Before 2020, Russia was the leading gas exporter to Turkey with a market share around 33%. Few were those who predicted any sudden alterations to this order of things. Even though Azerbaijan ramping up exports to Turkey with TANAP’s commissioning had been long time on the agenda and given the political proximity between the two its utility was never really debated, the annual aggregates would still keep Gazprom comfortably in pole position, having both BlueStream and TurkStream to avail itself with. Yet, tanking oil and gas prices have pushed Russia aside last year. Having shrugged off last year’s travails, Gazprom is now intent on retaking the No. 1 spot in Turkey.
According to Oil Price, Russian pipeline gas exports to Turkey plummeted in the first half of 2020, reaching only 4.7 BCm (having garnered half of it January 2020 alone). Not without soul-searching, Gazprom stated that the massive demand drop was due to COVID-19 curbing Turkey’s gas needs and spot LNG imports becoming more profitable than piped gas. The thing is that the Russian firm’s pricing formula is based on a European products basket, priced in with a 6-9 month lag so that in times of sudden price drops front-month Russian terms might very well become less attractive than spot LNG deliveries. This year, however, has brought about a complete reversal of Gazprom’s Turkish fortunes - in January-April 2021, Gazprom’s export tally to Turkey totalled 10.34 BCm, i.e. more than in the first nine months of 2020.
In the same manner that the multi-month pricing lag has made Gazprom piped deliveries sub-commercial in 2020, buying Russian gas now makes perfectly good commercial sense. The lagged pricing peg is calculating Gazprom’s monthly gas prices using the product prices of late summer/early autumn 2020 - when almost all the Northern Hemisphere struggled with the shattering impact of COVID’s second wave – as their basis. Turkish gas importers understand this and have been expectedly front-loading their H1 2021 supplies, wary that the gradual increase of oil-indexed prices might coincide with expensive LNG quotes.
The Russian pipeline vs LNG competition might have been much more edgy than it actually is right now. LNG flows, however, were first disrupted by the January cold snap in Asia and later with export issues in several countries – the lack of volumes from Australia, Malaysia, Indonesia and Nigeria was partially mended by US LNG (though this has shrunk whatever was available for European buyers). Thus, after prices for LNG landed in Turkey fell to 5.5 USD/MMbtu in March 2021, the normal assumption would be that they stay more or less flat throughout the spring/summer season. The exact opposite happened, landed prices started their incessant increase and by mid-May have surpassed 9 USD/MMbtu. This is the highest Turkish LNG import prices have been since November 2018 and, in all likelihood, they are still some way off from being capped.
Gazprom was partially aided by the expiry of the 2001 Azeri-Turkish supply deal. The contract, up until its lapse Turkey’s longest standing, stipulated deliveries of 6.6 BCm per year sourced from the Shah Deniz field. Whilst the intergovernmental contract was signed very early on, the actual movements of gas molecules only started in 2007 and for more than 10 years supplies via the South Caucasus Pipeline boiled down to these volumes. This was then boosted in 2018 when the commissioning of Shah Deniz’s 2nd phase and the subsequent launch of TANAP allowed for another 6 BCm per year to be contracted. Turkey’s national gas company BOTAS and the Azerbaijan Gas Supply Co., the institutional avatar of Shah Deniz stakeholders, have been holding negotiations for quite some time, however, could not find common ground on pricing issues despite the overall brotherly relations between Ankara and Baku.
It needs to be pointed out that not only the Shah Deniz contract is to run out this year, Gazprom’s agreements for the purchase of 8 BCm are to expire this December, too. Of this exactly half, i.e. 4 BCm per year, falls on the state-owned BOTAS whilst the other half has private gas buyers (such as Kalyon, Enerco, AKSA or Gama) participating. In total the Russian piped gas exporter has contracts to the amount of 16 BCm/year with Turkish partners, i.e. the aggregate take-or-pay commitments are the same as the throughput capacity of BlueStream. According to media reports, Gazprom has been renegotiating the terms and conditions of its long-term supply contracts. Whilst details on the progress made by the sides remains scarce, it might very well happen that the future contracts will be shorter as Turkey would prefer to maintain as much flexibility as it could get.
As promising as Gazprom’s export numbers into Turkey look right now, the big challenge will be to maintain these volumes in the second half of 2021. First of all, technical issues might hinder Russia’s export drive into Turkey. Tthe BlueStream pipeline will be undergoing maintenance for 15 days up until May 27, 2021 and if last year’s story is to repeat itself, it might happen that the maintenance will be used to cover up for the non-utilization of the pipeline. Almost right after BlueStream comes back onstream, the 15.75 BCm per year TurkStream pipeline will be down for another session of pipeline maintenance in June-July 2021. Beyond technicalities, gas prices will be a key determining factor – the farther out the pricing, the higher the prices as the relative market normalization of 2021 translates into costlier product basket formulae.
