Turkey: Azerbaijan's Natural Energy Partner

AZERBAIJAN AND THE NEW ENERGY GEOPOLITICS OF SOUTHEASTERN EUROPE is a 430-page book that's been released this summer by the Jamestown Foundation, a Washington, D.C.-based institute for research and analysis.

The book includes, among others, chapters dedicated to pipelines and geopolitics, how the Balkan region is figuring into Azerbaijan's foreign policy, and Russia's moves in Balkan energy markets like that of Greece. It also devotes a section and chapters to the transit countries in the Southern Gas Corridor, and, in a section dedicated to interconnections in Southeast Europe, reviews the prospects for Bulgaria, Romania and Macedonia benefiting from the Southern Gas Corridor.

Ms. Gulmira Rzayeva, Visiting Research Fellow at the Oxford Institute for Energy Studies, has contributed a chapter to the book entitled "Azerbaijan-Turkey Relations and Baku’s Energy Strategy for Southeastern Europe." With that text in mind, Natural Gas Europe spoke to her about the contents of the chapter.

You start out by reviewing relations between Azerbaijan and Turkey, dubbing them "strategic and commercial." Could you characterize the nature of these bilateral relationships and talk about any issues that should be overcome for the two countries to work together in the most efficient way?

Turkey is a natural energy partner of Azerbaijan, which is located in geographic proximity and is in need of importing gas from Azerbaijan for decades to come due to rapidly growing demand and necessity of diversification of supply sources. Energy relations would not be strategic and commercial if they would not serve the interest of both sides. Two countries largely benefit from such collaboration. For Azerbaijan, it is a large growing market where gas price is suitable, at the moment even higher than the average European gas price, and distance is short to make the exports commercially viable. SOCAR Gas Trade Turkey has been acting as a wholesaler in Turkey since 2012 selling gas mainly to industry entities in the country. SOCAR Energy Turkey also sells natural gas to power generations. For Turkey gas from Azerbaijan could be considered as a guarantee of supplies to satisfy the growing demand which can be as much as additional 10 bcm by 2020, given the lowest gas price Turkey pays for pipe gas at the moment.

At $20 billion, SOCAR looks to become the biggest investor in Turkey - what are the connotations of that commitment?

SOCAR has big plans in Turkey. Before the oil price crisis, SOCAR Energy Turkey planed to increase the total turnover in the country to USD15 billion by 2018. This would include constriction of oil refinery, container port, power generations etc. Current low price environment can affect these projects but in general this may remain the long-term SOCAR’s strategy towards Turkey. Furthermore, SOCAR Gas Trade Turkey would be interested in obtaining the import license from the EMRA to directly import natural gas from the suppliers, primarily from Azerbaijan’s next wave of gas production and this can increase the company’s role in the country. For that, after granting the license, SOCAR will need to win natural gas volume at an auction organized by BOTAS, in accordance with Article 2 of NGML.

We hear a lot about Turkey's growing demand for gas, but it sounds like market liberalization there is easier said than done. How should this be tackled, and how difficult is it to reduce the influence/weight of BOTAS when such measures may go against its interests? And will all of that company's capacity constraints be addressed by TANAP?

Turkey is an attractive market for energy majors due to suitable price and demand growth. A few years ago, BOTAS projected that the Turkish natural gas demand will be increased from current around 50 bcm to around 80bcm by 2030 and it is not clear where this gas will come from. Whether this projection is realistic remains to be seen, but we should not forget that the main driver for demand growth in any country, specifically in Turkey is a price. Current low oil & gas price can further push the demand up.

Indeed market liberalization is a long and difficult process. The Natural Gas Market Law, which was an important step towards the liberalization of the Turkish market, was published in 2001. Since then, there have been significant structural changes. Before the Law entered into force, the market share of the state monopolist BOTAŞ was almost 100%; now private companies have a market share of 20%, importing directly from Gazprom via the Western Line up to 10bcm/a of gas. This is paving the way for a multi-actor market structure. But during these 13 years of market reforms, not all targets have been met and the Turkish government has been slow in implementing all provisions of the Law. The main reason why the Turkish government originally suggested the opening of market competition was the growing natural gas demand, mainly driven by demand in power generation. Turkey still needs to do a lot more in this way.

The draft amendment (which has not been approved by the Parliament yet) to the NGML provides that new transportation companies should be established. This provision will weaken BOTAŞ’s position in the market, especially from the financial point of view as transportation along with storage is its most lucrative business. From the supply security perspective the Ministry of Energy of Turkey will be granted the authority to sign new contracts or renew expired agreements via BOTAŞ, meaning that BOTAŞ, if the MENR decides so, can keep its current import share in the market. Another important provision of the Draft on the ownership unbundling of BOTAŞ provides that by 2015 BOTAŞ will be split into 3 legal entities – Transportation Company, LNG and storage facility operator, and natural gas importer. BOTAŞ losses as a result of the subsidisation of the residential sector will then be visible as will compensating income from transportation and storage. TANAP will be a perfect solution for Turkey to accommodate additional volumes of gas the country has to import from various sources to meet the growing demand, when the capacity is expanded.

How crucial is EU/Western support for the Southern Corridor project at this point? What would Azerbaijan like to see in connection with that?

The government of Azerbaijan, SOCAR together with its partners including BP and other companies have been implementing the Southern Gas Corridor with the total cost of USD 45 billion on their own, without a significant external financial support including the EU support, although all the segments of the SGC are included to the list of PCI (TAP is on the PCI list however is not eligible to receive any funds from any EU pots because of exemption). But this did not anyhow affect the schedule of the project and according to the SD consortium the SGC and its segments will be materialized in timely manner in accordance with the set schedule. I think Azerbaijan and the partners would expect to solve any problem that could occur at the EU territory such as the landfall issue or any possible political challenge in a timely manner.

Could you talk a bit about what makes Azerbaijan a good partner for energy security in South-eastern Europe?

South-eastern Europe is the most single-supplier-dependant region of Europe. Gas coming from Azerbaijan is crucial for diversification of their supply sources and thus strengthening their positions at the price negotiations with other suppliers. For the time being, only Greece and Bulgaria in the region have contracted gas purchase from SD, but there is a great potential for the other countries in the region including the Balkans to buy gas from next generation fields in Azerbaijan.

With having TAP passes through its territory, Greece can play a significant role in creating a vertical corridor that would connect gas volumes going in the east-west direction. SOCAR, a company that has an interest in all segments along the industrial energy value chain, including Desfa, has a particular role to play here.

It is interesting that you mention developing reverse flow in the Trans Balkan Pipeline, so that Shah Deniz II gas could potentially flow to others along that route. What needs to be done to make that happen?

Gas to Bulgaria is planned to be delivered through the IGB pipeline that is expected to have FID by the end of this year. Another possible option of transporting Azerbaijani gas to the Bulgarian market is using already existing pipeline. The Trans-Balkan Pipeline stretching all the way from Ukraine to Greece currently transports Russian gas to Romania, Bulgaria, Greece, Macedonia, via Ukraine. The total capacity of the pipeline is 27 bcm/a but the current operational capacity is 18 bcm/a. The reverse flow will be needed to develop. Pursuant to the third party access rule of the EU Third Energy Package, the SDII gas producers could have access to this pipeline by booking capacity of 1 bcm. For that the capacity of the pipeline will need to be expanded. This can give many opportunities for SOCAR. The company can realize swap operations with Gazprom for Bulgaria while not necessarily participating in the transportation of gas through the Trans-Balkan Pipeline.

-Drew Leifheit