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On Aug. 21, President Recep Tayyip Erdogan announced that the Turkish drilling ship Fatih had found the country’s largest natural gas reserve in the Tuna-1 area off the Black Sea coast. Reportedly, the reserve discovered in this area is estimated to hold approximately 320 billion cubic meters of gas.
For Turkey, a country dependent on imports for its energy needs that paid around $41 billion to its energy suppliers last year, the announcement attracted the public attention and left the analysts with a struggle for predicting the possible outcomes of the exploration. The gas finding came after crucial steps that Turkey took to facilitate its energy finding process, such as increasing its exploration capacity and technological know-how by acquiring seismic and drilling ships, hiring competent personnel, emphasizing naval borders of the country under the slogan of “Blue Homeland”, and revising its legal regulations in the key areas.
Turkey aspires to launch gas production from the Tuna-1 area by 2023, which marks the centennial of the Republic. With the exploration, the country now wants to satisfy a significant portion of its energy needs from this field and reduce the cost of its energy imports. Since the annual gas production rate that can be yielded out of the reserve is still unknown, its exact impact on the Turkish economy and current account deficit has yet to be estimated.
In addition, as in other cases, the amount of natural gas that is recoverable will be detected after drilling additional wells in the appraisal period, which can result in changes both positively and negatively. Although the amount of recoverable share, annual stable production rate in the plateau period, and its impact on the economy are still unknown, the discovery may have serious implications for the country.
The gas discovery came ahead of the expiration of a number of long-term gas contracts that will soon expire, which turns it into a transformative event bearing the potential to give Turkey a more advantageous bargaining position in the re-negotiation process.
Furthermore, exploration and drilling activities demonstrate the recent increase in Turkey’s technological/logistical capacity and know-how. Beyond the amount of gas and its share in total consumption, the country’s recent endeavors might mean serious implications in two main areas: (1) it can substantially transform the country’s domestic energy market by affecting the conditions of long-term gas contracts, and (2) it can increase Turkey’s technological capacity and know-how. In an increasingly multipolar world, while the future benefits can bolster Turkey’s power in the region, it can also mean a further loosening of the already crumbling alliance structure.
Turkey’s energy ties and contract diplomacy
Turkey’s long-term gas contracts render the country dependent on regional actors such as Russia, Azerbaijan, Qatar, as well as outside countries like Nigeria. While Turkey wants to re-negotiate these contracts and replace them with more advantageous ones, the recent discovery can give Turkey an upper hand in the upcoming process by diversifying its access to energy. Turkey has been engaged in the diversification of its energy sources for a while to secure a more powerful bargaining position against existing and future gas suppliers and to induce a positive change in the contract terms and pricing mechanisms. Hence, the exploration may well grant Turkey the long-sought improvements in the domestic gas market.
The natural gas markets are shaped by two main competing pricing mechanisms, oil indexation, and hub-based pricing. Turkey has been party to many contracts signed with various countries on the basis of oil indexation. As opposed to hub-based pricing, oil-indexed agreements adjust their prices according to the oil market, which can often miss the dynamics internal to the gas market and diverge significantly in terms of price levels. Consequently, in recent years, the countries that signed hub-indexation contracts were able to pay substantially smaller amounts from the countries that followed oil-indexed agreements.
Since oil and natural gas are not perfect substitutes for one another, oil-indexed contracts frequently result in price divergences, asset bubbles, and unexpected volatility, which in turn creates large price gaps between different regions in the world. Therefore, some energy-importing countries have appealed to their suppliers in order to switch their pricing mechanism to hub-indexation in order to have more favorable positions. Turkey, as a country with many oil-indexed contracts, has also been seeking to re-negotiate its pricing mechanism with the supplier countries.
With the potential developments in favor of the country, the following years can witness important modifications in the long-term natural gas contracts. Many of the existing agreements will expire between 2021 and 2026. By the end of 2021, 18.25 bcm per year of gas contracts will expire, and a significant proportion of this amount (11.65 bcm per year of contracts) will be reopened to negotiation between Turkey and the gas supplier countries.
Moreover, the following years until 2026 will also mark the expiration of 30 bcm per year of contract. These years will be consequential for the country’s energy market. If Turkey manages to reach an upper hand in the upcoming negotiations, its access to natural gas can be cheaper, and additionally, the country’s ambitions to become a gas trading hub can be realized with further steps in the future.
High-tech investments and foreign policy
Recently, Turkey has been increasing its efforts both technologically and logistically to find commercial oil and gas wells in the Black Sea and Eastern Mediterranean. In addition to emphasizing naval borders of the country under the slogan of “Blue Homeland’’ and revising its legal regulations in the key areas, Turkey has added one seismic ship (Oruc Reis) and three drilling ships (Fatih, Yavuz and Kanuni) into its inventory in order to reach its goals in the energy domain. The finding of the commercial gas well came after eight failed deep-water drills by these ships.
While such state-backed projects requiring technological initiatives are usually considered as elements that boost economic growth, Turkish diplomatic steps in various crisis areas have shown that such inquiries can also be turned into important foreign policy tools. Recently, Turkish investments in military technology, especially on light-armed drones, proved to be an important element of Turkish maneuverings in the context of Syrian and Libyan conflicts. The active use of Bayraktar and Akinci drones in Idlib and Tripoli demonstrated that increasing technological capacity can actively be turned into an advantage in foreign policy.
For regional politics, to conceive the possible impacts of Turkish investments in the domain of natural gas explorations, which requires formerly unprocessed technology and know-how, one should think in parallel with the dronification of Turkish policy in recent years. Although the amount of the resources found by Turkey in the Tuna-1 region is limited for now, the fact that Turkish state-owned corporations can engage in drilling operations and will carry out formerly unexperienced procedures highlights an increasing technological capacity and know-how on the part of Turkey. With the discovery, Turkey’s exploration activities will likely enter a new phase by increasing its expertise and know-how on the issue. Moreover, given the discovery in the Black Sea coast of Turkey, a similar finding in the Mediterranean can change the balance of power to the greater benefit of the Turkish side.
A new window
Beyond its actual amount and its likely future contributions to the country’s economy, the gas discovery bears the potential to have large-scale implications in the context of an increasing multipolarity in the region.
Firstly, it may grant Turkey an upper hand and advantageous bargaining position in the upcoming re-negotiations of long-term natural gas contracts. Secondly, Turkey has been successfully engaging in drilling activities for a while, and the latest exploration can extend Turkey’s technological and logistical capacity for which the country has been striving. In the long run, these two factors can significantly affect Turkey’s position in the region. While Turkey seems to have been picking the fruits of its investments, its increasing real capacity further weakens the prospects for maintaining the existing alliance structure in the region.