Changes in EU Future Natural Gas Supply and the Role of Turkish Hub

Transcription

1 Changes in EU Future Natural Gas Supply and the Role of Turkish Hub Jalal Dehnavi, Yuri Yegorov, Aveed Raha, University of Vienna, Faculty Economics and Business IAEE 2015, Antalya, Turkey, May 2015 Concurrent session 1 (Manyas 2), Monday, 3:30 pm

2 Abstract EU dependency on imported natural gas is expected to increase and it is also worried about security in energy supply. Nowadays, Russia is the largest supplier of gas to EU, and due to Ukrainian transit games EU considers it as a threat. On one hand, EU strives to diversify its natural gas suppliers to overcome the security threats, while on the other hand, Russia also has made relatively expensive efforts to find ways of reducing reliance on unreliable transit countries. Nord stream and South stream projects prove that Russia already has tried to diversify its gas supply routes without any transit country as well. Despite some arguments in favor of LNGs, they are not likely to play more important role in European gas future because Asian market has higher price and this is more attractive for new LNG projects that are also becoming more expensive. Both Russian diversification strategy (replacement of South Stream by Blue stream expansion has been announced on December 1, 2014) and new pipeline gas flows from Caspian region and Middle East would increase the role of Turkey as gas transit country. The paper focuses on potential consequences of such an evolution than will eventually lead to monopolistic power of Turkey in gas transit to EU. Besides that, there might be many exporters which most likely will compete for this transit capacity. There are possibilities for multilateral cooperation among producers but it is not clear to what extent. 2

3 Introduction EU dependency on imported natural gas is expected to increase from about 62 % in 2010 to 83 % in 2035 due to reduced domestic production of natural gas (IEA, 2012). Russia is the most important player in European gas market, supplying about 30% of gas consumed by EU. The problems with Ukrainian transit and pressure over Russia have changed the topology of future transit routes, with replacement of South Stream by transit via Turkey. At the same, Middle East and Caspian countries are also planning to increase gas export to EU (see Fig. 1). All those routes will pass Turkey (see Fig. 2). If Turkish hub project would realize, it will allow for a new gas transit route to EU. At the same time, it will increase the power of Turkey (both over producers and consumers) as a monopolist on this transit route. This paper focuses on possibletransit games. 3

4 Forecast of gas import dynamics for EU up to Fig.1 Source: WEO

5 Evolution of the Southern Gas Corridor: new pipeline projects into the race. Fig. 2 Source: Platt s Energy Economist (2013). 5

6 Proposed gas pipelines on Eastern Mediterranean shore Example of geopolitically unsafe route Source: gory/countries/gaza/ 6

7 Pipelines versus LNG: Globally and for EU Dynamics of global LNG share in natural gas trade Structure of EU natural gas imports shares in 2013 Sourcec: Forecast by IEA2014 Source: Drawn by authors based on the data from BP

8 Some Facts about Turkey. 1 The primary concern of any government in Ankara is to satisfy Turkey s own energy needs. An essential component of a future southern gas corridor, TANAP (Trans-Anatolian Pipeline) would enable Turkey to become a major energy transit state. Turkey may only become a significant energy hub (physical and/or trading) after substantial investments have been made to upgrade infrastructure. To be a gas hub, there must be a degree of stability and security within the country and in the immediate neighborhood. Becoming a major energy transit state and possible future significant energy hub would strengthen Turkey s claim to be an influential regional power. Energy dependence on Russia will probably not thwart Turkey s plans as Turkish officials seek to facilitate the transportation of gas from northern Iraq and Turkmenistan, as well as from Azerbaijan, to the European market. 8

9 Some Facts about Turkey. 2 Turkey s primary energy consumption by fuel ( ) Numbers are in Mtoe Turkey has one of the most dynamic markets for natural gas in the OECD region. Given the fact that Turkey does not hold significant natural gas reserves, all this increase in consumption has had to be provided through imports. Source: Author s elaboration on the BP Statistical Review of World Energy, ,0 40,0 35,0 30,0 25,0 20,0 15,0 10,0 5, Oil Coal Hydro Gas 9

10 Potential Gas Exporters to EU: Caspian vs Africa Key Central Asian Natural Gas Data, 2013 Country Reserves (tcm) R/P (Years) Production Consumption Exports (bcf) (bcf) (bcf) Azerbaijan Kazakhstan Turkmenistan 17.5 More than Uzbekistan Source: BP Statistical Review of World Energy, Key North African Natural Gas Data, 2013 Country Reserves (tcm) R/P (Years) Production Consumption Exports (bcf) (bcf) (bcf) Algeria Egypt Libya 1.5 More than Source: BP Statistical Review of World Energy,

11 Major Gas Exporters that will Use Turkey as Transit Country Among the potential gas exporters to Turkey, we shed more light on Russia and Iran, the first and second biggest gas holders respectively. Iran At present time, due to some political conflicts, Iranian presence is not yet visible in EU gas market. Iranian-Turkish gas trade has already started in the 1990s. In 2011, Iran exported 8.4 bcm natural gas to Turkey. In addition, there is a MoU (memorandum of understanding) which includes Turkish participation in South Pars gas production. The construction of a pipeline from south pars through Iran to Turkey and then Europe. As Jalilvand (2013) says: It is more than doubtful whether this plan will be realized anytime soon. Hence, we should not take in to consideration Iran, in short term, as a source of gas supply to Turkey. 11

12 Iran s main gas lines Source: Jalilvand, David Ramin. Iran's Gas Exports: Can Past Failure Become Future Success?. Oxford Institute for Energy Studies,

13 Russia Before December 2014, Russia was planning South Stream route with the capacity of 60 bcm/year. Due to primarily geopolitical tension with the West (in particular, Bulgaria backed by EU and US, was not giving Russia the final permission to start this construction) Russia has decided to replace this route with Blue Stream-2 of similar capacity and has reached the preliminary agreement with Turkey about that during the visit of Russian president Putin to this country. While this action is practically economically neutral for Russia, it changes a lot for both Turkey and EU. Turkey becomes a much more important gas transit country comparing to its status before. This will pose a challenge for the construction of additional transit capacity via this country. As for EU, this elaboration (although, ironically, in line with EU 3 rd energy package) is not likely to bring additional utility. First of all, EU will need to self-finance many hundred km of pipeline capacity to reach Turkish border. Second, Turkey gains additional bargaining power against EU. While we do not expect strategic closure of pipeline for any political reason, Turkey might bargain on higher revenues for its gas transit. Moreover, this bargaining can go two sides. First of all, EU might agree on Turkish conditions for the price of gas transit (and we do not have any international law for its limit). Second, Turkey may impose its transit cost on the countries exporting gas to EU via its territory. Since there are several of such countries, and total demand for transit can exceed capacity, Turkey may get additional revenue in bargaining over the transit volumes with those countries. This question will be elaborated subsequently. This point has been mentioned in the paper of Yegorov & Wirl (2010), in application to Ukrainian case. 13

14 Competition for Turkish Hub We see that geography and resources make Turkey a key gas hub in the nearest future. As it was forecasted by IEA (2014), by 2025 there will be 30 bcm of natural gas from Caspian area and 70 bcm (now only 30 bcm) from Middle East that would reach Europe by pipeline. Additional gas coming to Turkey from Russia (due to political shift from South Stream to Blue stream project by Russia in the end of 2014) will only increase this volume. Thus, independently on the chosen scenario for future gas consumption in EU, Turkey will become an increasingly important hub for the transit of natural gas to EU. Hence, Turkey has to build new trans-country pipelines with the capacity of at least of at least 70 bcm for gas transit to Europe. Besides that, Turkey itself is a growing consumer of gas, so the volumes entering Turkey will exceed this volume substantially. As we know, even transit of one exporter over a country can be the source of games (see, for example, Yegorov & Wirl, 2010). In this case there will be many exporters. Clearly, Turkey will have monopolistic position. We do not expect its non-payment, so cutting supply (like it was between Russia and Ukraine in 2009) does not seem a problem here. The problem is that Turkey will have too much monopoly power over transit and can play rent seeking game charging too high transit price and/or limiting access of some exporters to EU market. Hypothetically (if the game will be rather fair), it may happen that Turkey will auction its pipeline capacity among exporters and there will be winners that will agree to pay the highest bid for transit. Inter alia, this can also make the price of gas for final consumer in EU more expensive. Another issue is to what extent gas supporters will cooperate. Some of them may be not economic but also political rivals, and no cooperation is visible here. From theoretical perspective, long term rivalry can be excluded if exporters can invest in additional transit capacity. 14

15 Modelling Competition in Turkish Hub Several models can be considered. However, it is too early to fix them. Consider the following model. There exist 2 exporting countries to EU (for example, Russia and Iran) and one transit country (Turkey) with limited transit capacity, Q. There are two cases: a) transit capacity is not binding. b) it is binding. 15

16 Modelling Competition in the Turkish Hub 16

17 Conclusions At the present moment, European natural gas security of supply is highly dependant to Russia (the most important player in Europe gas market) and its strategy in natural gas market. Due to worsening security concerns about the potential disruption of energy supply, the strategic objective "diversify sources and routes of energy supply" will follow more seriously by European Union. Given the history of gas conflicts between Russia and Ukraine, on one hand, and recent war of mutual sanctions between EU and Russia, on the other, EU has to either reduce its gas consumption in future or find new reliable suppliers. In this regard, the Southern Gas Corridor project (or alternative projects via Turkey) can play an important role. Here several exporters from Middle East and Caspian area will compete for the share in capacity, while Turkey may enjoy too much monoply power in transit. (However, they may decide to cooperate for a joint supply to Turkish gas hub which would, not only does increase the exported quantity to EU (if not beyond the limitation of transit route pipeline capacity), but also reduce the risks of interruption in supply for EU substantially.) That can make some potential exporters thinking about export diversification, for example, to Asia. Especially this is important for such large reserve holders as Iran and Turkmenistan who is also not likely to receive a priority treatment on Turkish hub. Dehnavi Yegorov Raha, Antalya, IAEE

18 References Yegorov Y., Wirl F. (2010) Gas Transit, Geopolitics and Emergence of Games with Application to CIS Countries. - USAEE-IAEE WP , 28 February 2010, 29 p. ( ). WEO IEA. BP Statistical World Energy Review Ramsey, Frank P. "A Contribution to the Theory of Taxation." The Economic Journal (1927): Dehnavi Yegorov Raha, Antalya, IAEE

19 Thank you for your attention! Please write your comments to Dehnavi Yegorov Raha, Antalya, IAEE