Will Turkey’s gas hub dreams become reality?

Turkey is on a mission to diversify routes and resources to strengthen its energy supply security and is set on becoming a prominent gas hub for Europe. Pamela Long wonders if these ambitious plans prevail.

Turkey’s plans are not surprising. The country is in a region adjacent to approximately 60% of the world’s proven oil and natural gas reserves and with one of the biggest energy markets in its region.

However, the context in which Turkey is exploring its ambitions is a tumultuous one, one in which Europe has been forced to rethink its dependence on Russian fossil fuels and diversify its gas supplies.

In this shifting geopolitical context, many ask if Turkey’s role as a gas trading hub has gained significance and increased its influence both regionally and within the European context.

Russian President Vladimir Putin has become interested in the idea of ​​Turkey as a gas hub following the war in Ukraine. Currently, Russia faces the problem of geopolitically stranded gas, which is further worsened by the dismantling of the Nord Stream infrastructure and the reluctance of certain nations to engage in gas transactions with Russia.

This means Russia is on the lookout for alternate routes to move its gas to other regions.

It is for this reason that Vladimir Putin would like to see Turkey become a gas hub with Russian supplies distributed to Europe, supply that has been disrupted by Ukraine-based sanctions and damage to key pipelines.

President Recep Tayyip Erdoğan, however, has a broader perspective regarding Turkey’s future. He has elaborated on the country’s plans in December 2022, stating that Turkey’s goal is to become a global gas trading center at which the benchmarked price for gas is determined – ambitious plans indeed.

Turkey is currently a major consumer of oil and gas and an important transit country for Azerbaijani and Russian natural gas.

In 2022, Turkey’s natural gas imports amounted to around 55 bcm, with an annual increase of around 7% compared to 2021. Its natural gas market is the 5th largest natural gas market in Europe with approximately 20 million subscribers.

Also, the nation is now a deepwater gas producer via the Sakarya gas field (discovered in 2020) and this year, Turkey discovered a large reserve of natural gas in the Black Sea, 540 bcm, a reserve large enough to meet the energy demands of all households in the country for the next three decades.

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Turkey plans to continue oil and gas exploration in the Black Sea and Eastern Mediterranean Sea and will likely continue to make investments in floating storage and regasification unit (FSRU) vessels as well. Russia already transports gas to Turkey and out to Europe via the TurkStream underwater pipeline.

In addition to TurkStream, a separate underwater pipeline known as Blue Stream connects Russia and Turkey, further demonstrating how Russia and Turkey have a joint interest in gas flows in the region.

However, both TurkStream and Blue Stream’s flows have previously been interrupted via shut-ins (for various reasons) and many worry that the underwater pipelines from Russia to Turkey could be weaponized to enhance Russia’s influence. Erdogan’s vision of a fully-fledged hub based on liberal market principles and Putin’s vision of a route to Europe demonstrates an ideological dichotomy with a potential for political implications.

Location, location, location

Turkey lies at the heart of the Southern Gas Corridor (SGC) pipeline system, an EU initiative which aims to diversify Europe’s energy supply by bringing gas resources from the Caspian Sea to markets in Europe, without involving Russia.

The corridor includes the Trans-Anatolian Gas Pipeline (TANAP), the Trans-Adriatic Pipeline (TAP), as well as the Baku-Tbilisi-Erzurum (South Caucasus Pipeline).

The capacity of the TANAP that carries natural gas from Azerbaijan to Turkey and further on to Europe was recently increased, contributing to the energy partnership between Ankara and Baku while putting Turkey in a greater hub position.

22.2 bcm of gas are expected to be exported this year via the pipeline, with 10.2 bcm destined for Turkey and 12 bcm for Europe.

Even though cooperation has not yet reached a level that eliminates dependence on Russian gas, these pipelines indicate Turkey’s potential role in fielding gas supplies.

In terms of liquefied natural gas infrastructure, Turkey has also been investing in regasification terminals as well as floating storage regasification units (FSRUs). This enables the country to receive LNG shipments and distribute gas to both domestic and European markets.

In January 2023, Turkey signed a 13-year gas deal with Bulgaria, what some believe to be a signal of Turkey’s ambition to secure gas supplies for the Balkans and hub plans coming to fruition.

The agreement will give Bulgarian gas distributor Bulgargaz access to five Turkish LNG terminals and the country’s gas pipeline network, run by stateowned company BOTAS. This means Sofia will be able to obtain more than half of its annual gas consumption, or 1.5 bcm, via Turkey.

While the EU’s LNG import capacity is significant, it is limited in south-east Europe, with only three LNG import terminals in the whole peninsula. Turkish LNG terminals could therefore bolster energy security in the region.

While these ambitions are not in doubt, Turkey has been criticized for its lack of transparency, transparent rules and aligned terms with Europe.

It appears as if some market reform will be necessary to facilitate the opening of a larger gas export corridor from and through Turkey to the West with the use of both Turkish terminals and the Trans-Balkan route. Also, signing of interconnection agreements with neighboring countries and opening key infrastructure such as LNG terminals and underground storage to third parties may boost cross-border gas trade and empower Turkey’s role as a gas hub.

Potential for gas trade

In the context of an energy trade centre, the establishment of Energy Markets Enterprise Inc. (EPİAŞ) in Istanbul in 2015 was considered a turning point.

EPİAŞ opened the spot natural gas market on 1 September 2018 and although it was established recently, EPİAŞ has become the fourth most traded energy exchange in Europe by volume in spot markets.

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Turkey’s ability to turn into a trade center that sets a reference price for natural gas also depends on the liquidity and diversity that will be created in the market, as well as the development of physical access opportunities to the markets in the region and the synchronization of transmission networks, storage and LNG facilities in these markets.

Also, an independent transmission system operator coupled with ownership unbundling would go a long way to establishing Turkey as a player.

Caner Can, Energy Counsellor, at the Permanent Delegation of Türkiye to the EU commented at ETCSEE 2023, stating he is confident in Turkey’s role as regional gas trade hub and ability to support Central and Southeastern European gas markets.

“Türkiye’s becoming a natural gas trading hub is not new…Türkiye has become the first country in the region to open an exchange where natural gas can be traded on a daily basis.”

However, not everyone is convinced, that Turkey can fulfill this role.

The German Institute for International and Security Affairs suggests that Turkey will not become a more central figure in EU energy markets, as Azerbaijan is the only country in a position to send gas to Europe via Turkey in the short term.

Medium-term prospects are also not favorable suggests the Institute, as the ability to one day acquire significant quantities of gas from other countries would take years and considerable investment.

For the infrastructure to be financed, it would also require Europe to commit to long-term gas contracts, which seems inconceivable given the roadmap towards energy transition.

Eser Özdil, non-resident fellow with the Atlantic Council in Turkey and founder of GLOCAL Group, suggests the country’s failure to liberalize the gas market could limit Turkey’s progress towards the goal of gas trading hub.

Commented Özdil in a recent blog post; “Even as Turkey balances its relations with the West and Ukraine on the one hand and Russia on the other, it would do well to remember that ultimately, the most important factors that determine the reliability and depth of hubs are liberal market principles and not interventions from politicians.

“Natural gas should be freely imported, traded, or exported by dozens of companies. That kind of trading structure can generate a reference price without any government intervention and turn a country into a hub…”

However, in the short term, replacing Russian gas leaves the EU desperate for alternatives. While some alternatives can be found in the North Sea, Norway, North Africa, the Middle East, the Caucasus, and the US, there are technical, infrastructural, and timing obstacles that make procurement difficult.

Valuable asset

It is in this context of securing new sources of supply that Turkey shows potential to be a valuable asset because of its geographical location.

It seems that in the short to medium term, Turkey appears to be a fairly attractive partner for Europe, or at least for the countries in the Balkans and the south of the continent. The questions are, of course, will Turkey implement its plans at the right time and pace, and what will happen when the EU’s energy transition reaches the point where required gas volumes decrease?

And one lingering question is whether Erdogan will decouple from Putin as he looks to expand Turkey’s influence into Europe — clearly, the country’s future as a regional gas trading hub will be a geopolitical balancing act.

Visit the Turkish pavilion at Enlit Europe to learn more about Turkey’s energy sector and gas ambitions.