Within the geopolitical energy triangle EU–Turkey-Russia, bilateral relations between Turkey and Russia have crucial importance. The geopolitical objectives of Ankara and Moscow have been hugely different in many areas of the world: from the Balkans to the Caspian, from the Caucasus to the Black Sea and the Middle East, and in particular Syria. However, Ankara and Moscow agreed to disagree on politics and decided to build their relations on economics and trade with energy being the main pillar for last decades. Turkey’s imports of oil and oil products from Russia – like it is the case with coal - are not crucial. Furthemore, Turkish dependence on the crude supplies is offset by Ankara’s ability to restrict oil flows via the Turkish Straits, a key route for Russian crude deliveries to the Mediterranean from the Black Sea ports. On the contrary, Turkish dependence on Russian gas is overwhelming. Virtually all gas consumed in Turkey is imported, principally under long-term contracts with take-or-pay clauses. In 2015, Russia supplied 27 bcm out of 48 bcm consumed in Turkey. Turkey is therefore Gazprom’s second largest client in Europe after Germany. Natural gas in the bilateral Russia – Turkey relation became a point of a (forced) mutual agreement when both countries faced negative attitudes of Brussels. After the denial of its’ EU bid in 2008, Turkey started its’ rapprochement with Russia and followed an ambivalent foreign policy moving between Brussels and Moscow. Following the de facto rejection of the South Stream Russia also turned to Turkey launching the Turkish Stream project. The relations between Ankara and Moscow sharply and suddenly deteriorated after the shooting down of a Russian jet in November 2015. The incident had an immediate negative impact on the bilateral energy relations with most important energy projects – for example such as the Turkish Stream – being postponed or cancelled.

A “freeze” in Russia-Turkish relations benefited Brussels but also forced both Ankara and Moscow – despite strong Eurosceptic rhetoric in both capitals - to implement with a (limited) re-alignment of their energy policies with the EU energy strategies. Within the general energy triangle between the EU, Turkey and Russia, Brussels seems to benefit from the deteriorating Turkish-Russian relations cautiously trying to force both Ankara and Moscow to accept its’ own “rules of the (energy) game”.

In case of Turkey, emphasis on ‘Southern Gas Corridor’ which requires consent of Turkey as the transit state has accelerated. At first sight, this coincides with Turkey’s ambitions to become the fourth gas channel to Europe together with Algeria, Norway and Russia. Turkey has already been incorporated through various pipeline projects into European “pipeline game”. Furthermore, Ankara shares Brussels’ key position on the security of energy supplies (diversification of sources and routes of oil & gas imports). Ankara as well as Brussels is concerned with a strong dependence on natural gas imports from Russia. Despite this commonality of interests, Brussels is not interested to treat Ankara as an equal partner as the EU does not want to deal with a new Russia in its energy arena. Brussels rather would like Turkey to be part of its “energy realm” by adopting European rules of the game, for example via the membership in the Energy Community and accordingly harmonization of its energy legislation. To make a long story short – Brussels wants Turkey to be only a transit country (which goes against Ankara’s plans to be a regional energy hub) and to push Turkey towards full liberalization of its natural gas market. Obviously, Turkey is not to in hurry to accept all these demands. Though Ankara has already agreed to become an energy corridor for Azeri gas, by signing the TANAP pipeline agreement, it does want to follow the EU “energy game”, but rather become the region’s most important gas distribution point. Seen from the Turkish point of view, the European Union – like Russia with the Turkish Stream project – just wants to secure the energy transit via Turkey in order to reach its’ own economic and political goals. However, deterioration of Ankara’s relations with Moscow has made Turkey more eager to follow a more “European” way in its own energy policy.

Although Turkey openly declared to become an energy hub at discourse level, Ankara has not been able to implement appropriate policies and regulations that are compatible with this aim. Gas market in Turkey is still under transformation and the pricing is not entirely defined by the market based mechanisms. The Turkish spot gas trade center - UDN (National Balancing Point) is too small and has very low churn ration (total virtual gas trade in Turkey was 24 bcm in 2015). Furthermore, the EPIAS (Turkish energy exchange) was established under the Borsa Istanbul, which might incentivise the Turkish Governmnet to develop a domestic hub. In order to strengthen the connection between Europe in the energy sector and secure Turkey's position, EPIAS applied to the Association of European Energy Exchange on November 26, 2015 to be a member. The first gas exchange there was launched in March 2016. Establishing a liquid market at home will increase bargaining power of the Turkish energy companies and will accelerate the ingration of the Turkish gas market with Europe's internal energy market. Once these goals are achieved, Turkish gas importers will be able to switch from oil-indexation to spot pricing. In a way, animosity in Turkey’s relations with Russia has accelerated Turkey’s decisiveness to create an EU-shaped liberal, liquid and competitive gas market focused on spot-based LNG imports. While, the first Turkish terminal is still fully dedicated to long-term supplies from Algeria and Nigeria, the second terminal in Aliaga is primarily allocated for spot LNG imports. Since the beginning of 2016, decrease in import of pipeline gas from Russia went in parallel with an increase in spot deliveries to Aliaga terminal.

As for Russia, the decision to put the Turkish Stream gas pipeline on hold announced in early December 2015 further increases the strategic importance of Nord Stream 2 (NS-2) as the only new natural gas route circumventing Ukraine and shifting the transit fees paid to Ukraine’s Naftogaz into construction of the NS-2. Though tensions between Russia and Turkey seem to be gradually calming down, all undersea pipeline projects in the region of the Black Sea will face significant delays and would not be able to directly access the gas hubs in Northern Europe, thus further emphasizing the importance of the undersea Baltic gas pipeline.

While NS-2 will certainly reduce Russia’s dependence on the gas transit via Ukraine, it might increase Moscow’s dependence on the European energy regulations.

Many important political actors in the European Union already perceive this pipeline as a threat to Europe. While it is unlikely that these objections will stop the construction of the undersea pipeline, the financial viability of NS-2 may be threatened if it the EU Commission decides that the undersea section of the pipeline is subject to the 3rd Energy Package and consequently imposes the Third Party Access (TPA) on Gazprom and its partners. Even the TPA for the land-based part will significantly complicate functioning of the NS-2 creating bottlenecks and leaving two lines half empty. In the present political climate it would be quite difficult for this pipeline to receive full TPA exemptions for the onshore gas transmission infrastructure. These requirements might force Moscow to re-consider its sacrosanct principle of the single energy channel (export monopoly for Gazprom). Russia has already partly liberalized its LNG exports and further breaches in Gazprom’s single export channel are lobbied by the independent gas producers such as Novatek and Rosneft. The Russian government could allow Russian independent gas producers (Novatek and Rosneft) to book 50% of the NS-2 transportation capacity, thus implementing TPA for the entire NS–2.

Gazprom made already substantial concessions to its European clients by partly switching to a spot prices, but potential export liberalisation for NS-2 may also allow foreign buyers to purchase some volumes on Russia’s largest commodity exchange SPIMEX (St. Petersburg International Mercantile Exchange). SPIMEX launched its first trading in natural gas in October 2014. In 2015 7.101 bcm was sold at SPIMEX and the trading is expected to reach 26 bcm in 2016. Despite relatively small volumes SPIMEX already offers month- and day-ahead physical trading and plans to launch forward (for 2-6 month period) and futures (2-72 month period) trading in 2017-18. Thus by 2020, SPIMEX might transform itself into an important trading hub offering a fair price-setting mechanism for deliveries both in Europe and Russia.

Conclusions



Within the general energy triangle between the EU, Turkey and Russia, Brussels seems to benefit from the deteriorating Turkish-Russian relations. As Turkish policy has shifted more towards Brussels and Russia has focused on the construction of Nord Stream 2 de facto under the EU energy market regulations. In addition, both Russian and Turkish domestic energy markets will be affected by developments in Europe that will likely result in further export liberalisation for the former and import liberalisation for the latter.

We should however see the situation not in static but rather in the context of rapidly changing global and regional energy dynamics which have the potential to affect regional energy outlook. Political tensions between Russia and the EU, crisis in Ukraine, recent tensions in German-Turkish relations and even a re-establishment of political relations between Ankara and Moscow could shuffle Brussels’ energy cards in this part of the world. Understanding of these risks was one of the key reasons behind the adoption in February 2016 of the EU Strategy for LNG de facto aimed at cutting EU dependence on the pipeline gas from Russia or the Southern Gas Corridor.


Dr. Danila Bochkarev is a Senior Fellow at the EastWest institute in Brussels (dbochkarev@ewi.info). Dr. Volkan Özdemir is the Director of the Institute for Energy Markets & Policies (EPPEN) in Ankara (ozdemir@eppen.org)

Disclaimer: the views expressed here are solely those of the author and do not necesseraly represent views of their organizations.