated tariff to gas-fired power plants remains at TL1,550.00/thousand standard cubic metres (kscm) and the Turkish lira exchange rate remains stable, LNG could be competitive for private LNG licence-holders.

This means that when converted into US dollars at the forward exchange rate, the Q3 tariff could hover around $7.18/MMBTu, putting it at a $0.74/MMBTu premium over the LNG Q3 ’19 price to Turkey.