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Turkey: Facing Oversupply, Ankara May Sell Excess Gas

Turkey is reportedly trying to sell some of the gas that it planned to import after years of denying that it would face a problem of oversupply. The effect on pipeline investments by several countries remains unclear as Ankara maneuvers to avoid penalties for contracts it has signed.

Boston, 30 May 2002 (RFE/RL) -- Turkish energy officials have opened talks to sell excess natural gas to other countries, less than two weeks after voicing concern that reports on the surplus could damage its state-owned pipeline company.

The latest sign of a gas glut could affect plans for new pipelines to Turkey, which has signed a series of agreements with countries including Russia, Iran, Azerbaijan, and Turkmenistan.

Speaking at a conference in Istanbul, Energy Minister Zeki Cakan said on 23 May that "a number of parties" were interested in buying cargoes of liquified natural gas (LNG) that Turkey is scheduled to import from Algeria and Nigeria this year.

IBS Research and Consultancy, an Istanbul-based consulting firm, said that some companies have approached Turkey, seeking surplus LNG cargoes on the spot market. The Turkish state pipeline company Botas is sending a delegation to Algiers, IBS said.

Cakan's statement may be meant as an assurance that Turkey will find ways to deal with its oversupply problem after a long period of denying its existence. Ankara has relied on inflated demand forecasts for years in signing a long list of gas contracts with foreign suppliers. Turkey has struggled since February 2001 with an economic slump that has sharply reduced its growth in energy use.

But officials have only recently started to cope with the consequences of signing too many take-or-pay contracts. Two weeks ago, Cakan lectured the press for reporting that Botas would have to pay Iran and Russia for gas that it would not use this year, saying it was "hurting" the company.

Cakan said, "Speculations that Botas has paid $170 million extra for unconsumed gas in the first three months and will have paid $500 million for unused gas by the end of the year are untrue, fraudulent, and ill-intentioned," the "Turkish Daily News" reported.

But in the same week, the London-based magazine"The Economist" said that "Turkey is looking for ways out of its excessive gas purchase commitments." The weekly concluded that until revised agreements are reached with suppliers, "Botas will either have to take gas it cannot use, or pay a penalty for having badly misjudged its needs."

Turkey at first denied it would have to pay Iran a penalty after taking delivery of only about half the contracted amount of gas in the first quarter of the year. But the National Iranian Gas Company warned Turkey that "it will still have to pay the price for the whole amount even if [it] doesn't import."

"The Economist" reported that Turkish officials have been pursuing several possible solutions, including offering longer purchase pledges in return for reduced contract terms now. The problem is that Turkey's growth forecasts and contract commitments are already too high. According to the latest Botas estimates, the country will use 24 percent less gas than it has contracted to buy this year.

Selling all the LNG purchased from Algeria and Nigeria to other countries could reduce the oversupply to 4 percent, assuming that the Botas forecast is right. "The Economist" suggested that it may be about 12 percent high. But other proposed solutions seem to make even less sense.

Two weeks ago, Botas General Manager Gokhan Bildaci said Turkey could use underground storage in Ukraine for excess gas, if needed. But most of Turkey's gas comes from Russia, which is negotiating to use the same storage facilities as part of a long-term deal with Ukraine. Russia's $2.5 billion pipeline across the Black Sea known as Blue Stream is due to increase the gas flow to Turkey later this year.

Bildaci also said Turkey could build LNG terminals to sell gas to the United States when fuel starts to arrive from the Caspian Sea. One analyst contacted by RFE/RL, who asked not to be identified, called that idea "zany," noting that the price would be prohibitive. "The Economist" said the global market for LNG is already oversupplied.

Ironically, Turkey's belated attempts to deal with the oversupply problem come just as its economy is showing the first signs of life in over a year.

The government recently reported that industrial production in March jumped 18.7 percent from a year earlier, pushing output for the first quarter up 3.5 percent. Analysts warned that the activity may be due to inventory adjustment, but any activity is welcome after Turkey's two economic crises since 1999.

Even if recovery comes, it may be too little and too late to justify the investments that countries like Russia and Iran have made in pipelines to serve Turkey's growth.

Although Turkmenistan has made no progress on a route to supply Turkey with gas by 2005, Azerbaijan plans to start building a new line through Georgia. The Turkish gas glut is raising concerns in Baku. This week, Ilham Aliev, vice president of the Azerbaijani state oil company SOCAR, gave assurances that there would be other customers for gas from its offshore Shah Deniz field if Turkey fails to honor its purchase agreement, the Turan news agency and RFE/RL reported.

All the rivals now hope that their gas can pass through Turkey to Europe, but it seems far from certain that all will succeed.

Turkey's bid to divert its gas supplies from Algeria and Nigeria may mark a first step toward redirecting some of the resources that it has previously tried to attract. But the effect on investment remains unclear after years of planning for growth that has been delayed.