Untangling Turkey’s Gas Pricing Knot

Leaked figures on the cost of Turkey’s gas imports, and sharp hikes in domestic electricity and gas prices, have refocused attention on the country’s energy strategy. With economic growth beginning to slow, the high price of imports may become an increasing burden. Analysis of the leaked figures suggest that, despite Turkey’s commercial stand-off with Iran, the real problem lies to the north.

On 1 April the government hiked domestic gas prices by 18.7%, with electricity prices (which are linked, since most power plants are gas-fired) rose 9.3%. The rises were intended to stop losses occurring at state energy firm BOTAŞ and followed three consecutive rises in gasoline prices last month.

Energy Minister Taner Yıldız, taking what some called a “defensive” stance on the issue, sought to deflect anger from both the opposition and the wider public by insisting that he too was displeased by the price hike but that it was unavoidable in the current climate. He said that the prices rose due to a weak lira and increasing oil prices on the back of geopolitical tensions, which had a knock-on effect on natural gas prices.

Most significantly, Yıldız asserted that the price rises would be even higher without the – still unspecified - discount obtained from Russia at the end of last year. That discount was obtained after Turkey gave permission for Gazprom’s giant South Stream pipeline to cross Turkey’s Black Sea waters.

At the time I argued that, contrary to some assessments, this was not Ankara selling out to Russia, as South Stream will probably never be built, but trying to shore up its own interests. The second part of that seems to be coming partly true.

But figures leaked to Turkish media recently suggest that even with this price cut Turkey is paying over the odds for Russian gas. The cost of 1000mof natural gas from Russia, which supplies 58% of Turkey’s natural gas, is $418. Iranian gas (19% of 2011 imports) in the last quarter cost $423/tcm – just five dollars more. Azerbaijan, the third main supplier, was a bargain at $282/tcm, or 35% less than the market price.

This pricing disparity matters. Ankara decided to take Tehran to arbitration in January, arguing that the cost was too high in the new climate of reduced prices. Subsequent reports suggest that in the new quarter, Iranian prices have spiked to $500/tcm as a result of generally increasing prices, but the point remains that the arbitration case was filed when Iranian gas was just a touch more expensive than Russian gas.

And prior to that in 2011, before the Gazprom discount, Turkey was presumably paying even more for Russian gas. Yıldız said back in September that Russian gas prices had rocketed by 39% in 29 months, which led BOTAŞ to terminate Gazprom’s 6bcm contract through the West pipeline. Russia’s discount last year may have been substantial but it comes off a much higher starting price.

Of course given the complexities of gas pricing, Turkey’s lawsuit against Iran was not solely about pricing but also about take-or-pay conditions. But recent news reveals that BOTAŞ had to pay $2.5 billion to Gazprom last year under the take-or-pay liability, so the Iran contract is not unique in its tough conditions.

So why is Iran getting such stern treatment whilst Gazprom, which even after a hefty discount is charging almost the same for larger quantities of gas, with similar conditions attached, being praised?

Because, as Hasan Selim Özertem points out, “although Iran is an important partner for energy, it is not a stable one.” Technical faults lead to regular cut-offs of Iranian gas, whilst Russia has consistently delivered, as well as being a willing partner in upgrading Turkey’s gas infrastructure (which will also help to reduce prices by improving efficiency). Politically too, Turkey is trying to bring Russia on board over the crisis in Syria.

Iran, by contrast, is both a political and technical liability for Turkey. Ankara has recently announced that it is cutting its oil imports from Iran by 20% in a sign of growing alignment with US-led sanctions. Hammering Iran on gas prices therefore says less about commercial reality and more about politics.

But focusing on Iran as Turkey’s main gas problem ignores the elephant in the room. With further supplies from Azerbaijan still some years away, Gazprom will remain the main source of Turkey’s imported gas. Unless it can push the Russian giant into lowering prices even further, domestic energy costs and the current account deficit will remain serious problems.

Alex Jackson is a political risk analyst at Menas Associates in London, focusing on the Caspian region. He also writes independently on politics, security and energy in the wider Caspian region. This article does not necessarily reflect the views of his employers.

 

 


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