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Colin Chilcoat

Colin Chilcoat

Colin Chilcoat is a specialist in Eurasian energy affairs and political institutions currently living and working in Chicago. A complete collection of his work can…

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Russian-Turkish Energy Relationship Set Back

A once promising relationship met its abrupt end November 24th. In a matter of minutes – or quite possibly seconds – Russia and Turkey’s burgeoning friendship is back to a perhaps more familiar Ottoman era iciness. Pragmatism will likely prevail, but emotions will define the relationship – energy and political – in the short- to medium-term.

Planned provocation or defense of its national borders, Turkey’s downing of a Russian Su-24 bomber is a puzzling, if ultimately unsurprising, assertion of its national interests in the increasingly international conflict in Syria. In short, and quite simply, Russia and Turkey have little common ground in the region – a mutual disdain for ISIS being little more than a surface-level bond. Still, substantial energy and trade ties seemed to preclude all but a relatively docile rhetorical battle. Related: Saudis Force Russian Ural Blend To Discount In This Key Market

For its part, Russia’s reaction has been swift. The Russian foreign ministry has warned against travel to Turkey and ended visa-free travel between the countries. Many Russia travel agencies have already suspended tour sales there. In 2014, Russians accounted for 12 percent of all tourists to Turkey. Moreover, controls on food imports and foreign workers are being tightened and Prime Minister Dmitri Medvedev has called for a boycott of Turkish agricultural produce.

Tourism and food imports are low hanging fruits – albeit extremely valuable fruits in this context – but further, more targeted, economic sanctions remain on the field of play. In this regard, most eyes rightfully belong on the nations’ energy ties, which have grown rapidly since the turn of the century. Related: Are OPEC Countries Creditworthy At $50 Crude?

As it stands, Russia fulfills more than half of Turkey’s natural gas needs – some 27 billion cubic meters (bcm) per year – and more than a third of its oil requirements.

Conversely, Turkey is Gazprom’s second largest customer after Germany and Russia’s sixth largest trade partner overall. According to Russian Deputy Energy Minister Anatoly Yanovsky, Russia will continue to honor its long-term gas contracts, of which there are several. However, any expansion of this relationship – which the Russians previously and actively sought – is now firmly on the rocks, a direction it had been trending well prior to the downing incident.

Since its well-publicized announcement, Russia and Turkey have failed to agree to terms on the TurkStream gas pipeline. Turkey is seeking international arbitration for an ongoing pricing dispute over current and future volumes, which Russia is looking to solve through assurances on the now 32 bcm TurkStream. However, as Ankara holds out, and installation delays plague the Russian side, TurkStream is little more than an idea; and in its current form, it’s a potentially redundant one too. Moreover, Russia has backed down from its plans to halt gas transit through Ukraine in 2019. Related: Saudi Cash Crisis Intensifies As Interbank Rates Soar

Any supposition of proactive action against TurkStream by the Russians assumes Nord Stream II gets off the ground, and that, while a safer bet, faces its own share of hurdles. Ten European governments – the EU’s eastern bloc – are calling for a summit-level EU debate on the pipeline project, which they believe runs counter to EU foreign and security policy. Political considerations aside, the pipeline’s commercial value is equally questionable – especially considering EU restrictions on Gazprom limit the existing Nord Steam to half capacity. Though, it should be noted that deliveries to Europe have increased year on year for four consecutive months.

To be sure, Russia, as a price-taker, cannot afford to turn away from Turkey’s lucrative market. But, despite the diplomatic headwinds – both self-inflicted and other – Russia’s geopolitical advantages afford the gas exporter some wiggle room in this constrained age of plenty. Iran’s gas industry is underdeveloped and ill fit to rapidly increase output to Turkey, let alone Europe. A proposed Qatari pipeline is simply unrealistic at this time. LNG offerings, both existing and planned, from the United States, Qatar, Australia, etc. will remain on the margin as cheap, oil-indexed gas holds the competitive edge.

By Colin Chilcoat of Oilprice.com

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