Energy Risk: Turkey’s Political Pipelines

Below is a new article authored by Robert Amsterdam in the latest edition Energy Risk on the East-West tug-of-war going on in Turkey over critical supply routes, and how the energy diplomacy game has been affected by the war in Georgia. RA has written for this publication in the past, and delivered a speech at their 2007 conference in Houston.

Turkey’s political pipelines Turkey’s strategic position at the crossroads of East and West has put it at the centre of a geopolitical tug of war, with energy supply a key driver. Robert Amsterdam examines the energy policies being brought to bear in the region Turkey’s role in global affairs is defined by its geostrategic importance as the bridge between Europe and the Near East. Following Russia’s invasion and occupation of Georgia in August, which caused considerable energy supply jitters, Turkey was once again thrust into the spotlight as the European Union considers its dwindling options for alternative supply routes beyond the reach of Gazprom, Russia’s natural gas oligopoly.

A key transit hub of both oil and gas to heavy consumer nations of western Europe, Turkey is a nexus of multiple important pipeline projects and increasingly desperate negotiations over access to the Bosporus Strait. According to a report by the European Commission, the country is geographically located in close proximity to 71.8% of the world’s proven gas and 72.7% of oil reserves, and has thus become “the Silk Road of the 21st Century”.Although Russia is Turkey’s largest bilateral trade partner ($28 billion) and receives more than 68% of its natural gas from Gazprom, Turkey has for many years maintained a fierce independence as the critical transit country balancing the interests of competing countries in the region.However, this balance is becoming less stable amid a domestic political crisis and the opportunistic resurgence of Russia, which may be driving Ankara away from an energy alliance with the West. If US and European energy companies hope to remain competitive in the future and guarantee energy security for their consumers, some smart diplomacy will have to be marshalled immediately before it’s too late.The Kremlin’s winning strategyEvents over recent weeks have served as an unpleasant reminder of how much more effective the Kremlin’s energy policy in Turkey has been while the US and Europe have been asleep at the wheel – a development with serious implications for companies and investors in this sector.What needs to be understood by the West in order to rescue Turkey from Gazprom’s monopoly is that Russia has gained a significant voice in Turkish foreign policy thanks to certain pipeline projects; that Turkey is aggressively pursuing its own regional interests; and that domestic political constraints have an impact on the state’s energy preferences.A smart engagement strategy to keep Turkey plugged into the West’s preferential energy supply routes will require a careful understanding of the country’s interests. So far that’s not what we have seen. Firstly, the West has displayed a frighteningly blase attitude towards the new importance of Turkey following the war in Georgia, as well as an ignorance of its national interests.Precarious marketsBefore the war in Georgia even started, energy observers were reminded of how vulnerable global markets are to supply disruptions in Turkey when the Kurdish separatist group PKK launched an attack on a section of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, causing a prolonged delay that spiked the price of oil. Then with the invasion of the only non-Russian controlled energy transit route from central Asia, several critical infrastructure projects were frozen and financing for new projects was scared off. Though the pipelines of Georgia were left undamaged, confidence was deeply eroded by Russia’s aggression, and a new series of diplomatic actions were set in motion.The BTC, which transports upwards of 850,000 barrels of crude oil from central Asia to the Mediterranean sea every day (more than 1% of global supply), is just one of the pipelines covering the East-West corridor in Turkey, along with other projected pipelines such as the Trans-Caspian and the Western-backed Nabucco project – both of which partially serve political purposes as Gazprom-monopoly killers.Turkey is also affected by a vitally important North-South energy corridor including the Blue Stream gas pipeline (arguably a foreign policy instrument of Russia) and the planned Samsun-Ceyhan oil and gas pipelines designed to relieve the immense amount of traffic going through the Bosporus Straits, a bottleneck that handles about 3.7% of the world’s oil supply every day. About 25% of Russia’s oil exports go through the Turkish straits, which accounts for Moscow’s activist diplomacy and numerous agreements with the neighbouring governments of Greece and Bulgaria, ratcheting up the pressure on Ankara.Gazprom and the Kremlin have also fought back against these Western-backed competing supply routes in Turkey with their own highly political projects (which are accompanied by economically unfeasible prices tags). To defeat the Nabucco, Gazprom has joined up with their largest European customer, Italy’s Eni, to propose the South Stream pipeline project, which would be laid straight across the length of the Black Sea from Russia to Bulgaria in order to cut Turkey (and the Ukraine) out of the natural gas distribution infrastructure. To avoid giving up a quarter of their oil exports to Turkish transit tariffs, Moscow is also pushing the $1 billion Burgas-Alexandroupolis pipeline to bypass the Bosporus.There is a very important geopolitical element in these energy deals that Western governments need to understand in order to be successful in Eurasia: Turkey views itself as an unparalleled regional leader, and recognises both the limitations of Russia’s ability to bully such a vital country as well as the tremendous opportunity to advance their interests. In other words, it would be a mistake to think that Turkey is simply awaiting its turn to be moved in the US-Russia grand chess game. It’s playing a game of its very own.In September, Turkish Foreign Minister Ali Babacan established the government’s clear intention to seize the role as the regional peacemaker, stating that “as a neighbour to the conflict, Turkey has an enormous stake in overcoming the tension between Russia and Georgia”, and proposing a new negotiation framework known as the Caucasus Stability and Cooperation Platform (CSCP). Similarly, just three weeks after Russia and Georgia signed a shaky peace agreement, Turkey’s energy minister made an emergency trip to both Kazakhstan and Turkmenistan to woo these governments into continuing their independent relations with Turkey.Turkey: regional peacemaker?In the summer months leading up to the war, Russia displayed a perfect understanding of Turkey’s aims and their own geopolitical limitations with this key player. Although energy relations between the two countries had been acrimonious in recent years due to Turkey’s choice to back the Nabucco project, Russia suddenly and unexpectedly relented in late July, signing agreements for a gas storage hub, a joint company to run urban gas grids, and an offer to extend the Blue Stream all the way to Israel. The message from Gazprom to Turkey: we will make it worth your while to do business with Russia.Observing this thaw in Turkish-Russian energy relations, Turkish commentator Sinan Ogan said that there was a “new period of co-operation”, and that “the rivalry between South Stream and Nabucco has been to the detriment of both countries”.Russia’s pre-war strategy proved to be immensely successful. When the fighting first began, Turkey, a NATO member that had participated in training exercises with the Georgian military, refused to share radar data and other military intelligence with Tbilisi, and shared and consulted on their proposal for the CSCP framework first with Moscow, which deeply insulted the Georgians. Then, once US warships were dispatched to the Black Sea on aid missions to Georgia, Washington was surprised to find that Turkey would strictly adhere to the tonnage limits on these ships under the 1936 Montreux Convention.Turkey also mimicked the Russian Navy in reminding the US that they would only be able to remain in the Black Sea for 21 days. Lastly, Ankara has also been very lukewarm about the NATO Membership Action Plans potentially being offered to Georgia and the Ukraine, as Turkey wishes to remain the only NATO power on the Black Sea.The fact that the Kremlin has been able to produce such successful foreign policy outcomes in Turkey is impressive, especially considering that the invasion, occupation and recognition of the separatist regions of Abkhazia and South Ossetia is extremely distressing for Ankara, in light of the destabilising territorial disputes involving Armenia and Azerbaijan at its own borders.Comparatively, the US diplomatic initiative to sway energy policy in the region has been considerably less subtle and effective. US Vice President Dick Cheney arrived in Tbilisi nearly a month after the war started, bringing a $1 billion aid package to Georgia and seeking to lock down commitments for Azeri natural gas for both the Nabucco and the Turkey-Greece-Italy pipeline. Clearly seeing the US-Russia relationship frozen until the next presidency, the Azeri president Ilham Aliyev did not receive Cheney with much hospitality – in fact, newspapers reported that neither the president nor the prime minister bothered to greet him at the airport, and telephoned Russian president Dmitry Medvedev to share details of the meeting.Trade trumps ideologyTwo important reasons why Russia has been more successful in pushing forward its energy preferences in Turkey than Washington has been that Russia seems to have grasped that Ankara’s push towards the East is more about trade ties than ideological alliances, and that the narrow political survival of prime minister Recep Tayyip Erdogan and the Justice and Development Party (AK Party) is mutually antagonistic with with the type of isolationist policies being pushed by Washington.Gazprom got a leg up on the Americans and Europeans on these critical pipeline projects simply by offering more business and more supply to go through Turkey. They promised in no uncertain terms that they wanted to be part of Turkey’s downstream energy sector at any cost. This strategy plays well into the government’s plans for economic expansion and their robustly growing trade. A report by the Council on Foreign Relations points out that it’s no accident that Ankara is looking to the East following the war in Georgia, as exports to the region have risen to $15 billion in 2007 from $3.3 billion in 2001, while $1.5 billion in foreign direct investment has been sent to Turkmenistan.Despite recent failures, there is no reason that US and European interests in Turkey shouldn’t be successful, they just need to be more intelligent, taking into account the Turkish aims to play a responsible role of regional leadership, their economic and trade agendas, and careful consideration of how these energy projects can be made politically feasible.There are certainly a number of other carrots and sticks available to lure Turkey back out of Russia’s embrace and indeed the Kremlin is mindful of what could happen if the West is forced to look around Turkey to use other levers of influence in the Middle East. Oddly, the US could learn a lot from Turkey’s anti-isolationist platform in the region, as many experts regard the inclusion of Iranian natural gas as the one piece that would guarantee the success of Nabucco – the last thing Russia would want to see.These developments in Turkey’s energy diplomacy must be carefully monitored by investors and companies seeking to gain an assessment of the political risk profile of the country – an infrastructure or transit project or deal is never as simple as commercial sense, and could be reversed quite rapidly if one of the regional players locates sufficient leverage.In the end, projects like the Nabucco are not going to put a halt to Russia’s energy business, but rather offer consumers important competing supply routes that should ideally deliver more efficiency, more affordable prices, and to the surprise of even Gazprom, a more healthy business environment for future projects. There is a compelling argument that the deepening of energy competition and the building of a vibrant trade market in Turkey and the Caucasus would be a win-win for all the players involved.Robert Amsterdam is a partner at the international law firm Amsterdam & Peroff. www.amsterdamandperoff.com.