Does Turkey’s Latest Natural Gas Discovery put them on the pipeline to Economic Prosperity?

On 21st August 2020, Turkish President Erdogan announced the discovery of 320 billion cubic metres (bcm) of natural gas in the Black Sea, the largest such discovery in Turkish history. Shortly after the discovery, the president’s son in law, Finance Minister Albayrak, declared that this gas store would enable Turkey to eventually eliminate its current account deficit. Turkey relies on 99% imports for natural gas, with export revenues only covering 60% of import bills. As such, Turkey has long suffered from a current account deficit which stalls the economy. Erdogan predicts that production will be up and running rapidly by 2023, as Turkey aims to reverse its 12 billion USD natural gas import bill and become a ‘net exporter’. Moreover, this find threatens to shift the geo-political balance between Turkey and its trade partners in Ankara’s favour. Notably however, regarding natural gas, there is a long road from discovery to market. Additionally, Turkey’s economic woes have been emphasised during this pandemic. Foreign exchange reserves have disappeared at an alarming rate as Erdogan gambles on there being a nearer end to the pandemic and sharper recovery than most other leaders. With neither looking promising, many analysts have cast doubt on the lasting effects of this find.

 

The Natural Gas discovery does bring numerous positive implications for Turkish economic growth. Firstly, Turkey will be able to meet its annual demand for natural gas (45 bcm), taking the stress and cost away from relying on Russian and Azerbaijani sources. Furthermore, according to Faith Birol, head of the International Energy Agency, the offshore discovery is worth upwards of 80 billion USD. This money in export revenue has the potential to offset the 4.92 billion USD current account deficit. This is needed to repair government image at a time of significant pressure on the Turkish lira, which has lost a fifth of its value since January. Similarly, the timing of this discovery could be economically critical. With oil and gas markets suffering during the pandemic with excess supply and contracted demand, much of the linked upstream services in this field have suffered too. As such, major engineers and firms used in the production of natural resources have seen layoffs and dropped prices accordingly. The heavy involvement in the production side for the Turkish state may yield further expertise from the firms they work with. These externalities could be realised in the future when other energy sources come to the fore over fossil fuels.

 

In terms of economic efficiency, Turkey will also go into production with the knowledge that a gas field (double the size) was found by Egypt in the Zohr site of the Mediterranean Sea. This site, led by Italy’s ENI, started in July 2015 and flowed until December 2017 – a similar timeline to the one Erdogan predicts. Lastly, the fact that state-run Turkish Petroleum Company (TPAO) discovered the reserves rather than a multinational, is advantageous. There is little risk that trade becomes slowed by paperwork, bureaucratic hurdles and sale-purchase agreements as is the case with private offshore companies. These implications, as well as Erdogan’s words, suggest now will be a time for a Turkish swift capital investment into natural gas production.

 

Turkey’s trade relations are also set to benefit from an influx of indigenous natural gas. Being dependant on Russian gas for so long has allowed Moscow to have the upper hand in negotiations, whether that be through setting a Russian favourable pricing formula or the ‘take-or-pay’ clauses which gave Turkey gas quotas the country had to buy annually. The contracts with Gazprom over the TurkStream pipeline are up for renewal at the end of 2021 and 2025 and having an alternative supply for hydrocarbons will be a top bargaining chip for prices and future volumes. Turkey has already reduced its Russian dependence by importing more Azerbaijani gas and Liquid Natural Gas (LNG) from Qatar. While Erdogan will continue looking to ally with Russia, he can use this new discovery to recast strategic relations with Putin.

 

There do nonetheless remain serious doubts following Erdogan’s announcement. Many analysts doubt the size of the field, which has yet to be independently verified. Offshore exploration is a costly business too. The TPAO has little expertise in extracting such a large amount of gas, so will likely have to partner with a western firm to develop its own field. This will cost billions of dollars and erode current account gains made by future gas exports. Moreover, energy markets have been crippled by declining demand and an influx of supply during lockdowns, leading to diminished gas prices and more unprofitable fields. Fossil fuels seem to have a limited future with carbon neutral agreements, like the Paris agreement, aiming for 2050. Additionally, producers in areas such as Qatar are undercutting traditional pipeline sellers with the easily transported LNG. Thus, Turkey’s jump into a relatively saturated and, for the moment, underperforming field is not without risk.

 

Whilst 320 bcm would fulfil Turkey’s gas demands for 7 years, this seems set to fall short of ending the country’ energy reliance and certainly seems discordant to the predicted net exporter status. Investors have observed this too, as the lira sank against the dollar after Erdogan’s announcement, when it became clear that earlier reports of a much bigger find had been inaccurate. Most importantly, the discovery also fails to be the ‘silver bullet’ to cure Turkish economic problems. These include runaway inflation, a devalued currency and slow growth with a high current account deficit, the latter of which will grow further once production fees kick in. None of these are solved as quickly and linearly as Erdogan seems to believe.

 

In all, Turkey’s expedited energy missions have finally paid off with its largest energy discovery, the largest ever in the Black sea. This is no small feat and will alter Turkey’s energy supplies and narratives within the upcoming negotiations with Russia and other energy importers. However, the discovery might not? have the ‘miracle’ level impact that Erdogan believes it will. Turkey’s economy is fundamentally stagnating, which is set to continue especially due to low levels of tourism in light of the pandemic. Moreover, the gas will be difficult and costly to mine by a country with little expertise in doing so. As such, whilst economic benefits may occur, this discovery alone is merely a pipe dream to guaranteeing economic prosperity.

 

By Jared Gibson

Senior Editor: Aaron Hobb

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