Russia is interested in building natural gas storage facilities in Turkey, officials from Russia's Gazprom said March 20. Over the winter, Gazprom redirected natural gas from its storage facilities in Europe after a spike in demand in Turkey. Now, Gazprom wants to build underground natural gas storage facilities in Turkey to help when supplies dwindle in the future.

Gazprom's proposal is part of Russia's larger strategy -- in both Turkey and Europe -- to increase Moscow's energy leverage with its customers. Although Ankara will be wary of giving Moscow more influence in Turkey, there is little it can do at the moment to withstand the Kremlin's strategy.

Analysis

Energy is one of the cornerstones of the Russo-Turkish relationship. Russia provides approximately 58 percent of Turkey's natural gas supplies, making it Turkey's largest natural gas supplier. Ankara has long sought ways to reduce its dependence on Russian natural gas, since Moscow traditionally uses its energy supplies as political leverage with many of its customers. For its part, Russia wants to keep Turkey tied to it through energy and to prevent other suppliers from helping Ankara diversify its natural gas sources. Thus, Russia wants to increase its leverage in its energy relationship with Turkey.

Russia is working on a complex strategy to strengthen its position relative to its Western energy customers, particularly in Europe. The first element of the strategy is to move Russia away from its primary role of natural gas supplier and increase its ownership of other natural gas-related assets. The second element is to lock many of Moscow's customers into 10-to-15-year contracts, which Russia has made more appealing by offering natural gas at a discount.

Russia is in negotiations to purchase electricity networks in Germany, natural gas distribution networks in Greece, and electricity and distribution networks in Italy. Moscow has also shown interest in the natural gas distribution networks in the Czech Republic. Russia has struck tentative deals with Germany, Italy and others on 10-year contracts with natural gas price discounts of between 10 and 30 percent. Amid Europe's financial difficulties, the discounts are welcomed. Russia knows that many long-term energy diversity programs are under way in Europe and so is trying to prepare for when those become operational by striking long-term deals.

This European strategy appears to be expanding into Turkey with Gazprom's announcement of interest in building natural gas storage facilities there. Turkey is already on Gazprom's list of countries that could take part in renegotiations on natural gas price contracts, according to Stratfor sources. Russia and Turkey's contract on supplies sent via the Blue Stream pipeline is set to expire in 2013, though the contract on Russian supplies that transit Bulgaria has many years left. Turkey could enter into larger negotiations, like the Europeans, and receive a discount of 10 percent or more. The problem is that Russia will insist on a long-term contract, likely spanning at least 10 years, and Turkey will resist such a deal because it anticipates an increase of natural gas supplies from Azerbaijan's Shah Deniz II project in approximately 5 years.

In the short term, however, the possibility of cheaper natural gas and Russia's constructing natural gas storage in Turkey are attractive ideas. Russia's offer comes as Turkey is in a pricing dispute with its second-largest natural gas provider, Iran. Turkey currently pays Iran $505 per thousand cubic meters (mcm) of natural gas -- a steep price compared to the $400 per mcm it pays Russia. Turkey also regularly experiences reliability problems with supplies from Iran, especially in the winter. While Ankara has been careful to maintain a working relationship with Tehran to help Iran circumvent sanctions, Turkey also would likely be interested in more security if more problems arose with Iranian supplies, particularly amid increasing sanctions on Iran from the United States and Europe.

Moscow would be more inclined to provide a greater discount on natural gas supplies to Ankara if the negotiations included Russia gaining assets in Turkey, as it would if it built natural gas storage facilities there. Such facilities could relieve the stress on Turkey's supplies should issues with Iran grow more problematic. Cheaper natural gas and more secure supplies from Russia make Moscow's offer attractive to Ankara. However, either agreement would give Russia greater leverage in Turkey, since Russia would own assets in the country and Turkey would be locked into a long-term contract.

Ankara could want to diversify its natural gas supplies away from Russia and prevent Moscow from gaining more energy -- and ultimately political -- leverage in Turkey. But Ankara has little recourse against Russia's strategy right now. New natural gas supply options -- increased supplies from Iran, the Azerbaijani expansion of Shah Deniz II or liquefied natural gas alternatives -- are years away, and problems with Iran are jeopardizing Turkey's current supplies. Russia might be the only option Turkey has in the short term.

 

 

 

Russia's Energy Plans for Turkey is republished with permission of STRATFOR.