A Cold Winter: Turkey and the Global Natural Gas Shortage
Azem Bartu Yıldırım, Researcher
Natural gas prices continue to hit record highs in global markets. The reference price in Turkish spot market, which is closely linked to the European one, has reached TRY 2552 per 1000 sm3 as of 29 September. This represents a staggering increase of around 97% over January prices. The same trend can be observed in the European and U.S. markets where prices has risen more than 250% and 100%, respectively.[1] This surge has stoked fears regarding economic recovery from the pandemic as high energy prices increase the risk of stagflation around the world.[2] Turkey too finds itself in an uncertain position. Deputy Minister of Energy and Natural Resources Alparslan Bayraktar stated that Turkey’s natural gas demand will be around 60 billion sm3 this year, an increase of 24% over 2020, and 29% percent above the country’s average demand since 2010.[3]
Though increased demand is understandable given the country’s desire to return to pre-covid levels of economic activity, Turkey is especially vulnerable in terms of supply. In 2020, around 99.7% of the demand was satisfied through imports. Situated in a neighbourhood with one actor, Russia, providing a significant share of the supply, and European countries scrambling to secure gas for the winter, several factors will determine how well Turkey will fare in the coming months.
- Areas of Vulnerability
Turkey has three main interlinked vulnerabilities. The first, and most straightforward one, is the matter of heating. In 2019, heat generation sourced by natural gas comprised around 50% of the total amount.[4] Increased prices have already affected the Turkish distributors most recently with a 15% rate hike, the eighth one this year. More hikes are expected, and it is likely that the increased prices for distributors will have to be passed on to consumers at one point.[5]
Natural gas is the main source of heating in Turkey, yet households’ share in total consumption was 32.35% in 2020. It was followed by the conversion section with 28.27% and the industrial sector with 26.31%.[6] Beyond heating, the price increase will also have effects on electricity generation and industrial output. A downturn in both would represent additional detriments for the economy. Unlike heating, where government regulation can shield consumers from price increases to some degree, lower industrial output would not only harm customers but may even hinder exports that are crucial for Turkey. Sectors key in exports such as steel, minerals, chemistry and textile are among those that consume relatively higher shares of industrial natural gas.[7] The commodity is also key in Turkey’s electricity generation. In 2020, it was the second biggest source comprising 22.7% of total generation. The shock is therefore certain to affect energy prices in Turkey, which will have adverse indirect effects throughout the economy.
An oft overlooked sector where natural gas plays an essential part is fertilizers which is in turn intimately tied with agriculture and food security. Natural gas is a key component in fertilizer production. Fertilizer prices in Turkey were already up by 150% since the beginning of the year. As skyrocketing natural gas prices sank in, an additional upward pressure was recorded as the price per tonne of fertilizer rose by TRY 500 in a day during mid-September. Emrah İnce, a working group member in the Chamber of Agricultural Engineers hinted at a 15% percent price increase at minimum for agricultural goods that will be reflected on the consumers.[8] Since food products are a part of this category, an increase in food prices may also be on the horizon.
- Factors
The degree of adverse economic effects incurred through the aforementioned vulnerabilities depends on the intensity of several factors. The first among these will be the temperature in the coming months. This is especially critical for heating as it will determine the number of days households will use natural gas for heating. Turkish State Meteorological Service predicts winter temperatures to be around seasonal averages[9] but uncertainties are endemic to such forecasts. Moreover, temperatures in previous seasons also impact natural gas supplies moving forward. Indeed, one driver of the current European demand is stock depletion from the particularly cold winter of 2020-2021 on the continent.[10] Increased natural gas demand for heating by households would not only lead to further price increases, but such increases would also affect other sectors utilizing the commodity.
Second, since Turkey is dependent on imports to meet its natural gas demand, the issue of suppliers is at the heart of the problem. Turkey’s portfolio of import partners has diversified over the years but Russia remains the biggest supplier. In 2020, it provided 33.6% of Turkish natural gas imports.[11] Russia has generally been a reliable partner to Turkey. Between January and August of 2021, Gazprom’s exports to Turkey increased by 173.6%.[12] Negotiations for the coming period are also underway but the price offered to Turkey is projected to be higher than the one for the January-August period which was USD 240 per 1000 sm3.[13] Two economic factors put Turkey in a tough position in terms of securing deals. For starters, Turkey is competing with Europe for access to Russian supplies. The crisis has reached to such a level in Europe that the IEA officially called for Russia to increase its supply to Europe even though Russian gas companies are already fulfilling their contractual obligations.[14] When the devaluation of the Turkish Lira is factored in, Turkey will have to pay a premium to fulfil its unusually high demand this winter as it will need to match the European prices in its deal with Gazprom.
Geopolitics complicate this situation further. President Erdoğan has reiterated his protest against the Russian annexation of Crimea during the recent UN General Assembly[15] and Russia has intensified its operations in Syria against Turkish-backed groups.[16] Natural gas supply becomes a point of concern whenever tensions between the two countries flare up. In 2015, during the diplomatic standoff after Turkey downed a Russian jet, a halt to exports by Russia was perceived as a risk in Turkey.[17] Though such a drastic move is not to be expected in the current environment, geopolitical tensions are sure to have an impact on natural gas prices in the near future. The Sochi meeting between Erdoğan and Putin on 29 September was expected to bring clarity to the future of the Turkey-Gazprom deal that is still not finalized. However, no official statement was made following the summit on this matter.
Alongside Russia, Turkey imports natural gas from other partners including Azerbaijan, Iran, Algeria and Nigeria.[18] Long-term contracts with these partners alleviate Turkey’s exposure to sudden price jumps to a certain extent. However, a risk for Turkey given its heightened demand projection this year is the possibility of having to resort to spot markets if supply through long-term contracts is not enough to meet the demand during winter, which ties in to the temperature factor. Turkey’s main spot natural gas supplier has traditionally been the USA yet the extreme prices in the European spot market, which the Turkish one is closely linked to, indicates that this option will be costlier than ever before.[19] Import prices on the European market are up by 441.1% year-on-year.[20] To make matters worse, natural gas transported as LNG, Turkey and Europe’s main method of sourcing the commodity from spot markets, is already reserved in significant volumes by Asian countries through long-term contracts[21]. The US itself is expecting a surge in demand; it is reported that lobbying groups are pushing for limits to LNG exports.[22] All things considered, it is safe to say that spot markets for natural gas will run hot this winter.
Given its higher demand, uncertain winter temperatures, and difficult markets, the Gazprom deal appears as a key determinant of natural gas prices this coming winter. Consumers will have to incur higher costs in any case, but the intensity of indirect effects on the economy at large will be determined based on the balance between the cost of long-term contracts and how much Turkey will have to resort to spot markets.
[1] Ranasinghe, Dhara. 2021. “Gas Price Surge, Just One More Headwind for World Economy”. Reuters. https://www.reuters.com/business/energy/global-markets-gas-2021-09-20/.
[2] Bosley, Catherine. 2021. “Commodity Price Gain Deals Stagflation Blow To World Economy”. Bloomberg.Com. https://www.bloomberg.com/news/articles/2021-09-28/commodity-price-surge-deals-stagflationary-blow-to-world-economy.
[3] “Bayraktar: Türkiye’nin Doğalgaz Talebi Bu Sene Çok Yüksek Olacak”. 2021. Bloomberght. https://www.bloomberght.com/bayraktar-turkiye-nin-dogalgaz-talebi-bu-sene-cok-yuksek-olacak-2288008.
[4] “Turkey”. 2021. IEA. https://www.iea.org/countries/turkey.
[5] “MMO: Doğalgaza Yapilan Zam Yeni Zamlarin Habercisİ!”. 2021. TMMOB. http://www.tmmob.org.tr/icerik/mmo-dogalgaza-yapilan-zam-yeni-zamlarin-habercisi.
[6] “Turkish Natural Gas Market Report 2020”. 2021. Ankara: Republic of Turkey Energy Market Regulatory Authority – Strategy Development Department. https://www.epdk.gov.tr/Detay/Icerik/3-0-94/dogal-gazyillik-sektor-raporu.
[7] Ibid.
[8] Bal, Gamze. 2021. “Gıdada Gübre Kaynaklı En Az Yüzde 15 Zam Beklentisi”. Sözcü. https://www.sozcu.com.tr/2021/ekonomi/avrupadaki-dogalgaz-krizi-turkiyeyi-vuracak-gidada-en-az-yuzde-15-zam-beklentisi-6672829/.
[9] “Mevsimlik Tahminler”. 2021. Mgm.Gov.Tr. https://www.mgm.gov.tr/tahmin/mevsimlik-tahmin.aspx?a=3#sfB.
[10] “Statement On Recent Developments In Natural Gas And Electricity Markets – News – IEA”. 2021. IEA. https://www.iea.org/news/statement-on-recent-developments-in-natural-gas-and-electricity-markets.
[11] “Turkish Natural Gas Market Report 2020”. 2021. Ankara: Republic Of Turkey Energy Market Regulatory Authority – Strategy Development Department. https://www.epdk.gov.tr/Detay/Icerik/3-0-94/dogal-gazyillik-sektor-raporu.
[12] “Gazprom’un Türkiye’ye Doğalgaz Sevkiyatı Arttı”. 2021. Sputnik Türkiye. https://tr.sputniknews.com/20210905/gazpromun-turkiyeye-dogalgaz-sevkiyati-artti—1048628545.html.
[13] Sağlam, Mühdan. 2021. “Erdoğan Ile Putin: Nereden Çıktı Bu Yün Yorgan”. Gazete Duvar. https://www.gazeteduvar.com.tr/erdogan-ile-putin-nereden-cikti-bu-yun-yorgan-makale-1536642.
[14] Ziady, Hanna. 2021. “Russia Urged to Pump More Gas To Europe As Energy Prices Soar”. CNN. https://edition.cnn.com/2021/09/22/business/iea-russia-gas-europe/index.html.
[15] “President Met with The President of Turkey Within The 76th UN General Assembly — Official Website Of The President Of Ukraine”. 2021. Official Website of The President of Ukraine. https://www.president.gov.ua/en/news/glava-derzhavi-na-polyah-76-yi-genasambleyi-oon-proviv-zustr-70741.
[16] Kasapoğlu, Can, Barış Kırdemir, and Zeynep Başaran. 2021. “Rusya İdlib Harekatina Başladi, Hava Taarruzlari Analizi – 1”. EDAM. https://edam.org.tr/rusya-idlib-hava-taaruzlari/.
[17] Ünay, Sadık. 2021. “Rusya Krizi ve Türkiye’Nin Değişen Enerji Jeopolitiği”. Al Jazeera Turk. http://www.aljazeera.com.tr/gorus/rusya-krizi-ve-turkiyenin-degisen-enerji-jeopolitigi.
[18] “Turkish Natural Gas Market Report 2020”. 2021. Ankara: Republic Of Turkey Energy Market Regulatory Authority – Strategy Development Department. https://www.epdk.gov.tr/Detay/Icerik/3-0-94/dogal-gazyillik-sektor-raporu.
[19] Sağlam, Mühdan. 2021. “Erdoğan Ile Putin: Nereden Çıktı Bu Yün Yorgan”. Gazete Duvar. https://www.gazeteduvar.com.tr/erdogan-ile-putin-nereden-cikti-bu-yun-yorgan-makale-1536642.
[20] “European Union Natural Gas Import Price”. 2021. Ycharts.com. https://ycharts.com/indicators/europe_natural_gas_price.
[21] Shiryaevskaya, Anna. 2021. “Here’S Why Europe, Desperate for Gas, Isn’T Buying LNG”. Bloomberg.Com. https://www.bloomberg.com/news/articles/2021-09-20/here-s-why-europe-desperate-for-gas-isn-t-buying-lng.
[22] “Natural-Gas Prices Are Spiking Around the World”. 2021. The Economist. https://www.economist.com/finance-and-economics/natural-gas-prices-are-spiking-around-the-world/21804953.
