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Turkey's energy dynamics, regional politics and pipelines in the context of global game-changers

14 October 2013


The energy debate is increasingly focused on new factors that could prove transforming for global supply and demand, and could alter longstanding assumptions about energy security and geo-economics. Shale gas, the rise of LNG as a global commodity, setback in nuclear power renaissance, climate change, new renewable initiatives, volatile energy prices and increasing geopolitical tensions all play a role in this changing energy outlook.


Produced for National Defence University, Washington DC, 14 September 2012 Mehmet Öğütçü, BREC Board Member



Key features of the developments in world energy


Since the end of the Cold War, and as the twenty-first century continues to unfold, international relations amongst the great powers have undergone fundamental changes. In one important respect, access to energy — and in particular fossil fuels — is reshaping the post-Cold War environment today more profoundly then could have been foreseen during the 1990s.

In the new, energy-centric world we have all now entered, the price of oil and gas will dominate our lives and power will reside in the hands of those who control their global distribution. In this new world order, energy will govern our lives and determine when, and for what purposes, we use our cars; how high (or low) we turn our thermostats; when, where, how or even if, we travel; increasingly, what foods we eat (given that the price of producing and distributing many meats and vegetables is profoundly affected by the cost of oil or the allure of growing corn for ethanol); for some of us, where to live; for others, what businesses we engage in; for all of us, when and under what circumstances we go to war or avoid foreign entanglements that could end in war.

The share of natural gas in the primary energy mix is rising faster than that of oil and coal and the gas industry is simultaneously undergoing immense changes as new technologies, demand and supply patterns entice new market forces. Natural gas, found in abundance in only a handful of countries (Russia, Iran and Qatar together possess over half the world"s proven gas reserves), is inercreasingly the fuel of choice for a number of end-uses. A development that has and is transforming the landscape of the natural gas industry is the advent of LNG.


Source: BP Statistical Review of World Energy

Shale gas has the potential to be a "game changer," dramatically augmenting natural gas supply and opening new opportunities for competition among different energy sources. Specialists see the strategic importance of developing shale gas in Europe as a means of reducing the continent's dependence on Russian imports. Some have argued that developing shale gas is even more important for Ukraine, a country which has no gas resources of its own but is rich in coal.

The countries where shale gas is presumed to exist in the EU are Germany, Poland, Sweden, France, Austria, Hungary and the UK. Warsaw is harbouring major ambitions to develop shale gas, the switch towards which is like "the 21st Century's gold rush"[1]. Shale gas cannot be seen yet as a game changer in Europe as it is in the United States, where roughly 50 percent of the country's needs are met by developing unconventional gas [2]. The "shale gale" sweeping across North America the past few years has more than doubled the size of the discovered natural gas resource in North America-enough to satisfy more than 100 years of consumption at current rates[3].

Overall, Western countries are producing less and less of their own energy, and are therefore having to import more and more. This is having a massive impact on the transfer of wealth. The energy guru, Daniel Yergin, has estimated that the U.S. is currently transferring about $1.3 billion to the oil-producing countries every day — or if you prefer, $475 billion a year. If we include China, the EU, India, and Japan in this calculation, every year the major oil consumers are transferring over $2.2 trillion to the oil producers[4]. What we know is that these massively increased energy revenues not only mean more economic power for the oil producers, but also, of course, increasing political power and influence in shaping the new global security order.

The new world energy system will be shaped by rising demand over the long term, dominance of fossil fuels, inaccessible supplies, price volatility, inadequate investment, geopolitical tensions, and climate change. Three great trends will define the geopolitical energy landscape of the 21st century: The rise of new economic dynamos like China and India, with voracious appetites for energy and other raw materials; the reluctance of the mature industrial powers, led by the United States, Europe, and Japan, to abandon their privileged status atop the resource-consumption pyramid; and the gradual depletion of many of the world's vital resources. How these three trends interact will largely determine the shape of the future world order.

A growing risk of conflict

Throughout history, major shifts in power have normally been accompanied by violence — in some cases, protracted violent upheavals. History has all too many examples of miscalculations leading to wars that spiral out of control. Think of the years leading up to World War I. In fact, Central Asia and the Caspian today, with their multiple ethnic disorders and great-power rivalries, bear more than a glancing resemblance to the Balkans in the years leading up to 1914.

Volatile prices have, together with many other factors, shifted power significantly to producing countries, especially a few large ones, where the majority of remaining reserves are located, such as the Gulf, Russia, and Central Asia. These countries seek a changing or reshaping of the traditional rules of the game for the benefit of their national interests.[5] They have the political will to use energy as an instrument to advance their economic and political interests.[6] Aware of their increasing power, many of the resource-rich countries either have re-nationalized their oil industries, or have established strategic control through further transfer of power into the hands of governments.[7] Production sharing contracts are in the process of being transformed into technical service contracts.

Due to increased demand and depletion of domestic reserves, major consumers will have to rely more on imported oil and gas, from a few politically instable regions such as the Middle East, Africa, Russia and Central Asia, through long-distance pipelines, and vulnerable sea routes[8]. This, combined with the fact that the international market is less stable and more prone to the disruptions of natural disasters, terrorist attacks, and isolated geopolitical acts, has increased the vulnerability of these consumer countries. Yet, suppliers are also concerned about demand security given the depressed prices and demand in most OECD economies as a result of the economic recession [9].

The uneven distribution of energy resources among states, and the critical need to access those supplies by all states, leads to significant vulnerabilities[10]. The coercive manipulation of energy supplies, competition over energy sources, the tendency of energy producing countries to political instability, attacks on supply infrastructure, competition for market dominance, accidents, and natural disasters are all adding significant risks to global energy security[11]. Increased competition over energy resources may also lead to the formation of security compacts to enable an equitable distribution of oil and gas between major powers.[12]

Another concern is the protection of critical infrastructure. As western, domestic sources of energy start to dry up, oil companies are drilling in much more isolated and hostile environments, because technology makes extraction more commercially viable. More oil and gas is extracted from under the sea rather than from under the land. Tankers criss-cross the oceans delivering these products from one continent to another. Pipelines are getting longer and often pass through unstable areas[13]. Over the past few months we have seen several examples of how easily these sophisticated supply networks can be threatened — in the Nigerian Delta, off the coast of Somalia, and in the Southern Caucasus.

What makes the world energy somehow unstable are "above-ground factors." Certainly, the poor state of the world's oil infrastructure is partly to blame. And, the lack of investment in new capacity by major oil exporters such as Russia, Iran, Venezuela and Mexico is another problem. But the energy infrastructure of the world is by definition both an above-ground and below-ground system. And, so by definition the level of oil production is influenced by technological developments, war, civil unrest, energy policy, investment decisions and a host of other human actions.

By dint of their sheer size and population -- and their collective decision to embrace their own particular brand of capitalism [14] -- BRICs are the economic future of the world. Together, the BRICs encompass more than 25 percent of the world's land mass and 40 percent of the world's population. Thanks to their anticipated, rapid growth, by 2050 the BRICs could eclipse the joint economies of the current, richest countries of the world. China and India will become the dominant global suppliers of manufactured goods and services. Brazil and Russia will be the world's leading suppliers of commodities. The BRICs today already account for a combined GDP of $15.435 trillion on a purchasing power basis[15]. By that measure, they are already collectively larger than the U.S..[16]

For the first time in recent memory, BRICs are growing not by borrowing, but by investing. China has the world's highest savings rate. Brazil and Russia are sitting on huge foreign currency reserves, thanks to windfalls from oil profits. Soaring commodity prices have put more money in BRICs" pockets than ever before. That means much less danger of a financial meltdown like those that Brazil and Russia experienced in the 1980s and 1990s. A decade after defaulting, Russia has a higher credit rating than the EU economies of Greece and Portugal.

Energy supplies are likely to get tighter in the next few decades for all economies, unless massive investments and new technologies are mobilized. The root-causes for most geopolitical tensions are the scarcity of resources that fuels competition among nations for a bigger pie, particularly in energy, water or food. Our generation never had to bother much about turning out the lights, heating our homes, or driving our cars. But our children's will.

How would Turkey"s future role in the new emerging energy architecture evolve?

In the midst of such game-changing developments, Turkey has emerged as an important actor to reckon with as a consumer, transporter, investor, regional hub, and security provider in energy and geopolitics. As global energy demand continues to grow, Turkey is positioning itself as an energy hub for supplies from the East and North, and consumers in the West. Meanwhile it is also working on improving its own security, with plans to boost the share of renewables and nuclear power in its portfolio, and to boost energy efficiency. Turkey"s energy sector is also readying itself for further major investment from abroad. Turks are acting increasingly in pursuit of their own self-interest, rather than following the dictates from Washington or Brussels.

The Turkish government predicts that energy needs will increase 10 percent each year for the next 20 years. Energy supply security[17] is therefore of prime importance to the country"s sustainable growth and development.

Turkey is not blessed with its own domestic energy resources, and imports more than 60 percent of the energy it consumes. Turkey"s domestic supplies, particularly in oil and gas, are miniscule. Its own oil and gas reserves account for only a tiny fraction of its rapidly rising demand. Oil consumption, at 35 percent, accounts for the majority of Turkish energy consumption (675,000 barrels per day — bpd) while crude production stood only at 48,000 bpd. This is followed by natural gas at 29 percent, coal at 25 percent, hydroelectric and renewable consumption at 11 percent. Nuclear electric energy consumption is for the time being zero — two nuclear power plants are under consideration with Russian and Korean support.

The growth in oil consumption is expected to continue at a rate of about 2-3 percent per year. Turkey's oil consumption, 78 million tonnes of oil equivalent in 1998 and 179 Mtoe now, is expected to reach 319 Mtoe by 2020. Turkey's natural gas consumption is expected to grow rapidly, quadrupling within the next 20 years, with 1,400 bcf gas consumption projected for 2020.

As a significant emitter of carbon dioxide and an ideal ground for solar, wind, hydro, geothermal and (perhaps) nuclear energy, it is also set to become a major player on the world"s increasingly important climate change and green energy stage.

A key transit/terminal hub of both oil and gas to the heavy consumer nations of Europe, Turkey is a nexus of multiple important pipeline projects and provides access to the Bosporus Strait and the eastern Mediterranean via the Ceyhan terminal. Not only a significant consumer in its own right, Turkey is also geographically close to 72 percent of the world's proven oil and gas resources, and thus is a natural energy hub between major oil-producing areas in Russia, the Caspian Sea basin, and the Middle East, and European consumer markets and has thus become the "Silk Road of the 21st century."

Turkey, poor in energy resources, and one of the high growth energy markets, also commands major chokepoints and transit routes for energy shipments. In natural gas, Turkey is Gazprom"s second largest market in the world after the EU. Despite difficulties in sustainable supply, Turkey is the only market for Iranian gas exports to date. It is the major outlet for Azerbaijani oil via BTC, and gas via the TGI Interconnector and the South Caucasus Pipeline. Iraq"s entry to the Mediterranean markets is through Turkey"s Yumurtalik deep-sea port. Iraq and the Arab peace pipeline coming from Egypt could also be other potential insurers of Turkey"s energy security.

Is Turkey a genuine regional powerhouse and energy hub?

By any objective criteria, Turkey is a regional power with which to reckon. A country of 780,576 square km, Turkey is almost the size of Germany and France put together. What opponents of Turkey's EU accession complain most about is that its population is too poor, and too big (at 73 million today and 80 million by 2015), although they are increasingly better educated and prosperous. If calculated in terms of purchasing power parity, Turkey is among the world's top 16 economies, with a GDP size of around $750 billion (the largest in its region and 7th largest in Europe).

Added to these facts are Turkey"s huge military power (second largest in NATO after the US and biggest in its region), world-class manufacturing and construction capacity, its status as a cultural center of attraction, and tourism potential. These facts imply a medium-size, global, economic, and military power. Turkey can do much better over the longer term, judging from the performance of dynamic Asian economies, if it can pursue a "high growth" (i.e. 7-8 percent per annum) path.[18]

Conscious of its unique assets in hand, Turkey pursues a long-term strategy of becoming a major Eurasian energy hub[19]. Better connections with both supplier countries and energy consumers not only serve to increase Turkey"s geopolitical standing, they also bring lucrative business opportunities in the form of transit fees, or through new refineries, LNG terminals, and trading facilities. Another value is to diversify Turkey"s own energy supplies and to re-export any surplus gas it may have.

Yet, whether the Turkish goal of becoming an energy bridge along east-west and north-south axes (and serving not only as a transit country, but also as an aggregator and center of trade) is a realistic one remains largely unanswered. True, Turkey is located at the crossroads of regions possessing three-quarters of the world's oil and natural gas reserves — sandwiched between major centers of energy production and consumption. Oil is fungible and could easily find its way to international, high-value markets, once it is loaded on a tanker. The critical fuel is natural gas.

If Turkey becomes a transit country for Russian gas only, its value will be rather insignificant. Turkey could become a critical energy hub if its supplies of gas were to originate from multiple sources, such as Russia, Turkmenistan, Iraq, and Iran. If Turkey could offer access to Russian and non-Russian gas supplies to European markets, its role as an integral part of the European energy structure would be secured.

In many ways, Turkey already fulfils the role of an energy hub. It does so in transporting oil through the Bosphorus strait and through several new pipelines linking it to Russia and the Caspian. Every year, some 10,000 tankers pass through the Bosphorus strait, which connects the Black Sea with the Mediterranean. Traffic keeps growing rapidly, and today a tanker maneuvers through these narrow, busy waterways every 20 minutes during the daytime.[20]

Can Turkey live up to its own rhetoric of being a regional energy hub? There are three projects on the drawing board. TANAP is an ambitious scheme to pipe 16 bn cubic metres of gas to central Europe. Although TANAP aims eventually to bring gas from Turkmenistan, Iraq and even Iran, none of the three projects will get off the ground without supplies from Azerbaijan"s Shah Deniz II fields, set to come online in 2018 and produce up to 16 bcm a year[21].

For its part, Turkey appears to be pursuing a two-pronged energy strategy. First, it seeks to diversify its own sources of imported fuel. Second, the Turkish strategists see the turning of their country into an east-west and north-south energy corridor as part of a broader plan aimed at enhancing Ankara"s geopolitical role in the region. Indeed, the main components of the Turkish energy corridor are the Straits, the Baku-Tbilisi-Ceyhan crude oil pipeline, the Shah-Deniz natural gas pipeline (Baku-Tbilisi-Erzurum), the Blue Stream, Iraq and Iran pipelines and the Trans-Caspian/TANAP Gas Pipeline projects.

Some EU officials say that energy is too pressing an issue to wait for the Turkey accession talks to make progress. They add another argument for decoupling energy from the enlargement process, namely that Turkey should not be allowed to use its strategic location to get concessions from the EU. This, they fear, could set a dangerous precedent: once TANAP and other energy links are in place, Turkey could try to use them to get ahead in negotiations with its EU partners in unrelated areas. Such fears are probably exaggerated. They certainly should not be used as an argument for not opening the energy chapter. If the EU is serious about the diversification of its energy supplies, it needs to do its utmost to unblock the accession talks in this area.

Turkey"s accession to the EU will only make progress if both sides keep reminding themselves of the benefits that deeper integration and closer co-operation would bring for both parties. Energy is an area where early gains are available. The fact that Turkey is negotiating for membership should help, not hinder, progress in this area. The evolving nature of the EU"s energy policy gives Turkey a great opportunity to make sure that its own energy policy contributes to Europe"s energy security, without neglecting its own strategic energy and security interests.

The possibility of Turkey shifting its focus in favour of Russia and the Middle East, as it now seems to be in the process of doing, despite denial by Turkish leaders that there is no change in the axis of the country's foreign policy, can easily be explained as a kneejerk reaction to the continuing saga of Turkey"s long-standing application for EU accession.

Turkey feels it has met all the requirements put forward by the EU, but that Brussels keeps moving the goal posts while the game is underway. Turkish Prime Minister Tayyip Erdogan, in fact, compared the E.U".s attitude towards Turkey to "changing the rules for the quarterback in a football game in the 36th minute."[22] In its own region, Turkey is regarded as a regional powerhouse and a force to be reckoned with, as opposed to the West, where many Turks are fed up with being treated like a second-class, poor man trying to gain entry into an elite club.

Who is who in Turkey"s energy world?

Turkey's energy establishment has been significantly controlled by the Prime Minister Recep Tayyip Erdogan and his close advisors/business proxies, with the Minister of Energy and Mineral Resources Taner Yildiz sitting on top of the day-to-day management of the energy governance. The Minister will not be allowed to make key decisions on investment, project choices and appointments without a clear go-ahead from the PM.

The President Abdullah Gul wants to be kept in the loop for key energy developments and has an energy advisor (Ibrahim Arinc). He also his own close circle of businessmen promoted for certain energy businesses. The Minister is loyal to him given that they come from the same city (Kayseri) and got this appointment.

Due to his personal interest (he was previously the PM's right-hand man on energy matters) the head of the Turkish Intelligence, Hakan Fidan, is also consulted on key energy matters and he influences decisions.

It is expected that a cabinet reshuffle will take place in November and Taner Yildiz is one of the ministers who might lose the government seat and be designated as a candidate mayor for Kayseri in 2013.

TPAO and BOTAS are state-owned oil and gas companies under the Minister's authority but his influence is limited. There is a long-standing plan to restructure them and create Turkey's own energy champions.

Pipeline politics

Being an energy hub is not having pipelines criss-crossing your territory. Turkey"s first priority must be to secure its own supply.

Second only to China, Turkey is the country in the world where the demand for energy supplies have increased most during the last decade. Turkey is dependent on foreign supplies for seventy-four percent of its energy consumption. Turkey"s main suppliers of natural gas are Russia and Iran. Natural gas accounts for the production of nearly fifty percent of its electricity, and eighty percent of the natural gas that Turkey imports is in turn provided by Russia and Iran.

To decrease the dependency on Russia and Iran, the diversification of energy supplies has long been a major preoccupation for Turkey"s leaders. Ankara has been looking to sign deals that would bring natural gas from Iraq, the Persian Gulf and the Caspian region to Turkey. This strategy aims both at enhancing Turkey"s energy security by diversifying its suppliers, and to turn Turkey into an energy hub, providing a transit route for energy to the European markets.

A web of pipelines already crosses Turkey, carrying hydrocarbons along east-west and north-south energy corridors. Among the most significant of these is the BTC oil pipeline, which connects the Caspian and Mediterranean via Azerbaijan, Georgia, and Turkey--notably, without crossing Russian soil. One million barrels of Caspian crude is pumped each day through the $4 billion pipeline, built through a Western consortium. Roughly two-thirds of BTC oil is headed for Europe. But attacks on this line--including strikes by Kurdish separatists in Turkey's southeast--have become a growing concern for Ankara.

Another important pipeline is the Turkey-Greece Interconnector (TGI), which has the capacity to transport 11.5 bcm of natural gas from Azerbaijan"s Shah Deniz field. Like the BTC oil pipeline, the line bypasses Russia. Other pipelines already pumping or in the works in Turkey include:

Kirkuk-Ceyhan: This 600-mile pipeline links northern Iraq with the Turkish port of Ceyhan. Two parallel lines have a combined capacity of roughly 1.6 million barrels a day, but a string of terrorist attacks since 2003 have repeatedly shut the pipeline down.

Blue Stream: The 754-mile Blue Stream pipeline connects mainland Russia with mainland Turkey, and will eventually deliver 16 bcm of gas annually once operating at full capacity. (The line was officially inaugurated in November 2005). A joint venture between Turkish, Russian, and Italian energy firms, Blue Stream was meant to provide Turkey with cheap gas by bypassing land routes in Eastern Europe. But the project has been criticized by the United States for potentially making Europe more dependent on Russia for energy.

Samsun-Ceyhan: A proposed bypass to the heavily traveled Bosporus shipping lane, this 350-mile long line would transport oil from the Kashagan oil field in Kazakhstan's portion of the Caspian Sea. Turkish officials say the project is part of a broader effort to reduce Bosporus traffic and protect Istanbul from a potentially devastating oil spill. The pipeline is still on the drawing board.

TANAP: The $7bn TANAP is set to transport 16 bcm of gas a year from Azerbaijan"s Shah Deniz II field, the largest natural gas field in Azerbaijan. Turkey has a 20 percent stake in TANAP, while Azerbaijan"s state oil company SOCAR holds 80 percent. Construction is expected to start at the end of 2013 or in early 2014, and the first phase should be ready in 2018. 10 bcm of gas is planned to be shipped to Europe, while Turkey will get the remaining 6 bcm. The project is designed to be expandable to 30 bcm and ultimately 60 bcm.

Turkey is keeping its options open. Posturing by Moscow has pushed Ankara to balance its cooperation with the West while expanding cooperation with Russia and Iran. For Turkey to be an energy hub, the energy resources don't have to go from east to west--they can also go from north to south. Pipeline projects connecting Turkey with Egypt, Iraq, Greece, and the Black Sea show how important Turkey is going to be for years to come. It's too early to know how European markets will be affected if Turkey's diversification strategy continues, or if Russia eats into Ankara's transport plans.

Turkey's emergence as a European energy hub seemed assured only a few years ago, but today, Turkey seems to be stuck in the middle of a great European energy game : with Europe looking to Turkey for diversification; Russia seeking to maintain its grip on the continent's gas transports; and Central Asian suppliers like Turkmenistan eager to expand to new markets but fearful of alienating Russia.

Will TANAP and Trans-Caspian pipelines threaten Russia"s national security?

Last week senior officials from Turkey, Azerbaijan, Turkmenistan and the European Union came together in Ashgabat to discuss the launch of the Trans-Caspian Gas Pipeline, which will include Turkmen gas in the Trans-Anatolian Pipeline project and deliver it to Europe through Azerbaijan and Turkey.

The project aims to strengthen the southern corridor that is an alternative source of natural gas for Europe, diminishing its dependence on Russian gas. The move comes at a time when Turkmenistan is trying to ease its export dependency on Russia -- the main market for Turkmen gas -- and as Turkey and Europe are looking for ways to diversify their supply.

Turkmenistan"s willingness to supply 20-30 bcm of gas to Europe is of great importance to Turkey[23]. The Trans-Caspian project is expected to provide Turkey with additional natural gas reso