contribution designing a new eu-turkey strategic...

ISSUE 2015/10JULY 2015 DESIGNING A NEW

EU-TURKEYSTRATEGIC GASPARTNERSHIP

SIMONE TAGLIAPIETRA AND GEORG ZACHMANN

Highlights• The European Commission’s February 2015 Energy Union Communication calls for

intensified work on the Southern Gas Corridor (SGC) and the establishment of anew strategic energy partnership with Turkey. The presence of the European Unionand Turkey in the region is complementary in a number of ways. Building on thiscould unlock the region’s gas export potential and make gas supplies to the EU andTurkey more secure.

• The EU should establish dedicated energy diplomacy taskforces with Turkey andeach potential supplier in the region (Azerbaijan, Turkmenistan, Iran, KurdistanRegion of Iraq). This would allow the EU and Turkey to make use of their comple-mentary diplomatic leverages to overcome barriers to regional gas trade.

• In parallel, the EU should establish with Turkey a dedicated financing mechanismto facilitate gas infrastructure investments, with a primary focus on the upgradeof the Turkish gas grid. The European Investment Bank might play a role in attrac-ting private and institutional investors through its financing tools.

• The four ‘EU-Turkey Energy Diplomacy Taskforces’ and the ‘EU-Turkey Gas Infra-structure Financing Initiative’ would be initiatives of the recently started EU-TurkeyStrategic High Level Energy Dialogue.

Simone Tagliapietra ([email protected]) is Visiting Fellow at Bruegel.Georg Zachmann ([email protected]) is Research Fellow at Bruegel. Theauthors thank Agata Łoskot-Strachota for comments that helped to improve the papersignificantly, and Giuseppe Porcaro for the preparation of the maps included in thepaper.

Telephone+32 2 227 4210 [email protected]

www.bruegel.org

BRU EGE LPOLICYCONTRIBUTION

DESIGNING A NEW EU-TURKEY STRATEGIC GASPARTNERSHIP

SIMONE TAGLIAPIETRA AND GEORG ZACHMANN, JULY 2015

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BR U EGE LPOLICYCONTRIBUTION

1. And the most importantnon-EU transit country,

Ukraine.

2. In January 2006, after along-lasting disagreement

on natural gas prices,Russia cut off supplies to

Ukraine for three days,Ukraine diverted volumes

destined to Europe and as aconsequence natural gas

supply to some centralEuropean countries fellbriefly. A second crisis

occurred in 2009, when thetransit of Russian gas

through Ukraine was com-pletely halted for two

weeks, resulting in a severecrisis in several central and

eastern European coun-tries. For a detailed discus-

sion of these two crises seeStern (2006) and Pirani,

Stern and Yafimava (2009).

3. “The EU will use all its for-eign policy instruments toestablish strategic energypartnerships with increas-ingly important producing

and transit countries ...such as ... Turkey.”

THE 2014 UKRAINE CRISIS brought energy secu-rity concerns back onto the European Union'sagenda when policymakers realised that thethreat of supply disruptions from the EU's mainnatural gas supplier, Russia1, reduced their politi-cal room for manoeuvre. In the debate on EUenergy security, Poland's then-prime ministerDonald Tusk coined the term ‘Energy Union’ tohighlight that only a European solution could sen-sibly resolve the systemic energy supply threatto various member states (Tusk, 2014). This dis-cussion was quickly broadened into a debateabout EU energy and climate policy generally. Thewide-ranging Energy Union concept was thentaken up by the new European Commission underJean-Claude Juncker, which made the creation ofan Energy Union one of its flagship projects whenit took office in November 2014. Juncker createdthe post of Commission Vice-President for EnergyUnion. The Energy Union Communication pub-lished in February 2015 was one of the first strate-gic documents of the new Commission (EuropeanCommission, 2015a).

The Energy Union Communication has five inter-linked parts: energy security, solidarity and trust;a fully integrated European energy market; energyefficiency contributing to moderation of demand;decarbonisation of the economy; and research,innovation and competitiveness. Given the originsof the document it is no surprise that energy secu-rity is mentioned first. Energy security should besafeguarded by reducing energy consumption,strengthening the internal exchange of energyand diversifying energy supplies. While reducingconsumption and improving energy marketsrelate to the second and third parts of the EnergyUnion (internal market and energy efficiency),diversification measures are seen as the core ofenergy security.

In the debate on diversification of imports, thefocus has been on natural gas because it can only

DESIGNING A NEW EU-TURKEY STRATEGIC GAS PARTNERSHIP

be imported through expensive infrastructure andhas been at the origin of several security-of-supply crises in the past decade. Natural gas is atthe centre of the current supply-security concernsarising from the Ukraine-Russia conflict. To diver-sify the sources of Europe's natural gas imports,the Commission wants to stimulate the construc-tion of new infrastructure and address the issueof higher liquefied natural gas (LNG) prices. As faras natural gas pipelines are concerned, the Com-mission seeks the reinforcement of the SouthernGas Corridor (SGC) initiative, which was launchedin 2008 (European Commission, 2008) as aresponse to the EU's energy security concernsemerged after the first Russian-Ukrainian-Euro-pean natural gas crisis2: “To ensure the diversifi-cation in gas supplies, work on the SGC must beintensified to enable Central Asian countries toexport their natural gas to Europe” (Figure 1).Given the pivotal role of Turkey in the corridor, theCommission calls for the establishment of astrategic energy partnership with Turkey3.

In this Policy Contribution, we discuss what the EUand Turkey can realistically expect from the strate-gic gas partnership, and make recommendations

EU Energy Union

Energy security

Energy efficiency Internal market Diversification

Internal market

Energy efficiency

Decarbonisation

Research, innovation and competitiveness

Southern Gas Corridor

EU-Turkey SEP*

Figure 1: The Southern Gas Corridor's place inthe EU Energy Union framework

Source: Bruegel. Note: * Strategic Energy Partnership.

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BR U EGE LPOLICYCONTRIBUTIONDESIGNING A NEW EU-TURKEY STRATEGIC GAS PARTNERSHIP

that should enable the mutual benefits to be max-imised. We mainly focus on the SGC, but alsoassess the potential impact on the EU-Turkey gaspartnership of the recently announced TurkishStream project.

We do this with two caveats. First, neither the over-all EU natural-gas diversification strategy nor theSGC should be seen as an attempt to completelyreplace Russian natural gas supplies to Europe.This would be difficult, considering the existingvolumes and the long-term contracts. The Com-mission's strategy is rather to ensure that nosource, supplier or route has an excessive shareof the EU natural gas supply architecture, and toenhance competition in those markets (south-east Europe) that are more exposed to Russiansupply predominance.

Second, a diversification option such as the SGCwill most likely be more costly than Russian natu-ral gas supplies via the existing infrastructure.However, considering that energy security has avalue, the EU should be ready to pay this price asinsurance against disruptions of supply from amajor supplier. This rationale also applies to themicro level of EU natural gas companies. In fact,companies are willing to pay premiums to have

4. For instance, Engie'slargest supplier, Norway,

supplies 26 percent of itsportfolio, Russia supplies

27 percent of E.ON RuhrgasAG's portfolio, Algeria sup-

plies 31 percent of Gas Nat-ural Fenosa's portfolio,

Russia supplies 32 percentof Eni's portfolio.

well-diversified portfolios. This trend is illustratedby the already variegated composition of EU com-panies' portfolios, which generally include two keysuppliers and a series of minor suppliers4.

THE DEVELOPMENT OF THE EU-TURKEY ENERGYRELATIONSHIP: A CRITICAL ASSESSMENT

Because of its strategic geographical location atthe crossroads of gas-rich countries in theCaspian, Middle East, Eastern Mediterranean andEurope, Turkey has progressively emerged overthe last decade as a potentially game-changingplayer in the future EU natural gas security-of-supply architecture.

In particular, since the launch of the SGC initiativein 2008 the Commission has stressed the poten-tial role of Turkey as key transit country for Euro-pean gas imports (Tagliapietra, 2014b).

The SGC has become a key component of the EUenergy security strategy because it would con-tribute to the reduction of the perceived EU over-dependence on Russian natural gas supplies byallowing new supplies from the Caspian andMiddle Eastern regions to reach Europe, and wouldmeet the objective of creating more competition

Figure 2: The Southern Gas Corridor's contribution to EU security of supply for natural gas

Source: Bruegel based on BP Statistical Review of World Energy, June 2015.

5. The Commission part-funded a feasibility study.

6. Natural gas from Azerbai-jan would have reached theTurkish border via the South

Caucasus Pipeline; fromTurkmenistan it would have

come via Iran or theplanned Trans-Caspian

Pipeline; from Iraq it wouldhave come via the planned

extension to the Arab GasPipeline.

7. For the EU, Nabucco wasa major opportunity to

diversify its natural gassupplies. For Turkey, it rep-resented an opportunity torealise its long-term strate-gic objective of becoming akey energy hub. For the US,

it represented a majorgeopolitical asset to reduce

EU dependence on Russiafor natural gas, exactly as

the Baku-Tbilisi-Ceyhanpipeline in the 1990s

reduced EU dependence onRussia for oil.

8. OMV of Austria, MOLGroup of Hungary, Bul-

gargaz of Bulgaria, Transgazof Romania and BOTAS of

Turkey. RWE joined the con-sortium in 2008.

9. Because of the invest-ments already made in its

Shah Deniz natural gasfield, and because of the

need to make a final invest-ment decision for Shah

Deniz Phase II (which wasconcluded on 17 December

2013).

10. The intergovernmentalagreement signed by the

five transit countries in2009 provided a legal

framework for 50 years,confirming that 50 percent

of the pipeline’s capacitywas to be reserved for the

shareholders of the projectand the remaining 50 per-

cent was to be offered tothird-party shippers on the

basis of a regulatory transitregime under EU law.

DESIGNING A NEW EU-TURKEY STRATEGIC GAS PARTNERSHIPBR U EGE LPOLICYCONTRIBUTION

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on southern and eastern European natural gasmarkets.

The rise and fall of Nabucco

The focus on the SGC translated into EU politicaland financial support for Nabucco5, the proposed3,800 kilometre pipeline with a capacity of 31 bil-lion cubic metres per year (bcm/y), intended tocarry natural gas from Azerbaijan, Turkmenistan,Iraq and Iran to south-east and central Europe viaTurkey6.

Thanks to the political backing from the EU, Turkeyand the United States7, the Nabucco project grad-ually advanced from the signing in 2005 of thejoint venture agreement between the five compa-nies initially involved8, to the signing in 2011 ofthe project support agreements between theNabucco consortium and each of the five transitcountries (Austria, Hungary, Romania, Bulgariaand Turkey) (Novinite, 2011).

However, notwithstanding the strong commitmentof the five transit countries and the unprece-dented support of the EU and the US, the Nabuccoproject ultimately failed for a variety of commer-cial and financial reasons, such as a weak outlookfor EU natural gas demand, uncertain deliverabil-ity of supplies, potential competition from theRussian South Stream pipeline that was supposedto bring gas from Russia through the Black Sea toBulgaria, and lack of guarantees or long-term ship-or-pay contracts that would facilitate access tobank loans (Hafner, 2012).

The failure of Nabucco had significant implicationsnot only for the evolution of the SGC but also forthe evolution of the overall EU-Turkey energy rela-tionship.

The Southern Gas Corridor after Nabucco

The difficulties encountered by the Nabucco proj-ect paved the way for the emergence of a new ver-sion of the SGC, promoted by the only availableregional supplier: Azerbaijan9. In 2011 Azerbaijansigned a memorandum of understanding withTurkey on the Trans-Anatolian Pipeline (TANAP), aproject very different to Nabucco in terms of initialcapacity (16 bcm/y) and especially in terms of

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2006

2008

2010

2012

2014

2001

2003

2005

2007

2009

2011

2013 2014

Norway

NigeriaAlgeriaAzerbaijan

Iran

Russia

Qatar

Figure 3: Turkey's natural gas demand, 2000-14,and import portfolio 2014 (bcm)

Source: Bruegel based on BP Statistical Review of WorldEnergy, June 2015.

legal structure. Nabucco, being a project com-pletely under EU law, was subject to rules such asthird-party access and unbundling throughout itsentire length10. By contrast, considering thatTurkey has not yet adopted the EU energy acquisin its legislation, Azerbaijan – with a major stakein the TANAP project – will in practice control thepipeline and all natural gas transit through it. Con-sidering both Turkey’s reluctance to enter the EUEnergy Community11 and the difficulties related tothe opening of the energy chapter of Turkey’s EUaccession process, this situation is also unlikelyto change in the foreseeable future.

The EU-Turkey energy relationship after Nabucco

The Nabucco odyssey and the emergence ofTANAP highlighted a difference in the way the EUand Turkey perceived the SGC and their energyrelationship more broadly.

After years of cooperation with the EU on Nabucco,Turkey decided to change its approach and turn toAzerbaijan to speed-up the development of theSGC via TANAP. There were two key reasons for this.First, as noted in Turkey's energy strategy, “the pri-mary aim of Turkey is to realise its own energysecurity”12. Considering its rapidly growingdemand for natural gas and its over-reliance onRussian supplies (Figure 3), natural gas diversifi-cation is a key energy policy priority for Turkey.

Second, the choice was driven by Turkey's gen-uine discontent with the EU about the continuous


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11. The reason for Turkey’sreluctance is clearly

described by Barysch(2007, p.6): “Turkey says

that there are technicalproblems with some of the

Energy Community Treaty’sprovisions. But more funda-

mentally, it does not likethe idea of unilaterally sign-

ing up to a big chunk of theacquis without being ableto ask anything in return.Turkish officials say that

such an arrangement maysuit countries that are not

eligible for membership. ButTurkey is already an EU

candidate and it does notwant to be fobbed off with

what it sees as a ‘privilegedpartnership’ in the energy

field”.

12. Republic of Turkey Min-istry of Foreign Affairs,

Turkey’s Energy Strategy,available online.

13. For a detailed discus-sion, see Korany and Sartori

(2013).

14. If not otherwise stated,all energy statistics in thispaper are from BP (2015).

procrastination in the accession negotiations ingeneral and the EU's vagueness about the openingof the energy chapter in particular13.

Implications of the current impasse

Since the failure of Nabucco, the EU-Turkey energyrelationship has lost momentum. This situation isin the strategic interests of neither the EU norTurkey. A coherent and actively coordinatedapproach to the SGC would have allowed the twoplayers to pursue their respective interests in amore effective way.

In fact, a joint EU-Turkey diplomatic effort directedat the natural-gas producing countries in theregion might have considerably enhanced thepossibility of translating the availability of regionalnatural gas resources into deliverable supplies. Inparticular, a coherent approach to the develop-ment of regional infrastructure might have allowedthe political and commercial barriers that have tra-ditionally undermined the regional natural gaspotential to be overcome.

Establishing a strategic energy partnership withTurkey would be a move in the right direction. Theopportunity should be fully seized and managedin a way that will avoid the mistakes of the past.

A solid EU-Turkey strategic energy partnershipshould be founded on a realistic assessment ofthe regional potential to deliver natural gas sup-plies. In the past, too much emphasis has beenplaced on the regional availability of resources,without always taking into account that in naturalgas markets, availability of resources does notautomatically imply that they can be delivered.

For this reason, in the next section we provide anoverview of the regional natural gas producingcountries, to better clarify the future potential forexports to the EU and Turkey. For each country, wealso describe how the EU and Turkey might worktogether for the best outcomes.

THE SOUTHERN GAS CORRIDOR: REGIONALPRODUCERS

Azerbaijan: the SGC front-runner

If there is a certainty about the SGC, it is Azerbai-jan, with 1.2 trillion cubic metres (tcm) of naturalgas reserves14. Azerbaijan has since 2007 sup-plied the Turkish market with about 5 bcm/y viathe South Caucasus Pipeline (Rzayeva, 2014).

With the ongoing development of the secondphase of the offshore Shah Deniz field, Azerbaijan

Figure 4: The Southern Gas Corridor, gas reserves and pipeline projects

Source: Bruegel based on BP Statistical Review of World Energy, June 2015.

15. On this issue, the EUand the World Bank have

financed a study that will bepublished by end of 2015.


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Pipeline (TCP) to deliver Turkmenistan's naturalgas to Turkey and eventually to Europe (Socor,2006, p.27). This idea was rekindled in 2006,when the EU sought to diversify its natural-gassupply in the aftermath of the first Russian-Ukrain-ian-European natural gas crisis. However, the EU'sefforts to promote this pipeline project have failedbecause of the complex geopolitical situation ofthe region. In particular, the major barrier to thedevelopment of the TCP is the international dis-pute over the legal status of the Caspian Sea.Russia and Iran have traditionally claimed theCaspian to be a lake in legal terms in order to applycustomary international law concerning borderlakes, instead of the United Nations Convention onthe Law of the Sea (Janusz, 2005). If the Caspianis regarded as a lake, Russia and Iran could pre-vent the development of the TCP.

Taking into account this situation, Turkmenistanlooked eastwards and agreed a major natural gaspartnership with China that culminated in the con-struction of the 30 bcm/y Turkmenistan-ChinaPipeline (via Uzbekistan and Kazakhstan), inau-gurated in 2009. This outcome marked a suc-cessful strategic policy initiative on the part of theChinese government, which in a timely way con-cluded agreements with Turkmenistan to con-struct the pipeline and to consistently involveChinese companies in upstream production. Thisspecial relationship is set to further deepen in thenear future, with the expansion of this pipeline toa capacity of 65 bcm/y by 2020 (Pirani, 2012).

Considering its huge, untapped, natural gasreserves, Turkmenistan could well supply bothChina and Europe in the future. However, theprospect of Turkmenistan exporting natural gas tothe EU via Turkey will continue to depend on theresolution of the legal dispute over the status ofthe Caspian Sea and on the clarification of envi-ronmental concerns relating to the TCP project15.

In the aftermath of the 2014 Ukraine crisis, theEuropean Commission reinvigorated its diplomaticefforts towards Turkmenistan. This effort culmi-nated on 1 May 2015 with the adoption of the Ash-gabat Declaration between Turkmenistan,Azerbaijan, Turkey and the EU. The partiesdeclared their commitment to cooperate on legal,commercial, technical and other issues related to

will export additional 6 bcm/y to Turkey by2018/19 and also 10 bcm/y to Europe by 2020.On the basis of a final investment decisionreached in December 2013 (BP, 2013b), the new16 bcm/y will flow to Turkey through an expandedversion of the South Caucasus Pipeline and TANAP,the construction of which started in March 2015(Euractiv, 2015). The 10 bcm/y destined for Euro-pean markets will then pass through the Trans-Adriatic Pipeline (TAP), which will connect TANAPand Italy via Greece and Albania. Sale agreementshave already been signed with companies oper-ating in Italy (for a total of 8 bcm/y), Greece andBulgaria (for the remaining 2 bcm/y) (BP, 2013a).

After 2025, more natural gas might become avail-able on the basis of the development of furtherphases of Shah Deniz (Interfax Global Energy,2014) and also on the basis of the development ofnew fields.

Because of the well-established energy partner-ship between Azerbaijan and Turkey, and also con-sidering the infrastructure already in place andthat now under construction, the role of Azerbai-jan in the SGC can be considered secure. In fact,the TANAP-TAP pipeline-tandem represents a goodexample of a win-win solution for all the playersinvolved.

In order to strengthen the current, positive, coop-eration approach and to secure future additionaldevelopments, the EU should engage with Turkey,Azerbaijan and Georgia in a structured platform ofdialogue to coordinate regional natural gas tradeissues. This would build on cooperation so far andoffer new cooperation opportunities.

Turkmenistan: just looking eastwards?

Turkmenistan's position as a potential natural-gassupplier is rapidly evolving. The estimate of thecountry's natural gas reserves skyrocketed fromabout 2 tcm in 2007 to 17.5 tcm in 2015. Thishuge difference underlines the profound under-exploration of the country's natural gas resources,and sheds light on the potential for further dis-coveries.

Since the late 1990s, the US has actively pro-moted the construction of the Trans-Caspian

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16. Reimbursement of capi-tal expenditure, operationalexpenditure and an agreed

remuneration fee.

president of Iran. In April 2015, after severalrounds of negotiations, Iran, the P5+1 (UN Secu-rity Council permanent members the US, UK,Russia, France and China plus Germany) and theEU agreed a framework nuclear deal that, iffinalised (ideally by the end of June 2015), couldimmediately lead to the lifting of energy sanctions(Einhorn, 2015). This would completely reshapeIran's energy sector, as international energy com-panies line up to take advantage of the huge,untapped, opportunities offered by the country'soil and gas sector (Financial Times, 2015a).

Iran's legal framework is also due for revision.Iran's oil minister Bijan Namdar Zanganeh said in2013 he would reform the current framework,bringing it closer to the model adopted in Iraq,which could be more attractive for foreigninvestors (The Economist, 2013). This reform willmost likely take place only once a final nucleardeal is agreed.

Considering these potential major changes, the EUshould cooperate with Turkey to keep open thepossibility for future natural gas flows from Iran.The prospects of natural gas exports from Iran tothe EU will mainly rely (because of geography) onthe Turkish-Iranian natural gas partnership. Con-sidering the current difficult relationship betweenthese two partners (currently under internationalarbitration over high prices for Iranian gas(Azernews, 2015)), the EU should play the role ofmoderator and propose the consolidation of Iran-ian natural gas exports to Turkey and the opening-up an export route to the EU via an upgradedTurkish grid. A coordinated effort by the EU andTurkey might succeed in persuading Iran that itshould not exclusively orient its future natural gasexport strategy eastwards (eg the Iran-Pakistan-India pipeline) or focus on LNG, which might go toAsia rather than Turkey (Tagliapietra, 2014a; Jalil-vand, 2013).

Kurdistan Region of Iraq: a new player

The Kurdistan Region of Iraq (KRI) has emergedover the last few years as a potential new supplierto the SGC. With an estimated range of 3-6 tcm ofnatural gas resources (Kurdistan Regional Gov-ernment, 2013), the KRI might be able to both sat-isfy its domestic natural gas demand and to

natural gas supply from Turkmenistan to Europe.Georgia will also be included at working-grouplevel because of its role as a key transit country(European Commission, 2015c).

It is too early to tell whether this renewed cooper-ation will be successful. However, this inclusivecooperation scheme represents an example ofgood practice that might also be applied by the EUto the other potential suppliers of the SGC.

Iran: the main prize

With its 34 tcm of natural gas reserves, the largestin the world according to BP, Iran is generally con-sidered the main prize for the international gastrade. Notwithstanding this rich natural endow-ment, the country has not yet translated potentialinto reality and, paradoxically, even continues tohave problems in meeting its own domestic natu-ral gas demand (Tagliapietra, 2014a).

There are two main reasons for the under-exploita-tion of Iran's natural gas resources: the interna-tional sanctions regime and the country's legalframework in relation to petroleum.

The international sanctions imposed on Iran bythe US, the United Nations (UN) and the EU in rela-tion to the country's uranium enrichment pro-gramme considerably delayed Iran's energydevelopment plans. In particular, the unilateralsanctions applied to the country's energy sectorby the US and the EU since 2007 have completelyhalted the activities of international energy com-panies in Iran (Reuters, 2015).

Iran's legal framework, meanwhile, has deterredinternational energy companies from investing.Iran's constitution has provisions restricting for-eign involvement in the country's energyresources. To implement these, internationalenergy companies are obliged to develop oil or gasfields with their own capital and then hand themover to the National Iranian Oil Company (NIOC)once production starts and wait to be reimbursedby NIOC16. These terms are highly unattractive forinternational energy companies.

However, there have been developments since the2013 election of the moderate Hassan Rouhani as

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BR U EGE LPOLICYCONTRIBUTION DESIGNING A NEW EU-TURKEY STRATEGIC GAS PARTNERSHIP

export volumes to Turkey and Europe.

Turkey plays an important role in this area, geopo-litically and commercially. Turkey and the Kurdis-tan Regional Government in Erbil signed anatural-gas sales agreement in 2013 for theexport of 4 bcm/y by 2017, 10 bcm/y by 2020and 20 bcm/y thereafter (Reuters, 2013).

Building on this agreement, the Anglo-Turkishcompany Genel Energy plc reached in November2014 an agreement with the Kurdistan RegionalGovernment for the development of two naturalgas fields, Miran and Bina Bawi, which GenelEnergy expects to deliver gross mean sales ofabout 240 bcm of gas (Genel Energy, 2015).

Considering the potential resource endowment ofthe region, natural gas exports from the KRI toEurope via Turkey might also well materialise inthe medium term, after the KRI reaches naturalgas self-sufficiency and after the KurdistanRegional Government fulfils its obligations toTurkey. However, such a development will dependon internal regulatory stability and regionalgeopolitics.

A major barrier to the development of the KRI'senergy resources has been the tensions betweenErbil and Baghdad over the distribution of oil rev-enues. In December 2014 the two parties finaliseda deal to ease these tensions (Financial Times,2014), which might ultimately pave the way for anew Iraqi federal hydrocarbon law, which wouldenhance foreign investors' confidence in thecountry (Korani, 2014).

Of course, the unpredictable evolution of regionalgeopolitics and the security situation in Iraq willultimately determine the pace of thisdevelopment.

Because of the crucial role of Turkey in the KRI, theEU should cooperate with Turkey, the KurdistanRegional Government and the Iraqi federal gov-ernment in Baghdad to secure future exports ofnatural gas to Europe. This cooperation would notonly be beneficial to the EU, but also to Turkey,because although Turkey has diplomatic leveragein Erbil, it does not in Baghdad, where the EU isinstead a well-established interlocutor.

A POTENTIAL WAY FORWARD FOR THE SOUTHERNGAS CORRIDOR

Our review of the SGC's potential suppliers hasshown both the complexity of the regional natu-ral-gas dynamics and the substantial benefits thatcould arise if the EU and Turkey work together. Weargue that the EU’s and Turkey’s political leveragein the region is to a great extent complementary.One indicator of this is that while the EU providessignificant bilateral official development assis-tance to Iran, Iraq and Georgia, Turkey is moreengaged in this sense in Azerbaijan and Turk-menistan (Figure 5).

Assessing future export potential via the SGC toEurope is a highly speculative exercise. The 10bcm/y by 2020 from Azerbaijan is the only certaininput. Beyond that, estimates depend on the evo-lution of the regional geopolitical situation.

In order to provide an idea of the potential ordersof magnitude, we assume an average scenario inwhich each prospective supplier will contributewith a volume corresponding to the start-upvolume of Azerbaijan (10 bcm/y) by 2025-30.

In this scenario, the SGC might ultimately beexpanded to 50 bcm/y, which would be a signifi-cant volume entering EU natural gas markets, espe-cially southern and eastern European markets.

But how can the EU proactively secure this transi-tion? On the basis of our analysis, we make twokey recommendations.

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Figure 5: Bilateral Official DevelopmentAssistance (2013), $ millions, current prices

Source: Bruegel based on OECD.

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structure to accommodate new Iranian and Kur-distan supplies to Turkey and the EU. These poten-tial volumes might be channelled to theTurkish-European border via the Turkish naturalgas grid. This would require an upgrade to theexisting network, which Turkey will need to do inany case, considering its growing natural gasdemand.

Another focus of cooperation could be the futureexpansion of TANAP in order to accommodateadditional volumes from Azerbaijan and new vol-umes from Turkmenistan to Turkey and the EU.These volumes might reach the Turkish-Europeanborder via an extension of TANAP, which isdesigned to be expandable to accommodate vol-umes of up to 60 bcm/y.

Considering the common strategic interest inhaving a reliable natural gas infrastructure, the EUmight team-up with Turkey to establish dedicatedfinancial mechanisms that will stimulate theseinvestments. In particular, alongside its alreadywell established activity in the Turkey (EuropeanInvestment Bank, 2014), the European Invest-ment Bank (EIB) might provide a wide set offinancing tools to attract private or institutionalinvestors. These tools could include i) guaranteesand securitisation; ii) equity and fund invest-ments; iii) project loans.

A new approach to the SGC

The aim of the EU-Turkey joint effort should not beto provide new major supply alternatives for Turk-ish and European natural gas markets in the shortterm. This would be unfeasible, as an expansionof the SGC will realistically not take place before2025-30.

The aim should rather be to lay the foundations forthe expansion of the SGC in the medium term. Apartnership that is tested through cooperation onrelatively limited gas volumes with up to four dif-ferent supply sources will do much for Europe’slong-term security of supply. It will enable Europeto quickly increase import capacity from thosesources depending on their evolution – we cannotforesee the political situation five or ten yearsahead in any of the source countries. And invest-ing today in a set of future options to increase

EU-Turkey energy diplomacy taskforces

The EU should establish dedicated energy-diplo-macy taskforces with Turkey and each supplier.This would allow the EU and Turkey to fully makeuse of their complementary diplomatic leveragein the region, and thus have the greatest chance ofovercoming the obstacles to the regional naturalgas trade. The recent EU-Turkey coordinatedapproach to Turkmenistan represents a first stepin the right direction, but this cooperation shouldturn into a permanent platform for dialoguebetween the high-level representatives of all theparties involved.

The four taskforces (EU-Turkey-Azerbaijan; EU-Turkey-Turkmenistan; EU-Turkey-Iran; EU-Turkey-Kurdistan) should be the key pillars of a newEU-Turkey strategic energy partnership. Thesetaskforces might be implemented within thecommon framework of the EU-Turkey StrategicHigh Level Energy Dialogue that was started inMarch 2015 by Commission Vice-President forEnergy Union Maros Šefcovic and Turkish Ministerfor Energy and Natural Resources Taner Yildiz(European Commission, 2015b).

Financing for infrastructure development

To truly engage Turkey in a new strategic energypartnership, common solutions should also befound to infrastructure shortcomings. After theNabucco experience, cooperation in the fieldshould first focus on small projects rather thanlarge ones. A starting point could be the infra-

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2020 2025-2030

Kurdistan

Iran

Turkmenistan

Azerbaijan

Proactive tra

nsition

Figure 6: A scenario for the Southern GasCorridor (bcm)

Source: Bruegel.

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Europe's imports from four different sources canbe done without having to commit to importing gasthat is currently not (and might never be) needed.

After all, current demand is back to the level of themid-1990s (Eurogas, 2014; BP, 2014), Europeancompanies are committed to purchasing morethan 125 bcm of Russian natural gas in 2020 andaround 70 bcm in 2030 (Dickel et al, 2014, p.4),and domestic production is expected to continueto decline during the 2020s. Taking these factorsinto account, it seems likely that it will only bepost-2025 (if at all) that there could be significantdemand from European natural gas markets fornew supplies via the SGC.

In the shorter term, reinforced EU-Turkey cooper-ation over the SGC could also be important con-sidering the new geopolitical landscape of theregion, with Russia proposing a major energycooperation project to Turkey: Turkish Stream.

TURKISH STREAM: THE NEW REALITY?

On 1 December 2014, Russian president VladimirPutin surprised the energy world by announcing,during a state visit to Turkey, the demise of SouthStream and a new project to supply Turkish andsouth-eastern European markets from 2019 whilecompletely bypassing Ukraine: Turkish Stream.

Turkish Stream would be a 63 bcm/y pipeline, run-ning 660 km across the Black Sea, from the

Russkaya compressing station to the north westof Turkey, and then continuing 250 km acrossTurkish territory to the Turkey/Greece border(Gazprom, 2015).

Turkish Stream could be advanced quickly by cap-italising on work already done on South Stream.Massive investment has already been made in the‘Russian Southern Corridor’ (Gazprom, 2012). WithSouth Stream pipes already delivered to Varnaport in prepration for laying, and with pipe-layingships already present in the Black Sea, the addi-tional cost for Gazprom to build Turkish Stream islimited.

On 7 May 2015, Gazprom CEO Alexi Miller saidduring a visit to Ankara that Russia and Turkeywould start to trade natural gas via Turkish Streamin December 2016 (Financial Times, 2015b). Thiscould lead to the 14 bcm of Russian natural gascurrently contracted to be delivered via the Trans-Balkan pipeline to Turkey (via Ukraine, Moldova,Romania and Bulgaria) being completely re-chan-nelled via Turkish Stream.

The development of Turkish Stream, via whichRussia intends to supply all the gas it currentlysupplies via Ukraine, will mainly depend on theability of Gazprom to renegotiate its contracts withEuropean companies (changing delivery pointsand, in turn, prices), and the development of newinfrastructure to deliver the natural gas from theTurkish/Greek border to destination markets.

Of course, both these issues will have a high polit-ical profile, considering that the EU will most likelytake a negative position on the project, in order tokeep alternative diversification options open andto not undermine Ukraine by helping Russiabypass its pipeline system.

The impact of Turkish Stream on the EU-Turkeyenergy relationship

Turkish Stream will be a pipeline wanted, financed,constructed and operated by Russia for its ownstrategic interest. Turkey's role will be minor.

Therefore, from an EU perspective, Turkish Streamwill be more about the EU-Russia energy relation-ship than the EU-Turkey energy relationship.

Figure 7: Turkish Stream

Source: Bruegel based on Gazprom.

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In contrast to the SGC, which offers the EU andTurkey broad scope for cooperation in terms ofenergy diplomacy in the region and infrastructurefinancing, Turkish Stream seems to offer no poten-tial cooperation avenues for the two players.

CONCLUSIONS

Our analysis has shown that, taking into accountthe new regional energy and geopolitical realities,cooperation on the SGC should represent the basisof a new EU-Turkey strategic energy partnership.Turkish Stream, meanwhile, would rather be apotential source of political disagreementbetween the EU and Turkey.

Considering the momentum in Europe for naturalgas supply diversification in the aftermath of the2014 Ukraine crisis, the EU should rapidly estab-lish a new SGC cooperation platform with Turkey,on the basis of a new, inclusive, approach that willrespond to the strategic interests of both players.The aim should be the creation of favourable con-ditions to allow energy companies to plan newcommercially viable projects in the region.

Cooperation on the SGC could be beneficial for theEU, Turkey and each potential supplier in theregion. For the EU it would allow the implementa-tion of a long-pursued diversification strategycharacterised by flexibility and scalability overtime. For Turkey, it would represent an opportunityto improve its own gas-supply security, by scal-ing-up imports from regional suppliers and unlock-ing new sources. In addition, by bundling suppliesfrom up to six sources (the four SGC sources plus

Russia and potentially the Eastern Mediter-ranean), Turkey could develop a larger strategicrole in the energy politics of the region, whichcould pay commercial and political dividends. Foreach potential supplier in the region, the SGCwould allow the diversification of their respectivenatural-gas export portfolios and would increasetheir revenues from natural-gas exports.

For the EU and Turkey, it is also important to under-line that a new joint initiative focused on the SGCwould also be about rebuilding mutual trust andgeopolitical cooperation between the two players.A joint diplomatic and financial effort to achievecommon goals in the region might ultimately havea positive impact on the overall EU-Turkey rela-tionship, at a time when Turkey seems to have lostits European momentum and appears to lookincreasingly eastwards.

EU-Turkey StrategicHigh Level Energy Dialogue

EU-Turkey Gas InfrastructureFinancing Initiative

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Figure 8: A new EU-Turkey Strategic EnergyPartnership: a potential institutional structure

Source: Bruegel.

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