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    Turkey's Gas Hub: Power or the Market

Summary

Turkey has not committed to the market principle owing to its dependence on Russia.

by: Aura Sabadus

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Global Gas Perspectives, Featured Articles, Pipelines, Security of Supply, News By Country, Azerbaijan, Turkey

Turkey's Gas Hub: Power or the Market

Turkey’s ambition to establish an energy hub has been a staple of the political, academic and media discourse of recent years.

But despite the literature and debates that it has ignited, the concept has not been properly defined, or expanded into an official strategy that could be rolled out within a given timeframe.

To those familiar with Europe’s northwestern energy setups, hubs are indistinguishable from markets: they are centres of trade and transport, where relevant regulations, services and infrastructure coincide to facilitate their smooth operation.

In Turkey, however, the concept has been interchangeably used to refer either to a corridor for the transit of oil and gas reserves that would play along the lines of its unique geography at the intersection of eastern riches and western trade routes; or as a market.

Although the discourse could have been just as well about an ‘electricity hub’ or ‘an oil hub’ since Turkey enjoys multiple power interconnections with neighbouring countries and transits crude from the Middle East and the Caspian region, the focus has been on gas, a commodity whose pricing and transport has been historically sensitive to politics.

The idea of a gas hub dovetailed with ambitions to liberalise the gas market, but in recent years the two have disconnected.

Trading hub on hold

Plans for a trading gas hub have been put on hold, while the discourse about a political hub to advance power and control security risks grew louder.

This came at a time when security risks multiplied, leaving Turkey to worry about the threats posed by a resurgent Russia and a Middle East in turmoil to its access to gas resources.

But problems on the domestic front have also multiplied. Turkey’s transmission system needs investment, being unable to cope with surging demand during the cold peak season. Prices paid for gas imports are some of the highest in Europe, and its energy subsidies sap the economy and drive away investors.

The newly appointed energy minister and his team of civil servants will have to address these challenges as they prepare to publish a medium-term strategy for Turkey’s energy security.

The options

The government is fully aware that the Turkish gas sector has to be overhauled.  

Proposed changes that would amend its law on a natural gas market (Law 4646) published in 2001 had been redrafted 10 times before the latest version was sent by the government to parliament in 2014 where they are still awaiting approval. They broadly require the unbundling of the vertically integrated incumbent, without offering a clear timeline.

Although there have been suggestions that the company’s market share should be reduced, there are further conditions, which stipulate that the state-run transmission and import company Botas should be allowed to import more if there are security of supply concerns.

The ambiguity of the text leaves room for interpretation and does not offer concrete reassurance that the management of the Turkish gas system would shift from the state to the private sector.

In fact, it may be the opposite, as Botas could be granted discretionary powers to sign more contracts for the import of gas from Iraq, Cyprus and Israel, should new sources be available.

The question that inevitably arises is why should Botas be allowed to consolidate its market position when it already faces significant costs linked to the construction of the Trans-Anatolian Pipeline (TAP) that will carry Caspian gas to its market and further to Europe and is embroiled in disputes with Iran and Russia for the price of its imported gas?

The hub as symbol of power

There may be two answers. First, by leaving the state, rather than the private sector, firmly in charge of the gas industry, Turkey merely reflects a continuation of historical thinking patterns that have informed the wider policy-making process.

Second, by refusing to loosen its grip over the gas sector, Turkey may pursue two foreign policy goals: to enhance power and minimise security risks.

Turkey’s recent quest for regional power has been described by some observers as a neo-Ottoman tendency to renew historical, diplomatic and economic ties with its erstwhile imperial hinterland.

In this respect, Ömer TaƟpinar, one such observer, argues, neo-Ottomanism brings a sense of grandeur and self-confidence as well as the central role of a regional superpower.

Such a political ambition has tallied well with the vision of a Turkish energy hub that would place the country at the heart of energy highways linking the Caspian region, the Middle East and the Levant to European markets. 

Nevertheless, as the regional security environment deteriorated after Russia annexed Crimea and the Middle East descended into chaos, Turkey’s foreign policy goals swung from regional power ambitions to palpable security concerns.

As a result, the perception of a Turkish gas hub also shifted from one conferring pivotal role in a hydrocarbon-rich area to one that would allow it to control and minimise the fallout of security risks affecting the region.

This is best exemplified by the recent political dispute between Turkey and Russia over the shooting of a Russian fighter jet that had allegedly breached Turkish airspace at the end of last year.

The incident created panic in the Turkish gas sector, which feared that Russia, its largest supplier of gas, would cut exports to Turkey.

In response, the Turkish government embarked on a charm offensive in Azerbaijan and Qatar to convince the two producers to pledge alternative supplies, even if these may not be readily available to compensate for possible Russian gas cuts this winter.

Based on these perceptions, a Turkish gas hub, dominated by a vertically-integrated incumbent, would fulfil three functions.

It would allow the government to micromanage a sector where any volatility in the price or supply of the commodity could sway consumer responses.

It would present itself as an instrument to gain and cement power since a central position within a nexus of pipelines would also entail a central position in a web of political relations.

Finally, a state-dominated gas hub would grant the government a convenient lever to control and minimise risks that may affect the country’s security.

The hub as trade   

However, the developments of the last 15 years show that the idea of a Turkish gas hub has not been an entirely state-centred political enterprise.

In fact, when Turkey set out to reform its gas market, the scope of its ambitions surpassed that of its neighbouring European states in many respects and displayed all the necessary ingredients to establish a traded gas hub similar to those in northwest Europe.

For example, its law on the natural gas market enforced in 2001 envisaged one of the most radical gas release programmes in Europe.

Under the terms of the law, Botas was required to sell at least 10% of its supply contracts each year in order to reduce its share of the total imports to 20% by 2009.

Although Turkey failed to stick to the goals it had set itself, it has managed, nonetheless, to enact two gas contract releases, transferring 10bn m³/year to the private sector.

Botas also enacted a volume release on its 6.6bn m³/year contract with Azerbaijan, transferring 1.2bn m³/year to the Turkish subsidiary of Azerbaijan’s oil and gas incumbent, Socar, which effectively increased the share of the private sector close to 25% of the market.

It was also one of the early promoters of third party access to its infrastructure and was keen to build connecting pipelines with neighbouring countries, such as the Turkey-Greece interconnector, as a first step towards establishing cross-border trading.

The traditional argument runs that reform in the gas sector had been pushed through under pressure from international financial institutions, which conditioned the disbursement of cash to help Turkey deal with financial problems in the early 2000s on switching to liberal market principles in its economy.

Others suggest that Turkey’s recognition as an official EU candidate at the Helsinki Summit of 1999 accelerated reform as Ankara was under pressure to align its laws with those of the EU as part of the accession process.

Both are correct, but reflect only part of the story.

The other side of the story is that the end of the Cold War and the shift from security-focused policies to those emphasising trade and prosperity also marked a fundamental change in the way Turkey thought and acted.

While Europe had been seen as a source of anxiety and fear as the memory of Sevres 1920, when the Ottoman Empire was dismembered at the hands of European powers, smarted throughout the 20th century, that perception changed in the early years of the new millennium when security fears subsided.

Europe and the principles it stood for, including free trade and private initiative, were no longer perceived as a threat, but as a source of inspiration.

This change in perception ushered in a period of stability and prosperity that ultimately propelled Turkey among the leading economies of the world.

However, the decline in Turkey-EU relations after Brussels failed to hold true to its membership promise for Turkey and the deterioration of regional security have prompted Ankara to sacrifice the openness of the early years of the millennium for introspection.

Where next?

While the last few years saw a period of political stagnation, 2016 may bring change. But change to what, one might ask when talking about Turkey’s gas sector and its plans to establish a hub?

The experience of the last 15 years when Turkey betted either on politics, or on markets shows that the answer ultimately lies in the way the state perceives its role, as well as the challenges it faces internally and externally.

It may choose the former, afraid to lose its bearing in an increasingly volatile environment.

It may flounder along, unable to decide which path would best define its goals.

Or, in the words of Anne Krueger, former deputy head of the International Monetary Fund, it may choose reform, convinced that such an option would bring benefits to Turkey and its people, regardless of developments outside its borders.

Aura Sabadus is a journalist specialising in Turkey’s energy sector