Amid a changing environment following last month’s discovery of a major gas field in the Black Sea, Turkey will now be seeking more competitive pricing and flexibility when renewing long-term gas supply contracts, a senior energy official said.
Starting in April, almost a third of Turkey’s existing contracts, totaling 16 billion cubic meters (bcm) a year, will expire over the next year, including those with Russia’s Gazprom, Azerbaijan’s SOCAR and the liquified natural gas (LNG) deal with Nigeria. Those contracts are indexed to oil prices and include take-or-pay clauses.
“We started to discuss whether we are going to renew them or whether we are going to find alternative supply," the Turkish energy ministry official told reporters Wednesday. “It depends on the suppliers and it depends on the market players what kind of terms and conditions they are going to give us.”
If the suppliers approach the agreements with the “same old habits, no flexibility, not very competitive price offers, ... I don’t think we will see the existing contracts continue," said the official, who spoke on condition of anonymity.
Turkey heavily relies on imported resources to meet its energy demand. It imports 92% of its crude oil needs and almost the entire gas demand and gas consumption. The country has been paying around $44 billion per year for energy imports over the last decade, the official said.
The country has seen a noteworthy drop in imports from its major markets such as Russia and Iran in the first half of 2020, while imports from Azerbaijan and LNG imports from the U.S. surged.
Natural gas imports from Iran and Russia declined by 44.8% and 41.5%, respectively, from January through June, according to data by the Energy Market Regulatory Authority (EPDK). Overall natural gas imports in the first half of the year dropped by 3.5% year-on-year to 22.5 bcm. Out of this amount, Turkey imported 12.1 bcm via pipeline and 10.3 bcm as LNG.
“Every year, we were paying $44 billion on average to import energy, and this is the main reason that the Turkish economy creates a current account deficit,” he noted, stressing that the main reason behind Turkey’s comprehensive long-term offshore and onshore upstream activities has been to reduce external dependency on oil and gas.
The country has also been boosting its energy infrastructure investments, including increasing its regasification capacity, citing the advantage of cheaper LNG prices.
“The last couple of months, the LNG supply to the Turkish gas market was very significant, and the U.S. all of a sudden became the second-largest supplier in the first part of 2020,” said the official. “But again, the main reason was that they were very competitive. And I believe that the other suppliers will understand this development and will provide what the market needs.”
He said that Turkey’s investments in the regasification capacity made it available for cheaper LNG to enter Turkish markets, adding that there has been a decrease in gas consumption from electricity generation of up to 12 bcm per year over the last two to three years.
“And that’s why when you look at today’s share of, let’s say, Russian supply to Turkey, it has very significantly decreased, but it is not related to our contracts or it is not related to changing supply portfolio. It is related to basically the competitiveness of gas, and when you have a very old fashioned, oil-indexed take-or-pay contract, it does not fit today’s realities, to be honest with you. It does not fit today’s market realities,” the official explained.
Full potential of Black Sea gas discovery to be known in October
Turkey expects the field discovered last month, the largest in the country’s history, to meet 30% of its domestic gas demand when plateau production is reached, which is currently planned for 2025.
The country said the field in the Tuna-1 location of the Sakarya Gas Field in the Black Sea contains 320 bcm of recoverable gas.
“It is the largest offshore discovery in 2020, and of course, the largest ever in the Black Sea region ... The potential economic value is between $65 billion and $80 billion as of today,” the official said.
Energy and Natural Resources Minister Fatih Dönmez last month said that data suggested more gas will be found as drilling continues deeper under the sea bed.
The official said the country expects to find out the full potential of its historic gas discovery next month when drilling of the prospects will be completed.
“The timeline will be most likely in October because we are trying to analyze two additional potential reserve areas” under the current level, the official noted. He said there could be an upside potential after the exploration reaches its targeted depth of around 4,500 meters (14,763 feet).
“As of today, it’s 320 bcm of gas – this discovery. But we will continue to develop this field. Sakarya is a pretty large gas field. It’s close to the discovery that had been made by Romania – by ExxonMobil and OMV couple of years back. It is a relatively small discovery. We have a larger reserve here, it seems,” he said.
President Recep Tayyip Erdoğan in August said Turkey would start pumping gas from the Black Sea discovery by 2023 – a symbolic year marking the 100th anniversary of the Turkish Republic – but the official said full production would take longer.
“The timeline we announced is for the first gas delivery,” he said. “It’s not going to be the plateau production, which will take at least an additional two or three years.”
The official said Egypt had brought gas onstream from its Mediterranean Zohr field with comparable speed, and two factors would work in Turkey’s favor.
First, the quality of gas from the Sakarya field in the Black Sea is good, meaning there is no need for a huge investment in gas processing. Second, the Sakarya Gas Field lies just 170 kilometers (106 miles) from an existing pipeline along the Black Sea coast, he said.
Turkey discussing oil, gas exploration in Libya
The official also said Turkey is in talks for oil and gas exploration in Libya.
“We are in talks with some potential new agreements and new fields but mainly the areas we’re looking at are the oil production areas. We are also discussing some potential offshore blocks,” he said.
Ankara has made increasingly clear its ambitions for lasting cooperation with the North African country on oil and gas explorations, particularly after the two countries in late 2019 signed a pact on maritime borders in the Eastern Mediterranean.
With Turkey's help, Libya’s United Nations-recognized Government of National Accord (GNA) halted an assault on Tripoli and in recent months pushed back putschist Gen. Khalifa Haftar's forces, which are supported by Russia, France, the United Arab Emirates (UAE) and Egypt.
The maritime pact with Libya asserted Turkey's rights in the region in the face of unilateral drilling by the Greek Cypriot administration, clarifying that the Turkish Republic of Northern Cyprus (TRNC) also has rights to the resources of the region.
Energy Minister Dönmez in June said Ankara had determined seven licensed areas in the Eastern Mediterranean for oil exploration and drilling under the pact, adding that drilling could start within three to four months.
Turkish Petroleum (TPAO) already applied to drill in the seven chosen licensed areas in the Eastern Mediterranean under the deal.
Libya’s National Oil Corporation (NOC) is involved in the talks, which include topics such as power generation and pipeline operations, the official said.
Turkey has been conducting oil exploration and production activities in Libya for nearly 20 years, but these works were interrupted in 2011.
“Actually, we already had some contracts with Libya. Turkish Petroleum was there since the 1990s – before the whole thing started in 2010 and 2011. So we had some contracts in Libya in the past and we still have some existing contracts in the southwestern part of Libya,” the official said.