Turkey Pursues Mixed Aims Over Supply Contract Cancellation With Russia

After the failure of Turkey’s apparently last-ditch effort to renegotiate the price for Russian gas, Turkish Energy Minister Taner Yildiz announced Turkey would not renew the supply contract through the “Western pipeline,” scheduled to expire at the end of the year. The contract was originally signed in 1986, which was a major turning point for Turkish-Russian relations, as Turkey went ahead with this deal in Cold War conditions. Since then, Turkey’s energy ties with Russia have flourished, in parallel with the overall improvement of bilateral relations.

Under the contract, Turkey imports 6 billion cubic meters (bcm) of gas through the Balkans, which is distributed in Istanbul and the surrounding areas. Turkey also has other supply agreements with Gazprom through the same pipeline and the Blue Stream pipeline, and additional supply agreements with Azerbaijan and Iran, as well as importing LNG from Algeria and Nigeria. Granted, Turkey’s imports from Russia account for almost two-thirds of its total gas consumption.

In addition to its concerns over the strategic liability generated by this overdependence, Turkey has raised several demands vis-à-vis Gazprom for some time. Ankara has confronted the problem of over-contracting, which emerged as a major issue following the contraction of its energy consumption in the wake of the global financial crisis. As Turkey had to incur penalties resulting from take-or-pay provisions, it has been demanding an easing of the supply terms. Moreover, given the calculation indexes linking gas and oil prices, Turkey, along with other importers, has been complaining about the hike in its energy bills. Again, Turkey’s demand for price revision has largely fallen on deaf ears, which became an issue during Turkish Prime Minister Recep Tayyip Erdogan’s trip to Moscow earlier this year. His Russian counterparts only deferred the issue for further discussion (EDM, March 18).

The parties were expected to notify their decision for the cancellation of the 1986 agreement six months prior to the expiration date, or it would be renewed automatically. Gazprom responded positively to Ankara’s request for the postponement of the date for notification to the end of September. Gazprom’s concession to Italy’s ENI in a similar plea partly encouraged BOTAS to expect a similar outcome (Sabah, July 25). Yet, Gazprom, instead, raised the price in its quarterly revision (Radikal, August 10).

While an agreement was not forthcoming in the lingering talks and the deadline was approaching, Yildiz threatened not to renew the contract, citing a 39 percent increase in prices over the last 29 months. In a swift reaction, Gazprom officials downplayed the minister’s remarks, arguing that they received no confirmation to that effect from BOTAS, which was their partner in Turkey (Hurriyet, September 29; EDM, September 30). However, Gazprom officials apparently undervalued some nuances: after all BOTAS was a public corporation and the Turkish government was very sensitive to energy issues, not to mention the fact that Turkey’s concerns were long on the agenda.

With the Russian side’s failure to meet the expectation for discounts, Yildiz announced that BOTAS conveyed to its partners the decision to end the contract (Anadolu Ajansi, October 1). While the decision seems to halt about 15 percent of Turkey’s supplies, Yildiz sought to allay concern that it might lead to gas shortages, citing the ongoing supply contracts with Russia and other countries, as well as the import contracts signed by the private sector. Alexander Medvedev, the Director-General of Gazprom Export, also confirmed this development, noting that Gazprom will continue to supply the same volume to Turkish end-users through existing and new customers, including those from the private sector (www.cnnturk.com, October 3).

This development was possibly sparked by various interrelated considerations, which is hidden in Yildiz’s remarks. First, there seems to be strategic reasoning. Through this move, Turkey wants to send a signal that it is determined to break its over-reliance on natural gas (especially for electricity generation) on the one hand and Russian gas on the other. It is instructive that Yildiz explained in detail how Russia was unresponsive to Turkey’s demands for price revision for a long time, and added that with this move Turkey demonstrated that it was not devoid of options for supply diversification. Granted, for Turkey, Gazprom has been a reliable supplier and will likely remain a major supplier in the years to come. Given that Yildiz also acknowledged that point and added that the private sector would likely sign new contracts with Russia, it seems that this move largely seeks to enhance Turkey’s bargaining position in the future.

A second and related point suggests that this development is driven by Turkey’s ongoing project of liberalizing its energy markets. In particular, the Turkish government has been criticized for its slow pace in decoupling BOTAS’s transportation grid and its monopoly on imports. Private companies have already secured supply contracts in some instances, and it was reported that Gazprom did not concede to the transfer of contracts to private importers. With this decision, the government hopes private companies will take over the contracts with Gazprom, hopefully on more favorable terms, while simultaneously reducing BOTAS’s market share, which is also a requirement the EU has put before Turkey. It remains to be seen, however, if this move will enhance Turkey’s bargaining leverage vis-à-vis Russia and other suppliers. There is reason to doubt whether private companies bidding for smaller volumes of gas will be able to gain a better bargaining power than what BOTAS has accomplished so far vis-à-vis Gazprom.

Third, the decision seeks to contain BOTAS’s losses, which has been selling gas to domestic consumers below its actual costs. On the same day that Yildiz announced the termination of the contract, BOTAS issued new prices for residential and industrial consumers, which implied price hikes of over 10 percent. While BOTAS cited the declining value of the Turkish Lira and increases in gas prices in international markets, this major price adjustment came as a shock to consumers. Instead of paying for unused gas, BOTAS had kept the prices constant in order not to curb consumption. The latest price hike, accompanied by efforts to reduce BOTAS’s market share and its take-or-pay obligations, seeks to improve the company’s financial standing, which has been running huge losses due to such practices in gas sales. But Turkish consumers – who became accustomed to this indirect subsidy – are unlikely to welcome the development.