Turkey's electricity consumption is primarily based on natural gas resources. However, the country's natural gas reserves are limited and it thus imports approximately 98% of its natural gas from Russia, Azerbaijan, Algeria, Iran and Nigeria – primarily through the state-owned Petroleum Pipeline Corporation (BOTAS), which dominates the natural gas sector in order to meet the country's increasing consumption needs (1.7 trillion cubic feet in 2014).

Turkish-Russian relationship

Russia's Gazprom is by far the largest single supplier of natural gas to Turkey, accounting for 57% of the country's total supply, and Turkey is Russia's second-largest export market for natural gas after Germany.

According to the latest figures from the Ministry of Energy and Natural Resources, Turkey imported 26.975 billion cubic metres (m3) of natural gas from Russia in 2014; as of the end of June 2015, it had imported approximately 12.909 billion m3. Turkey's natural gas consumption is expected to have increased further by the end of 2015.

In February 1986 Gazprom and BOTAS signed a contract for the supply of up to 6 billion m3 of gas per year for 25 years (1987 to 2011), based on an intergovernmental agreement dated September 18 1984. In 1998 Gazprom and BOTAS executed another long-term contract for the supply of an additional 8 billion m3 annually until 2022.

In February 2015 a series of negotiations were conducted in Ankara between Gazprom officials, Minister of Energy and Natural Resources Taner Yildiz and BOTAS regarding the price of Russian natural gas. Gazprom stated on its website that "in the framework of the planned discussions both parties have reached a win-win agreement on the price".

In contrast to Gazprom's statement, the interim Minister of Energy and Natural Resources, Ali Riza Alaboyun, stated that Turkey and Russia had been in dispute over Turkey's discount demands since December 2014. The minister added that in order to resolve the dispute, Turkey had appealed to the International Chamber of Commerce (ICC) as of October 27 2015.

According to the minister's statement, the dispute arose from Russia's ignorance of Turkey's discount demands on gas prices. In December 2014 Gazprom announced a 6% discount for natural gas purchases by BOTAS. However, Turkey demanded a further reduction and in February 2015 obtained a 10.25% discount on the price of the 28 billion to 30 billion m3 of gas that it buys from Russia each year. However, this discount was never effected by BOTAS or Gazprom.

The relevant contract between Turkey and Russia reserves the right to arbitrate if there is no breakthrough in negotiations for six months. Since no discount was applied and no action was taken regarding Turkey's demands as of December 2014, Turkey gained the right to take the dispute to the International Arbitration Court from June 2015. Accordingly, Turkey has since appealed to the ICC.

The minister additionally explained that the arbitration will not affect Turkey's gas purchases until the process has been finalised. On the other hand, Gazprom has indicated that an out-of-court settlement with Turkey regarding the dispute may still be possible.

Comment

The dispute between Turkey and Russia is expected to be settled amicably, given Turkey and Russia's long commercial history and their ongoing joint projects, such as Turkish Stream and the Akkuyu Nuclear Power Plant.

For further information on this topic please contact Ömer Kesikli or Oya Gökalp at Kesikli Law Firm by telephone (+90 216 348 29 24) or email (omer@omerkesikli.av.tr or ogokalp@omerkesikli.av.tr). The Kesikli Law Firm website can be accessed at www.kesikli.com.

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