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European Centre for Energy and Resource Security

‘Reflections’

Working Paper Series Volume 2, Spring 2016

EUCERS ‘Reflections’ Working Paper Series, Vol 2, Spring 2016 2

EUCERS ADVISORY BOARD Professor Theo Farrell, Chairman of the Board, Head of War Studies Department and Professor of War in the Modern World, King’s College London Marco Arcelli, Executive Vice President, Upstream Gas, Enel, Rom Professor Dr Hüseyin Bağci, Department Chair of International Relations, Middle East Technical University Inonu Bulvari, Ankara Andrew Bartlett, Managing Director, Bartlett Energy Advisers Volker Beckers, Chairman, Spenceram Limited Professor Dr Iulian Chifu, Advisor to the Romanian President for Strategic Affairs, Security and Foreign Policy and President of the Center for Conflict Prevention and Early Warning, Bucharest Dr John Chipman, Director of the International Institute for Strategic Studies (IISS), London Professor Dieter Helm, University of Oxford Professor Dr Karl Kaiser, Director of the Program on Transatlantic Relations of the Weatherhead Center for International Affairs, Harvard Kennedy School, Cambridge, USA Frederick Kempe, President and CEO, Atlantic Council, Washington, D.C., USA Ilya Kochevrin, Executive Director of Gazprom Export Ltd Thierry de Montbrial, Founder and President of the Institute Français des Relations Internationales (IFRI), Paris Chris Mottershead, Vice-Principal (Research & Development), King's College London Dr Pierre Noël, Sultan Hassanal Bolkiah Senior Fellow for Economic and Energy Security, IISS Asia Dr Ligia Noronha, Director, Resources, Regulatins and Global Security, TERI, New Delhi Deepak Puri, Chairman & Managing Director, Moser Baer India Ltd., Delhi Janusz Reiter, Center for International Relations, Warsaw Professor Dr Karl Rose, Senior Fellow Scenarios, World Energy Council, Vienna/London Professor Dr Burkhard Schwenker, Chairman of the Supervisory Board, Roland Berger Strategy Consultants GmbH, Hamburg MEDIA PARTNERS


PUBLISHED BY European Centre for Energy and Resource Security (EUCERS), Department of War Studies, King's College London The European Centre for Energy and Resource Security (EUCERS) was established in the Department of War Studies at King’s College London in October 2010. The research of EUCERS is focused on promoting an understanding of how our use of energy and resources affects International Relations, since energy security is not just a matter of economics, supply and technological change. In an era of globalization energy security is more than ever dependent on political conditions and strategies. Economic competition over energy resources, raw materials and water intensifies and an increasing number of questions and problems have to be solved using holistic approaches and wider national and international political frameworks. www.eucers.eu IMPRESSUM © 2016 EUCERS. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. Please direct all enquiries to the publishers. The opinions expressed in this publication are the responsibility of the author(s). EDITORIAL Dr Slawomir Raszewski, Editor ‘Reflections’ Working Paper Series, EUCERS Ms Rose Armitage, Editorial Assistant, ‘Reflections’ Working Paper Series, EUCERS European Centre for Energy and Resource Security (EUCERS) Department of War Studies, King's College London, Strand, London WC2R 2LS, UK About EUCERS Professor Theo Farrell (Head Department of War Studies, King’s College London)

Chair, EUCERS Advisory Board

Professor Dr Friedbert Pflüger Executive Director, EUCERS Dr Frank Umbach Research Director, EUCERS Dr Adnan Vatansever Associate Director, EUCERS Carola Gegenbauer Operations Coordinator

Senior Research Associates Dr Petra Dolata (University of Calgary) Androulla Kaminara (European Commission) Research Associates Jan-Justus Andreas Alexandra-Maria Bocse Jose A. Bolanos Kalina Damianova Arash Duero Dr Moses Ekpolomo Thomas Froehlich Lorena Gutierrez Lamya Harub Sandu-Daniel Kopp Dr Maria Kottari

Dr Tomas Maltby (King’s College London) Dr Maximilian Kuhn Flavio Lira Shiraz Maher Philipp Nießen Philipp Offenberg Marina Petroleka Dr Slawomir Raszewski Aura Sabadus Chunping Xie Dr Kaho Yu Shwan Zulal

About the Working Papers Series EUCERS ‘Reflections’ Working Papers Series (WPS) focuses on promoting an understanding of how use of energy and natural resources affects international relations. The Series seeks to contribute to questions including but not limited to economic competition over energy resources, raw materials and water through multidisciplinary approaches which are academically-rigorous and policy-oriented. The WPS intends to stimulate debate and exchange of research ideas including those in an early stage of development. The WPS intend to provide a space for scholars and practitioners to present their work to a broad readership and connect with established expert community working on issues related to energy and resource security.


Foreword European energy security politics is back and this time it is driven by a plethora of developments outside of the European Union. Globally, the impact of US shale and flooded oil markets following Saudi Arabia’s defiant OPEC policy has provided a new context for the European Union energy security. The Energy Union project's viability has indeed increased and the internal energy market is likely to be strengthened by global oil dynamics. Regionally, the on-going Ukrainian crisis is shaping the future of gas transit and trade. While Western/European Union sanctions on Russia continue, developments in Turkey and its strained relations with Russia are the new elephant in the room that is increasingly influencing EU energy policy. The second volume of the EUCERS Working Paper Series 'Reflections' captures the dynamics at the heart of the EU-Russia-Turkey energy nexus. Within this volume, five distinguished scholars offer four distinct, yet complimentary, papers that analyse different dimensions of this important three-way relationship. Dr Stacy Closson's policy-focused paper addresses Russia's sanctions on Turkey and the implications of the Turkey-Russia crisis on the EU. By utilising historical evidence the Woodrow Wilson Centre's Kennan Institute scholar provides insight into how the standoff is likely to affect European energy security, and what options are available to the EU to mitigate potential adverse effects. Russia-Turkey relations are explored from an Ankara perspective by Mr Emre Tuncalp from Sidar Global Advisors, Washington DC. Drawing on the past, Mr Tuncalp examines the options available to Ankara to improve its energy security. Dr Volkan Özdemir of the Institute for Energy Markets and Policies evaluates the geopolitics of Turkey-Russia-EU energy security politics. In his paper the Ankara-based scholar argues that the EU will likely benefit from the deterioration of Russia-Turkey relations as Turkish energy policy shifts closer towards Brussels. Finally, Mr Nolan Theisen of the Regional Centre for Energy Policy Research and Mr Brian King of the Central European University assess the EU’s natural gas relations with Russia and Turkey. They contend that the EU must depoliticise energy relations with Russia, and that Turkey must be encouraged to fully commit to transposing the EU energy acquis. I would like to thank Dr Adnan Vatansever for his help and support in designing the content of this volume. Our thanks go to Ms Rose Armitage for her excellent editorial assistance on this volume. The responsibility of views and opinions expressed in the papers remains with their authors. Dr Slawomir Raszewski Editor of EUCERS ‘Reflections’ Working Paper Series


Contents The Turkey-Russia Crisis: A Blessing in Disguise for Ankara's Natural Gas Policy? By Emre Tuncalp ……………………………………………………………………………………………6 Russia’s Sanctions on Turkey: Implications for European Union Energy Security By Stacy Closson………………………………………………………………………………………….…14 The EU-Russia-Turkey Energy Triangle By Volkan Özdemir……………………………………………………………………………..………….21 Building the Internal Gas Market at the Border: The Importance of EU External Policy with Turkey and Russia By Nolan Theisen and Brian King…………………………………………………………………….27

The Turkey-Russia crisis: A blessing in disguise for Ankara's natural gas policy? Emre Tuncalp

Abstract

Turkey’s downing of a Russian fighter jet on November 24, 2015 and the ensuing crisis has thrown the future of the bilateral energy relationship into question. Although a major supply disruption remains unlikely, Turkey’s energy security concerns are intensified by Ankara’s dangerous reliance on Russia for its natural gas supply. This paper examines Turkey-Russia energy relations and the impact of the current diplomatic tensions on Ankara’s efforts to diversify its natural gas portfolio away from Moscow, and the feasibility of some alternatives to Russian gas supply options. The paper argues that while Ankara cannot viably replace Russian gas supplies in the short term, the dispute could end up being a silver lining for Turkey if it can initiate a realistic conversation about Turkey’s long-term options and its domestic shortcomings in infrastructure and market mechanisms.


Introduction Over the past decade, Russia and Turkey have presented a perfect case study of how two countries can compartmentalize their relationship. Despite fundamental foreign policy differences over conflicts in places such as Syria, Georgia, Ukraine, and Cyprus, Moscow and Ankara have managed to forge closer political and economic ties, with a specific emphasis on the energy sector in what many described as the ‘Turco-Russian rapprochement’.1 Former Cold War enemies and bitter rivals, the two countries have over the course of their history fought a number of wars in pursuit of regional supremacy.2 However, in recent years Russian President Vladimir Putin and Turkey’s President Recep Tayyip Erdoğan developed close personal ties, and that relationship was mirrored at a wider level through strategic initiatives such as the High-Level Cooperation Council.3 Ankara and Moscow also increased their bilateral trade volume from around US$11 billion in 2004 to US$31.2 billion in 20144, and even agreed on the ambitious goal of increasing bilateral trade to US$100 billion5 at a time when Moscow felt increasingly isolated in the

1 Cenk Sidar and Gareth Winrow, Turco-Russian Rapprochement and the Future of the Southern Corridor, Turkish Policy Quarterly Vol 10, No 2, summer 2010. 2 Akin Unver, Ankara to Black Sea, Foreign Affairs, 12 May 2014, https://www.foreignaffairs.com/articles/russian-federation/2014-05-12/ankara-black-sea 3 Sevil Küçükkoşum, ‘Turkey, Russia accelerate cooperation’, Hurriyet Daily News, 19 January 2011, http://www.hurriyetdailynews.com/default.aspx?pageid=438&n=turkey-russia-accelerates-cooperation-2011-01-19 4 Emin Emrah Danis, Turkey-Russia Energy Relations and Future Expectations, Caspian Strategy Institute, 14 January 2016, http://www.hazar.org/blogdetail/blog/turkey_russia_energy_relations_and_future_expectations_1455.aspx 5 Russia and Turkey sign major trade deals, AlJazeera, 1 December 2014, http://www.aljazeera.com/news/europe/2014/12/russia-turkey-trade-deals-201412117443052995.html

international arena.6 7 As recently as December 2014, Putin and Erdoğan announced a host of new trade deals including a major pipeline project dubbed TurkStream that was unveiled during Putin’s visit to Ankara.8 Fast forward one year, however, and relations seem to have taken a dramatic turn for the worse following Turkey’s downing of a Russian fighter jet on November 24, 2015, in what was described as the most serious incident between Russia and a NATO member in the past several decades.9 The public fallout from the incident was quick to focus on the countries’ energy relationship, which comes as no surprise as the current state of mutual economic dependency between Ankara and Moscow is largely a result of their energy relationship. This is demonstrated by the large trade deficit in favour of Moscow, Turkey’s main natural gas supplier, with energy representing 65 percent of Turkey’s US$25.2 billion of imports from Russia in 2014.10 Although Moscow is unlikely to resort to an energy supply disruption, the incident heightened concerns over Turkey’s high dependence on Russia for its natural gas imports. The dispute could end up being a silver lining for Turkey, because it has

6 Emin Emrah Danis, Turkey-Russia Energy Relations and Future Expectations, op cit. 7 Russia and Turkey sign major trade deals, AlJazeera, op cit. 8 ‘Russia –Turkey annual trade could reach US$100bn’, Russia Today, 15 October 2015, https://www.rt.com/business/318746-russia-turkey-trade-projects/ 9 ‘Turkey seeks to diversify gas supplies amid dispute with Russia’, Reuters, 3 December 2015, http://www.reuters.com/article/us-mideast-crisis-turkey-energy-russia-idUSKBN0TM1TC20151203 10 Economic implications of Russia’s sanctions against Turkey, European Bank of Reconstruction and Development, 7 December 2015, http://www.ebrd.com/news/2015/economic-implications-of-russias-sanctions-against-turkey.html


forced Ankara to focus on alternatives to Russian supply. However, these discussions are dominated by grandiose geopolitical discourse, unsubstantiated arguments, and multi-billion dollar pipeline proposals that have quickly become less financially attractive in the current environment of low oil prices. This paper closely examines Turkey-Russia energy relations and the impact of the current political tensions on Ankara’s efforts to diversify its natural gas portfolio away from Moscow, and outlines possible alternatives to Russian supply and assessing their feasibility. Turkey’s natural gas demand: over-reliant on Russia Turkey is almost entirely dependent on imports for its oil and natural gas supply. Gas consumption has more than tripled in the country over the last fifteen years, from 15 bcm in 2000 to 49.2 bcm in 2014.11 According to estimates by the Turkish state-owned energy company BOTAŞ, the country’s natural gas demand is expected to reach 80 bcm by 2020,12 while the International Energy Agency (IEA) produced a more modest prediction of 60 bcm.13 In 2014, 99 percent of the country’s natural gas consumption was met through imports. Russia constituted the biggest share of that supply in 2014, with almost

11 The official consumption figure for 2015 was not released as of this writing, but it is expected to be more than 50 bcm. 12 It is important to note that BOTAŞ made this projection in 2012. Slowing economic growth in Turkey and adverse market conditions affecting developing economies overall is likely in turn to slow the growth of Turkey’s natural gas demand. 13 Gareth Winrow, Realization of Turkey’s Energy Aspirations, Brookings Institution Turkey Project Policy Paper Number 4, April 2014, http://www.brookings.edu/~/media/research/files/papers/2014/04/realization-turkeys-energy-aspirations-winrow/turkeys-energy-aspirations.pdf

55 percent of total imports at 26.9 bcm, followed by Iran at 18.1 percent, Azerbaijan at 12.3 percent, Algeria at 8.5 percent (via LNG), Nigeria at 2.8 percent (via LNG), and spot LNG at 3.4 percent.14 The country has four active international natural gas pipelines with a total import capacity of around 47 bcm.15 The share of Turkey’s natural gas supply provided by Russia decreased over the past decade from around 65 percent to 55 percent16 due to an increase in Iranian gas supply, Azerbaijan’s entry into the market, and an increase in spot LNG imports. The 55 percent share is still dangerously high, however, especially considering the major role natural gas plays in the country, particularly for power generation. Not only does gas represent 35 percent of Turkey’s primary energy mix17, around half of the electricity that is generated in the country comes from gas-powered plants.18 Russian gas is also vital for the Turkish economy because Russia is the main supplier for Turkey’s industrial Marmara region and Istanbul, both of which represent 40 percent of Turkey’s GDP. Recognizing this, the country’s natural gas strategy aims to reduce its over-dependency on natural gas in electricity generation from 45 percent to 30 percent 14 Emre Tuncalp, ‘Turkey’s natural gas strategy: balancing geopolitical goals & market realities’, Turkish Policy Quarterly, Vol 14, No 3, fall 2015. http://turkishpolicy.com/files/articlepdf/turkeys-natural-gas-strategy-balancing-geopolitical-goals-market-realities_en_9097.pdf 15 IEA, Energy Supply Security 2014: Turkey. OECD/IEA. https://www.iea.org/media/freepublications/security/EnergySupplySecurity2014_Turkey.pdf 16 Doğal Gaz Piyasası 2014 Yılı Sektör Raporu (Turkey Natural Gas Sector Report 2014), Turkey Energy Market Regulatory Authority (EPDK), Ankara 2015, http://www3.epdk.org.tr/documents/dogalgaz/rapor_yayin/DPD_RaporYayin2014.pdf 17 BP Statistical Review of World Energy, 2015. 18 David O'Byrne, ‘Analysis: Turkey balances on brink of gas supply crisis’, Platts, 21 December 2015, http://www.platts.com/latest-news/natural-gas/istanbul/analysis-turkey-balances-on-brink-of-gas-supply-26316986


by 2030, as well as reducing dependency on its single supplier – Russia’s state-controlled Gazprom.19 Turkey is Gazprom’s second largest market behind Germany.20 Although demand growth is expected to level off as the economy slows, it is still at a respectable level, especially compared with other stagnating demand centers in the region. This explains why maintaining the Turkish market, alongside the European one, will remain an important priority for Gazprom going forward. Turkey currently has two active natural gas supply contracts with Russia. The Blue Stream contract was signed in 1997 for a 16 bcm plateau period volume, and expires at the end of 2025.21 Western Line, signed in 1998 for an 8 bcm plateau period volume, expires at the end of 2021.22 These contracts are so-called take-or-pay agreements, which stipulate additional fees if the buyer is unwilling or unable to take up the volumes specified in the contracts. Diplomatic crisis and its impact on Turkish-Russian energy relations The November 24 downing of the Russian jet, and Moscow’s angry reaction, has thrown the future of the energy relationship into question. The incident came amid a very complex geopolitical situation in the region following Russia’s decision to take a hands-on approach in

19 Republic of Turkey Ministry of Energy and Natural Resources, Strategic Plan 2015-2019, Turkey’s Ministry of Energy and Natural Resources. http://www.enerji.gov.tr/File/?path=ROOT%2f1%2fDocuments%2fStrategic+Plan%2fStrategicPlan2015-2019.pdf 20 Gazprom, Gazprom Pipeline Projects: Turkish Stream. http://www.gazprom.com/about/production/projects/pipelines/turkish-stream/ 21 BOTAŞ, Natural gas sale and purchase agreements. http://www.botas.gov.tr/ 22 Ibid.

the Syrian conflict through airstrikes that began in September 2015. The crisis quickly escalated through a series of harsh reactions by Moscow as President Putin described the incident as a “stab in the back”23 and said Ankara would be made to regret the downing of the plane.24 Russian claims that Turkey’s leadership is indirectly supporting ISIS by turning a blind eye to the militant organization’s oil smuggling operations took the conflict to a new high25, despite calls for de-escalation by the international community. The Russian demands for compensation and an apology are unlikely to be met in the present hostile climate. Moscow also imposed a series of sanctions on Turkey that mainly targeted agriculture exports, but carefully avoided the energy sector in the measures. The decision to postpone the TurkStream Pipeline, an offshore pipeline project that would carry Russian gas underneath the Black Sea to Turkey and Europe, was interpreted by many as a consequence of the crisis. However, the project had already faced significant setbacks due to political uncertainty in Turkey26 and a dispute over pricing. Moreover, its feasibility was already being questioned long before the shoot-down incident.27 The future of Rosatom’s nuclear power 23 ‘Russia’s Putin calls Turkey’s downing of Russian jet “stab in the back’, Reuters, 24 November 2015, http://www.reuters.com/article/us-mideast-crisis-syria-turkey-putin-idUSKBN0TD1J420151124 24 Fulya Ozerkan, ‘Turkey seeks alternatives to Russian energy after plane crisis’, AFP, 5 December 2015, http://news.yahoo.com/turkey-alternatives-russian-oil-gas-erdogan-133646052.html 25 Keith Johnson, Russia Pours Hot Oil on Wounded Ties with Turkey, Foreign Policy, 2 December 2015, http://foreignpolicy.com/2015/12/02/russia-pours-hot-oil-on-wounded-ties-with-turkey-isis-erdogan-putin/ 26 Merve Erdil, ‘Turkey, Russia “freeze Turkish Stream talks”’, Hurriyet Daily News, 11 September 2015, http://www.hurriyetdailynews.com/turkey-russia-freeze-turkish-stream-talks.aspx?pageID=238&nid=88349 27 Keith Johnson, ‘Will Putin Use the Energy Weapon Against Turkey’, Foreign Policy, 24 November 2015, http://foreignpolicy.com/2015/11/24/jet-downing-will-threaten-but-not-derail-putins-pivot-to-turkey/


plant project at Akkuyu in southern Turkey still hangs in the balance amid the lack of any official decision on the future of the project.28 The actual supply of Russian natural gas to Turkey has remained stable despite the diplomatic standoff, however, and that stability can be expected to continue due to the economic interdependence between the two countries29. Moreover, Gazprom is bound by international agreements to supply the agreed volumes to Turkey throughout the contractual period. Taking a dramatic action to cut Turkey off would significantly hurt Russia’s reputation as a reliable supplier and further undermine its image in Europe, where supply security concerns have been at the forefront of energy policy discussions since Russia’s invasion and annexation of Crimea in February 2014. However, in the current antagonistic environment, the two countries might find it more difficult to agree on issues such as the pricing of gas, a long-standing cause of concern in Turkey that led BOTAŞ to take Gazprom to international arbitration in October 2015.30 Potential alternatives to Russian supply Though Moscow is unlikely to go so far as to cut off Turkey’s gas supply, the incident still proved to be a catalyst for energy supply security conversations in the Turkish public sphere. These were further fuelled by Ankara’s offensive in the immediate aftermath of its clash with

28 Sinan Ülgen, Is This the End of Moscow-Ankara Nuclear Cooperation? Carnegie Europe, 2016, http://carnegieeurope.eu/publications/?fa=62572 29 Turkey’s import bill for Russian energy was US$16.5 billion in 2014 30 For an example of this, see the following article: Orhan Coskun, ‘Gazprom cancels gas discount for Turkey-industry sources’, Reuters, 29 January 2015, http://www.reuters.com/article/gazprom-turkey-idUSL8N15D1CP

Russia, which targeted alternative suppliers Qatar, Azerbaijan, and Turkmenistan. A memorandum of understanding to purchase LNG from Qatar was signed during President Erdoğan’s visit to the country in early December last year.31 A day later, Baku and Ankara made a joint commitment to accelerate work on the Trans-Anatolian Pipeline (TANAP) that would initially carry 16 bcm Azeri gas from the offshore fields in the Caspian to Europe via Turkey.32 A week later, energy was on the agenda once again during Erdoğan’s visit to Turkmenistan33, which has the fifth largest proved natural gas reserves in the world.34 Despite these preliminary moves by Turkish officials suggesting that alternatives to Russian gas are available,35 realistically it is not possible for Turkey to fully replace its Russian supply in the short- and medium-term.36 First of all, Turkey’s contractual obligations as a buyer formally bind Ankara to continue purchasing Russian gas until the contracts expire in 2021 and 2025. Second, while Turkey’s other neighbours could indeed be on their way to ramping up their gas production in the future, many of these face political, economic, financial, and

31 Olgu Okumus, ‘Will Turkey be able to replace Russian gas with Qatari imports?’, Al Monitor, 4 December 2015, http://www.al-monitor.com/pulse/pt/contents/articles/originals/2015/12/turkey-russia-qatar-cannot-replace-russian-gas.html# 32 ‘Turkey agrees with Azerbaijan to accelerate gas project’, Hurriyet Daily News, 3 December 2015,p http://www.hurriyetdailynews.com/turkey-agrees-with-azerbaijan-to-accelerate-gas-project-.aspx?pageID=238&nID=92046&NewsCatID=348 33 President Erdogan in Turkmenistan, Presidency of the Republic of Turkey, 11 December 2015, http://www.tccb.gov.tr/en/news/542/37258/cumhurbaskani-erdogan-turkmenistanda.html 34 EIA, Turkmenistan Country Report, July 2015, https://www.eia.gov/beta/international/country.cfm?iso=TKM 35 ‘Erdogan: Turkey can find alternatives to Russian energy’, Radio Free Europe/Radio Liberty, 6 December 2015, http://www.rferl.org/content/turkey-russia-energy-alternatives/27409842.html 36 President Erdogan in Turkmenistan, op cit.


logistical obstacles that will make it difficult for them to be a panacea for Turkey’s pressing supply security concerns in the short-term. Turkey will have to wait until at least 2018 for the TANAP pipeline to be completed in order to receive additional gas from Azerbaijan. Even then, the initial supply to Turkey will be a mere 6 bcm as the remaining 10 bcm are contracted to European customers. Importing natural gas from Turkmenistan would require the construction of a Trans-Caspian pipeline, an expensive and financially unattractive proposition in the current low price environment. Moreover, its construction would require resolving the dispute over the legal status of the Caspian Sea among its five littoral states. Turkey does not have sufficient storage and regasification capacity to make significant use of potential future Qatari LNG imports, which would make it a very costly endeavor, and again something to be considered only for the medium- and long-term. Israeli offshore gas could be an option if domestic legal and regulatory challenges can be overcome.37 Despite a glimmer of hope in bilateral relations between Turkey and Israel through a preliminary deal to restore ties in December 2015,38 the political risk of pushing up premiums for what would be an expensive subsea pipeline project under the Mediterranean still remains a daunting obstacle.

37 For a good analysis of these challenges, see Nikos Tsafos, Israeli Gas: To Soon to Declare Victory, German Marshall Fund Foreign and Security Policy Program Policy Brief, 14 January 2016 http://www.gmfus.org/publications/israeli-gas-too-soon-declare-victory 38 Ari Rabinovitch and Tulay Karadeniz, ‘Israel and Turkey reach preliminary deal to restore ties – Israeli official’, Reuters, 17 December 2015, http://uk.reuters.com/article/uk-israel-turkey-idUKKBN0U02N120151217

Contrary to initial enthusiasm about Cypriot offshore gas, the volumes are simply not there to make the investment feasible for exporting to Turkey and other countries in the region. Iraq, despite its huge reserves, is only an option after 2019. Security risks in Iraq and the recent intensification of the civil conflict in southeast Turkey could also hinder the process. Finally, increasing imports from Iran - which has the world’s largest proven natural gas reserves39 - beyond the current levels of 9-10 bcm will be difficult in the short-term even after the removal of nuclear sanctions in January 2016, as Iran’s natural gas sector is lagging in development and must first satisfy high demand at home.40 Ankara and Tehran are also constantly in a pricing dispute, which would complicate increasing imports from Iran.41 Energy security starts at home None of the challenges mentioned above are insurmountable, and these additional supplies might indeed end up making their way to the Turkish market in the medium-term. While Ankara’s influence may be limited in expediting the development of these sources, there are many steps it can take domestically that would improve its supply security. Turkey’s lack of adequate infrastructure remains a major obstacle in the quest for energy supply diversification. The country’s very limited natural gas storage

39 Sara Vakshouri, Iran’s Energy Policy after the Nuclear Deal, Atlantic Council, November 2015, http://www.atlanticcouncil.org/images/publications/Iran_Energy_Policy.pdf 40Sara Vakshouri, Iran’s Energy Policy after the Nuclear Deal, Atlantic Council, op cit.41 ‘Turkey wins gas price row against Iran in court’, Hurriyet Daily News, 2 February 2016, http://www.hurriyetdailynews.com/turkey-wins-gas-price-dispute-against-iran-in-arbitration-court-taking-10-15-percent-discount.aspx?pageID=238&nID=94643&NewsCatID=348


capacity of 3 bcm42 is significantly hampering any efforts to replace Russian natural gas in the short-term.43 Similarly, the country only has two LNG regasification terminals with a maximum annual capacity of 14 bcm.44 Turkey’s storage/consumption ratio is only around 6 percent, one of the lowest in Europe45, leaving it with inadequate storage capacity and vulnerable to supply disruption and seasonal imbalances. Another important factor is daily delivery capacities, which usually are overshadowed by annual figures. However, the daily figures are arguably even more important, as shortages are caused by imbalances in daily delivery. Turkey’s existing gas delivery infrastructure could supply a maximum of 193 mcm per day, whereas reports suggest that demand could reach as high as 215 mcm46 per day on a particularly cold winter day.47 Bottlenecks in the domestic natural gas delivery infrastructure make it difficult to balance the supply on the east-west trajectory, which could inhibit the future pumping of additional Azeri or Iranian gas westward to the main demand centers.48 Finally, Turkey needs to liberalize and

42 IEA, Energy Supply Security 2014: Turkey, op cit. 43Ibid.44 Ibid. 45 Gulmira Rzayeva, Natural Gas in the Turkish Domestic Energy Market, Oxford for Energy Studies, February 2014, p. 53. 46 Some sources indicate that Turkish daily natural gas consumption reached 230 bcm in January and February 2015. See Hasan Selim Ozertem, ‘Russia’s energy trump and Turkey’s alternatives’, The Journal of Turkish Weekly, 15 January 2016, http://www.turkishweekly.net/2016/01/15/comment/russia-s-energy-trump-and-turkey-s-alternatives/ 47 David O’Byrne, ‘Turkey Balances on Brink of Gas Supply Crisis’, Platts, 21 December 2015, http://www.platts.com/latest-news/natural-gas/istanbul/analysis-turkey-balances-on-brink-of-gas-supply-26316986 48 In fact, lack of adequate infrastructure in the eastern parts of the country caused Turkey to pay fees in the past for the contracted gas it failed to take from Azerbaijan and Iran.

deepen its gas markets and establish a properly functioning legal and regulatory framework. Lack of transparency and competition are important issues that can only be tackled via a series of time-consuming reforms. Conclusion Despite Ankara’s knee-jerk reaction to publicly embracing its neighbours in the search for alternative energy supply in the face of Russia’s anger over the downed jet, replacing Russian gas in the short-term is simply not feasible for Turkey. Nonetheless, the situation does not have to be completely negative; the recent crisis could potentially have a silver lining for the country’s natural gas strategy. The benefits could be twofold. First, by highlighting Turkey’s vulnerabilities to supply shocks and its overreliance on a single provider, the crisis has brought the issue of natural gas supply security to the public attention, a factor that will force policymakers to think about non-Russian supply going forward. Second, the incident has the potential to initiate a conversation about Turkey’s domestic challenges and whether it is ready to weather supply shocks and meet its increasing natural gas demand. While a direct supply disruption by Gazprom is unlikely, even the slightest risk of it should serve as a wake-up call for Turkey given how crucial natural gas is for its economy, the dangerously high level of dependency on Russia, and the important shortcomings in its infrastructure and market mechanisms.

About the author

Emre Tuncalp is a senior advisor at Sidar Global Advisors, a Washington DC-based emerging markets risk advisory firm. He


holds an MA in International Relations and International Economics, with a concentration on energy and environment policy, from the Johns Hopkins University School of Advanced International Studies (SAIS) in Washington, DC, and a BA in Political and Social Sciences from

Sabanci University in Istanbul. A committed transatlanticist, Emre is a member of the Atlantic Council and Ecologic Institute's Emerging Leaders in Energy and Environmental Policy (ELEEP) Network.

Russia’s Sanctions on Turkey: implications for European Union energy security Stacy Closson

Abstract

The war in Syria and, in particular, Russia’s armed support for the Assad regime, has brought Russia and Turkey to the brink of direct armed conflict. As an energy bridge between source countries and consumer markets, Turkey has access to three-quarters of the world’s oil and gas. Should Russian sanctions on Turkey continue, and Turkey’s intransigence to Russia increase, implications for European energy security will become evident. This article outlines Russian historical use of sanctions and subsidies in Eurasia, applies lessons learnt to Russian sanctions on Turkey and how it may effect European energy security, and provides thoughts on what Europe may do to mitigate a potential crisis.

Introduction After the end of the Cold War, Russia-Turkey relations were on a path of recovery. The collapse of the Soviet Union meant Turkey and Russia could gradually move beyond the NATO-Soviet standoff and instead enjoy the South Caucasus buffer zone. As relations between Turkey and the United States (US) cooled over Turkey’s opposition to America’s invasion of Iraq in 2002, and as some members’ disapproval of Turkey’s EU accession grew after negotiations for full membership began in 2005, Turkish foreign policy increasingly aligned with Russia. The Russian President Vladimir Putin and Turkish President Recep Tayyip Erdoğan appeared to have similar ideas on encouraging traditional values at home while making friends abroad to balance the actions of the West. The two leaders agreed to stop intervening in one another’s neighbourhoods – Russia would halt support for the military arm of the Kurdistan Worker’s Party and Turkey would likewise stop supporting North Caucasus militants. Trade between the two increased, with energy comprising the majority of exports from Russia to Turkey. However, the war in Syria and Russia’s armed support for the Assad regime has put the two leaders’ on the brink of direct armed conflict. It began with Turkey’s downing of a Russian SU-24 aircraft over Turkish airspace in late 2015. An unapologetic Erdoğan infuriated Putin, causing Russia to respond with sanctions. Russia froze US$500 million in investments, blocked the import of Turkish textiles and agricultural products, cancelled the visa-free regime, banned package tours to Turkey, and halted the Turkish Stream gas pipeline across the Black Sea. Relations further deteriorated

when Russian military airstrikes in support of the Assad regime allegedly violated Turkish airspace again. As Turkish forces bombed members of the military arm of the Kurdish Workers’ Party in north Syria, President Erdoğan threatened to send ground forces into northern Syria, which could pit Turkish and Russian fighters against one another. A functioning Russia-Turkey relationship is closely tied to European energy security. As an energy bridge between source countries and consumer markets, Turkey has access to three-quarters of the world’s oil and gas. Over the past several decades, Turkey has buttressed its position as an east-west energy corridor linking Russian, Central Asian, and Middle Eastern hydrocarbon suppliers with European customers. Oil traded by tankers is sent from Black Sea ports through the Turkish Straits to Europe. Natural gas travels through Turkey to the Balkans, and there are plans for Turkey to greatly enhance its role as the only alternative for Central Asian gas to Europe, other than Russia. As Russia-EU relations deteriorated over gas cut-offs through Ukraine in 2006 and 2009, this corridor became even more important to European energy security. Nearly 2 tcf of gas is planned to transit several linked gas pipelines from Azerbaijan (and maybe Turkmenistan) to South Eastern Europe, including extensions of the South Caucasus Pipeline, the Trans-Anatolian Pipeline, and the Trans-Adriatic Pipeline. A bidirectional pipeline has also been proposed linking Northeast Europe to Southeast Europe and Turkey.1 Turkey’s position in enhancing EU energy security grew more evident after

1 EIA, International energy data and analysis: Turkey, July/August 2015, https://www.eia.gov/beta/international/analysis_includes/countries_long/Turkey/turkey.pdf


Russian military action in Ukraine. The Russian takeover of Crimea in 2014 and continued military action in eastern Ukraine resulted in EU and US sanctions on Russia. Travel restrictions on its elites, a block on foreign western finance, and pressure on western companies to refrain from joint projects affected Russia’s energy sector. Declining EU-Russia relations and depressed European gas demand led to a cancellation of the South Stream pipeline traversing the Black Sea to Bulgaria. Subsequently, Russia’s sanctions on Turkey resulted in a delay in the development of another pipeline project across the Black Sea – Turkish Stream – planned to deliver 2.3 tcf of Russian gas via the Black Sea to Turkey and onto South Eastern Europe.2 The Europeans and the Russians banked on Turkish Stream to make up for South Stream’s cancellation, but the former remains dependent on the corresponding infrastructure for natural gas transportation in Central and Eastern Europe, which could be affected by EU sanctions. Should Russian sanctions on Turkey continue, and Turkey’s intransigence to Russia’s military operations in Syria increases, implications for European energy security will become evident. First is the potential long-term challenges related to the delay of additional gas supplies through the Southern Corridor from non-Russian suppliers. Second is the possibility that Russia will increase sanctions against Turkey. In the post-Soviet states this has led to a monopoly of supply, sudden price hikes, and unannounced cut-offs. Third are the related implications for Turkey’s economic growth and political stability should energy security decline. Finally, should Turkey’s role as a transit corridor 2 Ibid.

weaken there could be long-term implications for Russia’s role in Eurasia. This paper asks: Under what conditions might the Russian sanctions on Turkey impact EU energy security? What can be done to pre-empt their negative effect? This paper will outline Russian historical use of sanctions and subsidies in Eurasia. It will then apply this to Russian sanctions on Turkey and how it may affect European energy security. Finally, thought will be given to what Turkey and the EU may do to mitigate a potential crisis.

Russia’s Sanctions and Energy Security in Eurasia Prior research on over two decades of Russian energy politics in Eurasia suggests that Russia has a set of coercive economic tools it uses with regularity against Eurasian states. Shortly after independence of the fourteen former Soviet states, Russia began assigning variegated subsidies according to levels of acquiescence neighbouring governments gave to Russian demands; the less cooperative states received lower subsidies, the more cooperative received higher subsidies. Over time, Russia’s friends got discounted energy supplies and Russia’s enemies were increasingly squeezed by higher energy prices. As governments’ debt to Russia grew, Moscow used this vulnerability to barter for strategic energy assets, access to transit pipes, and lock-in long-term contracts for gas supply with take-or-pay clauses. It resulted in weakened energy security, particularly for resource poor Armenia, Georgia, and Kyrgyzstan, but also for transit states Ukraine and Belarus.3

3 Stacy Closson, A Comparative Analysis on Energy Subsidies in Soviet and Russian Policy, Communist and Post-Communist Studies Vol 44, No 4, pp. 343-356.


Russia’s use of coercive economic tools had several political objectives. In the 1990s, Russia’s objectives in the former Soviet states included the return of nuclear weapons to Russia; basing rights for the Russian military in the former Soviet states; ownership or stakes in strategic industries, particularly the energy sector; citizenship, or autonomy, for Russian minorities; and Commonwealth of Independent States membership.4 During this time, Russia still dominated the export routes from Central Asia through Ukraine to Europe, and still supplied the majority of oil and gas to former Soviet states. Favoured Russian tools of coercion were primarily used for the energy sector, including raising tariffs on Russian imports, reducing energy subsidies and/or supplies to energy importers, and reducing access to and/or raising fees for using energy pipelines across Russian territory. For the period 1992-1997, according to a study by Drezner5, Russia was successful in achieving the intended result from the targeted Eurasian states, with fifteen of 39 coercion attempts resulting in significant concessions, or capitulation to Moscow’s demands. To determine these results, Drezner’s game theoretic Conflict Expectations Model (CEM) has two primary hypotheses. The first hypothesis is that Russia will sanction adversaries more than allies, and will sanction less against allies with whom there is only a small gap in opportunity costs of deadlock. In other words, if Russia feels it has a strong friend, it is less likely to sanction. The second hypothesis is that the more adversarial the relationship, the more likely the target is to concede to

4 Daniel W. Drezner, Sanctions Paradox. Cambridge: Cambridge University Press, pp. 234-235, table 7.2. 5 Ibid.

sanctions. In the 1990s, the larger gap in opportunity costs between the Eurasian states and Russia were favourable to Russia, making it more likely Moscow would impose sanctions. During this period, the Eurasian states feared that coercion attempts were just the first step in a potentially long and discordant relationship. Therefore, the target states were more likely to concede to Russia’s demands, giving Russia the upper hand. Research also discerned that Russia’s objectives for using sanctions evolved in the 2000s.6 The issue of nuclear weapons was resolved. Russia still sought basing rights, ownership or stakes in strategic industry, citizenship, or autonomy for Russian minorities, and membership of Eurasian states in the Customs Union Agreement. A new Russian demand was to end pro-Western/anti-Russian policies. Favoured Russian tools of coercion remained focused on energy, including: limiting Russian imports, reducing energy subsidies and/or supplies to energy importers, and reducing access to, and/or raising fees for, the use of energy pipelines across Russian territory. Over the two decades under examination, Russia maintained significant economic and military advantage over the other fourteen Eurasian states. Yet, it has been observed there was variation in Russia’s use of economic statecraft and in the magnitude of concessions granted to it.7 In the 2000s, there were more attempts against adversaries with a smaller gap in opportunity costs. Further, as the gap in opportunity costs shrunk, the target was less likely to concede to Russia. Even when relations between the Russia and the Eurasian states were less aligned, 6 Stacy Closson, Evan Hillebrand and Jeremy Bervoets, Declining Russian Sanctions Effectiveness: Learning by Strategic Interaction, forthcoming in Europe-Asia Studies. 7 Ibid.


Eurasian states conceded less, not more. What emboldened the target states not to accede to Russia’s demands? It was concluded that over time countries learned to pre-empt the effects of Russian sanctions by finding alternative energy and trade partners.8 Throughout much of the 2000s, with soaring world oil prices and a strong global economy, Russia was in a more powerful economic position than it had been in the 1990s. In the 1990s, Belarus, Estonia, Georgia, Latvia, Lithuania, Moldova and Ukraine were all dependent on Russia for over 80 percent of their oil or natural gas consumption, and Azerbaijan Kazakhstan, and Turkmenistan were dependent on Russia for export pipelines. However, from 1994 to 2012, all fourteen Eurasian states decreased their trade with Russia, which lessened energy dependency on Russia. By the 2000s, Kazakhstan found alternative routes for its oil, including rail and barge through Azerbaijan, as well as pipelines to China. Turkmenistan built a gas pipeline to China and two to Iran. Only Belarus, Ukraine, and the Baltic states (Estonia, Latvia, and Lithuania) remained at 80 percent or more dependent on Russia for oil and gas in their total consumption in 2012.

Implications of Sanctions for Energy Security Learning the lessons of two decades of Russian sanctions on former Soviet states, a set of increasingly stringent Russian sanctions could be in Turkey’s future, particularly as relations continue to deteriorate over the conflict in Syria. There is a chance that Turkey will ultimately concede to Russia. At the time of sanctions, Turkey had been a solid ally

8 Ibid.

of Russia’s for almost a decade and the chances of conflict were low. But, Turkey’s longstanding membership in NATO and the latest government’s pursuit of EU accession remains a source of tension. Likewise, there remains a significant opportunity cost gap for Turkey, as it is dependent on the majority of its gas supply from Russia, and Russia is its primary export market. Russia has additional tools at its disposal to pressure Turkey further, such as raising natural gas prices or staging a supply disruption. At the same time, Russia could also halt construction of the nuclear power plant, which would displace additional need for gas in power generation. This could have unforeseen consequences for the planned construction of two more nuclear power plants by France and China. Energy supply through Turkey to the EU may be diminished as a result of several moves Russia could make with regional players, including Armenia, Azerbaijan, Georgia, Iran, and Iraq. Russia could threaten Turkey’s immediate gas supply in exchange for a redirection to Russia of Azerbaijan’s gas expected to go through Turkey to Europe by 2018. Russia could coerce Azerbaijan to redirect this gas north through Russia with a combination of sticks and carrots. Azerbaijani President Aliyev has already redirected some gas north in the past believed, in part, to signal disapproval with the West’s criticism of his administration’s domestic policies, including human rights. Russia also has a lever over Azerbaijan; the stationing of 5,000 Russian soldiers in Armenia is presumably ready to fight alongside Armenians in retaining control of Nagorno Karabakh, the separatist region within Azerbaijan. Russia could also pressure Azerbaijan to suspend the nearly completed railway from Baku, Azerbaijan to Kars in eastern Turkey, which was expected to carry oil.


A Turkey that concedes to Russia is unlikely to be an ally of the EU, particularly under the current circumstances of western sanctions on Russia. Concessions could take the form of staying neutral in Syria or ceding strategic assets to Moscow. Turkey’s foreign relations with Europe could worsen in relation to counter-terrorism operations in cooperation with Russia. More directly, it may move Turkey permanently away from continuing negotiations on chapters within the acquis communitaire, or even reverse progress made in some chapters, including ones on harmonizing energy and commercial sectors. On the other hand, a Turkey that does not concede to Russia may end up in direct armed conflict with Russia, akin to what happened in Georgia (2008) and Ukraine (2014), only this time it would be a NATO member fighting Russia. The EU should be mostly concerned by Turkey’s domestic energy situation causing instability. In a time where Turkey is dealing with stagnant GDP growth, rising unemployment, and an influx of Syrian refugees, an energy shortfall could lead to even greater social unrest. Turkey’s energy already accounts for 58 percent of its trade deficit. More expensive LNG would only increase this deficit. Gas is responsible for 50 percent of the electricity generation supply. As demand increases, gas shortages have led to a switch to fuel oil, which is worse for the environment. Hydropower is threatened by dry spells. Turkish demand for energy is also expected to grow and an unreliable supply of power generation could lead to rolling blackouts, which in neighbouring states in the South Caucasus have led to protests and eventual revolutions.

Lessons for Turkey and EU Energy Security The most important lesson that Turkey can learn from the Eurasian states’ surviving two decades of Russian sanctions is to diversify trade, including energy supply. This will require western consultation, investment, and, in some cases, aid to ensure that the energy sector does not become a source of instability for Turkey and, by extension, Europe. This should include natural gas supply, but also the construction of alternative power supply including nuclear and renewable energy, and improving energy efficiency to moderate consumption as demand is expected to rise. Arguably, Turkey is too dependent on Russia for natural gas. Turkey imports about 27 bcm or 56 percent of its gas demand from Russia per year, negotiated in long-term energy contracts with take-or-pay clauses. An option for diversification is LNG, but current capacity is inadequate. According to the International Energy Agency’s analysis, Turkey's annual LNG regasification capacity does not exceed fourteen bcm and its LNG storage capacity is limited to approximately three bcm.9 Turkey is therefore in need of further investments in infrastructure for fixed pipelines, particularly entry points into Turkey. Two from Russia, one from Iran and one from Azerbaijan, and two LNG terminals are predicted to be inadequate. Another possibility for investment is piped gas from energy rich Middle Eastern neighbours, Iran and Iraq. But this will require placing energy security above politics. Relations between Turkey and Iran are tense as Turkey opposes the Iran-

9EIA, International energy data and analysis: Turkey, op cit.


backed Assad regime in Syria. Already, Iran is planning a pipeline through Armenia and into Georgia for gas supplies, and a second with Turkmenistan. Another solution is more oil and gas from Kurdish settled northern Iraq, although this option is perhaps even more politically unsuitable to a Turkish regime bent on quelling any hopes of Kurdish nationalism at home. Moreover, pipelines are subject to sabotage in the current state of war. The pipeline with Iraq from Kirkuk has been out of operation since early 2014 after the Islamic State of Iraq and Syria (ISIS) sabotaged it. The Iraq-Ceyhan pipeline

was also hit and out of service for a week in July 2015. Another pipeline from the Kurdish Regional Government to Turkey began only limited operation in May 2015.

About the author

Dr Stacy Closson is a Global Fellow with the Woodrow Wilson Center's Kennan Institute.

The EU-Russia-Turkey Energy Triangle Volkan Özdemir

Abstract

In the context of the emerging Turkey-Russia-EU energy triangle, this paper explores the fundamental geopolitics of energy security in the wider European energy arena. A special emphasis is put on the increasing tension in Turkey-Russia relations and its future implications for the trilateral relations. The paper concludes that in terms of energy security, Brussels seems to benefit from the deteriorating Turkish-Russian relations: both Russian and Turkish domestic energy markets will be affected by developments in Europe that will likely result in accelerating liberalization of export for the former and the liberalization of import for the latter.


Introduction European energy security has been at the centre of heated debates for more than a decade, especially since the first Russian-Ukrainian gas transit crisis. The European Union (EU) and Russia as a big consumer and supplier respectively have had different and mostly conflicting views on energy security. In addition, Turkey with its own energy agenda has started to emerge as an important third actor in wider European energy security. Now there is a dynamic energy triangle between the EU, Russia and Turkey. All three are dependent on each other but still have their own interests and priorities in energy policy making. In the context of increasing tension in Russia-Turkey and Russia-Ukrainian politics, and both the EU’s and Turkey’s increasing efforts to diversify away from Russian oil and gas, the Turkey-Russia-EU energy triangle is faced with fast-paced developments and opportunities for change. This paper explores the future implications for this relationship. Although the concept of energy security for the EU and Turkey, as net importers, means the diversification of supply, the same term for Russia is understood as the diversification of supply routes that target the European market in order to minimize the transit risks related mainly to Ukraine. In line with its common energy strategy, the EU has been creating incentives for alternative sources of gas including renewables and encouraging new infrastructure projects such as liquefied natural gas (LNG) terminals, storage

facilities, and applying exemptions for third party access for some pipeline projects that could bring dynamic competition to the market. Under European pressure Gazprom has been facing serious criticisms centred on price negotiations and even arbitration cases from its biggest clients.1 Brussels, in its search for reducing its energy dependence on Russia, sees Turkey as a transit country that would be part of the ‘Southern Gas Corridor’ for alternative supplies. However, the EU is not interested in giving a decisive role to Ankara since it does not want to potentially create a new influential actor in its immediate energy neighbourhood. On the other hand, as a response to this strategy, Russia has been developing new pipeline projects such as South Stream, Turkish Stream and Nord Stream 2. If one of them could be realized then transit risk stemming from Ukraine would be severely minimized and politically Moscow would have an important strategic leverage. That is why Moscow is insistent on marketing these projects for political reasons even if market rationality dictates otherwise. It never gives up to propose a new project when the previous one is getting stuck because of regulatory or political difficulties: the South Stream was dismissed because of regulatory obstacles from the EU’s 3rd Energy Package and resultantly priority shifted to the Turkish Stream. The latter was frozen because of geopolitical tension with Turkey, and now Gazprom is lobbying for 1 Volkan Özdemir and Sohbet Karbuz, A New era in Russian gas market: The diminishing role of Gazprom, Energy Strategy Reviews 8, pp. 39-44, July 2015.


a green light from the European Commission to start the construction of Nord Stream 2. However, Moscow is also not eager to give a big role to Ankara because of the possibility of creating a new problematic transit country while it is aiming to neutralize Ukraine. Converging interests In fact, there is a clear convergence of interests in energy between Turkey and Europe. Turkey aims to be the fourth gas artery to Europe after Norway, Russia and Algeria, and is compatible with the European concept of a ‘Southern Gas Corridor’. Turkey shares the aim of the EU of decreasing dependence on Russia but does not desire to lose its general bargaining power against the EU by becoming a cheap transit country for the latter. Through competing projects Turkey has already been incorporated into the pipeline game in the European energy arena. Although Turkey wants to become an energy hub at discourse level, Ankara has not been able to follow appropriate policies that are compatible with this aim. With Turkish Stream, Moscow has pretended to support Turkey becoming a gas hub, though its objective has been to use Turkey only as a corridor and a bargaining tool in its general struggle against Brussels. Ankara was suspicious about Russian intensions for this project from the beginning, which is why Turkey did not let Russia use its territory as a corridor for strategic purposes. Rather it has already opted to become an energy corridor for Azeri gas, by signing the Trans Anatolian Pipeline (TANAP) pipeline agreement.

Continuity and Change Within the geopolitical energy triangle, bilateral relations between Turkey and Russia have crucial importance. Escalation of tensions between the two after the shooting down of a Russian jet by Turkish Air Forces on 24 November 2015 has raised questions on whether this would further undermine energy relations. Although bilateral relations have flourished tremendously before the latest incident, cooperation between Ankara and Moscow was largely based on trade, of which energy was the main pillar for nearly fifteen years. The geopolitical objectives of Ankara and Moscow have been hugely different in many areas of the world: from the Balkans to the Caspian, from the Caucasus to the Black Sea and the Middle East, and in particular Syria. Like coal, Turkey’s dependence on Russian oil is not so great that it has no bargaining power at all, and has geopolitical leverage over its northern neighbour through the Turkish Straits - a key route for Russian crude deliveries to the Mediterranean from the Black Sea ports.2 Russia has a clear upper hand in its energy relations with Turkey in terms of natural gas. In 2015, 48 bcm of gas was consumed in Turkey and almost all demand was exported, as Turkey does not have significant natural resources. Turkish gas imports are regulated under long-term contracts with take-or-pay clauses. Russia 2 Nadia Rodova, ‘Russia says may cancel 'major projects' with Turkey after warplane incident: Medvedev’, Platts, 25 November 2015, http://www.platts.com/latest-news/natural-gas/moscow/russia-says-may-cancel-major-projects-with-turkey-26289206


as the biggest supplier to Turkey exports 55 percent of Turkey’s total gas consumption. Of the 158 bcm of Russian gas exported to Europe, Turkey is the second biggest market for Gazprom after Germany, with annual volumes of 27 bcm. On the other hand, increasing Turkish-Russian gas cooperation has had repercussions felt by the Turkish domestic gas market, and there has been a tendency of “Gazpromification” in Turkey. Ironically, the liberalization efforts in the Turkish energy market, which started in 2001 under IMF supervision, have resulted in the expansion of Gazprom activities in the Turkish downstream gas market through contract transfers. A total of 10 bcm/a of state incumbent BOTAŞ contracts were transferred to newly established companies, and there is a Russian partnership at least in half of this volume. Among those new players, a Gazprom subsidiary ‘Bosphorus Gas’ has the biggest share with a 2.5 bcm/a contract. Furthermore, these private companies import the same Russian gas at a discounted rate comparative to the prices BOTAŞ are subject to. Turkey’s energy challenges Turkey lacks adequate gas storage, which is only 3 bcm/a together with LNG tanks, and alternatives to Russian gas are limited. Additional pipe gas flow from Iran or Azerbaijan is unrealistic in the short term. On the other hand, one of two Turkish LNG terminals is contracted to LNG imports from Algeria and Nigeria. The second terminal in Aliaga is allocated for spot LNG imports. This terminal could be

used for additional supplies from Qatar, Norway, or even the US. However, there is only 4 bcm/a of underutilized regasification capacity at this terminal. Starting from 2016, spot gas imports from the terminal have been increased as LNG business again becomes profitable for private importers, but it is too small to be an alternative to Russian gas. Therefore, Turkey theoretically might struggle to balance her gas needs if a serious gas cut from Russia occurred. Despite it being difficult to assume a total gas cut amid Turkish-Russian geopolitical tension, this does not guarantee the unlikelihood of some politically motivated temporary Russian cuts. This was the case in late February 2016 when Gazprom cut some of the gas it sold to Turkey through Ukrainian transit.3 It seems difficult for Ankara to decrease dependence on Russia dramatically in the short term but starting from 2018 Turkey might overcome its overdependence on Russia with the completion of infrastructure projects: TANAP in 2018 (6 bcm/a) and Turkey – Kurdish Regional Government (KRG) gas pipeline in 2020 (10 bcm/a). Nevertheless, these projects are not immune to technical obstacles and security problems. Last year PKK committed a terrorist attack on the Baku-Erzurum gas network and more recently, in February, it attacked the Kirkuk-Ceyhan crude oil pipeline. The autonomous KRG of Iraq now controls the Iraqi part of this pipeline and sends 3 Emre Gurkan Abay, ‘Gazprom gas cut endengers its market position in Turkey’, Anadolu Agency Energy News Terminal, 29 February 2016, http://aaenergyterminal.com/newsMain.php?newsid=7648461


700,000 barrels per day of crude oil to international markets through Turkey. There has been continuing and long standing political turmoil in Iraq and Syria. This offers big opportunities for various actors to use terrorist groups to destabilize the flow of energy by targeting pipelines. In that sense, the PKK might further be used as a proxy to target critical infrastructure in Turkey. As Caspian and Middle East energy resources reach Europe through Turkey, PKK terroristic attacks to critical energy infrastructure in Turkey will have negative repercussions on European energy security. Energy opportunities ahead In the Caspian and Middle East, there is another window of opportunity for Turkey and Europe to diversify their gas imports from Russia, as by 2019 the gas transit contract between Ukraine and Russia ends. After the termination of Russian transit contracts, there will be excess capacity at Ukrainian transmission system. Ukraine currently imports significant amounts of European gas (German re-exports from Russia) and if this tendency increases, then South Eastern European countries including Turkey might be able to import extra gas using the already constructed infrastructure. After the latest crisis with Russia, Ukraine and Turkey have realized that their interests are very similar in terms of energy security and territorial integrity. In this framework, during the latest visit of Ukrainian President Poroshenko to Ankara a memorandum of understanding was signed between the two countries. This envisages further

energy cooperation, including Turkish access to Ukrainian gas storage.4 In terms of contracts, in gas pricing and patterns of trade, Turkey is currently decoupled from Europe and this situation is widely both a consequence of Turkey’s former geopolitical preferences and of the EU’s negative attitude towards Ankara. After 2008, as it was facing the rejection of EU accession, Turkey shifted towards Russia and followed an ambivalent foreign policy. Political orientation prevailed over market preferences and as a result energy market liberalization has been severely damaged in Turkey. Nonetheless, Ankara’s recent shift to the West will definitely have crucial political and economic ramifications. But, it will also decisively influence the structure of the energy market in Turkey. Tension with Russia is likely to accelerate European tendencies in Turkey to create a more liberal, liquid and competitive gas market and to integrate it into the European market. However, it is important to observe that there are a lot of different political dynamics that could determine the energy outlook in the region, such as the future of EU economic sanctions against Russia, the military situation in Eastern Ukraine and the Europe-Turkish migration deal. Conclusion Within the general energy triangle between the EU, Turkey and Russia,

4 Kama Mustafayeva, ‘As relations with Russia deteroriate Ukraine and Turkey discuss gas’, Natural Gas Europe, 11 March 2016, http://www.naturalgaseurope.com/turkey-and-ukraine-declared-gas-cooperation-28612


Turkish policy has shifted more towards Brussels, which is an additional burden for Moscow in its eternal struggle in the European energy arena. Changing realities of international gas markets - in particular the European market - in which decreasing prices are occurring due to the LNG glut5, abandonment of oil-price indexation and common market regulations, combined with weak demand, will provide little room for new Russian pipeline projects to be realized. In terms of energy security, Brussels seems to benefit from the deteriorating Turkish-Russian relations. Both Russian and Turkish domestic energy markets will be affected by developments in Europe that will likely result in full liberalization of exports for the former and the liberalization of import for the latter. Finally, politically speaking the energy triangle is very dynamic and the future of it is open to new surprises that could stem from various geopolitical developments in different regions. About the author After graduating from the Department of International Relations of Middle East Technical University, Ankara, Volkan Özdemir received his master degree from Upssala University, Sweden having completed a thesis entitled ‘Limits to Cooperation: Energy Security and Geopolitics of Gas Pipelines in the Caspian’. Mr Özdemir later continued his research studies with a focus on the

5 Global Gas & LNG Outlook to 2030, McKinsey Energy Insights. https://www.mckinseyenergyinsights.com/services/market-reports-analysis/global-gas-lng-outlook-to-2030.aspx

functioning of international gas markets and Russian-Turkish economic relations and in 2013 was awarded a PhD degree in Economics from the Moscow State Institute of International Relations (MGIMO), Russia. He previously worked for the Turkish Ministry of Energy and the BOTAŞ Company. Dr Özdemir is currently the Research Director at the Ankara-based EPPEN (Institute for Energy Markets and Policies). He has published numerous articles in English, Russian and Turkish on energy policy, natural gas markets and Eurasian geopolitics.

Building the Internal Gas Market at the Border: The Importance of EU External Policy with Turkey and Russia Nolan Theisen and Brian King

Abstract

This paper assesses the EU’s energy relations with Russia and Turkey and argues that the EU should employ more proactive engagement going forward. In the context of Europe’s declining indigenous production, Russia’s high aggregate market share should be managed rather than reduced, recognizing that the challenge of diversification is regional, in countries with low consumption, and not one of EU-wide importance. Second, the EU needs to ensure that Turkey commits to transposing the full energy acquis as an Energy Community member. Together, these parallel strategies will significantly contribute to the resilience of Europe’s internal market.


Introduction Despite EU diversification and integration efforts, declining indigenous production in the North Sea and the cap on output from the Netherland’s Groningen field create an additional dilemma for EU gas supply security. The underlying predicament is the potential opportunity for Russia to increase its European market share, and perhaps strengthen its commercial rationale for Nord Stream 2. However, conditions on the ground have significantly changed since Nord Stream was commissioned in 2011. The development of regional hubs ensures that the majority of gas is now delivered according to short-term competitive prices, and Brussels has regulatory leverage to influence Russia’s market entrance in ways previously unseen. This dynamic is in stark contrast to past decades, which were characterized by the Russian strategy of negotiating bilateral gas deals with individual member states to gain political and economic leverage in the region. Nord Stream 2 will present an important litmus test for the Commission’s newly declared energy security principles, but will mark only the beginning of what will shape the relationship between Brussels and Moscow into the next decade. Whereas Russian engagement is premised on the projection of internal market legislation, Europe’s interest with Turkey is to accelerate liberalization of its natural gas market to make it an equal partner. By the end of the decade, Turkey will hold a major strategic role vis-à-vis European markets as the energy bridge solidifies between sources in the Caspian and gains

potential for expansion into the Eastern Mediterranean, Iran and northern Iraq. Europe’s direct energy relations with Turkey have been relatively shallow over the last decade due to the issue of EU accession, but with construction of segments of the Southern Corridor under way, the ties between accession and energy market liberalization will need to be severed so that opportunities in natural gas are not forfeited. This is not to say that Turkey’s EU accession is unrelated or irrelevant to energy relations. However, it must be recognized that the complexities that have stalled the process over the years are better handled separately. In the end, successful adoption of the EU acquis will also satisfy the requirements of the energy chapter (Chapter 15) of the EU accession protocol and provide positive momentum on this front. Meanwhile, Third Energy Package legislation has been disseminated across member states and a number of crucial infrastructure projects that will bolster further integration are advancing from PCI selection to FID. Yet the grim reality for Europe is that no matter how flat consumption remains in the medium term, more gas will inevitably need to be imported. Projecting gas demand is difficult because it depends on several independent factors such as the merit order of electricity generation, CO2 policy, price, and the pace and success of energy efficiency. Notably, lofty long-term projections have been continually revised downward each year since 2009, and most experts expect very little growth in the EU over the next twenty years. However, with the decline in


conventional indigenous production, particularly in the North Sea, Germany and the Netherlands, the IEA estimates that Europe will consequently need to displace an additional 70 bcm of production by 2020. In this landscape, Russia and Turkey are primed to become more significant players in separate market segments (perhaps Italy is an exception), with Russia increasing it’s already significant volumes to Western Europe while Turkish transit (and possibly additional LNG in Croatia and/or Greece) aims to penetrate Central and South Eastern Europe (CSEE) markets, ultimately leading to an erosion of Russian market share. Any significant aggregate demand increase will most likely occur in Northwest Europe, reinforcing the notion that the primary rationale behind introducing Caspian gas to the small CSEE consumption segment is for the purpose of diversification as opposed to meeting demand. The downturn in production will need to be covered by some combination of LNG, the Southern Corridor and additional Russian gas. LNG has been viewed with scepticism in Europe over the past year for good reason; mainly, the symbolic entrance of the U.S. sourcing its eastern European ‘allies’ makes for good theater, but more importantly, LNG has become competitive in Europe for the first time since the Fukushima disaster in 2011. Europe has an abundance of regasification capacity in place (40 percent of its total demand) and now the global market is working in its favour; on the supply side, projects under construction in the U.S. and Australia promise to add 100 million tonnes per annum in the next 6-18

months. On the demand side in Asia, spot JKM prices have collapsed from all-time highs as nuclear restarts and efficiency programs in Japan and Korea take hold, leaving state owned utilities over-contracted. Yet dependence on LNG bears risk because it is priced exogenously according to global fundamentals that can, and do, change rapidly and unexpectedly. This was a glaring issue for soft European markets post-Fukushima that only absorbed 19 percent of LNG regasification capacity in 2014, and is a reality that can occur again. In this sense, Europe should be cautious in projecting LNG as a significant bedrock of demand when conditions happen to be favourable. Increasing accessibility to LNG is good for competition and security of supply, but even for these reasons, related investments need to be carefully examined to avoid stranded assets. Certainly LNG and supplementary infrastructure will increase liquidity and add a degree of value through competition and price convergence, but such a targeted initiative does not exist in a vacuum. These factors must be taken into consideration, in addition to the considerably higher cost inherent to the LNG production chain. Rather than extol the virtues of flexible LNG shipments, Europe needs to concentrate on building mutually beneficial, predictable partnerships with the two most important countries in its supply chain: Turkey and Russia. The benefits of Russia’s vast low-cost reserves and the scalability of the Southern Corridor will not be maximized in the EU’s internal market without improved government-to-government


cooperation and actionable strategic vision. Background: EU external energy policy with third countries The longstanding core of the EU’s diversification strategy is the synchronized development of the Southern Gas Corridor, a collection of multiple pipeline systems that are independent of Russian control, which can deliver gas to Europe from (initially) the Caspian region. It was first conceptualized as part of the EU’s grand strategy under INOGATE (Interstate Oil and Gas Transport to Europe) established in 1995. INOGATE evolved into the primary institutional framework for regional cooperation on energy security and integration, and in 2001 21 countries agreed to cooperate on pipeline development. From this, Europe’s external energy policy was formally institutionalized with the signing of the Energy Community Treaty (ECT), which came into force in July 2006. Turkey was slated to join Western Balkan and Eastern Partnership governments as a contracting party of the Energy Community, and entered its first negotiating session in September 2009 with Moldova and Ukraine just after signing the Nabucco IGA. At the time, however, Turkey’s priority was leveraging EU accession, and because the Energy Community was seen as a lateral move for countries far from contention, it withdrew. In September 2011, ‘The EU Energy Policy: Engaging with Partners Beyond our Borders’ communication laid out a comprehensive framework for Europe’s

energy supply security and international cooperation. It was structured into four priority areas, one of which - ‘building up the external dimension of our internal energy market’ - refers specifically to Turkey and Russia. For progress with Turkey, it haphazardly recommends opening the energy chapter for EU accession and accession to the ECT. However, the dichotomy between the two pathways would be counterproductive to the primary objective. It also proposed a more legally based ‘New EU-Russia Agreement’ to address energy topics of mutual interest (replacing the EU-Russia Partnership and Cooperation Agreement in force since 1997), which would emerge shortly thereafter. The fourth identified priority areas, and concludes that EU policies should be better promoted beyond its borders, particularly through the ECT and strategic energy dialogues. EU-Turkey energy relations have only recently been revived through a high-level dialogue on energy in Istanbul 28 January 2016, led by EU Commissioner for Climate Action and Energy Miguel Arias Canete and Turkey’s Energy Minister Berat Albayrak. The discussion focused on integrating all areas of the Turkish energy market with the EU, but TANAP and the Southern Corridor were mentioned as specific targets of renewed political momentum for energy cooperation. In November 2011, a year after the tenth anniversary of the EU-Russia Energy Dialogue, a new framework was launched in a joint statement whereby both sides were to establish an Advisory Council to


assess and discuss future trends in gas markets as part of the Energy Dialogue. It also mandated that the results of their work would serve as the basis for developing an EU-Russia roadmap until 2050 (RM 2050), which was successfully realized in 2013. This led directly to the establishment of the Gas Advisory Council (GAC), which met for the first time 17 October 2011. The GAC carried out an intensive, detailed program separated into different Work Streams that were released to the public following the meetings. However, the last of eight total sessions was held November 2013 and the GAC has not convened since. There is no official report as to why the planned 2014 meeting did not subsequently take place and no indication of if or when it will restart. Meanwhile, the RM 2050 was released in March 2013. The gas section affirmed Russia’s compliance and respect for Europe’s internal market and reiterated advocacy for broad, Pan-European strategic cooperation in the gas sector with suppliers. The proposal for Energy Union also speaks directly to external energy relations, as it attempts to enhance the Commission’s oversight and improve solidarity between member states. It emphasized the importance of strengthening the Energy Community and establishing strategic energy partnerships with increasingly important producing and transit countries, specifically reframing the relationship with Russia for the mutual benefit of both sides. Leading Turkey and netting benefits

The EU-Turkey energy partnership has so far failed to meet mutual expectations primarily due to the inability of either side to credibly commit to regional energy cooperation; the predominance of national over regional energy interests afflicts both sides and divergent perspectives on the potential political payoffs of energy cooperation have been extremely consequential. So far an incapability to disentangle energy cooperation from EU accession has plagued the process. Consequently, reform in Turkey’s gas sector has been lackluster, and the 2001 Natural Gas Market Law has yet to be actualized. The state-owned incumbent, BOTAŞ, remains vertically integrated and its ambitious contract release program has so far failed to come to fruition. The prevailing investment climate in Turkey was also a factor in the selection of TANAP over Nabucco. Having lost Nabucco, the EU (and Turkey) lost a pipeline that would have been regulated by intergovernmental agreements and compliant with EU rules stretching its entire length, most notably cementing third party access and unbundling. Since Turkey is not an Energy Community member and did not transpose the EU energy acquis into legislation for the purpose of EU accession negotiations, Azerbaijan will control gas transits across TANAP with a majority 51 percent stake, thus overseeing access to additional sources and setting the transit tariff. The private shareholders (BP, Statoil) do not have latent incentive to expand TANAP because they do not possess additional upstream assets that would feed into it. Without reforms in Turkey, it will be difficult encourage investments and reach


the full potential of the Southern Corridor as envisioned by the EU. With segments of the Southern Corridor already breaking ground, attention must shift to achieving a common energy vision for 2020 and beyond. For Turkey’s own supply security, the road to successful liberalization and diversification is becoming imperative. Competitive pricing would help relieve what are currently some of the highest contracted natural gas prices in Europe. Perhaps most importantly, it would open investment for internal and cross-border infrastructure, helping it to diversify its heavy dependence on Russia (55 percent). It is also the precondition for Turkey’s rise to a regional natural gas hub, which would elevate Turkey’s value to Europe and increase transit revenues. Finally, the energy harmonization will demonstrate a willingness and ability to conform to EU standards, certainly not hurting its chances to embark on EU accession. There are two overarching conditions that need to be met to fast track energy harmonization: first an acceptance of energy as a standalone issue, and second for Turkey to join the Energy Community. This is not to downgrade the relevance of EU accession but to recognize that the energy issue is too important to be held hostage by Turkey’s potential accession. Meanwhile the Energy Community provides a well-established architecture precisely for this purpose, offering technical assistance and expertise for countries seeking to transpose the EU energy acquis. It adds urgency and accountability that has thus far been absent from Turkey’s natural gas

market reform efforts since the Energy Market Act was introduced in 2001. The EU-Turkey High Level Energy Dialogue was announced March 2015, and with it a fresh screening of Turkey’s energy legislation with the acquis communautaire was completed. The last such screening for progress in energy reform was completed in 2006. This is a starting point, signaling recognition from both sides of the poor state of energy affairs over the past decade. However, it is not a sufficient platform to bring about expedient changes in Turkey’s natural gas sector. It appears that programmatic accountability enshrined in the ECT is the only realistic pathway for Turkey’s reform success. Fostering Stability and Trust with Russia Russia has, and continues to be, the most significant supplier of natural gas to the EU, and by virtue of turbulent geopolitical relations this is seen by many in Europe as a threat gas security. The 2006 and 2009 gas crises exposed an ill prepared, disjointed EU natural gas apparatus that remains the focal point of the Energy Union package in 2016. The key to Russian energy dominance within the EU lies in past long-term bilateral gas agreements with individual member states, in addition to its grip on gas pipeline and delivery infrastructure. The experience of 2009 was a defining moment that sparked a renewed interest in European energy security. Brussels looked inward and outward to improve supply security and diversification away from Russia, responding with reinforced legislation aimed at integrating the


internal market and a new supply line to break Gazprom’s grip in CSEE, Nabucco. The Nabucco pipeline was Europe’s long awaited answer to Russian pre-eminence in the markets, a new pipeline bypassing Russian infrastructure to deliver Caspian gas to Europe. Nabucco ultimately failed after years of on and off discussions, and while this was major setback for CSEE in particular, the EU settled for TAP, which still provides an independent path to Europe for Caspian gas. This is still a better outcome than the Russian backed alternative South Stream, which would have further entrenched Russia’s position in the region. Despite the abandonment of Nabucco and South Stream, the TAP pipeline could eventually integrate into the greater European gas market through the construction of interconnectors between neighbouring member states towards the realization of the North-South Gas Corridor. The Third Energy Package has greatly improved integration and diversification across Europe, which has forced all exporters to adapt to more competitive markets. This in itself is slowly changing Russia’s behaviour by effectively ending bilateral gas agreements containing restrictive clauses and pricing formulas tied to oil. Traditionally, Gazprom has retained its dominance through such agreements with isolated Member States, the strategic purchase of European energy utilities and gas infrastructure, and control over pipeline supply routes. However, these practices had already begun to subside with additional infrastructure and reverse flow exposing its market position. The Commission sent a Statement of Objections to Gazprom over its market

abuse in a clear position of power, and the expected resolution will legally ensure an end to these practices. Russia’s ability to manipulate European markets as a monopolist have been significantly diminished, and the trend is irreversible. At the same time Gazprom is not overly concerned with the prospect of competition, and for good reason. First, competition in Europe has become inevitable. More importantly, Russia is the lowest cost marginal supplier to Europe. Like any profit seeking company, it has traditionally operated as a monopolist in CSEE markets because it could. Now that the landscape is changing, the company is slowly adjusting its contractual pricing mechanisms to the market by increasing exposure to hub indexation. In a major first step, Gazprom held its first auction in Germany in September 2015, selling 1.23 bcm, and will hold its second in 2016, offering 560 mcm to the Baltic States. More recently, tensions between Russia and the EU tend to flare over Russian owned pipeline proposals landing on EU territory that do not allow competitive access to capacity. The Commission has indirectly restricted Nord Stream’s use by limiting the Opal line that connects it to Czech Republic, as it intervened with South Stream and could certainly delay or block Nord Stream 2 as well. The Commission has a difficult task to balance interests between member states and Europe as a whole, weighing import demand growth in Northwest Europe together with energy security in CSEE. Significant infrastructure investment will enable LNG and the Southern Corridor to penetrate CSEE markets traditionally


held captive by Russia, allowing the countries to obtain more competitive prices and increase supply security. This is unquestionably important, but it should be understood in relative terms. While diversification will naturally displace some Russian gas in the region, the overall demand levels are extremely small and without growth potential. On the other hand, Germany, the U.K., France and Italy comprise some 80 percent of the EU’s natural gas demand and they are also countries with shares of indigenous production that will need to be replaced. Europe relies on significant volumes of Russian gas, but it is a smaller percentage of total consumption. Nevertheless, these are the markets with some growth potential for Russia. With or without Nord Stream 2, Nord Stream operates at 50 percent capacity and thus there will be room for increased Russian supply. Of course, the EU is not attempting to shape or harmonize a third-party market with Russia as it has recently with Turkey, the Energy Community, or Eastern Partnership countries. EU strategy must continue to focus on sustaining a reliable and predictable partnership whereby Russia plays according to the rules of the internal market. To have the credibility for this posture, the EU first needed to achieve significant improvement in the integration of its eastern peripheral (now formally grouped together under the auspices of Central and South Eastern Europe Gas Connectivity Group or CESEC), and it certainly has since 2009. Given the fragility of the relationship, the EU needs to communicate its desire to incorporate Russia in its long-term plans

on the strength of its trending single market rather than antagonize its indispensable supplier. There needs to be an active forum to convey demand and supply expectations and foster the most efficient investments on both ends. The GAC was precisely the platform for this until its suspension, and it should be revived. Outlook The EU’s energy strategy centers upon member state solidarity and speaking with a single voice in energy relations, but divergent regional and national interests will continue to make this challenging. This dynamic proved particularly detrimental to a coherent external policy with Russia and also precluded agreements on Nabucco, leading to an arguably sub-optimal Southern Corridor and a European market that is integrating at a rather deliberate pace. The Commission clearly recognizes the importance of proactive engagement with Turkey and Russia, evidenced by its previous communications and high-level bilateral discussions with both countries, but has either lacked or completely missed opportunities to date. Currently, Turkey is not a contracting party of the Energy Community, and the EU-Russia Gas Advisory Council has not convened in more than two years. These failures are already affecting the health of Europe’s internal market and will be even more consequential in the long-run, which is why more urgency is required. There is a clear imperative for the EU to build solidarity with Russia and Turkey because if relations are not repaired and


harmonized, they will not become the reliable partners that geology and geography prescribe, leading to misguided internal infrastructure investments, an overreliance on expensive LNG imports, and a broad deterioration of Europe’s energy security architecture. Ideally, the EU must build trust through consistent bilateral engagements and follow the principles outlined in the Energy Union package. However, history tells us that this strategy is easier said than done. Looking forward, as a marginal supplier Russia will be able to exert influence in markets with pricing tactics depending on its market share goals, while Turkey may continue to seek concessions for EU trade and accession talks through energy policy manipulation. The only viable way for the EU to mitigate these policy challenges is by leveraging market integration and diversification, creating a level playing field and using it. More optimistically, the field of energy is where the prospect of mutual benefits can build positive bilateral momentum towards areas of cooperation. Joining the Energy Community will benefit Turkey because it will facilitate market development and also improve its prospects for EU membership. Turkey will move closer to tapping into the benefits associated with regional hub status and the central transit highway to Europe outside of Russia. In the long-term Turkey would benefit from a deeper partnership with the EU, which would extend to its own relations with Eastern Partnership countries. With sustained dialogue and a change in the public narrative, Russia can be perceived as a more trusted long-term

partner – which it has largely proven to be – and Europe as a whole can benefit from more accommodating Russian prices. In this respect shrewd management of the energy relationship with Russia will be paramount for Europe to maximize the welfare of its citizens with secure and affordable imports of natural gas.


About the authors

Nolan Theisen is a research associate at the Regional Centre for Energy Policy Research (REKK) in Budapest, Hungary. His areas of expertise include EU regulatory policy, European energy security, and natural gas markets in Central and South Eastern Europe. Mr. Theisen holds a Master’s Degree in International Economics from the School of Global Policy and Strategy at the University of California, San Diego and a Bachelor’s Degree from the University of California, San Diego.

Brian King is currently a PhD candidate at Central European University in Budapest Hungary, within the Department of Environmental Sciences and Policy. His research interests include the thematic units of energy security, energy efficiency, and energy poverty. The topic of his thesis involves the role of energy efficiency in building secure, sustainable, and competitive energy markets and the role of EU regulatory governance in member state energy policy and low-carbon transitions. Mr. King also holds a Master’s Degree from American University in Washington, DC, and a Bachelor’s Degree from the University of Wisconsin-Madison.


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