Gas crisis exposes Turkey’s vulnerability

When Turkey was covered in a thick layer of snow two weeks ago, thousands of companies were suddenly without gas and electricity. The Istanbul company SEM Plastik was also forced to shut down production for a few days because the government had shut down the energy supply to the industry. “The electric company asked us not to use heavy machinery,” said Yavuz Eroglu, the company’s president. “We had just enough power to keep the lights on at the factory.”

SEM Plastik makes packaging and medical disposables, which it exports to North America and Europe. The company has factories in Istanbul and the southeastern city of Malatya, which employ 300 people. “The power outage resulted in a 0.5 to 1 percent loss in annual sales,” Eroglu said. “But for my employees, who have to live on the minimum wage, two days of lost income is much worse. They are in bad shape because of the high inflation.”

The gas and power outages were caused by Iran temporarily suspending gas exports to its neighboring country in January. The export freeze appeared to be the result of increased domestic demand in Iran, due to the harsh winter weather. Iran’s oil ministry last month called on citizens to reduce their gas consumption and dress warmer. Iran supplies about 12 percent of Turkey’s gas. And 30 to 40 percent of electricity in Turkey is generated using gas.

So when Iran suspended gas exports on January 20, it created problems with both gas and power supplies. The Turkish state gas company BOTAS subsequently reduced the gas supply to the 320 industrial zones in Turkey by 40 percent. The gas supply to power stations was also temporarily shut down, leading to power cuts for industrial zones and large companies. They now have electricity again, but the gas supply is still 20 percent less than before.

Energy limitation unusual

The crisis is unusual for Turkey, which has never had a national energy-limitation plan for so long. The gas and power outages affected different regions on different days. The decision came as an unexpected surprise for many companies, who complained that they were only informed about the forced production stop a few days in advance. Eroglu: “Now we have to work extra shifts on Sundays to get some orders that we are contractually committed to.”

Critics suggest Iran’s export freeze is due to unpaid bills. But this is categorically denied by the Turkish government. “We are not the municipality of Istanbul,” snarled President Erdogan, referring to the high debts of the municipality, which incidentally have been built up under the former administration of his own AK party. “We have absolutely no debt with Iran. The interruption of the gas supply is due to technical problems.”

But according to experts, the gas crisis illustrates Turkey’s vulnerability to and poor preparation for potential hitches in the energy supply. The rapid growth of the economy and population has led to an increasing energy demand in recent decades. But as one of the few emerging economies, Turkey imports virtually all of its oil and gas. With 35 percent, Russia is by far the most important supplier of natural gas, followed by Iran and Azerbaijan.

In order to ensure enough energy, the Turkish government has expanded its import sources in recent years. Ankara also invested in the exploration of gas fields in the Black and Mediterranean Seas, leading to conflicts with neighboring countries. In addition, new pipelines were built, including TurkStream, which transports Russian gas to southern Europe via the Black Sea, and TANAP, which transports gas from Azerbaijan to Europe via Turkey.

“We have the ambition to make our country a global center for the distribution and trade of energy,” Erdogan said at the grand opening of TurkStream in January 2020. He called on the Mediterranean countries to cooperate. “Let’s turn the Mediterranean into a region of cooperation rather than conflict. The Turkish vision is embodied by TANAP and the new TurkStream pipeline, which we are proud to deploy today.”

Bad contracts

But according to Oguz Türkyilmaz, chairman of the energy council of the Chamber of Mechanical Engineers (TMMOB), Turkey is not benefiting enough from those new pipelines. “The government has not signed the right contracts to allow Turkey to buy enough gas at the right time. Who will benefit from this pipeline? The exporting countries. Azerbaijan sells gas to Europe, but does not give extra gas to Turkey when it really needs it.”

And to think that Turkey owns 20 percent of the shares in TANAP through the state gas company BOTAS. Nevertheless, it pays high delivery costs for the gas: 70 dollars per thousand cubic meters at the distribution point in the city of Eskisehir, and 110 to 120 dollars per cubic meter at the wholesale platform in Turkey. “This is nonsense,” says Türkyilmaz. “Turkey is a shareholder in the pipeline. And then our government claims that Turkey and Azerbaijan are two states, but one nation.”

Turkey has also not concluded a favorable deal on TurkStream with Russia, says Türkyilmaz. “Turkey did not take advantage of the fact that it offered Russia the right to build a pipeline that would bypass Ukraine. They could have included a clause in the contract under which Turkey could buy more gas at any time if needed. But they didn’t. And now there is nothing forcing Russia to help us if we are short of gas.”

When Turkish companies failed to honor gas agreements with Gazprom, they stopped supplying those companies

TurkStream has a capacity of 46.9 million cubic meters per day, but Turkey will only get 32 ​​million cubic meters. The difference is due to a conflict between three Turkish gas companies and the Russian state gas company Gazprom. The Turkish companies had long-term contracts with Gazprom for the purchase of large quantities of gas. But they failed to fulfill their obligations. Gazprom turned to the arbitration court, won the case, and stopped supplying those companies.

Compounding the gas shortage is Turkey’s failure to renew crucial long-term contracts with Russia and Azerbaijan that expired last year. “Instead of renewing the contract with Azerbaijan for the supply of 19.1 million cubic meters of gas per day, Turkey has, for reasons unknown, reduced the quantity to 7 million cubic meters per day. This creates an additional shortage in the cold month of February,” said Necdet Pamir, a prominent energy expert at the International University of Cyprus.

In addition to the problems with gas imports, the current crisis is also due to a lack of storage space, according to Pamir. Turkey has two underground gas storage facilities, one near Istanbul and one in the central Aksaray province. “But that combined capacity of 4.2 billion cubic meters is far too small given our annual consumption of 61 billion cubic meters,” says Pamir. “In addition, much of the stored gas was already consumed before the winter started. This is total mismanagement.”

Pay in expensive dollars

Another factor is that Turkish gas consumption has increased from 48 billion cubic meters in 2020 to 61 billion cubic meters in 2021. At the same time, the lira lost half its value against the dollar last year. This leads to financial problems at BOTAS, which pays for gas imports in dollars, but receives income in lira. Moreover, BOTAS keeps the gas price for households, companies and power stations artificially low with the help of subsidies.

“The subsidies for households can still be classified under ‘social policy’”, says Pamir, “although the main aim has always been to win votes. But in my view it is unacceptable to subsidize the gas consumption of industry and private electricity companies. This is the real reason for BOTAS’ financial problems, in addition to its mismanagement and incompetence.”

To cover the rising costs of gas imports, BOTAS needs more dollars. As a result, the central bank sold $4.1 billion in foreign reserves to the state gas company last month — the highest amount in a single month since 2014. Last year, the central bank sold a total of $6.1 billion to BOTAS. While foreign reserves are already deeply in the red as the bank has spent tens of billions of dollars in recent years in a failed attempt to stem the dramatic decline in the lira.

The cheap currency is nevertheless beneficial for the competitiveness of exporters such as SEM Plastik. “The positive side of the current situation is that the export market is very good, so the industry has enough orders,” says director Eroglu. “In that way, we are trying to offset our losses from the gas and power outages and weak domestic demand.”

But at the same time, the costs of gas, electricity and raw materials have risen dramatically, partly due to the sharp fall in the lira. “The only way companies can maintain production is through credit,” says Eroglu. “But the main problem is that it has become very expensive to borrow money in Turkey, much more expensive than in other countries. Sometimes it is difficult to find credit. That is one of the most important and most neglected consequences of the energy crisis.”