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Turkey gears up

The country must cross several hurdles before it can channel significant gas supplies to Europe

Turkey's long-nurtured ambition to become a regional natural gas hub has received several boosts over recent weeks. The US Energy Information Administration (EIA), says the country is "is becoming an important transit state" for gas. New pipelines are under construction that will "increase both gas imports and exports".

A further shot in the arm came from Russia's ratification of an agreement signed in 2014 for the construction of TurkStream, a 31.5bn-cubic-metre-a-year-capacity (twinned) pipeline, to transport Russian gas under the Black Sea from Anapa to Kiykoy, 120km west of Istanbul. The project was delayed when relations between Moscow and Ankara were frozen after Turkey shot down a Russian fighter jet over the Turkish-Syrian border in November 2015.

With presidents Vladimir Putin and Reccep Tayyip Erdoğan now friends, progress towards an intergovernmental agreement on the pipeline can continue, with an ambitious project completion target of 2019.

Turkey has also mended fences with Israel—damaged since 2010 after Israeli forces attacked Turkish boats trying to break the blockade on the Gaza Strip. The two sides restored diplomatic relations in 2016 and in February this year held their first strategic talks for six years. A joint statement listed energy as the first topic on which the two sides would cooperate.

This has given new impetus to the plan to build a sub-sea pipeline to transport the huge volumes of offshore Israeli gas to Turkey. But uncertainties remain: it isn't clear yet whether the pipeline would need to run through Cyprus's territorial waters. If so, this is unlikely to happen while the Cypriot and Turkish governments remain at odds over the status of Cyprus itself. The latest talks to reunite the island have stalled.

Turkey is also planning to import natural gas from the autonomous Kurdish region of northern Iraq. A gas-sales agreement was signed in 2013, but initial hopes of a 2017 start-up of exports has been put back, because of financial and technical difficulties, until at least 2020.

Turkey already has five pipelines bringing gas into the country, from Russia, Iran and Azerbaijan, and one, the Turkey-Greece Interconnector, taking gas westwards. Among pipelines planned, in addition to TurkStream, is the Southern Gas Corridor, which would take gas from Azerbaijan to Italy and southeast Europe via: the existing South Caucasus Pipeline to Turkey; the Trans-Anatolian Pipeline, or Tanap, across the country; and the planned Trans-Adriatic Pipeline to the west.

Infrastructure constraints

Given all the existing and planned pipeline projects and Turkey's strategic location, its gas-hub ambition seems eminently achievable. But problems remain, not least in Turkey itself. According to the EIA, Turkey imported 1.7 trillion cubic feet of gas in 2015 (about 48bn cubic metres), mostly from Russia and Iran, which accounted for 99% of the country's natural gas supply. Consumption growth is expected to remain strong as the needs of industry and residents keep rising.

Because of this, the EIA concludes, "Turkey's annual natural gas consumption is approaching the annual capacity limits of the country's import infrastructure". In other words, Turkey needs more gas-import and distribution capacity before it can export significant volumes to Europe.

Geopolitics and security provide the first of the other caveats. Turkey's turbulent relations over recent years with Russia (overwhelmingly its dominant gas supplier) and Israel (a potential supplier) indicate how vulnerable cross-border deals can be to political fortunes. Also, pipelines, especially those through areas where Turkish Kurdish separatists or the Islamic State group operate, could be the target of terror attacks. A hub would need steady and predictable supplies of gas.

Then there is the question of Turkey's own stability in the wake of the 2016 coup attempt. The political uncertainty in the country since then, along with Erdoğan's unpredictability, are not what a potential energy hub needs to attract customers.

Turkey also lacks the volume of gas storage that a hub would require. The EIA points out that Turkey has only one operating underground facility with capacity of about 5% of its gas imports. By contrast, EU states collectively have storage equal to about 20% of total annual consumption.

Another requirement, says natural gas analyst Charles Ellinas, is "a pricing mechanism that's cost-based and transparent in a liberal market. Turkey is behind in this." The EIA points out that the state-owned Petroleum Pipeline Corporation (Botas) "dominates the natural gas sector" and is "vertically integrated" across much of it. Timelines for unbundling Botas "have repeatedly been extended".

The final challenge, far outside Turkey's control, is the gas price. Current levels in Europe ($4-5 per million British thermal units) would make gas from, say, the Eastern Mediterranean, uncompetitive once transportation dues had been added to production costs. It is hard to see the picture changing, with Russia set to continue supplying Europe cheaply. As Gazprom's deputy chief executive said in February, "we can't see yet who else could offer European customers natural gas that's as affordable".

Hardly encouraging words for Turkey and its hub aspirations.

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