Business & Economics:
AS BLUE STREAM PAUSES, TURKEY SEEKS ENERGY INDEPENDENCE
Mevlut Katik: 4/30/03

Turkey has reportedly suspended purchases of Russian natural gas through the troubled Blue Stream pipeline. The export route, which started delivering gas this spring after years of delay, faces new competitive pressures that have prompted Turkish interest in Blue Stream to wane. For example, Azerbaijan’s development of the Shah Deniz natural-gas field is making it increasingly difficult to justify Blue Stream’s high costs.

Turkey’s state-owned pipeline company, Botas, has made no formal announcement about a suspension, but the Turkish media widely reported the development in late April. An official from the Russian gas giant Gazprom has said that the Turkish government ordered a halt to shipments in March. Botas disclosed only that it bought 89 million cubic meters of gas in February and 98 million in March.

Under the project’s terms, Turkey had agreed to purchase 2 billion cubic meters this year and increase purchases every year until 2008. Turkey would have to pay penalties after August if it continued refusing shipments. If shipments vanish for six months, this agreement will be hard to honor. The Russian newspaper Vremya Novosti reported April 28 that Turkey had assessed its competition and, judging that the odds of its extending a pipeline to the Balkans had fallen, had begun insisting on more favorable terms from the Russians. This suggests that Blue Stream’s appeal to Turkey is declining.

The 1,250-kilometer pipeline, which runs below the Black Sea, cost some $3.3 billion to construct. Throughout the pipeline’s development, critics charged that Turkey should have avoided the deal and waited for deliveries from the Shah Deniz field in Azerbaijan. [For background, see the Eurasia Insight archives].

Reports persist that Blue Stream – according to some, the deepest underwater pipeline on earth – is still grappling with technical glitches that make its supply costlier. On April 21, less than a month after the supposed Blue Stream suspension, the consortium exploring Shah Deniz announced that it had started drilling its first gas-producing well ahead of schedule.

Anglo-American energy giant BP, which leads the consortium, has said it hopes to start delivering Shah Deniz gas to Turkey by 2006. That supply could weaken the case for Blue Stream, especially as Turkey seeks to lower its overall energy costs.

In April, Turkish Energy minister Hilmi Guler told World Markets Research Center that the gas Turkey has bought via Blue Stream costs more than other Russian gas shipments. Turkey purchased a total of 11.6 billion cubic meters of gas from Russia in 2002, according to Botas, about 65 percent of 2002’s total imports. The Blue Stream commitment, he said, imposed a $196 million loss.

Guler reported that his government was trying to lower its purchase commitment, rather than renegotiate prices, and had signed gas deals with other countries like Algeria and Nigeria to reduce over-dependence on Russia. As Guler explores other sources of gas (and other possibilities in oil, which is hard to deliver to parts of the country), Turkey’s foundering economy still makes demand for gas less than robust.

Reports of the Blue Stream suspension come as Turkey’s government is exploring efforts to diversify and recoup costs more quickly from its energy sources. Privatized domestic gas distribution grids in Turkey’s central Anatolia region are helping to buoy hopes that the country can draw a significant portion of its energy from domestic sources. The country’s Energy Market Regulatory Authority approved a 12 percent hike in natural gas prices on April 30, a move that may dampen losses at the state level and prod some customers to seek other sources of energy.

Ankara has shown an interest in squeezing economic benefit from oil refineries in recent months. Gazprom and BP (in a joint venture with Russia’s TNK) have reportedly expressed interest in bidding for the country’s Tupras oil refinery. Prime Minister Recep Tayyip Erdogan has taken a personal interest in the sale, meeting with TNK chief executive Viktor Vekselberg in early April. While some critics object to the idea of selling one of the state’s more profitable sources of tax revenue, the government reportedly hopes to raise $4 billion from privatization efforts this year.

Privatizations, including the selling of shares in Tupras, have figured prominently in Turkey’s International Monetary Fund-approved game plan since 2002. Such diversification can promote Turkey’s bid for energy independence over the long term, which can help make the country more stable overall in investors’ eyes. It cannot shield Turkey from further expenses – and a potentially stormy short-term future – associated with the developing Blue Stream dispute.

Editor’s Note: Mevlut Katik is a London-based journalist and analyst specializing in Turkish affairs.