Gazprom to give Ankara $1 billion: for TurkStream or for Turkish market?

Gazprom signed a protocol with Turkey on the construction of the TurkStream second branch on the territory of the country. This news coincided with a report that the Russian holding agreed to a 10.25% discount for the Turkish Botas state-owned company and will return to it $1 billion of overpayments for gas delivered in 2015-2016. Some analysts stated immediately that this was the price for the transit branch of the TurkStream for European consumers bypassing Ukraine. Other experts believe that the Russian holding would still have to make concessions to Ankara because of competition - Turkey has more opportunities to buy gas from other sources.

Botas and Gazprom negotiated about a discount of 10.25%, in 2015. However, then it had not come to the agreement signing and the Turkish company filed for arbitration. This Saturday, the Russian holding said that both sides settled the dispute out of court.

The signing of the protocol between Gazprom and the Government of the Republic of Turkey on the overland section of the transit line of the TurkStream gas pipeline to supply Russian gas to European consumers took place on Saturday, the Russian gas holding said.

"As a result of long discussions, an agreement was reached on a discount of 10.25 percent on gas delivered in 2015 and 2016. The difference in payment for these two years, namely 1 billion dollars, will be returned to Turkey," Turkish President Recep Tayyip Erdogan said on the same day in one of the pre-election speeches. Berat Albayrak, Minister of Energy and Natural Resources of Turkey, confirmed his words. He said that Gazprom will have transfer the money by June 24, the day of the national elections. The head of the energy department also said that an agreement has been reached on the second branch of the TurkStream, which will be completed in 2019. Gazprom has clarified that a joint company, TurkStream Gas Transport, will be established, which will be engaged in the construction of a land section.

RusEnergy’s partner Mikhail Krutikhin said that the TurkStream costs Russia more and more expensive. "Once Gazprom began the South Stream project and invested $ 17 billion, and then the unfinished route was reoriented to Turkey and another 6 billion were invested, now for the second branch we are shelling out another 1 billion due to discounts to the Turks", the expert told MK. According to him, the Turkish side has achieved a discount for the future, so the losses of Gazprom will cost more and more. However, according to Kommersant newspaper, it is a discount only in 2015-2016.

Alexey Grivach, the Deputy Director of the National Energy Security Fund (FNEB), believes that the discount is not directed at the construction of the TurkStream. He notes that competition is growing in Turkey and it is necessary to stimulate the growth of demand, therefore it is necessary to maintain the competitiveness of Russian gas in the Turkish market.

Today, Turkey is the second largest client of Gazprom. Last year the country increased the import of Russian gas by 16.7% to 28.6 billion cubic meters, and the holding's share in the Turkish market was 51.8%. At the same time, the formula of the contract price for the Turkish Botas is tied to the "oil basket" and last year the price of oil and, accordingly, gas rose sharply. According to Turkstat, in 2017 Turkey spent $10 billion more on energy resources than in 2016 - $ 37.19 billion. Volkan Özdemir, head of the Institute for Energy Markets and Politics told the Anadolu state news agency that the lion's share of growth accounted for gas and in 2018 the cost of energy will amount to more than $ 40 billion.

According to the Oxford Institute for Energy Studies, Gazprom is the most expensive source of gas for Turkey. In the "Changes in gas supply to Turkey" report British analysts noted that in the fourth quarter of last year, according to Argus, Gazprom would sell gas Botas at a discount of 10.25% for $211, when Azerbaijan and Iran (after 13% reduction of the price following the arbitration) would sell just above $200.

Turkey has never been an easy client for a Russian holding company, and, for example, only last year it fully selected the contracted volumes of gas - 16 billion cubic meters by the Blue Stream. Under the "take or pay" condition Botas is obliged to buy at least 80% of gas - about 13 billion.

This year, Turkey will receive a new source of gas - the Trans-Anatolian gas pipeline will be launched in Turkey in June. Botas will receive 6 billion cubic meters of gas a year through it and Azerbaijani President Ilham Aliyev said that gas will be cheaper than Russian gas. The Turkish Institute of Energy Markets and Politics pointed out that the Turkish state company agreed to buy gas using the formula "the cost of Russian gas - 12%". Experts, however, pointed out that together with the cost of transportation through the territory of Turkey from the Georgian border, the price of gas from the second stage of Shah Deniz will increase by $ 79-103.

Nevertheless, Gazprom still has to take into account the increase in competitive supplies and as well as the fact that Ankara has an overabundance of capacity for importing gas. The rapid growth of gas prices brings the Russian holding more profit. According to ISIC, due to the increase in the oil cost, gas for Botas could rise in price by $ 55 to $ 260 by the third quarter. Therefore, the growth of gas consumption in Turkey may stop and Gazprom will need to maintain its market share. Therefore, the discount for gas promised by the holding company in 2015 is unlikely to be too significant loss for Gazprom, regardless of whether it is related to the TurkStream or not. Another question is whether the demand for discounts will become a "good" tradition.