Forum for Foresight and Future Analysis in the Areas of International Politics and Global Issues
In two previous posts, I have discussed studies that have dealt with the potential geopolitical implication of the shale gas revolution on a global level, as well as for exporters of conventional fossil fuels. In this third post on the future of shale gas, I discuss what impact the shale gas revolution might have for transit states and particularly for Turkey. Although often seen as improving Turkish energy security, I conclude that increasing levels of shale gas production might become problematic for Turkish ambitions regarding regional energy leadership.
Turkey, just as Ukraine, falls into an important category of players in gas politics: It is a transit state. Turkey became a focus of energy debates – particularly in Europe – in the 2000s, when energy jumped up the security and foreign policy agendas of European states and the European Union. Worries about scarce resources and two Russian-Ukrainian gas crises in 2006 and 2009 had pushed Europeans to seriously discuss the diversification of their energy, and particularly gas, supplies.
For the EU, the latter two promised to reduce dependency on Russia. For Turkey, Europe’s diversification efforts meant a boost in political importance. Indeed, the Ministry of Energy and Natural Resources has specified its vision in its Strategic Plan 2010–2014 (pdf) in terms of making ‘our country the leader in its region in energy and natural resources’. As Energy Minister Taner Yildiz specifies at the same occasion: ‘Turkey has acquired an identity of an “energy corridor”’.
Turkey, strategically located between Europe in the West and the Middle East and Central Asia in the East:
The ambition to become a regional energy leader by becoming an energy corridor is based on several assumptions: In the future, there will be growing demand for natural gas in Europe and there will be growing supplies in countries such as Azerbaijan, Turkmenistan, Iraq, and Iran. If gas would be transported from producers to consumers, so it further implies, the natural choice would be to transport it through Turkey, via pipeline.
There are several problematic aspects to these seemingly common-sense assumptions. Supply might be hampered by actual or potential political struggles in the region. Among these are the still unresolved Kurdish question in Turkey itself, the political struggles between the Iraqi central government in Bagdad the Kurdish Regional Government, the Syrian civil war that might spill over beyond Syrian borders, the future Russian approach to its ‘near abroad’ in Central Asia, the continuing geopolitical struggles surrounding Iran, as well as unresolved legal issues in the Caspian Sea that hamper the westward transport of Turkmen gas.
For countries such as Turkmenistan and Iran, it might furthermore be appealing to turn to China as an alternative target market. This tendency might be fostered by recent economic difficulties and debates about the future of renewable energies in Europe that generate uncertainty about future European gas demand.
While all these are important issues, I want to focus on another and less recognized factor in the Turkish energy transit equation: the role of new shale gas supply. I therefore turn to several studies that have recently analyzed Turkish energy politics and the role of (non-)conventional gas therein. Their main focus clearly is on the domestic market.
Turkey is not only an important transit state. It is in itself a large, and Europe’s fastest growing energy market. As outlined by a study recently published by the Oxford Institute for Energy Studies (OIES), Turkey consumed 45.2 billion cubic meters (bcm) of natural gas in 2012 and was (and still is) almost entirely dependent on imports. Imports came from Russia, Azerbaijan, and Iran as well as – via LNG (7.8 bcm in total) – from Algeria, Nigeria, and Qatar.
Future projections of demand differ somewhat: The OIES study estimates that Turkish demand in gas will increase to 70 bcm by 2030. It is more cautious than BOTAS, Turkey’s oil and gas transport and trading company, estimating that gas consumption will increase to approximately 81 bcm by 2030.
Despite its lower estimates, the OIES study concludes that there are two future periods in which gas supply shortages might occur in Turkey. It bases these conclusions on a discussion of factors such as existing generation capacity, licensing practices for new capacity, political progress in market liberalization, and changing market structure.
How to prevent these shortages? This is where shale gas comes in, if only indirectly. Increasing shale gas production is said to have three effects, all of them positive:
First, when discussing the prevention of supply shortages, much emphasis is put on LNG-imports. In the LNG market, in turn, the effect of increasing shale gas production is felt. The OIES study mentions that reduced US needs to import gas have freed new supplies, particularly from Qatar.
Second, it is mentioned in passing that US shale gas has provoked increasing coal exports to Europe and that also Turkey might profit from cheap coal in the future.
Third, shale gas is held to push gas prices down by expanding supply. If the side effects of the US shale gas revolution would force Gazprom to lower prices in Europe, so the study argues, this would also benefit Turkey by improving its bargaining position vis-à-vis Russia.
Shale gas is a good thing for Turkey, so it seems. One recent analysis even claims that any ‘increase in output, whether through conventional or unconventional means will of course work in Turkey’s favour.’
This assessment, however, might be overly optimistic. To show this, I turn to a scenario-analysis of Turkey’s recent and future situation with regard to natural gas, published in the context of Baker Institute’s program that I have referred to in the first post on the future of shale gas. This Turkey-specific analysis applies the same successful/unsuccessful shale production, successful/unsuccessful liberalization logic as the overall scenarios discussed in that previous post.
The four scenarios emerging form this logic contain a domestic and an international part respectively. I first discuss the domestic parts of the scenarios.
Indeed, the OIES analysis is very similar to the domestic parts of the ‘high shale success, high liberalization’ as well as the ‘high shale success, low liberalization’ scenarios. In both ‘high shale success’ scenarios, energy prices are expected to drop, positively affecting domestic political and economic development in Turkey. Price decreases are higher in the high liberalization scenario where actual global shale gas trade takes place. If liberalization should remain low, price effects would remain indirect (as described above).
Also the ‘low shale success, low liberalization’ scenario seems to conform the above analysis. Here energy prices remain high or increase with negative political and economic consequences for Turkey.
Interestingly, however the ‘most economically and geopolitically beneficial scenario’, in the words of the authors, does not include significantly increasing shale gas production. It is instead the ‘low shale success, high liberalization’ scenario. The reason for this assessment lies in the interaction of domestic and international politics – something that is largely overseen by the other analyses.
The reason why a ‘low shale success, high liberalization’ scenario might turn out being particularly beneficial for Turkey is the following: Turkey’s position as a transit country is intimately intertwined with European demand for gas traded via Turkey. If there is only low success with regard to shale production, three alternative sources for gas supply to Europe drop out: LNG volumes re-directed as a consequence of decreasing US imports, eventual direct shale gas imports from the US, as well as domestic European shale gas production. High liberalization also extends to the Turkish domestic energy market in this scenario, allowing for easier relations with a liberalized European gas market and well-functioning energy trade.
However, the other three scenarios are less favorable for Turkey’s role in international gas politics. In a ‘low shale success, low liberalization’, so the Baker Institute’s study argues, limited internal EU liberalization might foreclose a coordinated European energy policy. This would result in less political force behind the Southern Corridor idea. With no concerted policy to diversify European supplies, also Turkey’s position would be limited. The scenario assumes that Turkey might opt for an alternative strategy of supporting Russian efforts to establish the South Stream pipeline. This would grant economic benefits for Turkey, but it would limit the country’s potential standing as an alternative to Russia.
For the future of shale gas, however, the two ‘high shale success’ scenarios are more interesting. If shale success combines with ‘low liberalization’, the result for Turkey would be ‘doubly painful’, as the scenario study puts it. Not only would Europe demonstrate limited will to foster the Southern Corridor due to missing internal liberalization and thus unity (also see this study, in German). Moreover, while Europe increasingly develops its own shale gas resources, Turkey would remain largely dependent on higher cost pipeline gas. Turkish domestic shale gas production would take place largely in areas with strong Kurdish population, thus adding a new dimension to the still largely unresolved Kurdish question.
The last scenario, ‘high shale success, high liberalization’ bears different challenges for Turkey as a transit state: Increasing competition from US shale gas might move Russia to abandon oil price pegging (the above mentioned OIES-study highlights the possibility of Russia moving to a HH+5 formula, meaning that Russian gas could be priced following spot prices at the US Henry Hub plus an extra 5 $US). In general, the European gas market could transform into a constant buyer’s market and a general move towards spot market indexed prices could occur (also see here). Under these conditions, so the scenario study holds, the Southern Corridor would become uninteresting and eventually uneconomical and European consumers would lose interest. Particularly in this latter scenario, Turkey could move from the center to the periphery of global and regional energy politics.
So what would an increasing shale gas production entail for Turkey? Domestically speaking, indirect and maybe direct effects of the shale gas revolution might be beneficial in terms affordability of gas and supply security.
Looking at the international dimension of the shale gas revolution, however, the picture is not all that promising (see the following figure for the impact of different scenarios on Turkish ambitions to become a regional energy leader). The most beneficial energy future, from a Turkish perspective, might be one with high liberalization and low success in shale gas production.
The high shale success scenarios, are less beneficial: With abundant shale resources at hand, European leaders might lose interest in Turkey as a transit state. Even if they would not, the shale gas revolution is likely to provoke a transformation of gas trading and pricing structures – away from long-term contracts and oil-pegged prices towards spot trade and gas contract prices pegged to gas spot prices.
These developments would imply significant re-distributions of risks and benefits in gas trade and transit that would also shake the Turkish approach to energy transit. What is more, in a world of flexible markets, also producers might be increasingly driven to shift their exports towards more flexible LNG trade.
With gas markets gaining flexibility, potentially globalizing, and increasingly relying on LNG-tankers as major means of transporting gas, Turkey’s position – built on long-lasting, regional trading arrangements and over-land pipeline connections – could be severely hampered. Although further analysis needs to follow, ‘being a transit country’ might less and less transform into ‘being an energy leader’ in the future.
Author: Jörn Richert
Picture: Adapted version of NASA photo.
Figure: Own figure.