Turkey and Europe’s quest for gas:

Turkey and Europe’s quest for gas: The equilibrium of a bargaining position and its possible consequences for new gas transport routes Olgu Okumuş Maritano, Ecole Normale Supérieure Marc-Antoine EYL-MAZZEGA, Sciences Po / CERI Ingas NATURAL gasconference-Istanbul- 09-10/06/2009

Why does Turkey appears to be an important stake and pillar of the European gas supply challenge? Three key strategic issues : How do Turkey’s own energy and political interests, demands and strategies fit with EU’s demands and needs? To what extend are Turkey’s demands and interests with regards to gas supplies and transit sustainable and compatible with its fundamental strategic interests? Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

Table of content I / Are Turkey and the EU rivals or partners for gaining access to new gas resources? • EU’s increase of external gas demand • Turkey’s increase of external gas demand • How much gas is left for the EU once Turkey’s gas demand has been matched ? II/ To what extend do Turkey's national interests and gas policies contradict EU's interests ? • Azerbaijan • Shipping Turkmen gas through the Caspian or via Iran? • Adding Gazprom gas to the balance, possibly via a Blue Stream 2 gas pipeline ? III/ Assessing the strength of Turkey’s bargaining position with regards to alternative routes • White Stream • Novopskov-Bohorodzhany-Uzghorodgas pipeline • South Stream Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

I / Are Turkey and the EU rivals or partners for gaining access to new gas resources? EU’s external gas demand Important increase of total gas demand, massive increase of external gas dependence EU’s external gas demand is likely to increase over the two next decades, although to a yet unknown extend: the economic crisis has completely disturbed previous projections which were already quite uncertain. The only real certitude one can draw regarding EU’s future external demand is the fact that EU’s domestic gas production will be massively decreasing in the coming years. Supply gap ? How much? What are additional gas sources? Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

I / Are Turkey and the EU rivals or partners for gaining access to new gas resources? Gaining access to new gas supplies Gas pipeline project s of the Southern corridor where Turkey is at stake • Transcaspian gas pipeline: 10-20 bcma  Nabucco: 33000km, 30 bcma  White Stream gas pipeline : Linking Georgia and Romania through the Black Sea, 30 bcma • The Turkey-Greece-Italy gas pipeline : 11 bcma Other projects:  South Stream: 30-63 bcma So far, Russia, Norway and Algeria are key to secure EU’s external gas demand. Russia, the Caspian region and Iran are vital to secure EU’s future, additional gas supplies. Central and Eastern Europen states have poorly diversified gas supplies while their gas demand will increase = major incentive for gas supply diversification. The EU has been developing new gas pipeline projects to decrease the dependence on a single supplier and transit route (Gazprom gas shipped via Ukraine) and provide additional gas supplies to match additional gas demand. . Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

I / Are Turkey and the EU rivals or partners for gaining access to new gas resources? Turkey’s external gas demand  Turkey’s gas demand is raising, but lower than expected:  Current total import capacity: around 65 bcma Turkey has not any significant natural gas sources. Growth of Turkish economy since 2002 has lead to an important growth of energy consumption. Turkish gas consumption, especially from households, is sensitive to prices, as the last winter 2008 has illustrated. Current available capacity is largely sufficient to meet current demand and this at least until 2020, provided that sufficient gas volumes are contracted. Total spare import capacity is currently about 22-25 bcma, which is huge Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

I / Are Turkey and the EU rivals or partners for gaining access to new gas resources? Future gas export capacities/transit potential of Turkey  Potential gas export capacities/transit capacities of Turkey Based on available capacities, current extension possibilities of Turkish gas imports in today’s supply structure are significant. Very important potential for adding additional gas import capacities to Turkey, mostly from Russia, Iran and the Caspian: total available capacity could be up to 110 bcma by 2020-2030, Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

I / Are Turkey and the EU rivals or partners for gaining access to new gas resources? Future gas export capacities of Turkey Additionalgas import optionsfor Turkey - From Gazprom/ Russia: Gazprom is already providing more than 60% of Turkey’s gas demand and Turkey is thus interested in decreasing the share of gas imports from Gazprom - From Iran: Iran offers a good potential for gas import increase. In July 14, 2007, M. Erdogan signed a preliminary agreement (Memorandum of Understanding) to import 30 bcma. It would require building a 1850 km pipeline from the South Pars field andcouldalso involve Turkmenistan.Whatdoes Iran want? - From Kazakhstan/ Turkmenistan/ Azerbaijan:Turkey has been importing gas from Shah Deniz gas field since end 2007 via the newly operational Baku-Tbilissi-Erzerum gas pipeline. AndTurkey has been using its key geographic position to push down Azerbaijan’s gas price expectations - From Egypt via a linking by Syria:possible gas pipeline link in discussion - From Iraq: It requires rehabilitating existing pipeline infrastructures - Reinforce Storage Capacity : builidng new LNG terminals Based on available capacities, current extension possibilities of Turkish gas imports in today’s supply structure are significant. Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

I / Are Turkey and the EU rivals or partners for gaining access to new gas resources? How much gas is left for the EU once Turkey’s gas demand has been matched ? Possible gas transit potential through Turkey to the EU Turkey can play a crucial role for transporting possible additional gas supplies from Iran and the Caspian to the EU. This can only happen at the condition that Turkey’s gas demand is matched. One can make following projections, assuming that additional import capacity is added, that import capacity is matched by additional gas • Optimistic scenario: 45 bcma of gas can be transited to the EU by 2020-2030 •  Pessimistic scenario: 25 bcma of gas can be transited to the EU by 2020-2030 Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

I / Are Turkey and the EU rivals or partners for gaining access to new gas resources? 1st Conclusions  Turkey is no more facing the threat of not having enough external gas available to meet its future domestic demand , provided that import capacity is met by additional gas  The potential for extending gas import capacities, as well as gas imports, is tremendous so that Turkey has the potential to gain access to new gas volumes from different sources and become an important gas transit country This will increase the country’s energy security, prosperity and strategic position  So far however, none of all these projects are close to being developed! Turkey / its companies have thus a decisive interest in cooperating with the EU/ its companies, both on the upstream, transport and downstream: there’s a need for common political, economic and financial cooperation as these projects are expensive and bear risks = feasibility through mutually beneficial partnership . From this, EU and Turkey have a common interest in ensuring the success of new pipeline projects and acceding to additional gas sources which can benefit both entities  The key question is now how best to achieve this: the first test is the willingness test Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

II / To what extend do Turkey's national interests and gas policies contradict EU's interests ? Turkey's and EU’s interests and gas policies Economic and Political Relations with Gas Exporting Countries  Azeri Gas • Export gas availability is limited / competition from Gazprom • Turkey price offer couldn’t satisfy Azerbaijan • Risk that Turkey’s gas transit demands rebuff Azerbaijan  Turkmen Gas • Need to make clear comitment, either in favour of Transcaspian or transit via Iran (EU/ US are hostile for transit through Iran) • Risk that Turkey’s gas transit demands rebuff Turkmenistan and investors  Russian Gas Via Blue Stream 2 • Turkey’s energy security would be strengthened, • Turkey won’t be just a consumer of Russian gas, but also a transit country for the EU. • Likely contradiction with initial rationale of Nabucco gas  Iranian gas • Turkey key possible partner but poor progress so far • Key interest for Nabucco Turkey wants to prove its European commitments and credential in making a solid contribution to EU’s energy security What extend this is the case and what problems lie there? One can notice that at the same time, Turkey has been also keeping doors open as regards a possible extension of cooperation with Gazprom. The option of building a Blue Stream 2 pipeline remains open. Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

II/ To what extend do Turkey's national interests and gas policies contradict EU's interests ? Turkey’s conditions for gas transit through its territory Different options and conditions for gas transit raised by Turkey are : 1° The transportation hub: Turkey would thus import all the gas available through these pipelines, take for its own consumption what is needed, and then resell and reexport what is left. 2° Linking gas transit toEU negotiations:Erdoğan has threatened to back out of the strategic pipeline project if the energy chapter in Turkey's EU accession negotiations remains blocked.Nabucco project could be an opportunity for AKP government to achieve further steps in EU accession negotiations? 3° Conditioning gas transit to gas supply agreements based on net back pricing rather than replacement value/ preferential gas off take right 4° A 15% transit tariff : Turkey would retain 15% of gas in transit for its own consumption in return of allowing transit Turkey aims : To have an access to the same gas resources via the same pipelines to secure additional gas imports To make sure that it is not paying more than the net back price of gas sold to the final consumer coming from the same supply source. - To maximise the financial and economic benefit it will obtain from transiting this gas to the EU; - To maximise the political gains that can be made. Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

III / Assessing the strength and sustainability of Turkey’s bargaining position with regards to alternative routes Do Russia and Ukraine provide for a competing route for Caspiangas supplies to the EU ? The Pericaspian pipeline project and the Novopskov-Bohordzhany- Uzghorodgas pipeline projects (Turkmen/Kazakh gas) About 250 km shorterthan Nabucco Cheap transit possible / partlyavailable infrastructure The other alternatives: The White Stream gas pipeline WouldavoidTurkey and Ukraine Expensiveundersea portion but lower operating costs  The South Stream gas pipeline WouldavoidTurkey and Ukraine Lower operating costs as no transit country The viability of Turkey’s gas transit demands Turkey has been making strong demands for transit which might end up deterring investments into possible pipeline projects crossing its territory and/or favouring alternative gas pipeline routes Marc-Antoine ELY-MAZZEGA Olgu OKUMUŞ MARITANO

III / Assessing the strength and sustainability of Turkey’s bargaining position with regards to alternative routes The Novopskov-Bohordzhany-Uzghorodgas pipeline project Source: Bekker, Master Plan, Brussels international investment conference in Ukraine’s GTS, 23/03 Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

III / Assessing the strength and sustainability of Turkey’s bargaining position with regards to alternative routes The White Stream gas pipeline project Source: GUEU Group Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

III / Assessing the strength and sustainability of Turkey’s bargaining position with regards to alternative routes So far, all these pipeline projects are at a pre-feasibility study stage: Prospects for Nabucco’s, White Stream’s, South Stream’s building are ratheruncertain on the short to midterm! The TGIgas pipeline projectis the mostadvanced Turkeymight end up havinggas for itsowndemand, but playing no role or just a minorrole for transit The EU might end up having no additionalgas ressources  Criticalneed for cooperativepolitics!! The viability and accuracy of Turkey’s bargaining position Turkey has been making strong demands for transit which might end up deterring investments into possible pipeline projects crossing its territory and/or favouring alternative gas pipeline routes Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

Recommendations and Conclusions On the European Side: The EU should open the negotiations on energy related chapters while Turkey should pursue its reforms and both parties should make sure that Turkey quickly joins the Energy Community Treaty EU Commission was wrong in putting Turkey under pressure for the 15% clauses, because markets are very likely to do this by their own. On the Turkish Side: Turkey is right to demand that the EU opens energy chapter negotiations but wrong to threaten the EU with blocking gas pipeline projects. Turkey should continue its efforts to access Iranian and Turkmen gas supplies. Turkey should build gas storage infrastructure to reduce the need for import capacities and better balance supply and demand over the seasons; and develop renewable energy sources and alternative electricity generation. Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

Recommendations and Conclusions Gassupplysecurityis a sharedconcern of Turkey and the EU and both are interdependant: if bothentitiescooperate, then the prospect for the success of pipeline projectswillincrease as the trust of producing countries willbestrengthened It’s urgent time to achieve a breakthrough: EU and Turkeyshouldconcentrate on realistic, small to medium sizedprojects Shipping Shah Deniz 2 gas via the BTE-TGIgas pipeline wouldbe a welcomedstepwithlikelyspill over effects Turkeyshouldnowfacilitate the success of such a project Marc-Antoine EYL-MAZZEGA Olgu OKUMUŞ MARITANO

Thank you very much for your attention! olguokumus@yahoo.com, marcantoine.eylmazzega@sciences-po.org

The Nabucco Project Source: Nabucco Gas Pipeline Gmbh

Turkey and Europe’s quest for gas: