Gas helps to warm Russia, Turkey relations after tumultuous 12 months
Moving toward the brink of war is about as serious as a geopolitical relationship can get — and that is where Moscow and Ankara found themselves after NATO member Turkey shot down a Russian fighter jet on the border with Syria on November 24 last year. Diplomatic efforts succeeded in calming the immediate tensions, but nonetheless Moscow’s reaction was a pledge to “seriously reevaluate” its relationship with Ankara. As well as a raft of economic sanctions, part of the geopolitical rhetoric was a move by the Kremlin to halt all talks around the already complex negotiation process on the planned TurkStream gas pipeline from Russia to Turkey under the Black Sea.
The link — originally intended as a 63 Bcm/year South Stream replacement — had already been downgraded to a two-line 31.5 Bcm/year project, and talks were becoming increasingly protracted as Ankara insisted the pipeline’s realization be linked to a gas discount on Russian gas imports. But Moscow drew a line under TurkStream after the fighter jet incident (which Turkey initially refused to apologize for), suspending talks on further progress on the pipeline. The result was speculation about what could replace it — Bulgaria looked to capitalize on the Russia-Turkey standoff by quietly promoting the idea of a new version of South Stream to Bulgarian shores.
But as quickly as TurkStream was written off, it rose again in September like a phoenix from the ashes of the downed jet following a July apology from Turkish President Recep Tayyip Erdogan. And then in October, Moscow and Ankara signed an intergovernmental agreement on the construction of two 15.75 Bcm/year lines to Turkey, one for the domestic market and one to the Greek border for onward transit to southeast Europe. The revival of TurkStream was complete.
Now, work is moving quickly with offshore construction permits already in place, while the pipe that had been earmarked for South Stream is expected to be easy to quickly lay. Eyes will be on the lay-barge market to see if any large-scale chartering takes place. All this, of course, will help Moscow keep a hold over the gas markets not only in Turkey but also in the wider region.
The timing of the intergovernmental agreement was also notable, coming just a few weeks after Turkey imported a cargo of US LNG — the first time a European market traditionally supplied by Russia had purchased any US LNG. Clearly, the finalization of the political accord on TurkStream was a signal to Europe and competing suppliers that Russia still means business in the region. Price discount?
As part of the pipeline deal, Moscow and Ankara also reached an agreement on the price Turkey will pay for the gas it imports from Russia. It was not immediately clear if it would be equivalent to the 10.25% discount on the existing price structure agreed last year but never implemented. Sources told S&P Global Platts that a discount was part of the deal, but at a lower rate — anywhere from 5% to 7%.
Of course, a lot has changed since the discount was first agreed back in February 2015. The main thing is that gas prices in Europe have plummeted, making it less urgent for Ankara to secure itself a contractual price discount. Russia also has an incentive to lock Turkey in — new possible suppliers are emerging all the time.
As well as the startup in 2018 of gas flows to Turkey from Azerbaijan via the TANAP line, new gas could come to Turkey from the East Mediterranean, from the semi-autonomous northern Iraqi region of Kurdistan, and from a resurgent Iran. Turkey is a growing market with demand set to exceed 50 Bcm/year. Russia last year sent 27 Bcm of gas to Turkey — more than half of the country’s overall consumption — so Turkey is still very reliant on Russian gas.
And for Gazprom, Turkey remains its third biggest market, representing some 18% of the company’s total exports. So while the political 180 between Moscow and Ankara surprised some, in a way it was inevitable that the two countries would mend their fractured relationship given their interdependency in the gas sector. And in the end, all it took — it seems — was a simple “sorry.”
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