Compared with its Middle East neighbours, Turkey’s oil and gas resources are negligible. According to the US government’s Energy Information Administration (EIA), in 2009, Turkey produced an average of just 53,000 barrels a day (b/d) of oil and a total of 0.7 billion cubic metres of gas. Oil reserves are an estimated 300 million barrels, while gas reserves take just 6 billion cubic metres.

Despite its dearth of hydrocarbons resources, Turkey’s location between the energy-rich Middle East and Central Asia region and energy-poor Europe means it plays a strategic role in balancing supply and demand in the Eurasia region.

Supplying Europe

Europe’s own oil and gas production is in decline, while consumption continues to rise. Gas demand is expected to be particularly strong in the medium term. According to a report published on 6 June by the EIA, a combination of factors, including the economic growth in China and the reduced appetite for nuclear power after the recent disaster at the Fukushima facility in Japan, mean that the world may be about to enter what it terms a “golden age” of gas.

Under this scenario, gas demand among European members of the OECD group of developed nations would increase to 667 billion cubic metres in 2035, from 555 billion cubic metres in 2008.

Gas demand is rising quickly in Turkey too. Consumption in 2010 was 39 billion cubic metres, an increase of 9.2 per cent compared with the previous year, and more than double the 17.2 billion cubic metres consumed in 2002. A robust economy and an expanding population mean the strong demand growth is expected to continue in the years to come.

Turkey is one of the few pathways to get Central Asian oil and gas to Europe without it going through Russia

Washington-based economist

For Europe as a whole, opinion varies on the extent of the projected gas deficit. The unexpected discovery of huge quantities of monetisable shale gas in the US over the past 10 years served as a reminder that predictions are an inexact science. But there is a broad consensus that Europe’s supply/demand deficit will continue to grow. The EU is developing a strategy both to secure additional sources of gas and to diversify its sources of supply.

At the moment, Russia is the dominant supplier of gas to Europe, followed by Algeria. Interruptions to deliveries of Russian gas to Europe in 2006 and 2009 prompted Brussels to throw its weight behind a strategy to ensure that other import options are put in place and to reduce the political risk associated with energy supply. Turkey is crucial to this strategy.

“Turkey is one of the few pathways to get Central Asian oil and gas to Europe without it going through Russia,” says one Washington-based economist.

“Just because it’s an alternative to Russia means that at some point it will become much more of a hub than it is now.”

Europe has earmarked gas sources in Azerbaijan, Turkmenistan and Iraq, with the idea of piping it to Turkey and then on through what has become known as the Southern Corridor to southeast Europe and beyond. Three such pipeline projects have been proposed to date: the Nabucco project to bring up gas through Turkey to Austria; the Interconnector Turkey-Greece-Italy (ITGI) scheme; and the Trans-Adriatic Pipeline (Tap) from Greece to Italy.

Transit pipelines

All three projects have made a degree of progress. On 8 June, the Nabucco project took a stride forward when transit agreements were signed with Turkey, Bulgaria, Romania, Hungary and Austria. “Nabucco has made the final step from a project to reality,” said EU energy commissioner Gunther Ottinger at the signing ceremony in Kayseri in central Turkey.

Everybody wants to jump in the pool, but no one wants to be the first to get wet

Andrew Neff, IHS Global Insight

For the ITGI, a series of bilateral agreements are in place between Greece, Turkey and Italy. Bulgaria has signed a gas import agreement with Greece’s public gas corporation, Depa, and Italy’s Edison, each of which holds a 50 per cent stake in IGI Poseidon, the company responsible for developing the Italy-Greece section of the ITGI. Meanwhile, Germany’s Eon Ruhrgas, which supplies 4-6 billion cubic metres of gas to the Italian market, has taken a stake in the Tap consortium, joining the two existing partners, Norway’s Statoil and Switzerland’s EGL.

All three projects plan to use gas from Azerbaijan, making it unlikely that all of them will go ahead. Of the three schemes, Nabucco has the potential to offer most to European markets. The TAP and ITGI are both focused on the Italian market and plan to use existing pipeline infrastructure in Turkey.

Nabucco, in contrast, involves the construction of a completely new pipeline. It would serve several European markets and has planned a capacity of up to 31 billion cubic metres a year.

“The ITGI and the TAP pipelines are subsea routes into Italy, with Italy being the main market,” says Jeremy Ellis, head of business development at RWE Supply & Trading, one of the partners in the Nabucco pipeline consortium.

“They rely on securing transit rights for existing pipelines from Turkey’s Botash [a subsidiary of state-owned oil company TPAO]. Nabucco is a dedicated new pipeline from border to border and would go all the way to the wellhead in Azerbaijan.”

Nabucco scheme

On paper, the Nabucco scheme is a strong one. The demand for gas is certainly there and so are the reserves. The project intends to supplement Azeri production with gas from either Iraq or Turkmenistan. Iraq has the 12th-largest gas reserves in the world, with just more than 3 trillion cubic metres, but most of its production is flared. The government is keen to begin to monetise some of these valuable resources in order to help fund the country’s reconstruction. Azerbaijan is expected to bring on stream 16 billion cubic metres of gas for export in 2017, with the potential for more to follow. The Turkmen government has repeatedly claimed that it can bring on stream 40 billion cubic metres of gas for export.

Of the three gas sources, Azerbaijan is the most straightforward. The second phase of the Shah Deniz gas development is due to start production in 2017 and gas will be available to export in substantial quantities. But the situation in Turkmenistan and Iraq is rather more complicated.

The export of Turkmen gas to Europe would require the construction of a pipeline across the Caspian Sea. In 1999, the leaders of Azerbaijan, Turkmenistan, Turkey and Georgia signed an intergovernmental agreement to build a Trans-Caspian gas line. But within a few months, disputes had arisen over how much gas would be available for Azerbaijan, and once Baku made substantial gas discoveries of its own, all impetus was lost.

Exporting Iraqi gas, meanwhile, is politically delicate. The country is plagued with power cuts and domestic demand is expected to rise in the coming years, making gas exports difficult to justify to the local population. There is a regulatory problem too. The government’s failure to agree a framework for devolving the right to licence oil and gas acreage to the regions has left Kurdistan frequently at odds with Baghdad. Gas remains such a contentious issue that it is unlikely to be exported in significant quantities.

This leaves the Nabucco consortium – which has said it will not go ahead with the pipeline unless it has at least two suppliers – in a difficult position. It cannot commit to take Azeri gas until it has secured a second source of supply. But neither Iraq nor Turkmenistan is likely to commit itself without knowing that the project is definitely going ahead, and this relies on a commitment from Azerbaijan. “Everybody wants to jump in the pool, but no one wants to be the first to get wet,” says Andrew Neff, senior energy analyst at US energy consultancy IHS Global Insight.

In the middle of all the confusion, Russia is pushing its own proposal, the South Stream project, to move Russian gas to southeast Europe via a subsea pipeline through Turkish waters in the Black Sea. Concerns have been expressed in Europe that the scheme has only been proposed to undermine the Nabucco project. RWE claims the necessary capital expenditure for South Stream would be about three times that needed to build Nabucco. But Moscow insists it is serious about the scheme, which has proposed capacity of 63 billion cubic metres a year. Italy’s Eni and Russia’s Gazprom signed a memorandum of understanding to develop the project in 2007.

Transit hub for oil and gas projects

Turkey is trying to get the best deal it can from its transit status in both projects. Ankara has relatively little to gain monetarily from backing the South Stream project, the gas would never enter the Turkish network.

The Nabucco scheme would involve the delivery of 2 billion cubic metres of gas for Turkish consumption from 2017, rising to a possible 6 billion cubic metres in 2019, in addition to transit volumes for sale in central and eastern Europe.

The temptation is for Ankara to play the two schemes off against each other. As a major recipient of Russian gas through the 16-billion-cubic-metre-Blue Stream pipeline, it has an incentive to maintain good relations with Moscow. But if it can secure a good deal on transit gas or, even better, the right to resell a portion of the Azeri gas, it might be persuaded to favour the Nabucco scheme.

Some analysts believe that there is room for both the South Stream and Nabucco projects to go ahead. But others warn that Turkey must be careful not to be too ambitious. “There is a danger of Turkey overplaying its hand,” says Neff. “If they keep pushing for the best of both worlds, they may end up with neither.”