Will the Natural Gas Discovery in the Black Sea Create Problems

Turkey has been exploring for new gas deposits in the Black Sea and Eastern Mediterranean for many years in the hope of reducing its heavy dependence on imported gas. The Russian share of Turkish gas imports was highest in 2012 when it reached 58%. Turkey has been keen to reduce its natural gas import dependence from Russian since 2015 after the downing of the Russian military plane SU-24 and has achieved impressive success. In 2019 the Russian gas market share in the Turkish market was 30% and in the first half of 2020, it was only 18%. Turkey announced its biggest natural gas discovery in August, a 320 billion cubic meter (11.3 trillion cubic feet) Black Sea field which President Tayyip Erdogan said was part of even bigger reserves and could come on stream as soon as 2023.

The exploration ship made the discovery about 100 nautical miles north of the Turkish coast. The discovery of these reserves and their commercial extraction can transform Turkey's dependence on Russia, Iran, and Azerbaijan for energy imports.

BENEFITS FOR TURKEY

Any reduction in Turkey's energy import bill, which stood at $41 billion last year, would boost government finances and help ease a chronic current account deficit which has helped drive the lira to record lows against the dollar. For Turkey having its own gas will give it more flexibility in import volumes; it will straighten its hands in the negotiations. Turkey feels confident in adopting an assertive position in negotiations with Gazprom and other suppliers because it has significantly strengthened its position thanks to the strategy of doubling the daily entry-point gas send-out capacity. This has included increasing LNG import capacity but also decreasing import demand by significantly increasing the share of domestically produced energy such as coal, lignite, wind, solar, and hydro. This policy has borne fruit; the country produced 66% of its electricity from local and renewable resources in the first five months of 2020, and 62.08% from January through July this year, according to the data from the Energy and Natural Resources Ministry.

THE REALITY OF THE FINDINGS AND THE IMPLICATIONS

From the geological perspective, there is not much information about the structure discovered, and it is not clear whether the reserves are “total in place” or extractable. If the former, the extractable resources maybe 75% of the total or less, depending on many factors. Before production, wells need to be drilled from the platform, an undersea pipeline needs to be built, and the timing of production will largely depend on the sea depth. The exploration and development phase may possibly take 3 years and production within 3 years is possible if the depth of the well is around 2-3 km. If the well depth is around 6-7 km then 5 to 8 years may be required for exploration and production

Turkey, to achieve the objective of becoming an important regional energy hub, however, will require additional financial resources and specialized extraction technology. According to International Energy Agency (IEA) Executive Director Fatih Birol, the announced gas reserves Turkey discovered buried deep beneath the seafloor in the Black Sea are valued at $80 billion based on today’s market prices. But an investment of $6 billion dollars will be necessary to draw out the volumes in question.

The find in the Tuna-1 zone will not be enough to entirely eliminate the need for energy imports. To achieve a real level of self-sufficiency, new fields will need to be found, the share of renewable energy in the country’s energy basket increased, and present nuclear power plant projects put into operation. Whereas, to become a regional energy hub, Turkey will have to continue to invest in domestic energy infrastructure and provide the necessary conditions for the liberalization of the market.

Turkey doesn’t seem very keen on working with international E&P majors, at least not along with the production sharing model. Instead, they may just contract for services. Minister of Energy and Natural Resources, Fatih Donmez, stressed that the Turkish Petroleum (TP) will carry out the entire drilling independently, while the segment of pipeline connection to the shore may be subcontracted to an international company. Indeed, Turkey’s well-established oil and gas services sector would likely help TPAO maximize local content in the initial development phase. Yet, TPAO has no deep-water experience, suggesting that international support for subsea operations is a must. Wood Mackenzie’s Dr. Andrew Latham, Vice President of Global Exploration, says that the market is becoming more cost-efficient but more selective at the same time.

RUSSIA'S ROLE AND INTERNATIONAL PRESSURE

Over the past decade, Turkey has made large investments in its domestic energy infrastructure, notably including an expansion of liquefied natural gas (LNG) import capacity to 50 bcm per year, which is even higher than the country’s total annual gas consumption, equal to around 45 bcm in 2019 (Anadolu Agency, May 14). And though Russia rose to become Turkey’s largest (over 50 percent of domestic market share) foreign source of gas in 2018, since then that reliance on Russian pipeline gas has dropped significantly. Instead, neighboring Azerbaijan has overtaken Russia as Turkey’s largest single source of imports, while LNG shipments, particularly from the United States, grew to 10 percent of all foreign gas purchased in April 2020. In light of these market transformations and a global supply glut, Turkey is undergoing renegotiations to long-term contracts with suppliers Russia, Iran, and Algeria. Presumably, the Tuna-1 gas field find will further bolster Ankara’s position of strength at these talks as it seeks more preferable pricing deals on imports.

More than a quarter of Turkey’s long-term gas contracts expire next year, including imports via pipeline from Russia’s Gazprom and Azerbaijan’s SOCAR and a liquefied natural gas (LNG) deal with Nigeria. Turkey has also been exploring for hydrocarbons in the Mediterranean, where its survey operations in disputed waters have drawn protests from Greece and Cyprus.

Greece and Cyprus pushed for a tougher response to Turkey’s natural gas exploration in contested waters at a European Union summit on Friday but were essentially told to hold off until a meeting in December. Later, Turkey redeployed its survey ship, Oruc Reis, to disputed waters in an area among Greek islands, Cyprus, and Turkey’s southern coast.

Turkey pulled the vessel to shore last month for maintenance and resupply, saying the move would give diplomacy a chance. EU leaders meeting in Brussels unanimously condemned the decision as “provocative” and urged Ankara to reverse the move. But Turkish President Recep Tayyip Erdogan promised to push ahead with energy exploration. “We will continue our search for hydrocarbon resources in the Black Sea and the Mediterranean,” Erdogan said. He added the EU had become “captive” to Greece and Greek Cypriots in the dispute over natural resources in the eastern Mediterranean and this had damaged the bloc. “If the EU does not hold an unbiased stance in existing disputes in the eastern Mediterranean, this situation will be the official declaration of the end of the European Union,” he said.

THE WAY AHEAD

Turkey currently has four long-term take-or-pay pipeline contracts with Russia (Blue Stream until 2025 and Bati Hatti until 2021), Azerbaijan (until 2021), and Iran (until 2026). Even beyond these dates, Turkey will continue to import from these suppliers. However, Sakarya can provide bargaining power for Turkey to renegotiate the pricing in these agreements. If and when Sakarya comes online, energy experts argue that Turkey can convince Russia to index its current gas prices to spot natural gas prices—a proven strategy of European countries.

While the geostrategically positioned country connecting Asia with Europe is still far from achieving President Erdoğan’s goal of becoming a net energy exporter, the 320 bcm gross reserves estimated in Tuna-1 would serve to substantially minimize Turkey’s import volumes and costs. Turkey should make the most of the fact that the country is surrounded on three sides by open water and follow the Norwegian example: investment in and development of offshore wind energy technology would help reduce reliance on foreign sources of energy as the Black Sea field comes online, while the simultaneously developing homegrown renewable and hydrocarbon sectors would benefit from each other.