Along with causing considerable hand wringing among Western leaders, Russia’s recent annexation of Crimea has raised concern in the oil and gas world -- an already volatile sector of the economy that regularly contends with political upheaval in the energy-producing countries it relies on.
The oil business in particular does not react well to sudden disturbances in the economy or drastic political changes like what happened in Kiev in February. So many things can go wrong between when oil is extracted from a field in, say, Kuwait, Saudi Arabia, or Azerbaijan, and when it’s piped to a refinery and shipped to a port facility to await loading onto a tanker for transportation to its final destination.
In times of peace, sending oil onwards is a pretty straightforward transaction. The oil comes in, is refined, travels by pipeline or tanker to its destination, and all goes smoothly.
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However, when oil or gas has to pass through a conflict zone or unstable country, the dangers multiply with every transit point and can trigger a logistical nightmare. The moment insurance companies smell trouble, they tend to raise their rates, and the added cost is passed on to the consumer. It is usually the added costs of insurance that raises prices at the gasoline pump.
On the other hand, crises and conflict can offer opportunities for other parties to make or save money.
Russia, one of the world’s largest producers of oil and gas, may have a hard time offloading some of its production if sanctions are imposed by the West in retaliation for its actions in Ukraine. Already, one of its major oil customers is using that as leverage.
Turkey said this week that it would try to squeeze a discount out of Russia for the gas it currently purchases from them. Turkey’s Minister of Energy and Natural Resources, Taner Yildiz, said the issue of obtaining cheaper gas from Russia will be on the agenda at the next meeting of the management of Russian oil giant Gazprom, due to be held in the coming days. Yildiz’s comments were reported April 21 by Turkey’s TRT Haber TV.
He called reports that Gazprom has refused to agree to a discount “untrue” and said the contract between the two countries “gives every reason to Turkey to demand a discount on the gas it receives from Russia.”
Yildiz also said the meeting will include discussion of an increase in the supply of Russian gas to Turkey.
The Turkish state pipeline company, Botas, imported 38.42 billion cubic meters of gas from various sources in 2013, less than the 43.09 billion cubic meters it imported in 2012.
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Officially, gas prices are not made public. But thanks to the Turkish media, it’s an open secret that Turkey is currently buying Russian gas at $425 per 1,000 cubic meters. Turkey also pays $335 for 1,000 cubic meters of Azerbaijani gas, which is supplied via the South Caucasus Pipeline (Baku-Tbilisi-Erzurum pipeline).
The country pays $490 for 1,000 cubic meters of Iranian gas. Turkey has contracts with Russia to supply 20 billion cubic meters of gas per year, with Iran to supply 10 billion cubic meters of gas, and with Azerbaijan to buy 6.6 billion cubic meters.
Turkey also has agreements with Algeria and Nigeria to supply 4.4 billion and 1.2 billion cubic meters of liquefied natural gas per year, respectively. A diversified supply network reduces risk, after all, and it’s anyone’s guess where the next trouble spot might occur.
By Claude Salhani of Oilprice.com