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Analysis & Opinion
04.10.11 Jumping On The Bandwagon
By Andrew Roth

Turkish Energy Minister Taner Yildiz announced Sunday that Turkey would not renew a 25-year-old supply agreement for natural gas with Russia, after failing to receive a 20 percent discount on the gas in a renegotiated contract. While Yildiz stated that Turkey’s rigid position on the contracts was not politically motivated, a recent series of raids on Gazprom’s partners in Europe shows that across the board, consumers of Russian gas are pushing back against Gazprom’s dominant position abroad. Yet Russia’s inability to find a common language with Turkey may not only threaten the country’s gas exports there, but could also bode poorly for some of Russia’s larger projects, like the South Stream pipeline.

Debates over the pricing on deliveries of six billion cubic meters of natural gas per year to Turkey had been brought up at earlier meetings between Turkish Prime Minister Recep Erdogan and Russian President Dmitry Medvedev in March, but led to no concessions on the Russian side. Turkey gets close to 60 percent of its domestically consumed natural gas from Russia. Last year, the country imported 18 billion cubic meters of gas via two pipelines: the Blue Stream pipeline, which carries gas from Russia to Turkey across the Black Sea, and the Western pipeline, which carries gas from Russia to Turkey through Ukraine and Bulgaria. Turkey, meanwhile, also holds some leverage over Gazprom, being the gas monopoly’s second largest foreign consumer after Germany.

While it was reported that Russian officials believed Turkish state gas company BOTAS was merely bluffing on allowing the contract to expire, talks fell apart after Russia failed to meet BOTAS’ stated goal of a 20 percent discount on gas imports. The simplest explanation for the company’s decision to allow the contract to expire was that Turkey already imports more gas than it needs from Russia. With the country obligated to import 30 billion cubic meters of natural gas from Russia each year, jettisoning contracts allowed the Turkish company to avoid paying penalties on the gas that it did not consume.

“Ankara apparently feels that it holds some negotiating leeway, despite Russia’s overwhelming dominance in the Turkish market,” wrote Eurasia Daily Monitor analyst Vladimir Socor. “This leeway might prove effective in the short term. Turkey is potentially oversupplied with gas under multiple contracts that, in the aggregate, exceed Turkey’s current demand. This explains Yildiz’s confidence that Turkey would not experience a gas deficit in the event of a halt in Russian supplies through the Western pipeline. The Turkish economy and consumers would not be affected in that event.”

Moreover, the expiration of the contract may not actually stop those six billion cubic meters of gas from flowing to Turkey at all. Yildiz stated that private Turkish companies may take the place of BOTAS if they wish to negotiate contracts with Gazprom, and Gazprom officials announced today that they would be willing to work with private Turkish companies as well to ensure a continued flow of gas. The attempts to downplay the possible effects of the contract’s expiration have been a consistent strategy by Yildiz and the Turkish side, yet Russia had long seen a political edge to Turkey’s demands for a 20 percent reduction in price. To wit, Russia responded to an earlier ultimatum by Yildiz by announcing that it was negotiating with BOTAS, and not with the Turkish government.

With the political winds shifting against Gazprom, it’s easy to understand the company’s touchy statement. The Turkish government’s decision to divest itself of involvement in the contract points to a growing set of criticism against Gazprom’s foreign dominance in the European gas market. Last week, the European Commission carried out anti-monopoly raids in over ten countries against a number of companies related to Gazprom, in what many experts saw as a public warning to Gazprom. BOTAS also joined a number of European companies clamoring for reduced pricing by Gazprom, despite the fact that Turkey’s price for natural gas is almost $100 less per thousand cubic meters than Europe’s.

With Gazprom on the defensive, analysts saw Turkey attempting to play its advantage in the BOTAS-Gazprom negotiations. “This is a successful play on Gazprom’s problems,” said the head of investment analysis at Univer, Dmitry Aleksandrov, reported Polit.ru. “There’s no need in Turkey’s strategic plan for these Russian deliveries [of gas]. Moreover there are real possibilities to receive either a valued discount, or to earn the right to re-export Russian gas.”

Greater doubt now also lies over Russia’s hyped South Stream pipeline. Turkey has continued to refuse to grant Russia rights to lay the pipeline through Turkish territorial waters. If Russia and Turkey fail to find a common language over the pipeline, Russia will be forced to negotiate with Ukraine, which, considering the fact that the South Stream intentionally bypasses the country, is not a huge fan of it. If Gazprom can’t find a way to negotiate with Turkey, said Mikhail Korchemkin from East European Gas Analysis, “then it won’t be ruled out that Russia will be forced to negotiate the laying of the South Stream with Ukraine, through its waters and, at the same time, under Ukraine’s conditions,” reported Kommersant.
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