Brent crude is down some 35 percent year-to-date, WTI too. Global gas prices are experiencing a similar bottoming out. Amid this backdrop – and with the understanding that this is likely more than a short-term trend – Russia is flirting with yet another protracted conflict. To recap, in Ukraine, large-scale fighting has mostly subsided, though political-economic battles are still being waged over Russian gas and coal imports. On another front, Russian support for Syrian President Bashar al-Assad is eroding political and economic relationships in the region and around the world. New US sanctions notwithstanding, the Syrian conflict has particularly strained Russia-Turkey affairs.
Following the November 24 downing of a Russian Su-24 bomber, the Kremlin enacted sanctions targeting Turkey’s tourism and agricultural sectors. Further, the Russian Defense Ministry has launched a campaign to implicate Turkish president Tayyip Erdogan and his family in the ISIS oil trade. As they currently stand, the tensions could cost Turkey as much as $9 billion and shave up to 0.4 percent off the country’s GDP in the near-term; and more may be on the table.
For all intents and purposes, Russia has decided, if only selectively, that it doesn’t need Turkish business. It’s a strong move politically – and another blow to the average Joe – but such shows of strength have proved massively popular at home, where national relevance trumps economic blight. However, it remains to be seen whether Russia has the gumption to further table the nations’ symbiotic energy ties.
Presently, TurkStream is frozen – though it remains only an apology away from new life. Should the project fizzle out altogether, Gazprom is looking at roughly $2 billion in sunk costs. It’s a frankly familiar, and overall untimely, sight for the state-controlled gas giant, whose growing spending is being met by shrinking margins. While Gazprom doesn’t expect to lose any market share in 2016, revenues are projected to drop 16 percent.
A similar dark cloud hangs over Rosatom’s Akkuyu nuclear power plant, which would likely be the focus of any additional sanctions package should Russia choose to escalate the trade conflict. The $20 billion, 4.8GW nuclear plant – Turkey’s first – is due to launch in 2020 and could provide a significant lift to the nation’s stressed, and natural gas heavy, power generation network.
For its part, Turkey is downplaying the spat, its significance, and the prevailing Russian narrative of dependence. In preparation for a protracted standoff, Ankara has targeted, or rather redoubled its efforts to expedite imports from Azerbaijan.
Toward that end, Turkey and Azerbaijan have agreed to accelerate construction of the Trans-Anatolian Pipeline (TANAP), with an eye on gas deliveries before 2018. TANAP and the expanded South Caucasus Pipeline will transport gas from the Shah Deniz 2 field, which, according to operator BP, is on target for first gas in late 2018. Ignoring the apparent timeline discrepancies, the forward-looking agreement changes little for Turkey. Existing intake infrastructure and current Azeri production limit any short-term expansion of deliveries. As such, Ankara is also looking south to Qatar.
On December 2, Turkish and Qatari delegates signed a memorandum of understanding regarding long-term LNG imports. To date, the countries have primarily traded on spot markets. A final agreement has yet to be reached, though it will presumably seek to significantly expand upon the 1 bcm of Qatari LNG Turkey purchased in 2014. Still, more than 90 percent of Qatar’s LNG production to 2021 is already committed as part of supply purchase arrangements, and it’s unclear how much LNG can be directed Turkey’s way. Moreover – as with piped gas – Turkey’s intake infrastructure is limiting; regasification capacity is sufficient to markedly increase LNG imports, but existing storage capacity bounds LNG trade to approximately 20 percent of total gas consumption, or about 3 bcm greater than current volumes.
In short, piped Russian gas will continue to dominate Turkey’s imports as its diversification takes hold in the medium-term. With that said, the Kremlin’s own diversification measures are faltering and maintaining market share likely means more discounts in Europe and abroad. For now, the Kremlin can take solace in the fact that Turkey has few options, but time is not on Russia’s side as truly pipe-breaking developments on global gas markets appear to be upon us.
First published at Oilprice.com