Turkish LNG imports break records
Low spot LNG prices will give Turkey an advantage in renegotiating its long-term gas supply contracts
Turkey’s LNG imports reached 2.34 bcm in January, up 19% on the year, according to data released by Turkey’s energy regulator EPDK.
This was not only the highest volume of LNG Turkey has imported in a single month, but at 40% of total gas imports, it is also the highest contribution that LNG has made to Turkey’s monthly import portfolio.
More significantly, as much as 57.5% of the LNG was imported as spot cargoes, a clear sign that increasing volumes of LNG entering global markets and falling spot prices are having a significant effect on the Turkish energy market.
Fall and rise
On the one hand, the record LNG imports can be viewed as evidence that with the commissioning over the past two years of two FSRU terminals at Aliaga and Dortyol, in addition to the two existing on land, LNG import terminals have been a success.
The increased import capacity ensured that Turkey experienced none of the peak winter season gas shortages that had caused problems for several years, while at the same time providing much needed price competition with Turkey’s existing contracted LNG and pipeline gas imports.
However this has not been without cost.
As the dominant market player, BOTAS has been able to leverage its position to ensure that it meets the take or pay commitments in its long-term contracts with Russia, Azerbaijan and Iran for gas delivered by pipeline, and with Algeria and Nigeria for LNG.
However, the seven private companies that import Russian gas via Turkey’s western import line have not been so lucky. 2018 saw the lira fall sharply on currency markets, and with national elections scheduled for the end of June state-owned BOTAS moved to hold down retail gas and power prices by selling gas at below cost. Coupled with other pressures to reduce gas burn, this effectively froze the private importers out of the market.
Worse was to come the following August with Ankara hiking the price of gas for CCGT plant – the country’s main consumers – depressing demand and further hurting the private importers.
Most are believed to have fallen far short of the take or pay commitments in their contracts with Gazprom, and face possible bankruptcy.
The problem is glaringly apparent in the January data with BOTAS’ imports for the month up 7.2% at 5.566 bcm, and those by the seven private importers down 76% at 0.244 bcm.
Gazprom for its part is believed to be pressing for the seven to be merged and taken over by BOTAS, which would then assume responsibility for meeting contract commitments.
Whether or not this will actually happen remains unclear. To date no official announcements have been made on the situation by either Ankara or Moscow with the implication that any possible resolution will be bundled with a broader agreement on a range of gas issues.
These include the development of Russia’s TurkStream gas pipeline through Turkey to Europe which is slated to carry the 14 bcm of Russian gas currently imported by BOTAS and the seven private companies through the existing Transbalkan pipeline.
Of this, 8 bcm per year is imported by BOTAS under a 1998 contract half of which was subsequently transferred to four of the seven private importers with the five agreements expiring between February 2022 and April 2023. The remaining 6 bcm is imported by four of the seven under agreements signed in 2012, two of which run to 2035 and two, 2042.
In the event that the seven cease trading, the 1998 contracts will revert to BOTAS. Meanwhile, the 2012 contracts are expected to be annulled, which could see contracts for all 14 bcm to be carried by TurkStream, ended by early 2023.
As TurkStream will supply gas to Turkey’s main gas consuming region, the industrial north-west, it is unlikely to fall out of use.
However, with the recent lira crisis having rekindled Ankara’s interest in reducing the effect of gas imports on the country’s current account deficit, price is certain to be key in talks for contract renewal.
Hitting the spot
The Mediterranean region is already enjoying a ‘gas glut’ thanks to significant volumes of spot LNG arriving from Qatar and the US. With further major LNG production capacity expected to be commissioned in Egypt and Israel, the expectation is both of significantly increased competition in the spot market, and increased downward pressure on prices.
This expanded spot market looks certain to grant Ankara significant leverage in future negotiations with its long-term gas suppliers.
The more so if it continues to take the advice of IEA head Fatih Birol, and continues efforts to increase the country’s underground gas storage capacity.
Current plans envisage the expansion of the existing 1 bcm capacity Tuz Gollu facility to 5.4 bcm by 2023, which together with ongoing expansion of Turkey’s existing Marmara gas storage facility will give Turkey close to the recommended 20% of annual consumption.
That leverage is not confined to Russian volumes.
The next five years will also see the expiration of BOTAS’ 6.6 bcm contract for Azeri gas (2021), its contract for 4.4 bcm of Algerian LNG (2023) and its 1.2 bcm contract for Nigerian LNG (2023). During the following five years, its contracts for 16 bcm per year of Russian gas via the Blue Stream Pipeline (2025) and for 9.6 bcm per year of gas from Iran (2026) will also expire.
Indeed talks over the Russian contracts are believed to have already started, while Iranian media said recently that Tehran had already begun talks with Turkey over increasing gas exports, a move which would necessarily involve price concessions.
The two long-term LNG contracts are unlikely to be renewed without significant concessions on price to match anticipated moves in the spot market.
Similarly, three of Turkey’s five import pipelines (Iran, Russia, Azerbaijan) and much of its own transit grid have long been paid for, suggesting significant scope for price reductions on the gas they supply.
While geographical and technical limitations mean that there will be limits to what portions of these contracts could be comfortably replaced with spot LNG, the easy availability of cheap spot LNG cargoes will be a significant factor in the renegotiation of Turkey’s gas import portfolio.