Turkey’s New Gas Hub Could be a Boon for a Beleaguered Russia

The Turkish Republic celebrated its centenary on 29 October, but for the energy sector, festivities started much earlier, in April.

Its inaugural Black Sea gas deliveries from the recently discovered Sakarya field and the shipment of nuclear fuel for its first nuclear power plant were meant to reinforce Turkey's great power image in its anniversary year.

The establishment of a gas hub, which the government hopes will place Turkey at the heart of a complex route linking its resource-rich neighbours in the East with European markets in the West, is meant to achieve the same goal.

The idea is not new. Turkey has been struggling to fulfil this ambition for nearly two decades. However, it was always doubtful that a hub – at least of the Western European sort, founded on free trade and private initiative – was likely to take off in a country where the energy sector remains firmly under government control.

The latest twist, however, is that Moscow has offered to help Ankara achieve its goal, raising suspicions that Russia would be using Turkey to recapture lost market share even as Europe is looking to wean itself off Russian gas exports by 2027.

It is not yet clear what a Turkish-Russian gas hub would look like, but it is safe to assume that with Russia sharing Turkey's interventionist instincts, it would not be a beacon of free trade, transparency and competition.

In fact, a contract announced by Turkey and neighbouring Bulgaria earlier this year – details of which were leaked to the media in July – offers a glimpse into the arrangements that are being put in place.

Under this deal, the Bulgarian state company Bulgargaz can secure cargoes of liquefied natural gas (LNG) and have them delivered in Turkey.

However, its Turkish counterpart BOTAS can instruct Bulgargaz to have the cargoes delivered on its behalf anywhere in Europe. In exchange, BOTAS will ship the equivalent amount via pipeline into Bulgaria.

Furthermore, BOTAS itself can deliver gas directly to Bulgarian consumers or to neighbouring Eastern European countries using the Bulgarian internal transmission network.

It can also 'sublet' its share of the transmission capacity on the border with Bulgaria to third parties, although it is unclear who these third parties are and how they would be selected in Turkey.

BOTAS has started to sign export deals with companies in neighbouring countries, including with a Moldova-based entity reportedly associated with the US-sanctioned billionaire Vlad Plahotniuc, who had been living in Turkey.

Turkey's deal with Bulgaria has already raised concerns at the EU level. Earlier in October, the European Commission's Directorate General for Competition launched an anti-trust investigation amid concerns that Bulgargaz would be acting as the 'sole agent and distributor' of gas imported from Turkey.

More worrying still are claims that this complex scheme would in fact allow Russia to export gas to Europe through the backdoor, using Turkey and Bulgaria to mask the origin of molecules.

To be clear, neither Russian pipeline gas nor Russian LNG imports are banned under EU rules. However, the fact that the Turkish-Bulgarian deal extends over a period of 13 years, well beyond the EU's proposed phase-out date for Russian gas, raises questions about the EU's ability to enforce that goal.

Furthermore, since Turkey also imports gas from Azerbaijan and Iran as well as LNG, it could blend deliveries of different origin and export Russian gas under a different label.

In fact, many Central and Eastern European companies such as Romania and Hungary have been wooing Azerbaijan for gas supplies transiting Turkey, even though the Caspian country does not have large additional supplies on top of what it already sells to Turkey and a few Southern European customers, being forced to import Russian gas itself to meet demand last winter.

Although Russia has not made any statements beyond the fact that it intends to support Turkey in establishing a gas hub, expanding this route is vital to its interests.

After cutting gas exports to Europe by 80% from contracted levels, hoping to weaken European support for Ukraine following Russia's all-out invasion last year, Gazprom has been looking to sell more gas to China and Central Asia, but with limited success so far.

Recovering at least part of its lost European market share is critical, not only because some of its wells may suffer damage in case of prolonged shut-ins, but also because Russia needs cash to prop up its sinking rouble and sustain its costly war effort.

It also knows that it has a short window of opportunity to recapture at least some of its lost European share until 2025–2026, when the global LNG market is expected to be flooded with additional volumes from the US and Qatar, which are set to double their output by then.

Russia is fully aware that countries such as Germany, which has received pipeline gas in the past, are unlikely to discredit themselves politically by reopening supply corridors such as the controversial Nord Stream route, which was sabotaged last year.

Meanwhile, Ukraine is unlikely to renew a transit contract with Gazprom which expires at the end of 2024.

The only option left is Turkey, which Russia is hoping to use as a springboard to European markets, while also astutely playing into Ankara's ambitions to project power regionally by controlling the gas flowing in and out of the country.

However, if Ankara expects to be fully in charge of supplies without worrying about Russian pressure, it would do well to remember past episodes such as when Gazprom reduced gas supplies in the middle of the winter of 2014/2015 amid political disputes, or when Turkish importing companies were involved in extensive arbitration cases, some of which they subsequently lost.

BOTAS is currently strenuously denying reports that it owes $27.5 billion (£22.7 billion) to Gazprom and that is has pleaded for debt restructuring. While it is difficult to verify either claim, it is also clear that the government had been using BOTAS to sustain an onerous cross-subsidies scheme to gain political support in exchange for cheap gas to end consumers.

Russian payment deferrals or price discounts on expensive gas imports would be a lifesaver for BOTAS and the Turkish economy, whose inflation rate has been at a 20-year high in recent months and currently exceeds 60%.

Emboldened by the vision of achieving its goal to project regional power through its own brand of gas hub, Turkey may not fully grasp the fact that depending on Russia to achieve that ambition could leave it highly vulnerable to political and economic blackmail.

Regrettably, Europe's mercurial energy companies – currently knocking on Turkey's doors, eager to snap up profitable deals for Russian gas sold under different labels – have already forgotten that, as last year's energy supply crisis showed, cheap gas comes with high security costs.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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