Vitaly Yermakov is a Senior Research Fellow at the Oxford Institute for Energy Studies
The discovery of a large deep-water Sakarya gas field in the Turkish economic zone in the western part of the Black Sea shelf in August 2020 gave Turkey a winning combination of cards, which could be further strengthened by additional discoveries., This seems to be happening as the announcement of a new successful well at Sakarya in early June 2021 allowed an increase of estimated natural gas reserves to 540 billion cubic meters (bcm). For the Turks, the name of the field has a symbolic meaning: in August 1921, a hundred years before the discovery, a turning point in the Greco-Turkish war took place in the battle near the Sakarya River, as a result of which the Turks conquered Asia Minor, which was a turning point in the formation of the modern Turkish state.
The recent success seems to be giving Turkey an even stronger hand in upcoming negotiations with gas importers and promises to greatly decrease Turkey’s gas dependence on imports.
However, the data on the Sakarya field does not yet allow for conclusions to be made on the timeline for putting the field into operation, its production levels, or its economic profitability.
For now, Turkey's two main goals are improving the terms of gas import contracts and betting on new discoveries that could increase Turkey’s energy security.
First, at stake are the terms of long-term gas import contracts, some of which expire in 2021 and some in 2024–2026. Gas consumption in Turkey in 2020 amounted to 48 billion cubic meters, almost all of which was imported. Turkey receives pipeline gas from Russia through the Blue Stream and Turkish Stream gas pipelines through the Black Sea, from Azerbaijan via Georgia through the Trans-Anatolian Natural Gas Pipeline (TANAP), from Iran, as well as liquefied natural gas (LNG) under long-term contracts from Qatar, Algeria, and Nigeria and LNG on the spot market from the United States.
In 2021, several long-term import contracts for the supply of natural gas to Turkey with a total volume of 18.3 billion cubic meters will expire, which corresponds to 40% of Turkey’s current consumption. Most of this is covered through contracts with the Turkish national gas company Botas: 6.6 billion cubic meters under an agreement with Azerbaijani SOCAR, 4 billion cubic meters with Russian Gazprom Export, 2.1 billion cubic meters of LNG supplies from Qatargas in Qatar and 1.3 billion cubic meters for LNG supplies from Nigeria. In addition, Gazprom Export’s contracts with four private Turkish gas companies with a total volume of 4.3 billion cubic meters are about to expire. And in 2025, Gazprom Export ends a contract for the supply of gas via the Blue Stream gas pipeline with a volume of 16 billion cubic meters.
In the course of the upcoming negotiations on the renewal of contracts, Turkey wants to achieve a revision to several key terms of the agreements in its favor - primarily about on the principles of oil-indexed pricing, as well as the lifting of the ban on gas re-exports.
The first discovery of its own large gas field in more than 20 years of Turkey's efforts to explore hydrocarbon reserves in the Black Sea, gives Turkey strong leverage in gas trade negotiations.
President Recep Tayyip Erdogan's officially announced target for the start of production at Sakarya is 2023, and it undoubtedly ties in with the celebration of the 100th anniversary of the establishment of the Turkish Republic on Oct. 29, 2023. Nonetheless, this is an extremely ambitious task, and most likely, the maximum possible production volumes at Sakarya of up to 20 bcm per year, according to statements of Turkish Petroleum Corporation (TPAO) or more than a third of Turkey’s expected gas consumption in the most optimistic scenario can only be achieved by the end of 2020s. Field production can usually remain at plateau for several years, which then starts to decline gradually. Future annual production figures are subject to confirmation of reserves and the successful implementation of a complex project that includes the construction of a deep-water production complex and a two-hundred-kilometer large-diameter gas pipeline at great depth from the offshore field to the mainland of Turkey.
Thus, negotiations with importers on new terms of contracts will take place even before Turkey can seriously change its gas balance through its own supplies. But the argument that uncompromising partners risk losing their market share seems to be already being used by Turkish gas negotiators, a case in point is the drag on the renewal contract of 6.6 bcm with SOCAR for Shah-Deniz phase 1 gas.
Second, in the wake of the euphoria from the discovery of Sakarya, Turkey plans to redouble its efforts in exploration drilling on the deep-sea shelf both in its economic zone in the western part of the Black Sea and in the Eastern Mediterranean, where the operations of a Turkish exploration vessel in disputed areas of the shelf to the west of Cyprus in the summer of 2020 escalated the long-standing conflict between Greece and Turkey and also led to rounds of confrontation between Turkey and France, which has only grown since then. The recent discoveries of large and gigantic gas fields on the shelf of the Eastern Mediterranean - Aphrodite, Leviathan and Zohr - have enabled Cyprus, Israel, and Egypt to meet their gas needs for decades to come. If Turkish geologists manage to discover new large offshore hydrocarbon deposits, this can significantly strengthen the country's energy security and its position as a transit corridor from Asia to Europe.
However, there is still little information about the field. According to TPAO's brief press releases published on Aug. 21 and Oct. 17, 2020, the well was drilled offshore at a sea depth of 2,117 meters, at a length from the seabed of 2,658 meters, making a total length of 4,775 meters. Press releases contained estimates of gas reserves of 320 bcm in August and 405 bcm in October. In early June this year, Turkey announced successful drilling at the Amasra-1 well at Sakarya that added an estimated 135 bcm to earlier announced reserves. As a result, the total announced reserves at Sakarya now stand at 540 bcm.
It should be understood that estimates of field reserves based on drilling data for three wells are preliminary and can either increase or decrease as a result of drilling additional exploration wells as part of clarifying the boundaries and building a geological model of the field.
In addition, for gas fields, as a rule, only 70–75% of the total reserves are recoverable because as the field depletes, reservoir pressure drops, and extraction becomes unprofitable. For example, the giant Zohr field on the shelf of the Eastern Mediterranean with total reserves of 850 billion cubic meters has 610 billion cubic meters of recoverable gas reserves. Applying a similar coefficient to the preliminary estimates of the Sakarya reserves, estimated recoverable reserves fall in the range of between 378 and 405 bcm.
The cost of drilling deep-water production wells, the construction of a subsea production facility and a subsea gas pipeline at a depth of 2,000 meters is likely to be considerable. A correct assessment of the required investments will be made based on the results of detailed modeling of the field development plan and gas pipeline construction. In the meantime, using the method of analogs, it is possible, as a first approximation, to estimate the volume of investments in Sakarya at US$7.6 billion relative to the estimated total investments for the development of the Israeli Zohr field of $12 billion, with estimates of reserves 1.6 times higher than those of Sakarya.
It is also important to note that major international oil and gas companies are leading challenging deep-water projects in the Eastern Mediterranean. TPAO has not yet announced its intention to form such a partnership and it seems will try to get by with contracts with service companies, which, in the absence of experience in project management of this scale and complexity, can lead to significant delays.
In the most optimistic scenario, it can be expected that production at the field by the end of the 2020s will gradually reach a peak, which TPAO has assessed as 20 billion cubic meters per year, and will remain at this level until the mid-2030s, and then will begin to decline. Thus, Turkey's dependence on gas imports will decrease substantially in the 2030s but will not disappear altogether.
Threats to the Turkish economic model and dependence on energy imports
Turkey’s economic miracle associated with high GDP growth rates, which between 2002 and 2015 amounted to about 6% per year on average for the period, was due to the inflows of foreign investment and an increase in external debt. Consequently, for some time it was impossible to implement ambitious infrastructure projects financed from the national budget. In recent years, Turkish foreign policy has become more assertive and has required more and more infusions of limited monetary resources. Foreign trade imbalances have been growing, and have led to a volatile monetary policy, a reduction in foreign exchange reserves, and a sharp depreciation of the Turkish lira, as well as a serious increase in inflation and unemployment.
The strained relations with the US and the EU further limit external financing opportunities and undermine investor confidence in the Turkish model of injecting borrowed funds into the economy that are not backed by domestic resources. GDP growth in 2019 was only 0.9%, but in 2020, despite the COVID-19 pandemic, Turkey’s GDP increased 1.8%, partly due to the record-low global energy prices and better trade balance.
Trade balance problems for Turkey are largely related to the need for large-scale imports of energy resources, including oil, oil products, coal, and especially natural gas. Turkey’s national gas production at the moment is scanty and involves production on the Black Sea shelf and in southeastern Anatolia. The country's imports account for about 98% of its gas consumption levels and are extremely sensitive to price volatility in external markets. Since the beginning of the 2000s, Turkey's gas imports nearly quadrupled, reflecting growing demand from industry and households, to 48 billion cubic meters in 2020.
Gas relations between Russia and Turkey: a changing balance of power
Until the mid-2010s Russia was the main external supplier of natural gas to Turkey, with a market share reaching 58% at its peak. However, as consumption and imports grew, Turkey, worried about energy security and the risks of dependence on one dominant supplier, embarked on a course of gas import diversification, investing heavily in the construction of regasification terminals on the Mediterranean coast and in the development of gas transportation infrastructure. As a result, in addition to traditional gas supplies from Russia, Iran and Azerbaijan, Turkey now can import significant volumes of LNG.
Furthermore, Turkey's geographical position makes it an important transit country for the export of hydrocarbons from the Caspian region to Europe. After the US pressured Bulgaria to refuse to accept the South Stream gas pipeline on its territory, Russia reoriented its export gas pipeline through the Black Sea to Turkey. One of the two lines of the Turkish Stream, completed in 2019, now directly supplies gas to Turkey, which previously went there from Russia via the Trans-Balkans gas pipeline through Ukraine, Moldova, Romania, and Bulgaria. After the recent completion of the construction of the receiving gas pipeline through Bulgaria, the second string of the Turkish Stream begins to transit Russian gas through Turkey to the countries of South-Eastern Europe - Bulgaria, Serbia, Hungary, with ultimate access to the gas hub in Austria’s Baumgarten.
Thus, the balance in gas relations between Turkey and Russia in the 2020s has changed and is now markedly different from the situation at the beginning of the 2010s. Turkey has been able to diversify gas imports through LNG and reduce its dependence on Russian gas supplies. In turn, Russia was able to reduce its dependence on the risks of Ukrainian transit but had to accept the risks of transiting gas to Europe via Turkey instead as a “second-best” solution. The modification of relations from the “dominant supplier - consumer” model to the more complex model of “competitive supplier - transit country - consumer” has transformed relations in the gas sector between the two countries. It is now a relationship of increased interdependence in the gas trade. Russia has to take this into account in the context of its broader foreign policy and economic relationships with Turkey.
*Opinions expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Anadolu Agency.