Turkey is an OECD country and a nation in G-20 that is situated in a key geostrategic location at the cross-roads of Europe, Asia, and Africa. Seventy-five percent of total Turkish energy demand is outsourced, and the country depends on the import of oil and gas to meet 95% of its domestic consumption. In recent years, energy security has heightened in importance to sustain Turkey’s economic growth. This is due to the shifting geopolitical alliances in the Middle East such as the Abraham Accords, East-Med Gas Forum (EMGF), pandemic-related global economic downturn, and the quest for political leadership in the region. Especially, deterioration of Turkey’s relations with the Middle East since the Arab Revolts aggravated its isolation from energy partnerships.
In this context, gas is a critical commodity for power generation, industrial production, and household consumption that has economic and strategic implications for Turkey’s security outlook. It constitutes about 30% of Turkey’s primary energy demand. The main economic and geopolitical challenge for Ankara is excessive dependence on pipeline gas on long-term, take-or-pay type contracts with destination clauses, minimum purchase commitments, and oil-indexed prices. Long-term pipeline gas intake continues to create geopolitical risks that hinder the country’s maneuverability in regional affairs. Until 2021, Turkey used its buyer’s advantage in an oversupplied market to diversify its gas suppliers. First, it increased the scale and volume of LNG imports to replace inflexible pipeline input; and second, it developed off-shore gas in the Black Sea as a priority for domestic consumption in the short-to-mid-term. As gas prices skyrocketed due to supply squeeze in 2021, Ankara wants to leverage its diversification strategy to re-negotiate its pipeline contracts on shorter and more favorable terms with Russia. Gas supplies have become so important that, in a documentary titled Mavi Vatan (Blue Homeland), Admiral (Ret.) Cihat Yaycı, one of the progenitors of Turkey’s new maritime concept, argues that the quest to access offshore natural gas deposits is the main driver of Ankara’s assertive naval doctrine.[i]
For almost two decades, Turkey’s economic growth has depended on unsustainable levels of domestic consumption, erratic monetary policy, and trade deficits supported by cronyism that has left Turkey with a large current account deficit, touching -5.1% at its peak, over the last decade.[ii] The failed coup attempt in 2016 provided the AKP government with an opportunity to consolidate power and re-define itself in the domestic arena as the champion of a neo-nationalist economic agenda.[iii] As such, the twin challenges of sustaining growth while keeping the deficit under control required a strategy of import-substitution in critical items like hydrocarbons. Specifically, energy security for Turkey means access to affordable, sustainable, and reliable resources to maintain an annual GDP growth rate of over 5%.[iv] Indeed, the economic impact of import-dependence in energy is severe for the state budget. Partly due to global warming and dry summers, low hydropower input forced an increased reliance on imported gas for power generation. Due to record demand at times, Turkey tapped into spot markets at exorbitantly high rates to top up pipeline gas. The gaping current account deficit on a 12-month rolling basis as of August 2021 was $23 billion,[v] or 3.2% of Turkey’s GDP, of which $15 billion accounts for gas imports.[vi] This expenditure contributed to depletion of the country’s precious foreign currency reserves that, it is estimated, amounts to $128 billion[vii] and kept inflation at double digit figures.
In recent years, Turkey and Russia have forged close cooperation in the fields of energy, tourism, and defense despite their disagreements on Syria.[viii] Erdoğan’s policy of rapprochement with Eurasian countries after 2016 bore fruit mostly in the defense industry, such as the controversial purchase of S-400 air-defense missiles from Russia and technology transfer from China. Yet, in the bigger picture Turkey remains as the weaker party in the “cooperative rivalry” it forged with China and Russia during the past five years.[ix] The most important economic achievement is the agreement between Turkey, Russia, and Iran to do energy trade in local currencies, albeit indexed to the US$.[x] Beyond this, neither China nor Russia would want to transact in their local currencies for other tradable goods simply because they run trade surpluses against Turkey. The Turkish Central Bank has a $6 billion FX Swap agreement with China and could use Yuan funding to partly cover its imports but that would still fall far short of the $23 billion import volume.[xi] Similarly, to fully switch to Ruble on bilateral trade with Russia would appreciate it against the US$ and would suppress Russian exports to other countries. Turkish-Russian trade volume dropped to $22 billion in 2020 and Turkey has run a large and persistent trade deficit for many years with its exports of only $4.4 billion (25% of the volume).[xii] Russian tourists account for 14% of arrivals in Turkey while Moscow imports mostly agricultural products, textile goods (60% of Turkey’s exports), and construction material.
The picture in energy trade is somewhat different and is gradually moving towards Turkey’s favor. The AKP government adopted a more activist foreign policy since 2016 to form a defense belt around its periphery and project power to near abroad like Syria, Libya, and Azerbaijan. Through its energy policies in the Eastern Mediterranean and the Black Sea, Oya Dursun-Özkanca says, “Turkey engages in boundary testing against the West by the use of informed strategic non-cooperation and collaborative balancing with Russia”.[xiii] Despite the Covid-19-induced economic slow-down, Turkey’s gas imports touched 48.2 bcm[xiv] in 2020 with 6.5% year-over-year growth rate.[xv] About a one third of that input came from Russia. Moreover, in 2021, Russia’s year-to-date gas export to Turkey soared by 138% nearing 25 bcm, which is almost half of Turkey’s total demand.[xvi] However, Turkey’s precarious relationship with Russia is indeed an act of geopolitical balance, a partnership of convenience or “conflictual connivance”[xvii] rather than a “strategic alliance”.[xviii] As the 2015 shooting incident of a Russian Su-24 attack aircraft along the Turkish-Syrian border showed, potential coercive use of energy as a weapon by Russia in regional conflicts adds a risk premium on Turkey’s economic outlook, which prompts the government to search for mitigation strategies against pipeline politics. In other words, there is an asymmetric interdependence between the two countries. Oil continues to be a major expense item in the budget since electrification of the Turkish transport sector is in its infancy and may take many years to transition. The main area for savings in the energy sector, therefore, is in pipeline gas supply from Russia for household and industrial consumption.
Turkey uses the bulk of imported gas in heating (32%), industry (27%), and electricity generation (25%).[xix] During the pandemic-induced economic crisis in 2020, Turkey’s state-owned pipeline operator, BOTAŞ, paid $228 per 1000 cubic meters of oil-indexed Russian gas, even when spot prices in Europe fell below $100 per unit in 2020.[xx] Although the global supply glut in 2020 brought hub-indexed spot prices to around $2 per mmBtu[xxi] in Europe, BOTAŞ’s long-term purchase price of $6.7 per mmBtu from Gazprom locked Turkey into a wasteful contract that was signed long ago in oil’s heyday on an outdated logic of supply security under illiquid market conditions. This economic ordeal caused significant dislocations that induced synergistic issue linkages in the government between energy, economy, and geopolitics. From this perspective, since foreign policy is a convenient arena to divert attention from economic woes, to develop a success story, and to boost approval ratings from the nationalist voter base, the AKP’s promise to gain energy independence for Turkey is a central pillar of its policy of prestige at home.
Future demand for gas in Turkey is tightly linked to price, volume, and term-length of supply. Meanwhile, the AKP’s decision to diversify gas supplies hints at geopolitical reasoning as well as economic rationality. Until 2021, as Turkey switched to coal and renewables to reduce inflexible pipeline imports from Russia by 62% and Iran by 32%, it increased the share of LNG imports from the US by 144%, Azerbaijan by 20.5%, and Qatar by 32%.[xxii] These developments point to a shift in Turkey’s energy policy towards greater autonomy due to rising geopolitics affecting Turkey’s precarious situation between NATO and Russia in the Black Sea, deteriorating economic conditions at home, and Erdoğan’s changing political calculus. On the one hand, since Russia’s annexation of Crimea in 2014, Erdoğan calls for “increased NATO presence in the Black Sea”[xxiii] and even hints at updating the “Montreux Convention Regime” (1936) that governs passage through the Turkish Straits. On the other hand, Erdoğan is keen to improve trade ties with Russia and increase the bilateral trade volume to $100 billon per year.[xxiv]
Ostensibly, Turkey is seeking to rebalance its energy portfolio and distribute geopolitical risk among its trade partners in the West, Middle East, and Eurasia by shifting to local resources for electricity generation and diversifying the gas import-base for heating and industrial production. On top of this, the recently discovered offshore gas field of 540 bcm in the Black Sea, if productionized and monetized, can reduce the current account deficit by $3-4 billion per year and meet 30% of Turkey’s demand in 2027-28 at a rate of 15 bcm per year.[xxv] Turkish industrial plants require gas-generated electricity, so most if not all the recoverable gas, estimated to be at 4-5 bcm per annum on average, will be utilized in power generation as backup or electric storage to balance renewable energy. For comparison, the size of these gas deposits is almost three times that of the Aphrodite field in Cyprus’s exclusive economic zone (EEZ). Turkey and Greek Cypriots have been locked in a bitter dispute over maritime zones and energy rights in the Eastern Mediterranean since 2004. The Black Sea discovery in the Sakarya gas field expands Turkey’s resources and gives Ankara a stronger hand for gas monetization prospects against Cyprus and Greece in the Mediterranean.
Interestingly, there has never been gas development in the Black Sea by any country before. ExxonMobil had a test well called “Neptun Deep” in Romania’s waters but did not develop it and wants to divest its stake. By contrast, in energy exploration, the AKP government appealed to popular national-religious narratives by taking Fatih (conqueror) drilling vessel to the Black Sea on May 29, 2020 on the occasion of phenomenal festivities to celebrate the 567th anniversary of Constantinople’s (Istanbul) conquest by the Ottomans in 1453 and official re-conversion of the Hagia Sophia museum into a mosque.[xxvi] Drawing on the symbolic meaning of the day, Erdoğan stated: “We preserve and protect the interests of our country not only in the territory of 780,000 km2 of homeland, but also in the Blue Homeland line… I wish success for our Fatih drilling vessel’s mission which started on this special day”.[xxvii]
As the table above shows, three of Turkey’s long-term gas contracts expire this year, of which two have been renewed and one is up for negotiation with Russia. As low prices over the last couple of years have dampened capital investment into energy sector globally, an unexpectedly strong rebound in demand in 2021 raided gas prices from $2 mmBtu to $34 mmBtu while the 8 bcm expiring contract with Russia brought Turkey to face the risk of either supply shortages or steep costs in the coming winter. Ironically, disadvantageous oil-indexed gas prices in 2020 have now become more desirable in Turkey as hub-indexed spot-market prices have risen much higher than oil-indexed prices. Due to its relatively weak bargaining power, Turkey paid three times the price for Russian gas than the EU did in past years. In addition, dire economic straits tumbled Turkish Lira’s value by more than 20% since the beginning of the year, making it harder to pay for imported gas in US$. The critical question is under what terms and conditions Russia would offer to extend the expiring 8 bcm contract to Turkey. Putin reassured Erdoğan that Turkey is “safe from gas crisis in Europe, feeling confident and stable, thanks to Turk Stream pipeline”,[xxviii] but did not provide clues at the conditions or prices that would be attached to additional gas inflows from Gazprom.
As expected, Russia uses energy as a bargaining chip in its negotiations with Turkey for renewal, as it did with Germany for Nord Stream-2, one of Gazprom’s two largest customers. At the recent summit in the Black Sea resort of Sochi, Erdoğan and Putin did not hint at a deal, but Turkey certainly wants a short-term contract at reasonable, flexible rates to create more room for LNG and its domestic gas input from the Black Sea discovery in the Sakarya gas field starting 2023. In this context, it is questionable whether Russia’s Turk Stream pipeline is relevant anymore in the long term, whose only purpose is to eliminate gas transit through Ukraine.[xxix] It might come to Turkey’s rescue during the current gas crunch, which is likely to last in the next 6-to-12 months, but no more than that. Putin and Erdoğan as authoritarian leaders “see eye-to-eye” on many issues and the latter cannot afford to alienate the former, but, as the evidence shows, Turkey is not as vulnerable to energy politics as before and rather has a stronger position to negotiate future contracts even if the market trend creates a short-term downside risk. Although Moscow and Ankara diverge on some strategic interests like Syria, and Russia firmly establishes itself in the Eastern Mediterranean and Levant, it no longer enjoys a monopoly power in gas supply to Turkey as it did 10-15 years ago.
In summary, Turkey’s discovery of Black Sea gas deposits is a ground-breaking development that may significantly shift the bilateral trade imbalance with Russia to Ankara’s advantage. Although Turkey is switching to renewables and coal primarily for economic reasons to reduce its current account deficit and increase the share of local input for electricity generation, trade diversion in other pillars of energy such as pipeline gas/LNG point to rising geopolitical rationale. The Turkish government’s overarching aim in energy geopolitics appears to be to deny monopoly power to any external supplier and to maintain a diverse set of partnerships in a “balance of threat” strategy.
[i] TRT Haber, Mavi Vatan Belgeseli, 2021, https://www.youtube.com/watch?v=Kuui_8LofFg.
[ii] “Economic Outlook: Republic of Turkey – Ministry of Trade,” September 2021, https://www.trade.gov.tr/data/5b9229ab13b876136466584b/Economic%20Outlook%20September_2021.pdf.
[iii] “Where Turkey Goes Next,” The Economist, July 16, 2016, https://www.economist.com/europe/2016/07/16/turkeys-failed-coup-gives-its-president-a-chance-to-seize-more-power.
[iv] “Turkey and the IMF,” IMF, April 2021, https://www.imf.org/en/Countries/TUR.
[v] “TCMB – Balance of Payments Statistics, The Central Bank of the Republic of Turkey,” 2020, https://www.tcmb.gov.tr/wps/wcm/connect/en/tcmb+en/main+menu/statistics/balance+of+payments+and+related+statistics/balance+of+payments+statisticss.
[vi] Daily Sabah with Reuters, “Turkey Steps up Spot Purchases as It Braces for Record Gas Demand,” Daily Sabah, October 12, 2021, sec. Energy, https://www.dailysabah.com/business/energy/turkey-steps-up-spot-purchases-as-it-braces-for-record-gas-demand.
[vii] “128 milyar dolar tartışması: Nasıl başladı? | Cumhuriyet,” April 16, 2021, https://www.cumhuriyet.com.tr/haber/128-milyar-dolar-tartismasi-nasil-basladi-1828662.
[viii] “Syria High on Agenda as Putin and Erdogan Meet in Sochi,” September 29, 2021, https://www.aljazeera.com/news/2021/9/29/syria-high-agenda-putin-erdogan-meet-sochi.
[ix] Dimitar Bechev, “Turkey’s Tightrope Between Russia and the United States – The Moscow Times,” April 14, 2021, https://www.themoscowtimes.com/2021/04/14/turkeys-tightrope-between-russia-and-the-united-states-a73591.
[x] “Turkey, Russia, Iran to Use Local Currencies for Trade | AA,” September 9, 2018, https://www.aa.com.tr/en/energy/international-relations/turkey-russia-iran-to-use-local-currencies-for-trade/21528.
[xi] “Turkish Statistics Institute,” Foreign Trade Statistics, December 2020, January 29, 2021, https://data.tuik.gov.tr/Bulten/Index?p=Foreign-Trade-Statistics-December-2020-37412&dil=2.
[xii] Daily Sabah, “Turkey Vows to Rev up Trade with Russia to Reach Mutual $100B Goal,” Daily Sabah, August 1, 2021, sec. Economy, https://www.dailysabah.com/business/economy/turkey-vows-to-rev-up-trade-with-russia-to-reach-mutual-100b-goal; “Türkiye Ile Rusya 100 Milyar Dolarlık Ticaret Hacmine Kenetlendi,” DEİK, 2019, https://www.deik.org.tr/basin-aciklamalari-turkiye-ile-rusya-100-milyar-dolarlik-ticaret-hacmine-kenetlendi.
[xiii] Oya Dursun-Özkanca, Turkey-West Relations: The Politics of Intra-Alliance Opposition (Cambridge: Cambridge University Press, 2019), 58.
[xiv] Billion Cubic Meters.
[xv] Nuran Erkul Kaya, “Turkey’s Gas Reserve Volumes in Black Sea Expected to Rise,” AA (blog), June 3, 2021, https://www.aa.com.tr/en/economy/turkeys-gas-reserve-volumes-in-black-sea-expected-to-rise-/2263274.
[xvi] Emre Gürkan Abay, “Gazprom, Türkiye’ye bu yıl yaklaşık 25 milyar metreküp gaz sevk etmeyi planlıyor,” Anadolu Ajansı (blog), October 25, 2021, https://www.aa.com.tr/tr/gundem/gazprom-turkiyeye-bu-yil-yaklasik-25-milyar-metrekup-gaz-sevk-etmeyi-planliyor/2402162.
[xvii] Marc Pierini, “Russia’s Posture in the Mediterranean: Implications for NATO and Europe,” Carnegie Europe (blog), June 8, 2021, https://carnegieeurope.eu/2021/06/08/russia-s-posture-in-mediterranean-implications-for-nato-and-europe-pub-84670.
[xviii] Yuri Barmin, “TASAM Istanbul Security Conference: Balance of Power in the Middle East” (Istanbul, Turkey, November 7, 2019).
[xix] “Turkish Ministry of Energy and Natural Resources,” 2021, https://enerji.gov.tr/info-bankenergynatural-gas.
[xx] “Gazprom Losing Once-Promising Turkish Market, Report Says,” Daily Sabah, September 4, 2020, https://www.dailysabah.com/business/energy/gazprom-losing-once-promising-turkish-market-report-says.
[xxi] Million British Thermal Units.
[xxii] Gulsen Cagatay and Nuran Erkul Kaya, “Turkey Becomes Key Player in Global Wind Energy | AA,” December 12, 2020, https://www.aa.com.tr/en/turkey/turkey-becomes-key-player-in-global-wind-energy/2093753.
[xxiii] Gönül Tol and Yörük Işık, “Turkey-NATO Ties Are Problematic, but There Is One Bright Spot,” Middle East Institute (blog), February 16, 2021, https://www.mei.edu/publications/turkey-nato-ties-are-problematic-there-one-bright-spot.
[xxiv] “Turkey Seeks Balanced Trade Growth with Russia – Latest News,” Hürriyet Daily News, August 1, 2021, https://www.hurriyetdailynews.com/turkey-seeks-balanced-trade-growth-with-russia-166738.
[xxv] Erkul Kaya, “Turkey’s Gas Reserve Volumes in Black Sea Expected to Rise.”
[xxvi] Ebru Sengul Cevrioglu, “Turkey: Fatih on Course for 1st Black Sea Deep Drilling,” May 29, 2020, https://www.aa.com.tr/en/economy/turkey-fatih-on-course-for-1st-black-sea-deep-drilling/1858126.
[xxvii] T.C. İletişim Başkanlığı, “Post on Fatih Drilling Vessel,” May 29, 2020, http://wt.iletisim.gov.tr/english/haberler/detay/president-erdogan-shares-a-post-on-fatih-drilling-vessel/.
[xxviii] “Putin Says Turkey Safe from Gas Crisis Thanks to TurkStream Pipeline,” Reuters, September 29, 2021, sec. World News, https://www.reuters.com/article/us-russia-turkey-putin-gas-idAFKBN2GP1AI.
[xxix] Pavel K. Baev and Kemal Kirişci, “An Ambiguous Partnership: The Serpentine Trajectory of Turkish-Russian Relations in the Era of Erdoğan and Putin,” Brookings (blog), September 19, 2017, https://www.brookings.edu/research/an-ambiguous-partnership-the-serpentine-trajectory-of-turkish-russian-relations-in-the-era-of-erdogan-and-putin/.