Despite high level negotiations in Ankara, Russia and Turkey failed yet again to resolve a price and volume dispute over natural gas mid-July, though Turkey's energy minister suggested a settlement was still possible as the month drew to a close - and that gas shipments might even resume on August 1.
The dispute, which has halted gas imports to Turkey via the USD3.4bn Blue Stream gas pipeline system since March, has also cast doubt on another major natural gas scheme involving Turkey.
Under the Blue Stream project’s terms, Turkey had agreed to purchase 2bcm of Russian natural gas this year, increasing to 16bcm in 2008.
However, the Turkish government has demanded a price decrease, saying that the Russian charges are way above market prices.
Turkey’s move also comes within the scope of a move by Ankara to shift Turkey’s energy policy, diversify energy suppliers and use other resources such as coal and hydro-electric power in producing energy.
After meeting Turkish Energy Minister Hilmi Guler in the Turkish capital on 10 July 2003, Gazprom Chief Executive Alexei Miller left without claiming to have made any progress. “The two sides agreed to continue consultations on the issue,” Gazprom said in a later statement.
Analysts say that the main area still under discussion is the contracted baseline gas price, which Turkey wants to slash from USD115 per thousand cubic meters (tcm) (USD3.20 per million Btu), to USD75/tcm (USD2.08/mbtu).
Turkish officials say they want the reduction because the price is much higher than the market value and Turkey could have purchased gas more cheaply from other countries such as Turkmenistan and Azerbaijan. Energy Minister Hilmi Guler said the 1,250-kilometer Blue Stream pipeline - an engineering triumph that connects Russia's southern gas fields to Turkey's Black Sea port of Samsun - “imposed a USD196m loss for Turkey.”
Yet making the reduction as Turkey wishes would cost Gazprom an estimated USD15bn in export revenue over 25 years. The Russian energy giant is also reportedly obliged to pay back some USD1.7bn in debt incurred in the building of the Blue Stream project
However, analysts suggest that the failure of the mid-July round of talks means that Gazprom will have to offer new concessions, including a deeper price cut, given that the freezing of the project altogether could cost the gas giant closer to USD42bn in export income.
Gazprom Deputy Chief Executive Alexander Ananenkov sounded an upbeat note when he told reporters on June 18 “We believe that gas supplies through Blue Stream will be continued in the very near future, and positive steps in this direction have already been noted.” Ananenkov added that since Blue Stream was first launched at the end of 2002, Turkey had imported only 500m cubic meters (17.65bn cubic feet) of gas.
Yet the issue seems likely to continue burning, as Turkey’s natural gas provision continues to grow - far outstripping both domestic consumption and the means to distribute imports to customers.
In March 2003, the BP-led consortium developing Azerbaijan’s Shah Deniz gas field gave the financial go-ahead for the project’s USD3.2bn, Phase 1 development. This aims to begin delivery of natural gas to Turkey in 2006. Chances are that an oversupplied Turkey, although somewhat relieved by the rescheduling of Iranian and Blue Stream gas imports, is not leaping for joy at news.
Under the initial schedule, Turkey was to take 2bn cubic metres/year (cm/yr) of Shah Deniz gas in 2005, rising to 3bn cm/yr in 2006, 5bn cm/yr in 2007, and a plateau rate of 6.3bn cm/yr in 2008. Iranian gas shipments to Turkey will start at 2bn cm this year and rise by 1bn cm/yr until they hit plateau of 10bn cm/yr around 2010. Russia may undershoot its combined contracts to supply 14bn cm/yr to Turkey outside Blue Stream, having supplied only 11.8bn cm in 2002.
While Gazprom says that it hopes to resolve all Blue Stream problems with Turkey within a month, this contrasts strongly with other reports suggesting that the entire wrangle could be referred to international arbitration.
Russian Deputy Foreign Minister and presidential envoy for the Caspian Viktor Kalyuzhny terms the problem “geopolitical not economic”. Speaking at the conference A Tale of Three Seas on 4 June 2003, Kalyuzhny said that Turkey was discriminating against Russian gas and seeking new Caspian suppliers in its place. Questioning whether it makes sense to build a new pipeline when such problems already exist, Kalyuzhny then suggested that Shah Deniz gas could in the future enter Turkey via Blue Stream.
However, BP, the upstream operator at Shah Deniz and the pipeline’s technical operator, says that it is now too late to alter the line, even if it wanted to.
On June 23, World Gas Intelligence reported a BP spokesman saying “We’ve ordered pipes for it,” adding that the terms and route had already been agreed.
The spokesman added that BP’s partners had not studied options for shipping their Azeri gas across southern Russia via the Gazprom grid to Blue Stream’s entry point at Dzhugba, on the Black Sea Coast.
BP’s gas pipeline is to be built along the route of the Baku-Tbilisi-Ceyhan oil pipe from Azerbaijan across Georgia to Erzurum in eastern Turkey. At that point, the oil line will head south to the Mediterranean, while the gas pipeline is to connect with the Turkish national network. The Turkish state pipleine company, Botas, is to build the portion of the line inside Turkey. Norway’s Statoil is to become commercial operator once the Shah Deniz gas pipeline is built.
US ambassador for Caspian energy policy Steven Mann claims in Baku on June 4 that the Shah Deniz pipeline would “bring the cheapest gas to Turkey” and undermine Gazprom’s supply monopoly in the region. Given that Turkey is considering turning itself into a transit country for gas flows to Greece and onward into Europe, he says competition could improve in Europe as a whole as a result of building the route.
Guler and Miller were due to meet again to discuss the Blue Stream dispute July 30. While Guler did say it was possible gas could resume flowing as early as August 1, he also said Turkey would maintain its position on a revised pricing policy.