In the Pipeline

Until now, Turkey’s dynamic energy sector has been reliant on imports of oil and natural gas from Russia and other regional neighbors to feed the ever-increasing demand in the Turkish domestic market. A new joint scheme with Azerbaijan, a country that shares close cultural ties with Turkey, is set to help the Turkish Republic meet the dual challenges of growing demand and an increasingly unpredictable geopolitical climate.

Turkey’s energy sector has experienced sustained growth over the past ten years, hand in hand with the urbanization, industrialization and population growth that accompanied Turkey’s strong economic performance. This growth shows no sign of slowing down: the Turkish Investment Support and Promotion Agency reports a 2% compound annual growth rate in energy consumption between 2007 and 2012, which the Economist Intelligence Unit expects to increase to 4.5% by the end of 2015. Turkey also has one of the fastest growing electricity markets in the world, achieving an average of 9% annual growth in 2010 and 2011, and producing 70% more power in 2013 than in 2003 according to Turkish government statistics—that’s a whopping 315% increase on 1990 levels.

Despite this record of rapid, sustained growth in both demand and market value, the one potential pitfall for Turkey has been its lack of domestic oil and gas resources. This has resulted in a level of reliance on foreign imports in order to satiate domestic demand. Natural gas is the most important source of Turkish electricity—accounting for 44% of production—and International Energy Agency (IEA) figures suggest that 56% of that gas is imported from Russia. In addition, half of the gas that Turkey imports goes towards other domestic uses, making gas acquisition one of the most crucial aspects of current Turkish energy policy.

However, this challenge also brings opportunity: Turkey’s geography may not be blessed with abundant fossil fuel resources, but it is strategically placed between some of the world’s main oil and gas producers—Russia, Azerbaijan, Iran, and the Gulf States—and Europe, a consumer of at least 300 BCM of gas in 2013, according to the BP Statistical Review. It is in this context that Ankara has struck a deal to cooperate with Azerbaijan on the Trans-Anatolian Natural Gas Pipeline (TANAP), with construction getting started this March.

TANAP is a major co-operative project between Turkey and Azerbaijan to transport gas from Azerbaijan’s large Shah Deniz II gas field in the Caspian Sea. The pipeline is no small undertaking, with a projected length of 1,850km, running from Georgia in the east to Greece in the west, using 1.2 million tons of steel piping, delivered in approximately 150,000 pieces. But, once this pipeline is complete, Turkey will have emerged as a major transit nation for Azerbaijani gas, with potential for additional connections to Central Asia via the proposed Trans-Caspian Pipeline. With TANAP in place, Turkey may also begin to consider how to extend its transit network to include other oil and gas-producing neighbors, becoming a regional energy transit hub.Realizing the potential of this transit arrangement is clearly at the forefront of what TANAP hopes to achieve. The project’s vision statement tells us that they intend to encourage investment, develop competitive gas markets, and increase security of supply through the opening of the pipeline. With the IEA expecting energy demand within Turkey to continue to grow at the same rate until at least 2030, and vast reserves available for import from Turkey’s neighbors to meet the increasing domestic and European demand, this vision may turn out to be too modest. The domestic effects will be as transformative as the international benefits that Turkey is set to gain; a direct connection to gas production in Azerbaijan and beyond should dramatically reduce Turkey’s reliance on Russian gas. Gas from Azerbaijan currently accounts for only 8% of Turkey’s annual imports. With demand increasing all the time, this figure can now only increase.