IRAN AND RUSSIA POISED TO ALLEVIATE TURKISH GAS CRISIS

Created: 2/22/2000

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Office of Transnational Issues

Iran and Russia Poised to Alleviate Turkish Gas Crisis

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Turkey faces shortages of natural gascontrary assurances

ti lo turn to imported gas from Iran sooner than the

eadline.arger undertaking, Russia's Blue Stream project, continues to outpace the US-backed TransCaspian Pipeline projectlthough Ankara views the TCP as its top priority, the project is bogged down in negotiations among tlte parties:

Turkey's current gas shortages are estimated to be at least IS billion cubic meters per yearrercent of current needs, causing declines in industrial output and blackouts in peak demand periods.

has completed its segment ofthe pipeline to Turkey, while

lurkey is close to completing its segment from the border to Kmirum and has begun construction from

there westward-

Russia's Blue Stream gas project also is moving forward quickly. Credit approval from tbe Italian credit agency Sace for its financing package, delayed since the Summers the only remaining obstacle before construction of the Black Sea portion of Ihe project can begin. The delay is due to lingering concerns about the volume of financial and technical data that must be reviewed and the technical challenges inherent in the rjrqject Sace, however, has given no indication of canceling the project, which is far advanced in all other aspects:

Meanwhile, Ihe TCP is bogged down in complex negotiations between the parties:

Tirrtoepistan's President Niyazov has threatened not to renew the consortium agreement to develop the TCP unless an acceptable financing package and accelerated construction timetable are adopted.

Niyazov's intransigence regarding tlie volumes of gas to be granted Azerbaijan on the TCP hasfurther delayed progress on the project.

Imports from the Blue Stream and Iran-Turkey pipelines would delay the TCP until late tills decade because Turkish demand growth would be insufficient over the next several years lo accommodate another large project, thus making financing nearly impossible to obtain. If the TCP is set aside, Turkmenistan probably would opt to export gas via Iran and Russia.

Turkey's Immediate Need for Gas

Turkey's gas shortages are said by senior Turkish Government officials to be at leastillion cubic meters per year (bcrn/y) short of current gas requirements. Various Turkish press reports and senior Turkish officials have cited gas shortages as the cause for low industrial capacity utilization. Finns in far western and central Turkey lack sufficient gas to meet their current needs, according to industry experts. Moreover, in9 Turkey activated several new gas-fed power plants, addingo its gas demand. These plants are cuncntly operating by using their gasoD backup capability, which is more expensive and less efficient than gas use. Country-wide blackouts are symptomatic ofthe country's inability to meet natural gas and electric power needs during periods of peak usage:

Inurkey experienced rolling blackouts of two hours per day foreek because of insufficient natural gas to fuel gas-fed power plantseather-related delayouefied natural gas (LNG) shipment from Algeria and reduced deliveries from Russia, according to press reports.

In lateurkey again experienced three days of three-hour rolling blackouts becauseompressor problem on the Russian linearticularly cold weather period I-

Gas Market Growth Expected

The Turkish Ministry of Energy and Natural Resources (MENR)well as ourthat Turkey's natural gas needs will roachhe forecast is largely predicated on Ankara fulfilling its construction plans for gas-fed power plants and distribution rnpelincs. This latest dernaadsince thehat Turkish demand for electricity will riseoercent per yearf this, betweenndercent will be fueled with rjatural gas. I

This level is achievable but will require substantial investment fromespeciallyMENR estimates that Turkey will need as much5 billion per year invested in its energy irnmstructure, and it is looking to foreign investors to5 billion per year toward that amount, according to industry press:

This TiicrDcirairdum wet prepared by tuiaiycs from ihe Office ofueries are welcome aod may be

Turkey's prospects for attracting such investment improved nAtfannally inhen the Turkish Legislature passed cwosthutional amendments assuring openness to foreign mvestment in independent power projects (CPPs) and providing for mternational arbitration in the eventispute.

The implementing legislation for these amendments also has been passed and took effect onccording to Turkish economic press, thereby placing Turkeyavorable position to attract foreign investors to help it meet hs energy-development agenda.

A large number of independent power plant projects have begun construction or are near finalotable among new IPP projects are three large gas-fed plants that Ankara awardedS-Dutch-Turkish consortium led by Intergenartnership between US Bechtel and Royal Dutch Shell) that are expected to be completed between1 and

Gas Suppliers Race to Meet Turkish Demand

Turkey has been targeted by several potential gas suppliers eager to deliver additional volumes to help meet Turkey's gas needs. Ankara has encouraged all potential suppliers and has signed either rjre4imiriary agreements or finalized contracts for more gas than it can use in the first half of tbe decade. Therefore, Ike projects that do not come onstream first will have to wait undl late In the decade when demand growth should be sufficient to enable Turkey to accommodate new gas supply sources.

Iran-Turkey Gas Pipeline Nearly Complete

Several Turkish Government officials havedie Iran-Turkey

gas supplyscheduled to deliver Iranian gas starting 1be delayed untilurkish press reports the startupurkishTurkey has persuaded

1trcd plants will require roughly IS0 heavy of gas.

Iran to delay implementation of the pipeline. iJespite tnese statements, because of growing needs, Iran could be the first major new gas supplier to Turkey before the end

Iran would begin delivery5 bem of gas to Turkey inrepresenting partial -year shipments at an annual rate ofeliveries would increasean3 until

Although the original contract signed6 provided for Turkey

Iran has completed its segment of the Iran-Turkey gas pipeline

and is oearing completion of the compressor stations on tho line that wouldgas shipments of just under 1Botas is

close to completing the first phase of its portion from the border to Erzurum and could be ready to delivercra'of gas to Erzurum by spring:

We judge that eastern Turkey could readily usef natural gas to generate electric power -either by converting existing oU-fired power plants along the pipeline route or using the several! mobile power stations that can use cither natural gas or gasoiL Imports from Iran would increase steadily as (he pipeline and compressor stations arc completed along the route on tbe way to connect into the western trunk! ines at Ankara, scheduled for mi d-

Once the connetmon into Ankara is complete and compressor stations are in place, Turkey would be able to use more than tbe full contracted amountem/y. Q

Given Turkey's desperate need for gas and electricthe reported state of readiness in easternwill be under intense pressure, especially from Turkish industry, to accept Iranian gas as soon as preparations to and within Erzurum arein the springhis pressure will intensify as Turkey experiences more country-wide blackouts during peakwill become more often until new power and natural gas sources can beas more of the infrastructure is developed.

S

eventually to importcrn/y, the take-or-pay provision applies onlyem/y, obligating Botas, the Turkish state pipeline company, to purchase only that much. I

Russia's Blue Stream Next in Line

The next major gas supplier to Turkey is likely to be Gazprom's Blue Stream project, which is scheduled to deliver gas to Turkeyipeline under tbe Black Sea starring inlue Stream continues to move0 start of construction on the Black Sea segment, according to industry experts. In latehe Gazprom-ENI consortium signed contractsillion with Italy's Saipem, France's Bouygues, and the Japanese consortium comprising Mitsui, Sumitomo, and ltochu for implementation ofthe subsca segment ofthe project The contracts pave the way for the design, engineering, equipment supplies, and construction of the segment that will transit the Black Sea from Tuapse, Russia, to Samsun, TAtrkey:

With the signingrotocol by Moscow and Turkey in late9 covering tax-related issues mvorving Blue Stream, the only issue remaining to be resolved before construction of the subsea segment can begin is credit approval from the Italian export credit firm Sace, according to industry press. The Blue Stream consortium has beenecision since9 but it has not yet been rendered, most likely because ofthe volume of financial and technical data that must be reviewed pertaining to tins technically difficult project Sace has given no indication that it is about to cancel the project, which is already so far along in all other aspects:

Russian land portion

' Timoint venture between Gazprom and Italy'sdelivero Turkey, with an additionalor Europe by the end of the decade.

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There haselay in the finalization of Japanese loans for the

The delay will only slightly alter the construction schedule on the land portion and final loan approval is anticipated, according to industry experts. [

Torkey probably will not renege on its commitment to Blue Stream, even if the project is delayed. Ankara's main concernesire to obtain gas supplies as quickly as possible, and Ankara has consistently inaintaipcd that ii welcomes gas supplies from any potential source.ecent slight decline in gas proiiuctioQ, Russia has ample reserves available to supply Blue Stream and has given the project the highest priority in terms of supply availability:

Prime Minister Eoevit said in an interview in late October that Turkey is wifiing to take gas from whomever can supply it and that Turkey would live up to its contractual obligations with Russia. President Demirel, titing Turkey's gas needs9 interview, reiterated Ankara's comrnjtincnt to Blue Stream.

Moreover, therearge number of Turkish contractors involved in Blue Stream who stand to lose millions of dollars if Turkey backs out of the project.

The TCP: Spinning Its Wneah

In contrast, the TCP is bogged down in negotiations among tbePresident Niyazov waroecTfie would

exercise his contractual right not to renew the agreement signed with the US corrsoraurn,ast year if PSO does not come up with an acceptable financing package aod an accelerated construction timetable,]

Niyazov asserted that the consortium's three-year design ana corrsrrucuonor the TCP is too long and that he wants gas to flow

While Niyazov continues to proclaim his cornrnitrnent to the TCP,with the project's slow progress and the need toproject-related legal agreements has induced him Toto Russia and

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Azerbaijan's Gas Is Complicating tbe Issue

Azerbaijan's partidpation in the TCP is key to the its viability because the TCP is routed through Azerbaijan to Turkey. Large gas reserves have been discovered in Azerbaijan's Shah Dcniz field, and Baku bas said that it wants access to half tbe capacity of the TCP for its exports or the project will not proceed through its territory:

Although Niyazov recentlySG delegation led by George Shultz that he mightmall volume of Azerbaijani gas to transit the TCP once Turkmen gas deliveries reach fully contracted volumes,e offered is insufficient to meet Baku's export necd-sj

Id January meetings with representatives of tbe signatory countries, Niyazov said be would be flexible in allowing Azerbaijani gas into tbe pipeline, but he refused to comm.it as to specific volumes.

with Niyazov^

]Valeb Aleskerov, Director of Foreign

Investment for the Azerbaijani energy firm Socar, said in January that be plansa project toas export pipeline to Turkey due onstream by thewould enable Baku to export Shah

Deniz gas sooner than it would fhiouph the TCP and without competition from Turkmenistan. Azerbaijan could become an attractive supply option for Turkey, because it offers the shortest supply route and because the Azerbaijani Government has tbe rights to obtain the gas from producers at low prices, thus enabling Baku to sell gas to Turkeyompetitive priceJ

Furthermore, Aleskerovcompanies developing the Shah

Deniz gas field are coasidering exporting ine gas through to Iran because it would be the easiest and cheapest way to move gas to Turkey/-

"jHe said that Iran is willing to purchase moref Azerbaijani

gas for re-export to Turkey and for domestic use in northern Iran. Iran's northern pipeline system has been expanded sufficiently to transport Azerbaijani gas to Turkey, and tbe newly completed pipeline from Tabriz to Turkey has enough excess pipeline capacity to deliver morecrn/y.

Despite these storm clouds, PSG and Royal Dutch Shell are attempting to convince Azerbaijani leaders that Baku's interests are better served by cooperating with the TCP rather than pursuing an independent pipehne project to send gas to Turkey,

The consortium maintains that Baku can save

J Estiinaes of Agabsjjaniexportsmiey mgsolul volumes comingariousduring tbe decade. I

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money and spare itself the problems of concluding host government agreements by aligning itself with the TCP.

Aleskerov may calculate that movementas deal between Azerbaijan and Turkey might spur Niyazov to offer Baku better terms and could induce PSG-Shell to alter its terms to meet Baku's requirements.

Egyptian Gas Could Be Added to the Mix

Spotting an opportunity, Egypt is primed to join the race to supply Turkey with gas by mid-decade with pipeline gas and liquefied natural gas (LNG) projects under consideration.urkeyetter of intent toillion cubic meters per year (bem/y) of gas from Egypt with the means of delivery and starting data

The pipeline project involves the ejetension to Turkeyroposed Egyptian gas export pipeline toewof the Egyptian General Petroleum Corporationn Egyptian businessman, and Israel's Mcrhavbuild the pipeline, according to press reports. Tbe Egyptian Government has agreed that the company will be granted the rights toipeline from El Arish to Israel along tbe southern Mediterranean. I

The extension to Turkey would dependeace agreement being reached between Israel, Syria, and Lebanon. It would be economically viable only if it were to be built in shallow territorial waters off the coasts of Lebanon and Syria Talks are already underway between EGPC and Turkey's Botas over volumes. Egypt wants to export athile Turkey has limited the purchase amountecause of other purchase commitments. Because underwater pipelines generally needndf throughput to be cornmerciaily viable, it is unlikely that the project will advance quickly. I-

LNGore realistic alternative because Egypt could profitably supply Turkeyf LNG. Ankara is evaluating bids tolanned LNG project at femir with BP-Amoco and ExxonMobil the two contenders for the award.

Implications for the TransCaspian Gas Pipeline

Successful completion of Blue Stream and the Iran-Turkey gas pipeline would set back construction of an east-west gas pipeline corridor for years. Most industry experts say Turkey can use the gas from only one of these large projects for most of tbe decode, especially since both Blue Stream and tbe TCPake-or-pay obligation for Turkey.esult, financing for the TCP will be difficult to obtain

until later in the decade, when Turkish demand grows sufficiently to accommodate large new gas supply sources.

If the TCP is set aside,to find outlets to export its gas-probably will opt to export gas via Iran and Russia,

Turkmenistan could enterwap agreement with Iran in which Ashgabat supplies northern Iranian markets with Turkmen gas through an existing pipeline between the two countries, thus freeing Iranian gas for export to Turkey.

Turkmenistan will sellcm of gas to Gazprom this year, and the two countries will meet this summer toongertenn deal

Meanwhile, Iran would be weU-positioned toarger share of the Turkish gas market because of excess pipeline capacity and large gas reserves that could be developed for additional exports.

Longer term prospects for the TCP will improve if Azerbaijan reaches an accommodation with Turkmenistan and forgoes plans to build its own pipeline. Turkey's desire to diversify its gas supply sources, coupled with an expected rise in both Turkish and European gas demand sufficient to accommodate another large export project, would make the TCP viable toward the end ofthe decade.

Current and Proposed Gas Supply Projects to Turkey

Finalized Contracts

Supplier

(bem/y)

LNG

segment complete; Turkish segment near completion. Onstmam1 or earlier.

Stream

credit approval pending; construction targeted for

y mid-decade

export capacity. Planning additional deliveries when the Izmir LNG facility comes onstream mid-decade.

LNG deliveries to Turkey9

Agreements

Azerbaijan

Trans Caspian Pipeline

not in place. Agreement between Turkmenistan and Azerbaijan needed on pipeline capacity shares.

or. hold pending lilting of sanctions.

and ExxonMobil competing to supply planned Izmir LNG facility.

gas pipeline from Egypt to Israel with extension to Turkey.

: ITurkrsh Gas Needs (CIA estimate)

-Caspian Pipeline

(TCP)

Bine Stream

Russia: Ukraine,Moldova, Romania, Bulgaria route

Iran

LNG from Algeria and Nigeria

Estimated Turkish Natural Gas Needs and Supplies0 (With probable delivery schedule)

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