Turkey’s New Natural Gas Discovery and Its Implications

On August 21, President Recep Tayyip Erdoğan announced the discovery of sizeable gas reserves of 320 bcm by the Tuna-1 well in the Sakarya Gas Field, located around 170 kilometres offshore in the Black Sea. As the estimates are preliminary, according to Turkish officials there could be an upward revision in the estimate, stressing the efficiency of the work being carried out.

From the geological perspective, there is not much information about the structure discovered, and it is not clear whether the reserves are “total in place” or extractable. If the former, the extractable resources may be 75% of the total or less, depending on many factors. Before production, wells need to be drilled from the platform, an undersea pipeline needs to be built, and the timing of production will largely depend on the sea depth. The exploration and development phase may possibly take 3 years and production within 3 years is possible if the depth of the well is around 2-3 km. If the well depth is around 6-7 km then 5 to 8 years may be required for exploration and production. 

The important question is what will be the annual production volume from a field with 320 bcm of resources? This will depend on the number and depth of the wells, and on the precise reservoir parameters. Production may range between 5 and 8 bcm/year, which is around 10-18% of Turkey’s annual natural gas consumption (in 2019 it was 45.2 bcm).

The geopolitics of the new discovery 

Turkey has been exploring for new gas deposits in the Black Sea and Eastern  Mediterranean for many years in the hope of reducing its heavy dependence on imported gas. The Russian share of Turkish gas imports was highest in 2012, when it reached 58%. Turkey has been keen to reduce its natural gas import dependence from Russian since 2015 after the downing of the Russian military plane SU-24, and has achieved an impressive success. In 2019 the Russian gas market share in the Turkish market was 30% and in first half of 2020 it was only 18%. 

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The new natural gas discovery coincided with the time when Turkey was making the necessary market preparations for the impending renegotiation of long-term gas sales contracts with its current suppliers. The measures have been directed to structural changes in the market and its long-awaited liberalisation through freeing it from long-term contracts (LTCs), oil-linked prices, Take or Pay (ToP) obligations and destination clauses. The current market situation created by the pandemic, with the gas price falling below US$2/mmBtu in the major European liquid hubs and a surplus of both LNG and pipeline gas elsewhere in the world, will only accelerate this transition to a free, open, and transparent market. Turkey has long been unhappy with the relatively high prices it pays for gas, compared to the rest of Europe, and wants to move away from the linkeage to oil and oil products. It has traditionally purchased gas on long-term, oil-price-related contracts and the government has taken all the price-related risk by subsidizing the BOTAŞ gas price for the population, justifying it with security of supply.

Turkey’s new, present natural gas strategy is timely and coincides with the situation that all LTCs with the current pipeline suppliers will expire in the 2020s. In 2021 alone, 16 bcm/year of LTCs will expire, of which 8 bcm/year is Gazprom gas, half imported by BOTAŞ, and the other half by seven private sector importers. Consequently, the year 2021 is expected to be crucial in terms of market restructuring, with the new contracts expected to have more flexible and competitive terms, as has long been anticipated. 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% Turkish market share since 2017. 

Current long-term contracts with its pipeline and LNG suppliers have prevented such changes, although it has made some spot LNG purchases, and so far Turkey has failed to achieve better contractual conditions, as most European countries and companies did. Oil indexation, which still exists in Turkey’s natural gas pricing, destination clauses, and ToP, have hindered the ability of BOTAŞ and private sector importers to re-export unwanted volumes to neighbouring markets when faced with falling demand, high stocks and limited gas storage. ToP and oil indexation have made supply less responsive to demand shocks and falling prices, but have also long delayed liberalisation in this, Europe’s second biggest natural gas market.

For Turkey having its own gas will give it more flexibility in import volumes; it will straighten its hands in the negotiations. Turkey feels confident in adopting an assertive position in negotiations with Gazprom and other suppliers because it has significantly strengthened its position thanks to the strategy of doubling the daily entry-point gas send out capacity. This has included increasing LNG import capacity but also decreasing import demand by significantly increasing the share of domestically produced energy such as coal, lignite, wind, solar, and hydro. This policy has borne fruit; the country produced 66% of its electricity from local and renewable resources in the first five months of 2020, and 62.08% from January through July this year, according to the data from the Energy and Natural Resources Ministry. Turkey is approaching its goal of producing almost 66% of its electricity from local and renewable sources annually , thereby reaping the fruits of long-term investments in renewable energy deployment. May 20th was a historic day, because 94% of the country’s electricity was generated from domestic sources.  Turkey wants to become self-sufficient in energy, and domestically produced energy can help to wean the country from natural gas import dependence.
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