Next year will be a crucial turning point for the Turkish natural gas market, as in 2021 alone, 16 billion cubic meters (bcm) per year of long-term contracts with Turkey’s existing suppliers will expire, a study by Oxford Institute for Energy Studies (OIES) has disclosed.
“Turkey will not accept the same old-fashioned long-term sales contracts, with oil price indexation and burdensome take or pay [scheme], in the new contracts,” said Gulmira Rzayeva, OIES research associate, in the report released on Sept. 16.
Long-term contracts covering pipeline natural gas of eight billion bcm per year will expire next year, Rzayeva noted. Turkey’s state-owned crude oil and natural gas pipelines and trading company, Botaş, imports half of these while seven private sector importers take the other half.
“Gazprom has already suffered from the situation of low spot gas prices and decreasing sales volumes as a result of demand stagnation; it has already lost 30 percent of the Turkish market share since 2017,” said Rzayeva.
She also said that natural gas prices in Turkey do not reflect pure economic market fundamentals, and therefore, necessitate a change toward short and mid-term contracts, gas-to-gas indexation and flexibility in contractual terms.
The expert underlined that Turkey could be confident in adopting an assertive position in negotiations with Gazprom and other suppliers, particularly Iran and Azerbaijan because it has significantly strengthened its position, thanks to the strategy of doubling the daily entry-point gas send-out capacity.
It includes both the rising liquefied natural gas (LNG) import capacity and decreasing import demand by significantly increasing the share of domestically produced energy such as coal, lignite, wind, solar and hydro.
Turkey’s self-sufficiency energy goal of domestically producing electricity from local and renewable sources annually will help wean off natural gas import dependence and inflexible long-term contracts, according to Rzayeva.
This policy has borne fruit, and the country has produced 66 percent of its electricity from local and renewable resources in the first five months of 2020 and 62 percent from January through July this year, according to data from the Energy and Natural Resources Ministry.
“May 20 was a historic day because 94 percent of the country’s electricity was generated from domestic sources,” she said.
Options to receive hub price
Rzayeva said for Turkey to develop its hub per market price, it would need Botaş, the dominant player in the market, to strengthen links with European market hubs.
She has highlighted another option in developing pipeline connections through reverse flows on the Malkoclar-Stradja2 pipeline, the Turkey-Greece pipeline, the Trans-Anatolian Natural Gas Pipeline (TANAP) and TurkStream, all of which would allow Turkish buyers to access pipeline gas from the rest of Europe at the hub prices.
This option would force pipeline gas suppliers to accept European hub prices for their gas in long-term contracts, but probably only after a major contractual fight.
According to Rzayeva, Botaş may conclude a short-term contract based on current market prices with Gazprom and Shah Deniz-1 next year using its access to cheaper LNG. But she said it will have to fully liberalize the market gradually by the end of 2020s when all its LTCs with pipeline suppliers expire, leaving aside political and strategic considerations and driven by pure economic logic.
Turkey imported 45.3 bcm natural gas last year, paying approximately $12 billion.
Besides pipelines, Turkey has improved its LNG infrastructure in a bid to increase the share of cheaper LNG in its natural gas mix to around 33 percent in 2020 from 28 percent in 2019, according to the Natural Resources and Energy Ministry.
Turkey’s LNG suppliers are Qatar, the United States, Algeria, Nigeria, Cameroon and Egypt.
When gas from the newly established Sakarya field in the Black Sea flows into the national grid after 2023, Turkey’s natural gas import is expected to decrease by approximately $2.6 billion per annum, according to the Turkish Natural Gas Distributors Association (GAZBİR).