Although the imminent expiry of two Gazprom contracts and the release of capacity on certain sections of the Western Line will not affect Turkey directly, the country’s role should not be underestimated since it has the potential to transform the region within the next five years.
The pipeline has been transporting natural gas from Russia to Turkey and Greece via Ukraine, the Republic of Moldova, Romania and Bulgaria for three decades, being controlled by Russia’s Gazprom.
However, with the expiry of two contracts at Romania’s interconnection points with Ukraine and Bulgaria, capacity will be freed up to third parties, bringing much-needed competition to the region.
Of equal importance is the fact that capacity on the Bulgarian-Greek border has also become available earlier this summer thanks to the latest changes to the EU’s network codes, which include requirements to harmonise the allocation of capacity in pipelines as well as streamline gas trading, gas transmission and data exchange.
This, in effect, will help to establish a bidirectional north-south corridor linking Ukraine to Greece and pave the way for the launch of a gas market.
The four countries have already signed interconnection agreements, and Romania will hold its first capacity auctions on its border with Bulgaria on 5 September.
Despite the great opportunities that these changes usher in, their success relies on securing gas volumes.
In this context it is important to stress that the most obvious source of supply would still be Russia’s Gazprom. Even so, the changes that come will give the region’s private companies the opportunity to source their gas from Russia and sell it independently of Gazprom. Nevertheless, any contracts that would be signed in EU member states would have to be compliant with EU anti-trust rules, testing Gazprom’s behaviour in eastern Europe, as a former diplomat put it in an interview with ICIS.
New sources of natural gas that arrive in the region from the Caspian and the Black Sea by the end of the decade should introduce an element of competition, but the period between now and 2020 will be critical. It is here that Turkey’s role cannot be underestimated.
Gazprom has signed a number of supply agreements with Turkey’s private importers and the incumbent BOTAS, which amount to a contractual annual volume of 14 billion cubic metres (bcm). The volumes are delivered on the Western Line. Five supply contracts with BOTAS and four private importers will expire in 2021. The remaining four contracts will be phased out between 2036 and 2043.
This means that Turkey’s interconnection with Bulgaria on the Western Line will not be available for third-party access until at least 2021.
Nevertheless, Turkey could fast-track the construction of its interconnector with Bulgaria and establish reverse flows with its western neighbour. The link is in fact considered a project of common interest (PCI) by Brussels and Turkey could benefit from EU funding as a result.
On the other hand, Turkey could boost the existing interconnection capacity with Greece and establish reverse flows on the border.
Although Turkey has experienced gas supply constraints in its high-consumption northwestern Marmara region in recent years, its plan to expand its LNG capacity would be of great importance both for its own market as well as that of the region.
Within less than six months Turkey should receive its first floating storage and regasification unit (FSRU), which will be located on the western Aegean coast near the existing onshore LNG terminal at Aliaga. The terminal will have a 5 billion cubic metre capacity, half of which will be available for private companies, according to the latest tender announcement published by the regulator EPDK.
There are plans for at least another four offshore projects dotting Turkey’s western coastline from Canakkale in the Marmara Sea down to the Mediterranean Bay of Anatakya, which could boost supplies and allow enough flexibility for Turkey to start exporting volumes.
Although LNG prices were prohibitively expensive after the Fukushima nuclear disaster, they have started to fall thanks to a global oversupply. This means that LNG volumes will be able to compete with pipeline imports on price.
Turkey – a major gas exporter?
Although Turkey is now in talks with Russia’s Gazprom to build TurkStream – a pipeline that would carry Russian volumes across the Black Sea to Turkey’s domestic market and possibly further to southern Europe, the country’s gains might be greater elsewhere.
Firstly, the proposed capacity of TurkStream’s first string will be 15.75bcm/year, only 1.75bcm/year higher than what Turkey already receives through the Western Line. This means that Turkey may not gain extra flexibility, since the string would merely divert the 14bcm/year that Turkey already receives via the Western Line to a different route.
Secondly, if TurkStream is built in full, ie four strings with a combined capacity of 63bcm/year as discussed when the project was launched in 2014, Turkey’s prospect of exporting gas from alternative sources would diminish. This is because the sheer volume of gas imported via TurkStream would minimise the need for other sources.
In contrast, Turkey’s LNG alternative and related export opportunities look more promising.
If Turkey’s multiple FSRU projects were to materialise, the country could start exporting any excess volumes to regional markets via its interconnecting pipelines. Thanks to the capacities that are now opening up in eastern Europe, Turkish traders could sell gas anywhere along the Ukraine-Greece corridor as well as allow for reverse flows from these countries in case of supply shortfalls.
Of course, FSRUs are not the ultimate answer in terms of security of supply, but in combination with pipeline volumes imported from Russia, Iran, Azerbaijan and possibly Israel in the future, they should give Turkey significant leverage in the region.
This leverage, however, hinges on Turkey building and expanding its interconnection capacity with Bulgaria and Greece, removing its restrictions on import/export licensing rules, publishing much-needed reverse flow tariffs and allowing private companies to become actively engaged in domestic and regional trading.
As gas demand remains weak in eastern Europe, and Turkey’s own consumption levels have been falling since 2015, the only way to deal with the gas glut that is building up is to open up borders and allow markets to balance demand and supply.
In this context, the changes that are now underway in eastern Europe should encourage Turkey to consider its long-term energy vision as well as the role it could play in its immediate neighbourhood. email@example.com