Easwaran Kanason

Co - founder of NrgEdge
Last Updated: August 26, 2020
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Business Trends

It began with a tease. Turkish President Recep Tayyip Erdogan dropped hints that he was going to make a major energy announcement on Friday, 22 August 2020. It immediately set tongues wagging. Hit with a crumbling economy and a major Covid-19 outbreak, Turkey has been in the headlines for the wrong reasons over the year 2020. The new discovery, located in the Black Sea is an opportunity for Erdogan to change the narrative: claiming it as a historic step for domestic energy security and the fruits of an accelerating exploration drive that has put the country at loggerheads with its European neighbour(s).

The details of the discovery are this: some 320 bcm of natural gas located in the Tuna-1 sector of the western Black Sea. The numbers are based on initial estimates from a single well spudded by the drill ship Faith, but is enough to be the largest ever upstream discovery in Turkey, as well as in the Black Sea. Commercial viability has yet to be assessed, yet Erdogan has already set a production target of 2023. This is highly optimistic. The Black Sea region might have great potential, a US geological survey carried out in 2010 estimated up to 122 tcf of natural gas in place but is sorely lacking in current infrastructure. Romania’s Neptun Deep gas megaproject that is 100km north of the Tuna well has already stalled because of logistical challenges; and that infrastructure deficit applies to Turkey too. Bringing this gas to market is more likely to take at least 5 years, possibly up to a decade.

Not that the gas will have to travel far. Rather than earmarking this gas for potential piped exports to Europe (Turkey is already the host of several current and planned oil/gas pipelines connecting Russia and Azerbaijan to EU markets in the west), Tuna gas will be targeted for domestic use. Turkey is a currently major importer of natural gas, reliant on Russia, Azerbaijan and Iran for piped volumes and (increasingly) LNG, particularly from the US, to fill its growing demand. While the Tuna discovery will not be enough to eliminate its total import requirements, it could potentially make a huge dent in the national deficit – which is the source of the country’s current financial woes that have been exacerbated by the weakness of the lira. Which is why Erdogan hinted that the discovery will only hasten its drilling plans. 

Turkey has plenty of reasons for doing this, not just political or commercial. It has seen how the east Mediterranean energy renaissance has transformed the fate of its neighbours. Egypt is now a major gas producer, thanks to the landmark discovery of the Zohr gas field. Israel made several mega-finds over the past decade, which inspired Lebanon to investigate its waters as well. Erdogan will be hoping that Tuna can kick off about that same transformative change in his country: as the first in long streak of envisaged discoveries.

But that will take Turkey into uncharted waters. While exploration in the Black Sea has been long on-going, Turkish energy has been recently focused on a different part of the sea. Buoyed by discoveries around Cyprus and abutting Egyptian/Israeli finds, Erdogan has been sending a fleet of drillships to the waters surrounding Cyprus. This brings it into direct confrontation with the EU, since the island of Cyprus is still divided but the only country that recognises the northern breakaway part is Turkey. Through this, Turkey claims to have maritime rights in the area and a legitimate claim to any energy resources. The EU – especially Greece and the Cypriot government – vehemently disagree. In the past, this diplomatic issues was always tip-toed around. But Erdogan has cultivated a more antagonistic relationship with the US than his predecessors, and therein lies the problem. In fact, when Erdogan first dropped his tease, most chatter in the market surrounded not what the discovery is, but where it was; because one in disputed Cypriot waters comes with it a political dilemma with no clear path to be solved.

For now, this time bomb has not yet started ticking. Tuna natural gas in firmly within recognised Turkish borders. But given the speed and verve that the country is harnessing in the eastern Mediterranean, it is only a matter of time. If there is gas in the disputed waters, it will be found. When that happens, Erdogan and his government will have to confront a difficult situation – here is natural gas, but who does it belong to?

Market Outlook:

  • Crude price trading range: Brent – US$43-45/b, WTI – US$40-42/b
  • Global crude oil markers have been staying largely rangebound, as demand recovery remains unbalanced and the headache of OPEC+ compliance still applies
  • While demand in Asian economies – which have propelled much of global energy demand growth since 2020 – has recovered well, the demand situation in the Americas is still soft, as countries in North, Central and South America grapple with Covid-19
  • Within OPEC+, compliance is the word of the day; while Saudi Arabia has managed to haul laggards like Iraq and Nigeria to task with meeting quotas, there is still some overproduction that threatens price levels given that Russia and Saudi Arabia are both easing off the throttle on their own production cuts

Read more:
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