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9 March 2012
[JTW Interview] USAK Expert Hasan Selim Özertem: Turkey Needs to Review Its Energy Strategy
By Betül Buke Karaçin & Burak Can Bayram, USAK
USAK energy security and Eurasia expert Hasan Selim Özertem commented on energy policies and regional developments for USAK Strtaejik Gündem. Özertem discussed issues regarding the transportation of Iranian gas to Turkey. The previous month, he drew attention to the halt of gas transportation from Azerbaijan and Iran as well as the yields of agreements which were signed between Ankara and Baku. He also noticed that if Turkey wants to avert these cuts in gas, it might need to take serious precautions regarding this issue.
Q. What do you think about the cuts in natural gas transportation from Iran and Azerbaijan during cold weather in February?
Hasan Selim Özertem: This halt of natural gas transportation from Iran was not the first time. There have been eighteen instances of Iran decreasing the pressure or cutting off the flow of its gas pipelines to Turkey up to today. On the other side, there are some technical and political problems regarding the gas supply coming from Iran.
Regarding the natural gas which comes from Azerbaijan, people might have noticed that winter seasons have passed very brutally in recent years. Also, one of the coldest winter seasons of recent times in the region has just passed this year. Because of the freezing of the Caspian Sea, there have been some technical problems in the transportation of Azerbaijani gas.
Nevertheless, one way or another there are many instances that shows Turkey’s neighbors use natural gas like a weapon may be today not against Turkey, but nobody can give any guarantees for the future. Therefore, Turkey might formulate a good strategy regarding dependency on natural gas. The most effective way to balance this dependency on natural gas is the diversification of energy resources not only in terms of resource countries, but also regarding the type of energy that it consumes.
Q: There have been some serious problems about natural gas in Turkey. What do you think about Turkey’s energy strategy?
Hasan Selim Özertem: Turkey is aware of the situation, so it has recently formulated alternative energy policies on nuclear and renewable energy. And also there is another alternative resource which is coal. In Turkey, there are many coal reserves, but because of some technical problems there is a capacity issue. Therefore, these reserves are not evaluated very well.
On the other hand, there is a difference between Turkey and its neighbors. Turkey has a significant LNG (liquefied natural gas) capacity. The main problems are a lack of diversity and the storage of natural gas. In most developed countries, the percentage of natural gas storage is equal to 15% of the country’s consumption, but in Turkey this percentage is nearly 5% (2.6 m3). Turkey signed an agreement with China to establish natural gas storage with a 1 m3 capacity under Lake Tuz. But this storage will not be enough to solve Turkey’s needs. Therefore, in my opinion, there might be a strategic plan which includes establishing new storage in Turkey’s industrial regions such as Bursa, Gaziantep, and Adana. Through this plan, Turkey can solve most of the problems of natural gas cuts during the winter. At the same time, Turkey’s “take or pay” agreements with Iran and Russia could be balanced and Turkey would not pay billions of dollars for natural gas which is not consumed. Actually, this situation would only be one result of the strategy.
Another step of the strategy is about providing diversification of the resources regarding natural gas. In particular, Turkey might plan a good strategy based on the proven natural gas reserves in the Middle East. Because of the Arab Spring, the region is still unstable and this situation causes some expensive investments which cost billions of dollars, so the most important step of the feasibility operation is security. If you want to consume Qatari gas, first you might think about the security of the route which passes through Iraq or consider the situation of Syria while receiving natural gas from Egypt. In this condition, the best option is the diversification of energy resources. In this context I can say Turkey is not in a bad position. In certain levels Turkey even consumes Algerian and Nigerian gas. And also, depending on seasonal dynamics natural gas in the spot market can be more attractive rather than long term agreements. However, to use it you should have some extra capacity of storage.
Another strategy involved the decreasing rate of dependency on natural gas. It does not mean that Turkey’s natural gas consumption is decreasing, in direct contradiction, while consumption is increasing, Turkey can make a new strategy to find alternative energy sources.
Q: How can the situation of Turkey’s energy market liberalization be evaluated?
Hasan Selim Özertem: First of all, if we look at the situation in the privatization of natural gas infrastructural networks, liberalization in Turkey has been executed regionally. Up to today, Turkey has showed a relatively successful strategy in big cities such as Ankara, Bursa, and Istanbul. If we look at the other side of the picture, we can see that Turkey encourages the private sector through some agreements which have been signed with other countries. Up to now, BOTAŢ has been the only authority to make agreements with third countries. Because of the process of synchronization with the European Union, the authority of BOTAŢ was limited. However, you should plan well and move accordingly when it comes to privatization or else not well managed strategies might harm the stability in the market. Moreover, it should be underlined here that you need companies with capacity to negotiate with actors of the energy market like Gazprom, Iranian government and SOCAR.
In 2011, Turkey decided to not renew an agreement signed with Russia which includes 6 bcm. On the other hand, the Energy Market Regulatory Authority (EMRA) announced that private corporations could obtain a license if they adhere to regulations and make agreements with Gazprom directly. Because of the limited time period, winter conditions, increasing natural gas consumption and depending on some other reasons, this arrangement failed. Therefore, once again BOTAŢ made an agreement with Gazprom. However, within the framework of the renewed agreement BOTAŢ got the privilege of transferring some of its rights within the contract to the private sector.
While making liberal reforms, governments pay attention to the energy security issue. If you liberalize without noticing the energy security point, society can be affected by natural gas cuts during the winter season or the interruption of electricity during the summer season. Therefore, advantages and disadvantages should be calculated seriously in the long term.
Gazprom wants to negotiate with other big corporations. In this context, the privatization attempt of Turkey’s distribution canals and electricity networks results in strong actors in the market. Therefore, this condition can supply financial power and comparative advantage to Turkey in the long term.
Q: Turkey had to take the Iranian gas conflict to arbitration and permitted South Stream to be constructed and operated in its exclusive economic zone (EEZ). This second step is a frustration for the NABUCCO project. Do these steps indicate a shift in Turkey’s energy policies?
Hasan Selim Özertem: Arbitration with Iran and South Stream issues are totally irrelevant and two independent issues. Let’s look at the Iranian issue first. While signing agreements with other states, Turkey should envisage the pros and cons very carefully. It should take into account its liabilities and the binding clauses in a professional way. Such agreements are long-term agreements and sometimes extend to 20-25 years. However, international politics and economic conditions are rapidly changing. The international gas markets were exposed to significant changes from 2010 to 2011 due to the global financial crisis. The global economic crisis began in 2008 and in almost all countries the domestic markets contracted and economic growth slowed down. As a consequence, oil prices started to increase.
At this very point, many European states had to take the gas price issue to international arbitration and received price deductions. Turkey is not out of this general picture. It renewed the 6 bcm (western pipeline) agreement with Russia and in return let the South Stream pass through its EEZ. As a result, Turkey also received a price reduction from Russia.
On the other hand, Turkey’s gas agreement with Azerbaijan seems to have more advantageous terms for Turkey compared to those with Russia and Iran. As I have already mentioned, it should be admitted that Iran did not show a successful performance of supplying gas since the gas pressure declined in the middle of winter and supplies were cut for a period. Therefore although Iran is an important partner for energy, it is not a stable one. But we are still paying the highest price for Iranian gas. Considering the economic crisis and the declining prices for Europe, Turkey requested Iran to lower the gas prices. However, Iran rejected. Turkey did not immediately take the issue to international arbitration and extended the negotiation talks. If such efforts fail, Turkey will then choose the arbitration alternative. This is a rational approach.
If you look at the issue from the Iranian perspective, Turkey is not the only country importing Iranian gas. However nowadays, Iran is subject to a containment policy by Western countries. Most probably, significant sanctions will hurt Iran and Iranian oil trade will also be negatively affected.
On the other hand, Turkey has long been against the Western containment policies toward Iran. To that end, I believe that Iran should review its stance and reduce the gas price for Turkey. However, Iran is under increasing economic pressure and in addition Iranian currency is losing value against the dollar, therefore it would not be eager to make such a price reduction. Under these conditions, the money Turkey pays to Iran is of vital importance. In the end, either a mutual solution or the decision from the arbitration is on the agenda; however the first seems to have been inconclusive up to now.
For the South Stream case, there can be different comments on why such permission was given. One of the main reasons is Turkey’s request for a lower price and better terms for the 6 bcm gas supply agreement. However, it can also be claimed that the reduction and the agreement in general is not that vital for Turkey.
On the other hand, Turkey signed a new agreement with Azerbaijan regarding the Shah Deniz Phase-II gas supplies. At the very outset, we may state that Turkey got what it wanted from this agreement. According to the agreement, a second trunk gas pipeline will be constructed via Turkey and will be the main transit (artery) to Europe. Therefore, the permission given to South Stream (SS) would not affect Turkey’s aspirations and strategy to become an energy and gas hub since the Shah Deniz will have a 16 bcm capacity. Giving permission to SS would enable Russian gas to be transported to Europe via the Black Sea. Therefore, Russia will be transporting Russian, Kazakh or Turkmen gas to Europe. Such a development will not necessarily change the regional power balance. Furthermore, Turkey is looking for Russian support on the Syrian issue. While Russia is not taking a place in the camp which wants Assad removed, I think in the mid-term Turkey should persistently seek Russian support on this matter.
Through such permission, Turkey had shown Russia that it is not a risk element but a dependable partner in the region. The policy so far implemented by the EU had also shaped Turkey’s policies to give priority to regional cooperation rather than following a European way.
*Translated into English by Doruk Pamir.
