Rising energy demand and growing economy

Turkey is classified as either a developed country or an emerging market economy, according to different sources. It has one of the fastest-growing economies in the world and its energy demand has increased at the same rapid pace as its economy. In terms of increase in demand for natural gas and electricity, Turkey is second only to China.

Turkey is an oil and natural gas producer, but its output is not substantial enough to make the country self-sufficient. At present, approximately 26% of total energy demand is met by domestic resources; the rest is imported. Turkey depends on imported gas to generate electricity and imports 98% of its natural gas supply from Russia, Azerbaijan, Algeria, Iran and Nigeria.

In order for Turkey to meet its rising energy demands, high levels of investment are required in the fields of electricity, natural gas and oil. The government has allowed the private sector to take the lead in financing these investments, while at the same time creating a favourable investment environment.

Turkey needs to secure its natural gas imports by expanding gas storage facilities in order to avoid shortages. Expanding gas storage facilities will strengthen the country's position when negotiating contracts on a take or pay basis. The country experienced financial losses in the past due to the requirement to buy pre-agreed amounts of gas at a price which was excessive at the time of trade. To tackle this problem, the Natural Gas Market Law requires gas importers to organise storage facilities for at least 10% of their imports. Government-led gas storage projects have also been undertaken, including the Salt Lake natural gas underground storage facility.

EU-Turkey strategic energy partnership

Turkey is an important oil transit state and it aspires to be an important gas transit state and energy hub. Large volumes of oil are transported by the Baku-Tbilisi-Ceyhan and Kerkuk-Ceyhan pipelines, as well as by tankers through the Turkish Straits. However, geopolitical and security issues affecting the pipelines must be addressed for Turkey to function as a secure transit state and energy hub.

In order to increase its energy security, Turkey must diversify its supply sources. The Ministry of Energy and Natural Resources' Strategic Plan 2015-2019 underlined the following strategies in this regard:

  • improving the security of energy supply through a strong and reliable energy infrastructure, optimum resource diversity and effective demand management;
  • promoting energy efficiency and energy saving;
  • promoting good governance and stakeholder interaction through the effective use of IT and a well-coordinated ministry with a strong corporate capacity;
  • improving regional and international effectiveness through integration with regional energy markets;
  • promoting the development of indigenous technology in energy and natural resources and results-oriented R&D;
  • improving the investment environment through competitive and transparent markets and streamlined investment processes; and
  • promoting the security-efficient and effective use of non-energy natural raw materials.

Under the Strategic Plan, no country will provide a majority of Turkey's gas imports.

In an effort to diversify its imported gas sources, Turkey has signed agreements with other energy producers. In this regard, Turkey's interests overlap with those of the European Union, which also prioritises energy supply security and diversification. Decreasing domestic gas production in the European Union in recent years has resulted in increased demand for imported gas. Finding ways to secure the supply of gas has therefore become a priority. The urgency of this issue was made clear in 2006 when the Ukraine-Russia conflict erupted over Russia's gas prices. When Russia cut off supplies to Ukraine for three days, Ukraine began tapping into gas supplies that were meant to flow into Europe. The result was a gas shortage in some central European countries. It was a decisive moment for the European Union, which drew up a strategy to help member states develop a functioning internal energy market and develop a new EU gas supply security structure.

The European Commission sought alternative ways of avoiding dependence on one supplier. One strategy in that regard was the Southern Gas Corridor. Turkey plays a crucial role in this project and the European Union realised that a strategic energy partnership would be beneficial for both parties. The Turkey-EU Positive Agenda was drawn up following a meeting between the parties on June 14 2012 in Ankara. It addressed enhanced EU-Turkey energy cooperation and several important issues in that regard, including:

  • long-term perspectives on energy scenarios and the energy mix;
  • market integration and the development of an infrastructure of common interests;
  • global and regional energy cooperation;
  • the promotion of renewable energy;
  • energy efficiency and clean energy technologies; and
  • nuclear safety and radiation protection.

The European Commission's 2020 Energy Strategy aims to strengthen the European Union's relationship with existing suppliers and find new energy sources. The strategy also underlines the importance of the Southern Gas Corridor as a potential connection to the Middle East. Once the required conditions have been met and sanctions lifted, Iran, Iraq and Turkmenistan are expected to contribute to the expansion of the Southern Gas Corridor. The implementation of this strategy is not expected to result in a drastic decline in the import of Russian gas. However, it should result in increased energy security for the European Union.

The Southern Gas Corridor was first proposed in 2008 in the European Commission's Second Strategic Energy Review – An EU Energy Security and Solidarity Action Plan. The Russia-Ukraine crisis accelerated that need. Further, the availability of natural gas resources in Iraq and Israel means that the 2020 Energy Strategy has a better chance of being realised.

Southern Gas Corridor

The Southern Gas Corridor consists of three different gas pipelines that will connect the Caspian region with Europe across a 3,500 kilometre (km) route. The pipeline system has been designed to be scalable to double its initial capacity in the event that the gas supply increases in the future.

The first part of the project is the 691 km South Caucasus Pipeline that runs from Azerbaijan to Turkey through Georgia. The decision to expand the pipeline was made on December 17 2013. The natural gas that it transports is produced offshore in the Caspian Sea Shah Deniz 2 gas field.

The Trans-Anatolian Pipeline (TANAP) is the second part of the Southern Gas Corridor. It will run from the Turkish-Georgian border to the Turkish-Greek border. TANAP will be operated by the State Oil Company of Azerbaijan Republic (SOCAR), which holds a 58% stake in the project. The Southern Gas Corridor Closed Joint Stock Company (58%), the state-owned Petroleum Pipeline Corporation (BOTAS) (30%) and BP (12%) are partners in the project's development. The length of the pipeline is 1,841 km.

The Trans-Adriatic Pipeline (TAP) is the third part of the Southern Gas Corridor. It is planned to run from Turkey through Greece and Albania before terminating in Italy. The pipeline will be approximately 870 km long. TAP's shareholders are BP (20%), SOCAR (20%), Statoil (20%), Fluxys (16%), Total (10%), EON (9%) and Axpo (5%). The onshore section of the pipeline will be approximately 773 km long (550 km in Greece, 215 km in Albania and 8 km in Italy). TAP will cross the Adriatic Sea between Fier in Albania and Puglia in Italy. Environmental protection requirements and the seabed were examined closely when choosing the proposed route.

The Southern Gas Corridor project is 51% state-owned; 49% is owned by SOCAR. The TANAP shareholders' agreement was signed in March 2015 prior to the start of work on the pipeline and the TANAP Project company will be headquartered in the Netherlands.

Comparison between Nabucco, South Stream and TANAP


The Nabucco gas pipeline was designed to carry natural gas from Azerbaijan, Turkmenistan, Iraq and Iran to Southeast and Central Europe via Turkey. The project proposed building a 3,300 km gas pipeline from the Georgian-Turkish and/or the Iranian-Turkish border to Baumgarten in Austria via Turkey, Bulgaria, Romania and Hungary. Shah Sea in the Caspian Sea was the planned starting point for the project. The pipeline also planned to eventually transport gas from Egypt and neighbouring countries.

Despite political support from the European Union and the United States, the Nabucco project failed due to financial reasons. It was a large-scale project competing with South Stream, its backers were primarily mid-sized companies and the conditions of bank guarantees were severe. Steady demand was not assured and potential suppliers (with the exception of Azerbaijan) were not fully convinced of the plan to transfer gas to Europe via Turkey. After the project's failure, Turkey instead focused on TANAP. This change of approach was due to Turkey's dissatisfaction with the European Union's stance in its accession negotiations. Turkey also had to take steps to ensure its own energy security.

South Stream

The South Stream pipeline was a project that envisaged transporting natural gas from Russia through the Black Sea, to Bulgaria, Serbia, Hungary, Slovenia and Austria. It was seen as a rival project to the Nabucco pipeline. However, South Stream failed due to non-compliance with EU competition and energy legislation regarding the internal energy market, rules regarding unbundling and the independence of national energy regulators and energy markets.


TANAP represents a new version of the Southern Gas Corridor. It is a bilateral project between Azerbaijan and Turkey. The project's strength comes from its financing structure, as Azerbaijan has secured the estimated $7 billion to $10 billion to finance the infrastructure needed through its State Oil Fund.

The groundwork for the project was laid by a memorandum of understanding signed between Azerbaijan and Turkey. The memorandum of understanding established a consortium to build and operate the pipeline. The binding intergovernmental agreement on TANAP was signed by Azerbaijan's president and Turkey's prime minister in June 2012.

The TANAP pipeline differs from Nabucco in terms of its initial capacity. The Nabucco project was designed to have a gas transport capacity of 31 billion cubic metres annually. However, initial supplies were expected to be between 4.5 billion and 13 billion cubic metres annually. Instead, the TANAP pipeline is planned to supply initially 10 billion cubic metres of gas to Europe annually and 6 billion cubic metres to Turkey. The gas will be sourced from Azerbaijan's Shah Deniz 2 gas field in the Caspian Sea. The pipeline's capacity will be increased in subsequent phases to reach 31 billion cubic metres annually by 2026.

The Nabucco project was developed under EU law, which meant that the pipeline would be regulated by rules such as third-party access and unbundling. In contrast, TANAP is an undertaking between two non-EU member states. As a result the legal framework of the TANAP project is more straightforward.

Turkish Stream

Turkish Stream is a proposed gas pipeline from Russia that will run across the Black Sea from the Russkaya compressor station near Anapa to Kiyikoy in Turkey and then via Luleburgaz to Ipsala on the Turkish-Greek border. The project will have a 660 km offshore pipeline and a 180 km onshore pipeline. As a result, annual capacity is planned to be 63 billion cubic metres. There will be four strings with a capacity of 1.575 trillion cubic metres each. The first string is intended exclusively for the Turkish market.

In December 2014 a memorandum of understanding was signed between BOTAS and Gazprom, and in May 2015 Gazprom started construction of the offshore gas pipeline. Gazprom is responsible for the offshore construction project, while the Turkish gas transportation facility will be built jointly.

However, after the jet crisis erupted between the two countries in November 2015, Russia imposed a number of economic and trade sanctions against Turkey and on December 3 2015 the Russian energy minister announced that the Turkish Stream project had been suspended. On December 17 2015 the Russian president stated that Russia was willing to continue with the project if Turkey received guarantees from Brussels. Russia wants the project to receive European Commission support.

The project is still suspended, but there is a possibility that it will be resumed.

TANAP and natural gas market

The Turkish economy will directly benefit from TANAP in terms of job creation. Overall investment in the project is estimated to reach $11.7 billion and it is expected to create 15,000 direct jobs and numerous indirect jobs. According to some estimates, Turkish infrastructure companies will be awarded infrastructure contracts amounting to $5 billion to $6 billion. On completion, TANAP will be one of the world's longest gas pipelines. In addition to the direct benefits of the project, such a large-scale investment will contribute to Turkey's economic growth.

Turkey imports natural gas from Russia, Iran and Azerbaijan via pipelines as well as liquefied natural gas from various countries. Import prices are estimated to be $400 per trillion cubic metres for Russian gas, $480 per trillion cubic metres for Iranian gas and $340 per trillion cubic metres for Azerbaijani gas. Importing more gas from Azerbaijan will reduce Turkey's import bill.

Further, Turkey will receive more natural gas supplies through TANAP, which will increase competition in the market. It will boost Turkey's bargaining power against other suppliers, which will be forced to reduce their gas prices. Turkey will also be able to re-export natural gas that it imports through TANAP to Europe, which will increase revenues.

TANAP's route represents the most cost-effective means of transporting natural gas from this region to Europe. Azerbaijan is the only supplier for now. However, other gas-rich countries in the region such as Turkmenistan, Iran, Iraq and Israel might wish to use this corridor in future to deliver their natural gas to Europe. This greatly increases the potential for Turkey to become an important transit country and an influential player in the European energy market. In all respects, Turkey should support the project.

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

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