Turkey’s energy supply security from Azerbaijan, Iran, and Russia

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Master Thesis

Turkey’s energy supply security from

Azerbaijan, Iran, and Russia

A thesis submitted in fulfillment of the requirements for the degree of Master of Science

in Political Science

Faculty of Social and Behavioral Sciences Department of Political Science

Author:

Mehmet Emre Demirkiran

Supervisor: Dr. Mehdi Parvizi Amineh Second reader: Dr. Benno Netelenbos

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Abstract

This thesis is about the energy supply security of Turkey from Azerbaijan, Iran, and Russia (AIR). It analyzes the domestic and geopolitical challenges that Turkey faces in securing energy supplies.

The energy supply security of Turkey faces risks from two types of challenges. On the one hand, domestic challenges in Iran reduce the chances for (re)newed energy contracts between Iran and Turkey due to international sanctions. Turkey depends on the return to the diplomatic solution with Iran to sign new contracts. Geopolitically, the intensifying tensions in the Middle East pose a great risk to the overall stability of the region and, therewith, the export of energy from it and in particular the Persian Gulf. This study finds that the hegemony of the US in the region is breaking down, which leads to more aggressive US policy. The result of this breakdown is the rise of tension and conflict that impede Turkey’s energy supply security.

Eventually, the Turkish national interests will diverge from this US policy. As re-source scarcity is on the rise, Turkey has to compete with rising industrial powers that operate in the region as well. In other words, Turkey cannot await the geopolitical game that the US plays in its region.

Keywords: Turkey, energy supply security, geopolitical economy, challenges, Middle East

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Acknowledgements

I would like to extent my gratitude to a number of people that have supported me in the process of writing this thesis. First and foremost, I would like to thank all those who are dear to me and supported me while writing this thesis. In particular, I thank my parents for providing me with not only the opportunity to study, but also for their additional spiritual and financial support.

Special thanks also go out to my thesis supervisor: Dr. Mehdi P. Amineh. I met him during the bachelor course Geopolitics and Security in the Middle East and Central Asia as he was the lecturer. Words fall short for the effort he put into guiding me through my academic career and my intellectual development. He triggered a profound interests in me to study Turkey, the Middle East, energy, geopolitics, International Political Economy, and so on and so forth. This interests has become part and parcel of my life. It helped me to form my personal identity while at the same time igniting an inner drive forward toward acquiring more knowledge and contributing to the knowledge that we have on said topics.

Lastly, I want to thank my fellow student with whom I worked together in and outside class to complete this work. We spent a great length of time studying at the library. New friendships emerged and new insights were gained. Specifically, I want to thank Regine for her friendship during this process, Dimitrios for our discussions on Turkey, and Danilo for allowing to come over to his apartment and work through the night before the submission deadline to complete our theses.

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List of Figures

2.1 GDP (current US$) and energy available for final consumption of Turkey. 16 2.2 Final consumption decomposed per sector normalized to 100%. . . 18 2.3 Energy imports of Turkey per source in Mtoe . . . 19 2.4 Energy imports per source and normalized to 100% . . . 20 2.5 Final sectoral consumption of natural gas (left) and oil and petroleum

products (right) . . . 21 4.1 Organizational chart of NIOC, its subsidiaries, and connection to the

Ministry of Petroleum and Majlis . . . 67 4.2 Organization chart of the financial income of the IRGC . . . 68 5.1 Price of Brent (green) and West Texas Intermediate (red) and the

breakeven fiscal oil price for Iran (yellow) and Saudi Arabia (blue) . . 80 5.2 Iran’s oil output in million barrels per day . . . 80

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List of Tables

2.1 Turkey’s domestic energy statistics in Mtoe . . . 17 2.2 Imports of oil and gas from AIR in percentages . . . 19 3.1 Proven oil and gas reserves of Azerbaijan, Iran, and Russia, and their

global shares in 2017 . . . 24 3.2 Imports of crude oil, petroleum products, and natural gas from AIR in

percentages of total . . . 25 3.3 Total value (in billion USD) and share of total (in %) of export from

Turkey to AIR . . . 38 3.4 Total value (in billion USD) and share of total (in %) of imports to

Turkey from AIR . . . 38 3.5 Ownership of oil and gas companies . . . 39 3.6 Share of crude oil and other petroleum products to the export economy,

state budget, and GDP . . . 39 3.7 Pipeline connections of Turkey with AIR . . . 41 3.8 Decomposition by product and destination of Azerbaijani trade in 2017 42 3.9 Decomposition by product and destination of Iranian trade in 2017 . . 46 3.10 Decomposition by product and destination of Russian trade in 2017 . . 48 4.1 Main bilateral disputes between Turkey and AIR . . . 56 4.2 Overview of the configuration of ruling elite and society . . . 57 4.3 Levels and growth rates of per capita income in PPP between 2000-17

for AIR . . . 65 4.4 unemployment rates (in %) of the total labor force according to ILO

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List of Abbreviations

AIIB Asian Infrastructure Investment Bank

AIR Azerbaijan, Iran, and Russia

BC Business Council

BOTAS Boru Hatları ile Petrol Taşıma Anonim Şirketi

BTC Baku-Tbilisi-Ceyhan oil pipeline

BTE Baku-Tbilisi-Erzurum gas pipeline

D-8 D-8 Organization for Economic Cooperation

DEIK Turkish Foreign Economic Relations Board

EBRD European Bank for Reconstruction and Development

ECI Economic Complexity Index

EIB European Investment Bank

EMRA Energy Market Regulatory Agency

ESS Energy supply security

FDI Foreign Direct Investment

FSRU Floating Storage and Regassification Units

GDP Gross domestic product

HLCC High-Level Cooperation Council

HLSC High-Level Strategic Cooperation Council

IBRD International Bank for Reconstruction and Development

IEA International Energy Agency

IPE International Political Economy

IR International Relations

IRGC Islamic Revolutionary Guard Corps

JEC Joint Economic Commission

JCPOA Joint Comprehensive Plan of Action

LEF Law enforcement forces (Iran)

MIGA Multilateral Investment Guarantee Agency

MENR Turkish Ministry of Energy and Natural Resources

NIOC National Iranian Oil Company

OPEC Organization of Petroleum Exporting Countries

SDF Syrian Democratic Forces

SL Supreme Leader of Iran

SP Strategic Plan

SOCAR State Oil Company of Azerbaijani Republic

SOE State-owned enterprise

SWF Sovereign wealth fund

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TPAO Türkiye Petrolleri Anonim Ortaklığı (Turkish Petroleum)

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Chapter 1 Introduction

Since the 1950s, Turkey’s industrialization generated wealth and at the same time a new set of problems. The early-2000s mark the beginning of a new period of this process as the ruling Adalet ve Kalkınma Parti (AKP) of President Recep Tayyip Erdoğan stimulated the economy by structural reforms and economic liberalization. This period coincides with furthering globalization, which is an economic, political, and social phenomenon based on increasing interdependencies and market integration between the different states, economies, and nations in the world. Naturally, glob-alization also affected Turkey with high levels of economic growth being one of the most important factor reshaping political, economic, and social relations in the past two decades. At the basis of this industrialization lays the (increasing) consumption of energy products, which acts as the fuel that keeps the machine running.

Energy is a vital element for the economy without which economic growth slows down. In fact, energy has a dual role within the economy. On the one hand, it is product that is consumed by households for, e.g., transportation and heating. On the other hand, it is an input for the production of all goods and services in the economy. In the latter case, energy can be in the form of fossil fuels that are burned to transport products or as an input for industrial processes, as electricity to keep communication networks online, or as a product used by the energy sector itself for the production of goods like gasoline. In short, energy is a prerequisite for all economic activity.

The access to energy is crucial to create a stable environment for economic activity to foster. Lacking sufficient domestic energy resources create problems for countries, especially those that have not secured access to foreign energy resources. Uncertain supplies of energy also lead to decisions that are sub-optimal and impede industri-alization. For Turkey, securing energy supplies from abroad is of vital importance. The country does not possess sufficient domestic energy resources and its oil and gas production is nearly non-existent. Thus, the country is (almost) entirely dependent on the import of oil and natural gas.

1.1 Objectives, time frame, social entities, and actors

The main objective of this thesis is to study the energy supply security of Turkey from AIR. To do so, this study researches and identifies the challenges that impede the supply of energy to Turkey. These challenges emerge from a set of internal and external impediments that originate from political, economic, technical, and security risks. The

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context of internal challenges are the domestic political conflicts and tensions within Turkey’s supplier countries that create risks for the import of energy products. The external context involves the development in the regional and international levels that shape current relationships between major and relevant powers, which spillover to the energy supply security of Turkey. The selection of AIR as the supplier countries under study is because they supply the majority of Turkey’s oil and gas needs. They play a crucial role: Turkey is virtually dependent on imports from AIR and cannot differentiate in the short-term. Thus, Turkey’s energy supply security is subject to supplies from AIR. Secondly, Azerbaijan, Iran, and Russia possess vast amounts of proven oil and gas reserves. The current industrialization of Turkey is contingent on these resources. Thirdly, the close proximity of AIR increases the importance of these countries to Turkey’s energy-import mix. Not only does Turkey import a major portion of its oil and gas from these countries, it also cooperates with them to re-export and sell their oil and gas to the regional and global markets. Such projects coincide with the last period of economic growth that started from the early-2000s. In part, this can be explained by favorable financial factors, such as the reinvestment of oil rents during the boom period of the 2000s or the economic growth of Turkey. Therefore, this thesis limits itself to the period between 2000 and 2019.

To study the energy supply security of Turkey, it is important to understand the domestic energy situation of Turkey and the policies that Turkey implements to improve this. The Ministry of Energy and Natural Resources (MENR) is the main institution that establishes the strategy, sets goals, and produces policies to improve the energy supply security of Turkey. Two state-owned enterprises (SOEs) are key tools in this process: TPAO and BOTAS. Their activities concentrate mainly in the up- and midstream segments of the oil markets. For the downstream segment,

this thesis studies privately-owned Tupras and SOCAR Turkey.1 _{Privately-owned}

Tupras owns and operates the majority of the Turkish refineries and was responsible for all domestically refined oil products in 2017 (Energy Market Regulatory Agency, 2018b). Since 2019, SOCAR Turkey opened a new refinery. Expanding Turkey’s refinery business not only contributes to the energy supply security by reducing the dependency on foreign capacity, but also through more intense energy relations with Azerbaijan, which owns SOCAR Turkey.

For the energy relations between Turkey and AIR, I concentrate on official state organizations and their leaders in cooperation with economic actors in the energy sector (state-owned or private). The former encompasses three relevant institutions: presidential offices and the ministries that are responsible for the foreign and energy affairs of the state. The SOEs of Turkey are also deployed as a tool to build rela-tionships with SOEs of AIR and to conduct energy trade. Thus, they form the basis for energy relations. SOEs play a key role due to the importance and sensitivity of energy, which makes energy relations a politicized issue. The relevant SOEs of AIR are:

1

The upstream segment of the oil and gas markets refers to the production of crude oil and natural gas. The midstream segment includes the processing, storing, transporting and marketing oil and gas. The downstream segment starts from refining the oil and gas products down to the point of retail.

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1. Azerbaijan: State Oil Company of Azerbaijani Republic (SOCAR) 2. Iran: National Iranian Oil Company (NIOC)

3. Russia: Gazprom

Lastly, the analysis of chapter 4 places emphasis on the domestic political situa-tion of Iran as a danger the energy supply security of Turkey. Although Azerbaijan and Russia are not warranted from domestic conflict, the challenges that Iran face are particularly important for Turkey’s energy supply security. Iran’s importance relies on two connected issues. The first is the complexity of the organization of the Iranian state. Based on republican and theocratic institutions, this configuration has, in con-junction with the behavior of the political elites in Iran, limited Iran’s engagement with the international community and (energy) markets. However, recent develop-ments have changed the outlook of Iran’s possibility to engage internationally and export its oil and gas. The second issue is the unilateral withdrawal of the US from the JCPOA and (re)imposed sanctions on Iran. Therefore, the social entities and actors studied in chapter 4 are the political elites of Iran.

1.2 Relevance

The relevance of this research is divided into social and scientific relevance. The social relevance of this research is to gain an understanding of Turkey’s energy supply secu-rity while considering the recent developments that have occurred that are relevant to Turkey’s energy supply security. Domestically, the Turkish governmental contracts regarding the import and distribution of oil and natural gas are expiring and new con-tracts have to be issued. Currently, the oil and, especially, the natural gas markets in Turkey are getting ready for some important changes in the business and market envi-ronment. A large challenge for Turkey is the successful renegotiation and contracting of the supplies in its energy markets. Internationally, there have been some important changes as well. Most notably are the developments surrounding the Iran-deal and the integration of Turkey’s key supplier Iran into the world community, the agreement concerning the division of the Caspian Sea and its resources, the sanctions on Russia and its key business people as well as the normalization of Russo-Turkish relations after Russia’s fighter jet and ambassador to Turkey got shot, and the Syrian Civil War and its conflict resolution efforts (here, Iran, Russia, and Turkey deploy diplomatic and military tools together). Put differently, the energy supply security from AIR is in constant flux and new developments may hit Turkey significantly. This research adds to the social understanding of the importance of Azerbaijan, Iran, and Russia in Turkey’s energy security with consideration the new evidence and developments.

Scientifically, this research adds to the body literature an understanding and ex-tension of the Turkish energy supply security as well as the challenges that Turkey faces in securing its energy supply. Furthermore, this research adds to the scientific community an upgraded understanding of the theory and concepts as well as their op-erationalization by deploying them in energy research. On top of that, this research

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also contributes to the literature of energy studies as it includes a literature review as well as the utilization of the theory of geopolitical economy to explain phenomena.

1.3 Research questions

To study the objectives stated above, the following research question has been de-veloped: what are the challenges to Turkey’s energy supply security regarding oil and natural gas from Azerbaijan, Iran, and Russia, and how does Turkey deal with those challenges that endanger its energy supply security from these countries?

Moreover, four subquestions have been developed. These subquestions relate to the multifold dimensions of the main research question and help to delineate the different aspects to Turkey’s energy supply security:

• Chapter 2: what is the current energy situation in Turkey and how did it develop between 2000-19?

• Chapter 3: what are the policies developed by and available tools of Turkey, and how does it implement and apply those in securing a portion of its energy need from Azerbaijan, Iran, and Russia?

• Chapter 4: which disputes and domestic challenges affect Turkey’s energy supply security from Azerbaijan, Iran, and Russia, and to what extent?

• Chapter 5: what are the regional and international challenges to Turkey’s energy supply security from Azerbaijan, Iran, and Russia?

1.4 Literature review

In this section, a literature review is given that contains a selection of the relevant aca-demic work on the subject. It starts with the scholarly work that has been published over the past two decades that helps to shape a basic understanding of the energy supply security of Turkey. The first subsection discusses the vision and reforms of Turkey with respect to energy. The second subsections identifies the challenges and opportunities that are identified by the literature so far. Lastly, the final subsection presents the gaps in the literature and what this study seeks to provide in order to close said gaps.

1.4.1 Turkey’s policies on energy and relevant reforms

The literature on Turkey’s energy system encompasses several different subtopics within the broader topic of energy (supply) security. Recent years of development within the scholarly body of literature of energy research regarding Turkey have fo-cused on the energy transition. One important document outlining the future path of developmental goals set out by the governing AKP in 2023 (the centennial of the Republic) is the Vision 2023 -plan. As Turkey is a heavily import-dependent country with respect to fossil fuels, Vision 2023 sets goals for the energy sector in Turkey to

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increase the energy supply security as well as to reduce the dependency on foreign energy resources. Academic publications that center around Vision 2023 are rare. Only Melikoğlu has done some research in this regard: he has connected the goals of Vision 2023 with the feasibility of achieving these goals. Melikoğlu (2013a), Melikoğlu (2013b), Melikoğlu (2016), and Melikoğlu (2017) are only four works by the same au-thor that deal with the renewable and alternative energy perspective of the goals set in Vision 2023. Up until now, Melikoğlu (2013b) is the only work by the same author that deals with the importance of natural gas. However, this analysis is done within the framework of connecting the current fossil fuel economy with the future economic demand of natural gas, partly due to its function as a “fuel for energy transition.”

Bilgin (2011) is one of the few other academic publications that fall within the objectives of this study with respect to the strategy and policies of the Turkish gov-ernment. In this paper, Bilgin analyzes the development of investment plans and pipelines. Moreover, he established that energy security became “a strategic tool for Turkey’s regional and foreign relations” (ibid., p. 1). Importantly, Bilgin finds that Turkey’s energy strategy is introduced by the Turkish authorities. This finding strengthens the focus on state entities and actors as well as the selection of the theory (see below). Unfortunately, to the best of my knowledge, there is no other recent scholarly work that delineates itself to study Turkey’s vision regarding oil and gas.

Other scholarly work that deal with the Turkish energy supply security focus on the reforms that the Turkish state implemented since the early-2000s with a particular focus on the energy market reforms. In a similar spirit as other countries during the first decade after the collapse of the Soviet Union, Turkey opted for a liberalization program to open up its energy markets. This liberalization had at its core the goal of allowing private investments to flow in coupled with the completion of the devel-opment of liberal market institutions. Two of the most important develdevel-opments were the establishment of an independent regulatory agency and the removal of the legal monopoly of SOEs.

Atiyas, Çetin, and Gulen (2012) deal with the reforms in the natural gas market after a decade that it was implemented and lay down some recommendations in their book. After creating a contextual framework that deals with the situation at hand, they move on to the Natural Gas Market Law of 2001 (Law No. 4646 Adoption Date: 18/4/01). An important conclusion of their analysis is that the unbundling of the monopoly power of BOTAS has not led to the intended results of a lower natural gas price and the inflow of eligible private suppliers in the natural gas market of Turkey (important for the conceptualization of energy supply security). Their research correlates with affordability, the sufficiency of quantities, and availability components of the concept of energy supply security.

A similar conclusion is encountered in the following article: Hasanov (2017). Herein, the market power of now-former state-monopolist BOTAS is analyzed as a strain on the natural gas markets of Turkey. Despite the liberalization efforts, the state-owned company continues to possess a large market share yet is unable to re-duce the prices and operates with subsidies to keep the consumer price low. However, these subsidies cost the Turkish Treasury vital resources. In a simple game-theoretic

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model, Hasanov argues that a full import liberalization will reduce the overall costs of important natural gas even though the volume will rise: the price falls significantly to offset rises in import volume. His study reports evidence against considerations regarding the affordability and sufficiency of quantities of energy, and herewith em-pirically invalidates criticism. Nevertheless, his quantitative study was conducted in a “simple game-theoretical model” (Hasanov, 2017, emphasis added). Such models inevitable reduce the importance or ignore altogether dimensions that may turn out to be important after all.

1.4.2 Challenges and opportunities of Turkey’s energy supply secu-rity

However, these scholarly works do not consider the full importance of the energy supply security of Turkey. That is, they focus on specific problems that relate to specific situations in the world. Hasanov (ibid.) does not consider, for example, the word security throughout his article, except in a bibliographic reference regarding Russo-European natural gas supply security. Balat (2010), on the other hand, does specifically focus on the energy supply security of Turkey. His article is a compre-hensive work that includes the different energy reserves that could contribute to the improvement of the energy supply security of Turkey as well as improvements in the consumer markets to reduce the energy intensity of the country. Although Balat (ibid.)’s work includes a discussion on the energy imports of Turkey from foreign countries, it does not deal specifically with the geopolitical-economic challenges that these imports struggle with and how it affects the energy supply (or import) security of Turkey. Bilgen (2016) also does not deal with the geopolitical economic factors and limits itself to merely providing the status of the different fossil fuels in the primary energy mix of Turkey. Referring to the view that the under-utilization of domestic reserves is seen as a waste, the author has no other option than to call upon an im-proved utilization of domestic coal reserves as crude oil and natural gas are nearly non-existent.

Ipek (2017), on the other hand, does deal with the import security in relation to energy supply security from two countries: Iraq and Syria. However, her research is limited to only these two countries and the dimension of conflict that is currently present. She also deals with sub-state actors. While closing the gap for some of the geopolitical economic challenges of some countries that export crude oil to Turkey, she leaves another gap regarding the actors at the level of the national state. The gaps that are closed and left open are not necessarily mutually exclusive. But it does characterize the type of research that is done regarding the energy supply security of Turkey. Simply put, there is also a lack of social relevance as two components of energy supply security (availability and sufficient quantities of supply) are under-represented: Syria and Iraq were during the past two decades far from being the most important suppliers.2

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For the Kurdish authorities in Iraq, Turkey remains an important transit country for their energy export. But this does not mean that they are very important for Turkey as the central government

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1.4.3 The foreign dimension of Turkey’s energy supply security

As Ipek (ibid.) touches upon some foreign actors, there still remains a gap regarding the energy relations between Turkey and Iran, Russia, and Azerbaijan. Her book chapter on Turkey’s energy relations between the 1990 and 2016 closes this gap. Nev-ertheless, it does not necessarily deal with geopolitical-economic aspects of Turkey’s energy relations (İpek, 2017).

Unal (2016) did try to analyze the geopolitical economic dynamics concerning imports from Iran in the post-sanctions era before the unilateral withdrawal of the US from the Joint Comprehensive Plan of Action (JCPOA). However, the new situation surrounding the economic embargoes that are imposed on the Islamic Republic of Iran create a new reality that renders Unal’s work already outdated even while Turkey is proceeding to import energy from Iran.

Suleymanov, Bulut, and Rahmanov (2017) is an exception as they deal with the Azerbaijani investments in the Turkish energy markets. Still, they do not necessarily deal with the geopolitical economy and security aspect of the energy relations be-tween Azerbaijan and Turkey. Moreover, the energy relations bebe-tween Azerbaijan and Turkey are not situated within a broader theme of Turkey’s energy supply secu-rity, since the authors remain limited to the strictly political economy of Azerbaijan-Turkish relations. Other works regarding the energy relations between Azerbaijan and Turkey are often not published in academic journals. There is, however, a body of various works on these relations, mostly in policy journals. A 2016 edition of Turkish Policy Quarterly deals with the Turkish energy situation. The geopolitics of Azeri-Turkish relations is discussed in nine different games that emerged since the disintegration of the Soviet Union. The authors Ediger and Berk (2011), however, refrain from analyzing in a scholarly method the energy relations between Azerbaijan and Turkey. Bilgin (2015) is another example of work that is essential and regards the foreign policy of Turkey; however, it is likewise published in a policy journal.

Regarding the relations between Turkey and Russia, a different body of literature emerges: mainly one that deals with Turkey as an energy hub connecting the Russian energy supplies with the European demand markets. Karagöl et al. (2016) is one article that puts Turkey in the middle between the two larger energy markets. On the other hand, Kim and Blank (2016) focus on the Turco-Russian energy relations within the framework of the “TurkStream” project. A big gap in this research is the time frame. Being published in 2016 and focusing on the Caspian energy relations in 2013-14, they do not account for the developments that have occurred in the years between their publication and the completion of the sub-sea pipeline in 2018. Öniş and Yılmaz (2016) arrange the energy relations between Russia and Turkey in a wider sphere of the global political economy. Unfortunately, they do not specifically focus on energy and the related geopolitics of energy, but on the broader security concerns. Situating them at a global level, they introduce other external forces, e.g.: the US, but refrain from engaging in energy research.

in Bagdad and relations with the regional authorities in Erbil are continuously under heavy tensions due to domestic and international political dynamics.

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1.4.4 Gaps in literature

The preceding discussion highlights gaps in the academic literature regarding the en-ergy supply security of Turkey. Three important gaps are identified that this research wants to fill. The first gap is the under-representation of oil and gas in energy studies. An important portion of the body literature focuses mainly around renewable and alternative energy resources. These are important for Turkey as they are, next to coal, the only domestically available resources. Oil and gas are nearly non-existent in Turkey. However, this makes good documentation and analysis of the oil and gas supply security for Turkey all the more relevant. Strengthening this point is the fact that renewable and alternative energy sources are not able to overtake oil and gas in the energy mix of Turkey.

A second gap in the academic literature is the lack of an extensive and compre-hensive research on the energy relations between Turkey and AIR. Although some research exists, there still remains a lot to be written on how bilateral relations have established, what the role of energy has been and still is, and how energy could con-tribute to a development or intensification of the bilateral relations between Turkey and AIR.

Lastly, the substantial lack of incorporating of regional and international creates a big gap in the academic literature when it comes to the challenges that Turkey faces. These geopolitical-economic challenges are important to understand as they reveal the nature of competition between advanced and industrializing countries in accessing the same energy reserves that Turkey wants to access. Furthermore, by incorporating AIR at the same time, this study adds to the academic literature the limits of Turkey in utilizing its geographic location when it comes to serving as a transit country between or energy hub for the Western demand markets and the Eastern supply markets.

This study seeks to fill these three gaps by connecting Turkey with AIR regarding the import of oil and gas. Furthermore, it will provide an updated account on the development that have occurred with a particular focus to add to our understanding the effects of the JCPOA and the (re)emergence of the current geopolitical situation in the Middle East. Filling these gaps are of crucial importance as new and lasting developments within the neighborhood of Turkey —e.g., the completion of new infras-tructural projects— reshape the power relations and affect the energy supply security of Turkey.

1.5 Theoretical framework

For my analysis, I utilize the theory of geopolitical economy, which is a sub-stream in the critical geopolitical theories. Amineh and Yang (2018, p. 65) write that one attempt of critical geopolitics is to analyze the domestic and international relations between the major states within the context of International Relations (IR) and Inter-national Political Economy (IPE). As a theory, critical geopolitics reacts to classical geopolitics, which places heavy emphasis on the nation-state. From this emphasis results the concept of “national security” that ceased to be regarded as the defining feature of geopolitics (ibid.). The rise of critical geopolitics started around the end of

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the Cold War, which provided impetus for a more thorough investigation of alterna-tive factors that lay at the foundation of geopolitics. Key to critical geopolitics is the incorporation of non-material spatial practices that enrich the theory to identify and study different aspects connecting political with geography.

According to Amineh and Yang (2017, p. 29), critical geopolitics consists of three streams. The first stream emphasizes the cultural factors that play a role within geopolitics and scholars that belong to this stream (see Huntington (1996)) seek to study those as the determinant of the community borders. The second stream of scholars (e.g., Said (1979)) focus on discourse and analyze these to understand the political and social context in which geopolitical power is constituted. Lastly, a third stream of scholars try to connect critical geopolitics to IPE and build theories to an-alyze geopolitics based on determinants that relate to geoeconomics. The theory of geopolitical economy builds on this third stream of thought as it incorporates the geo-graphic and/or territorial dimensions of the state in connection with the geoeconomic dimension (Amineh and Yang, 2017; Amineh and Yang, 2018). This means that in order to study the geopolitical economy of Turkey’s energy supply security, one has to analyze the diplomatic, economic (trade, investment, and finance), and security relations between Turkey and its energy suppliers.

Within geopolitical economy, two logics interact that shape the relation and policy of countries toward each other. Amineh and Yang (2017, pp. 28-32) explain that the geopolitical logic refers to the power projection of major states in the space of geography and politics. It deals with the deployment of military power by major states outside their legal border to create solutions for their political, economic, and security challenges. The geoeconomic logic is about the continuous requirement of capitalism to expand and find new markets. Capital exists without borders and the internationalization of financial and national markets contributes to the destruction of what is left of the borders against capital. The inherent instability of the capitalist system leads to oversupply and saturation of domestic capital accumulation (within certain domestic economic sectors). As such, pressure within the domestic economy pushes the state and society of a country to move beyond its borders. Geoeconomics looks at cross-border trade, investment, and finance to analyze the expansion of capital and what the effects are for the state-system.

The sequence in which countries have industrialized explain the current power configuration within the international system. The UK was the first to industrialize. Its industrialization happened from societal forces. Eventually, the UK became the most powerful in the state system by creating an international order that was coined Pax Britannica. As a response to the power of the UK, the US, Germany, and Japan began to articulate the three goals mentioned before, successfully industrialized, and started to compete for power. The clash that happened between these four countries led to two World Wars (communicated to the author). Eventually, the US won and build the Pax Americana after WW2 by building liberal (or Western) multilateral institutions. Nowadays, the East Asian country (primarily China and to a lesser extent India) are contending the Western-based multilateral institutions. Contender states are able to do this by implementing industrialization policies and export their

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institutions to the international system. Such contender states introduce tension to the international system and affect the ability of Turkey to secure energy supplies from the Caspian Sea and Persian Gulf regions.

However, one major obstacle for many industrializing powers is the lack of sufficient domestic energy resources. After a certain point of industrialization, countries like China, India, and Turkey lack energy resources to fuel their capitalist industrialization. Therefore, they need to gain access to energy resources that lay outside their legal borders for which they need to formulate policies.

To explain this type of foreign policy, Amineh and Yang (2014) developed a resource-scarcity model that enables to identify three types of scarcity leading to the connection of the domestic economy with foreign economies: (1) demand-induced, (2) supply-induced, and (3) structural scarcity. Demand-induced scarcity results from three developments: increasing GDP, increasing per capita income, and a growing population. All three developments increase demand in (energy) resources. When there is no change in the supply, a scarcity will rise from the demand-side of the econ-omy. Supply-induced scarcity relates to the decrease of supply without a parallel drop in demand. Simply put, there are insufficient supplies for consumption and to fuel (the growth of) the economy. Structural scarcity is a specific type of supply-induced scarcity. Whereas supply-induced scarcity stems from economic dynamics, structural scarcity stems from actions that create such supply shortages as a result of (deliberate) activities by major powers (e.g.: US activities in the resource-rich Middle East).

1.6 Brief argumentation and hypotheses

The theoretical framework and concepts relate to energy supply security. This research focuses on the energy supply security of Turkey from Azerbaijan, Iran, and Russia. Specifically, studying the oil and gas import security from these countries is the main objective of this research. Therefore, the following testable hypotheses have been developed in relation to the theory and concepts.

H1: Turkey has developed and implements a complex set of policy and market tools that support the securement of oil and gas supplies from Azerbaijan, Iran, and Russia.

H2: Domestic and geopolitical-economic risks and challenges impede Turkey in se-curing sustainable oil and gas supplies from Azerbaijan, Iran, and Russia, and thereby threaten its industrialization.

1.7 Operationalization

Turkey’s industrialization is marked by a peculiar case of a near-absence of domestic oil and gas reserves. Industrialization in Turkey depends almost entirely on the ability of the state in accessing and importing foreign oil and gas resources. While Turkey can be classified as a regional power, it lacks the ability to act as a major power. Deployment of military power only has limited effect. That is why Turkey primarily deploys diplomatic and economic tools to secure oil and gas supplies from abroad. To

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the diplomatic tools belong treaties and other documents that lay at the foundation of bilateral relations with energy-supplier countries as well as state visits to and from these countries.

By examining the trade, investment, and finance relations between Turkey and AIR, this thesis aims to operationalize the nature of the energy relations between Turkey and AIR. Regarding energy relations, trade is the cross-border exchange of energy products. Investments are the development of production, infrastructure, and process capacities for oil and gas. Finance refers to the way in which funds are supplied to realize energy projects. By analyzing what products are traded between Turkey and AIR, this thesis aims to discover the nature of their trade relationships. Locating investments between of Turkey in AIR and from AIR in Turkey helps to identify whether these investment contribute to the energy supply security of Turkey. Investigating the financing of energy projects helps to understand how Turkey and AIR put the weight of the state behind the realiziation of energy projects. Such projects are conducted by SOEs. Although Turkey has a more market-based energy sector, its two main energy SOEs are dominant in the energy trade that the country conducts.

Lastly, the Greater Middle East is invested with conflicts that increase security risks. By examining the security relations between Turkey and AIR, this study aims to understand to what extent Turkey and AIR are cooperating with each other and to identify the limits of this cooperation on the energy supply security of Turkey. Moreover, security risks that originate from outside the region by the influence of major states like the US and China also add an additional dimension to the security within the region. This dimension has proven to pressure and limit the bilateral relations between Turkey and AIR.

1.8 Research method

This research applies the qualitative method in dealing with its data collection and analysis. The collection of data begins from quantitative databases from the Turkish Ministry of Energy and Natural Resources (MENR) and British Petroleum as well as peer-reviewed journals, policy documents, and books to provide the context of Turkey’s energy situation and the importance of its key suppliers. The energy scarcity model will be applied here to identify the different scarcities that Turkey faces. Two MENR’s Strategy Plans (2010-14 2015-19) are relevant documents. Furthermore, the Energy Market Regulatory Agency’s (EMRA; falls within the MENR) reports will be used as well to present the situation of the energy markets in Turkey. Quantitative data will be retrieved from the EMRA and the Statistical Review of World Energy from British Petroleum.

To analyze the second part of this research, namely the challenges, peer-reviewed publications and books that include data on the energy security of Turkey and the political-economic relations between Turkey and AIR, with a particular focus on the energy sector, will be used. In addition, similar sources will be analyzed to assess the domestic challenges of key supplier countries. Besides scholarly work, data from

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news media will be utilized as well. The main source will be the English-language Turkish newspaper Daily Sabah. This medium is closely followed by the SETA Foun-dation, a think-tank belonging to the Presidential Spokesperson of Erdogan, and has a developed section on the energy sector in Turkey with regular publications on the developments and events in the energy markets. On top of that, statements made by Presidents, Ministers, and other relevant actors will be analyzed to retrieve data on the (energy) relations between Turkey and AIR.

1.9 Organization of the thesis

The research is divided into two parts. The first part deals with presenting an overview of the energy supply security of Turkey. The second part deals with the challenges that Turkey faces in securing energy supplies.

The first part starts with chapter 2. This chapter outlines the energy situation of Turkey. Historical developments and trends are at the main focus of this chapter. Turkey’s total energy demand, supply, production, reserves, and growth are discussed in this chapter as well as the sectoral energy use. As such, chapter 2 functions to provide evidence for the problem statement that Turkey suffers from resource scarcity. Chapter 3 deals with the strategies and policies that Turkey has developed to solve for its resource scarcity problem. It connects the domestic energy situation of Turkey with AIR and their role within the energy markets of Turkey. Chapter 3 also discusses the tools that are deployed by Turkey in securing a portion of its energy supply. These tools are to establish, develop, and maintain (energy) relations with AIR.

The second part of this thesis consists of chapters 4 and 5. Chapter 4 deals with risks of energy supply insecurity from bilateral disputes and domestic challenges from political elites in AIR. This chapter focuses on the most recent and relevant events. In its assessment of the risks stemming from tensions within the political elites of AIR, it limits itself to the Iranian case for two reasons. The first reason is that Iran has a complex and fractured political elite system. This means that the potential for elite conflict that result in a disruption of supply to Turkey is present. Such elite conflict is not observed in the other two key supplier countries. The second reason is the sanction regime put on Iran by the US. These sanctions have had enormous impact on the Turkish energy supply security.

Chapter 5 continues the assessment on the challenges and risk by incorporating the regional and international dimensions into the analysis. The geopolitical economy of energy in the Caspian and Persian region is discussed in this chapter with a specific focus on the interventions and dynamics created by the US.

Chapter 6 will conclude this research. First, it will present its findings and answer the research questions. Secondly, it will argue what gaps are discovered and left open in relation to Turkey’s energy supply security from Azerbaijan, Iran, and Russia.

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Chapter 2 Energy situation of Turkey

2.1 Introduction

This chapter deals with the energy situation in Turkey. Specifically, the question that this chapter is going to answer is: “what is the current energy situation in Turkey and how did it develop between 2000-19?”. The primary objective of this question is to establish the context that forms the basis of this thesis. In other words, this chapter presents the problem at hand that is dealt with this thesis. Briefly put, Turkey’s economic growth and lack of domestic energy production require the country and its different actors to look outside its legal borders for energy supplies. This sum-mary contains one of the conclusions of the theory of geopolitical economy applied at resource-scarce industrializing countries: emerging market economies without suf-ficient domestic energy reserves depend on imports and this situation is problematic, mainly in relation to their energy supply (in)security (see chapter 1).

The role of this chapter for this thesis is twofold. At first, this chapter is to provide data, knowledge, and understanding of the energy situation in Turkey and how it evolved to this situation over the past two decades. Herewith, this chapter adds to the general knowledge required to investigate the energy supply scarcity of Turkey. Secondly, the outlining of the energy situation in Turkey allows this study, and also the reader, to take a more detailed and analytic look at the exposure of Turkey regarding its energy supply security. To this end, this chapter provides the information of what energy sources Turkey is most exposed to, the reason why it is exposed to these specific sources, and how it should contain this exposure. This chapter, thus, creates the context that forms the basis of this thesis as mentioned above.

In the next section, I look at the energy scarcity of Turkey. More precisely, I deploy the energy scarcity model in Amineh and Houweling (2007a) and Amineh and Houweling (2007b), and look at the demand- and supply-induced scarcities of Turkey. The third section deals with the economic part of the energy situation. I use four indicators to discuss the growth in the energy market of Turkey: (1) national energy reserves, (2) domestic energy production, (3) domestic energy consumption, and (4) imports. In addition, the financial burden of energy is also dealt with in this section. Ultimately, this chapter builds up to the energy problem that Turkey faces.

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2.2 Scarcity of domestic energy reserves in Turkey

This section discusses the energy scarcity in Turkey by applying the scarcity model deployed in Amineh and Houweling (2007a) and Amineh and Houweling (2007b). Below, I briefly discuss the developments in relation to demand- and supply-induced scarcity in Turkey in the time under study.

As explained in chapter 1, demand-induced scarcity relates to the increasing de-mand for energy sources with less than an equivalent amount of supply. Marketwise, prices increase to lower demand so as to equate demand with supply. However, it is important to understand what factors contribute to this rise in demand. Amineh and Houweling (2007b) give three indicators: (1) GDP, (2) GDP per capita, and (3) population growth.

Economic development ensues in the rise of energy demand. Classified as an industrializing economy, Turkey has a GDP that increased multifold during the past two decades. In figure 2.1, it can be seen that the GDP of Turkey for the years 2000-17 more than quadrupled. Higher GDP levels in Turkey are the result of industrialization, which is the result of the application of new technologies within the economy to increase output. Expansion of industrial output sees that demand for energy increases to buy necessary energy inputs for economic production. In addition to that, the consumption of energy rises as well as the connections to the grid increase. In Turkey, GAZBIR is a non-governmental association consisting of the natural gas distribution companies. Its chairman said that at the end of 2018, approximately 80 percent of the Turkish population had access to natural gas (Daily Sabah, 2019b).1 _This number means that approximately 16.5 million people do not have access to natural gas, according to the population figures Turkey (Turkish Statistical Institute, 2019c). It is the policy of the Turkish government to increase the access to these people as well. Moreover, the modernization of the dwellings that house families2 _coupled with economic development implies that natural gas consumption will increase. Thus, when it comes to the increases in energy demand in Turkey, it is clear that there is a positive trend that is set to continue in the next decade. The result of which is that the demand-induced scarcity of Turkey will increase.

The anticipation of the rising demand and consumption could trigger governments to prepare for such scarcities by implementing policies beforehand. The recent history of Turkey shows that the country has opted to apply natural gas in its industrialization process. This choice can be traced back to the industrialization of other countries. Due to the process of sequential industrialization, Turkey has entered the geopolitics and geoeconomics of energy supply security relatively late. Through a complexity of factors, it has opted to invest mainly in policies and facilities that improve its natural

1

The reference implies in its title that natural gas consumption is going down. While energy efficiency is a goal of the Turkish government as outlined in the second phase of the energy transition policies developed by the MENR, it is not yet implemented. GAZBIR’s chairman argues that the higher average temperature throughout 2018 is behind the drop in natural gas consumption by households.

2_{Rapid urbanization during the 1980s posed many challenges to municipal governments and still}

does (Karam, 2015). Indeed, the rise of in popularity of President Erdogan began during his years as Mayor of İstanbul when he improved drinking water quality and increased access to natural gas for households; therewith also reducing air pollution.

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gas supply, because it identifies its opportunities most favorable — at least when it comes to fossil fuels.

In part, this choice can be traced back to the scarcities of oil in the past two decades. Here, two factors are interacting. The first factor is the global depletion of the oil reserves. Although recent technologies and discoveries have increased the extractable stock of oil reserves, the policy orientation toward gas is partly based on the anticipation of supply-induced scarcity in the oil markets interlinked with the global demand-induced scarcity due to rising global income and population. Secondly, the choice for gas has been made due to the fact that the Caspian countries are much safer exporters of fossil fuels and in particular natural gas. Turkey’s rationale to focus on gas to fuel its transition toward an industry-based society rests on the stability of natural gas supply. Moreover, Turkey is able to bank on its geographic position and act as an energy hub connecting East and West. Ultimately, the function of being an energy hub could translate in lower (gas) prices for Turkey overall. However, this reduction in prices is not yet the case. Chapter 3 will dive into the policy and discuss in detail the reasoning behind this delay.

In short, I have discussed two different types of scarcities that endanger the energy security of Turkey. Rising demand in oil and gas coupled with the heavier depletion of global oil reserves due to increasing industrialization move Turkey toward a national energy policy favoring gas as a fuel in the process of industrialization. Secondly, the lack of experience in the geopolitics of oil pushes Turkey toward gas as well. In the next section, I provide data on the economics of the energy situation of Turkey.

2.3 Energy situation of Turkey

Economic growth is one lever through which energy demand increases. Throughout its republican history, Turkey has undergone several growth spurts. In figure 2.1, I portray the fourth growth period of Turkey’s economy. This period started in 2001 after the 2000-1 banking and financial crisis of Turkey. In 2001, the total GDP of the country was around 200 billion USD. It peaked at 950 billion USD after a short temporal break in 2008. This short break was the result of the global financial crisis, which Turkey survived relatively well. We can also extend this analysis to the per capita GDP, which closely correlates with the total GDP growth of the country (World Bank 2009a; 2009b).

However, various political risks resulted in an economic slowdown after 2013. The most relevant risks are of a domestic political nature. Of these risks, the July 15, 2016 coup attempt and its repercussions have had the greatest impact on the Turkish economy. In the international dimension, the tension between the US and Turkey over the procurement of the S400 missile system has led to two major events. The first is the doubling of US tariffs on Turkish steel and aluminum imports. The second is the lifting of Turkey as a developing economy, which granted Turkey some favorable benefits in the export of its output to the US. Minimal or the absence of serious political risk has been important for Turkey to finance its economy through foreign capital as it lacks sufficient domestic capital resources. Political stability has therefore

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been an important variable in explaining the growth spurts of the Turkish economy, especially as they occur after successful military interventions. Sufficient political stability is important because it eases the attraction of foreign investors to invest in key economic sectors, among which the energy sector is one: between 2008-15, 50 billion USD flowed into the country (Erensü, 2018). However, while there was a slowdown in the growth of consumption around the year 2013, just like there was an economic detraction going on, the consumption of energy continued.

Nevertheless, this does not necessarily unveil a causal relationship between political stability, energy sector investments, and increasing consumption. The tripling of the foreign direct investments (FDI) in the first five months of 2018 proves the requirement of political stability for serious FDI to enter the country (Daily Sabah, 2018). But it also shows that the Turkish government is able to signal and convince investors to invest in the Turkish energy markets and that investors trust the policies that are in place and implemented.

Figure 2.1: GDP (current US$) and energy available for final consumption of Turkey. Source: World Bank (2019b), World Bank (2019c), and Eurostat (2019).

Note: The sectoral decomposition of the energy available for final consumption is added to the graph.

The situation around the energy resources is quite different. Turkey lacks energy resources, especially oil and gas. This lack is corroborated by evidence (Oil and Gas Journal, 2019). This journal provides evidence that the domestic oil supplies of Turkey are 294,826,000 bbl (barrels) on January 1, 2014, which is very limited considering the Turkish demand. Similarly, this situation also counts for Turkey’s natural gas

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Table 2.1: Turkey’s domestic energy statistics in Mtoe

Domestic energy statistics 2000 2010 2017

Oil Gas Oil Gas Oil Gas

Production 2.7 0.5 2.5 5.6 2.7 0.3

Consumption 26.7 5.1 28.7 13.1 41.3 25.2

Net imports 29.3 11.5 29.3 30.8 47.0 45.0

Source: Eurostat (2019)

resources. The Oil and Gas Journal (ibid.) reckons that 241 bcf (billion cubic feet) of natural gas is proven to be within the borders of Turkey on the first of January 2014. Although these numbers are from 2014 and do not account the recent, albeit limited, discoveries, they show that Turkey’s primary energy resources regarding oil and gas in relation to production and consumption are very limited (ibid.). Table 2.1 shows production, consumption, and net imports for the years 2000, 2010, and 2017. It proves that Turkey is highly dependent on foreign imports.

The development in the primary production from 2000 until 2017 can be ascribed to and explained by the lack of domestic resources. In 2000, there was a total primary production of 26.392 Mtoe (megatons of oil equivalent) and this number increased to 36.500 Mtoe in 2017: an increase of just 38 percent. Likewise, oil and gas production have remained reasonably similar during this seventeen-year period. It is interesting to see that the renewables and biofuels have gained traction in Turkey; however, their growth is beyond the scope of this research.

The final energy consumption relative by sector is shown in figure 2.2. Data from Eurostat (2019) show that the transport and agriculture and forestry sectors increased their share in the primary energy consumption of Turkey. This increase has been at the relative cost of the households. All in all, what is striking is that Turkey has increased its final energy consumption from 2000 until 2017 by approximately 100 percent: it has doubled from 54.510 to 100.481 Mtoe. The rise in final energy consumption does not correlate in full of the growth in total GDP, which grew fourfold (see figure 2.1). Thus, there is a production-consumption gap in the Turkish energy markets, which requires Turkey to search for energy supplies outside its legal borders. Figure 2.3 shows the imports of Turkey per energy source. The share of natural gas in the energy import mix has risen: from 12.051 in 2000 to 45.487 Mtoe in 2017. Oil and petroleum products increased from 30.664 in 2000 to 53.933 Mtoe in 2017. This period saw a decrease in the share of oil and oil products in the energy import-mix of Turkey. Natural gas gained traction and largely filled the space that the oil left in the import mix. As policy developments will be discussed in the next chapter, it suffices to say that Turkey set to exploit its geographic location in a quest to become an energy hub between East and West to explain the rising importance of gas. In addition, the rise of gas is partly due to the stage of the global economy at which Turkey is continuing its industrialization (Amineh and Yang, 2018, p. 18).

It is important to mention that there are three preliminary explanations for the rise of gas in trade patterns. The first explanation is that gas is gaining an autonomous

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Figure 2.2: Final consumption decomposed per sector normalized to 100%. Source: Eurostat (2019)

or independent status from oil. While gas prices were first linked to the oil price, a gradual detachment has been observed during the past decades. The consequence of this development establishes better-integrated gas markets and more demand for gas as trade in gas is less complex. The second explanation is that the European Union has hinted and works toward a policy that favors gas for its energy transition toward green energy (European Commission, 2006; European Commission, 2013). Turkey’s location functions as a transit country toward the European Union and increases its importance. The last preliminary explanation is that Turkey’s own gas demand is on the rise. This is shown in figures 2.4 and 2.5. On top of that, the Oxford Institute for Energy Studies (2018) writes that as of 2018 all Turkish provinces were connected to the natural gas grid. In other words, gas became better available, because (mainly) households and other consumers had a direct connection to the gas grid. This means that it is much easier for them to consume gas. The elimination of the process to buy physical gas storage units (tubes) contributes to the ease of consumption and therewith consumption itself.

Figures 2.4 and 2.5 display the increase in energy imports and in particular oil and gas. Table 2.2 summarizes the imports from AIR and their relative share to the total imports of oil and gas in Turkey altogether. In the nine-year period presented in the table, Turkey has managed to diversify its imports from oil and gas. Especially regarding oil, the share of Russia and Iran has decreased. The same counts for the diversification of imports for gas, except for Iran. An increase in the share of Iran’s

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Figure 2.3: Energy imports of Turkey per source in Mtoe Source: Eurostat (2019)

Table 2.2: Imports of oil and gas from AIR in percentages

Imports (% of total) 2008 2017

Azerbaijan Iran Russia Total Azerbaijan Iran Russia Total

Oil and petroleum products <1 36 33 70 <1 27 19 47

Gas 12 11 62 85 12 17 52 81

Source: Compiled by the author with data from EMRA’s (EPDK in Turkish) Yearly Petroleum Market and Natural Gas Market Reports (Energy Market Regulatory Agency, 2010; Energy Market Regulatory Agency, 2018b; Energy Market Regulatory Agency, 2018a) Note: The remaining 19 percent of the import of gas in 2017 came from LNG trade with Algeria (8%), Nigeria (2%), and the spot LNG markets (9%).

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Figure 2.4: Energy imports per source and normalized to 100% Source: Eurostat (2019)

contribution to Turkey’s gas imports shows that the actors in the Turkish and Iranian gas markets, especially the state authorities, trust each other sufficiently enough to continue the current gas trade; although this energy trade has not been without disputes.

Moreover, from figure 2.5, we can see that the transportation sector has increased its consumption of oil between 2000-17. This growth is explained by the growing GDP and per capita income, which are itself explained by an increase in the economic activity in Turkey. However, figure 2.4 provides us with evidence that the share of oil and petroleum products are in decline in the total energy-import mix. Thus, oil only provides a declining part of Turkey’s economic growth. Gas, on the other hand, has seen a five-fold increase: from a consumption of less than 5 Mtoe in 2000 to almost 25 Mtoe in 2017. Figure 2.4 shows that gas also increased its share in the total energy-import mix of Turkey. This means that a considerable portion of the economic growth in Turkey can be explained by the increasing consumption of gas. In fact, figure 2.5 shows that the industry and commercial sectors have more than doubled their consumption of gas. Put differently, industrialization in Turkey since the early-2000s has been fueled predominantly by the import of natural gas.

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Figure 2.5: Final sectoral consumption of natural gas (left) and oil and petroleum products (right)

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2.4 Conclusion

This chapter dealt with the energy scarcity and situation in Turkey. Plainly, scarcity in Turkey is on the rise. Turkey faces serious scarcity issues that are only going to be worse without the implementation of proper policies. Demand-induced scarcity is increasing as all three indicators (GDP, per capita GDP, and population growth) are estimated to rise as a result of industrialization and urbanization. Additionally, there are still approximately 16.5 million people detached from the natural gas grid. Con-necting this part of the population could be a serious challenge for the supply security of Turkey. Supply-induced scarcity, likewise, decreases the probability of success for Turkey in gaining access to required oil and gas resources to fuel economic growth. In particular, the securement of natural gas plays a vital role for the continuation of the industrialization of Turkey as the industry sector depends on natural gas (see figure 2.5).

The data shown in this chapter provide the basis of the problem at hand. Tables 2.1 and 2.2 gives a view of the energy supply security of Turkey. What is deduced from these data is that Turkey lacks oil and gas resources, while it is partially successful in reducing dependency from the three key suppliers. Nonetheless, it remains a fact that Turkey is heavily dependent on Russia and to a lesser extent Iran. Azerbaijan seems like a reasonable option for diversification. The main conclusion of this chapter is that Turkey is in need of policies that secure the supply of oil and gas. The policies that Turkey has toward its domestic oil and gas markets as well as the three supplier countries are discussed in the next chapter, where they are configured on the basis of these findings.

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Chapter 3 Turkish policies and tools for

securing energy supplies

3.1 Introduction

This chapter deals with the policies and tools that Turkey has developed in securing a portion of its oil and gas from AIR. It starts with discussion on the strategies and policies according to the Strategic Plans (SPs) developed by the Ministry of Energy and Natural Resources. These SPs are important as they form the basis of Turkey’s energy supply security policies. After this discussion, the tools that Turkey deploys are analyzed. The question that is central to this chapter is: “what are the policies and tools of Turkey, and how it apply those in securing a portion of its energy needs from Azerbaijan, Iran, and Russia?”.

This chapter is structured as follows. Section 2 deals with the strategy and policies that Turkey developed in securing oil and gas. Section 3 deals with the foreign relations of Turkey with AIR. It starts with a general overview of Turkish policy after which it focuses on the diplomatic relations with AIR. Section 4 continues with the economic relations and analyzes the trade, investment, and finance between Turkey and AIR, and the role of energy in economic relations. Lastly, section 5 studies the security relations to give an understanding of the strategic nature of the relations of Turkey with AIR. Security cooperation is not only important to facilitate a secure interaction between actors transnationally, but also indicate that bilateral relations have entered a deeper and strategic phase. Finally, a conclusion is given.

The technical aspect of energy supply security is discussed in section 3. Thereafter, the tools that are deployed by Turkey are analyzed in section 4 (diplomatic), section 5 (economic), and section 6 (security). Section 7 concludes the chapter.

3.2 Turkish national policies of energy supply security

Table 3.1 shows that AIR have plenty proven oil and gas reserves to supply the Turkish economy. The table displays that AIR have sufficient resources to supply Turkey. Three important observations can be made based on this table. The first observation is that Azerbaijan’s proven oil and gas reserves are relative small. They are both below 1 percent of the global reserves. Nevertheless, the relatively low level of reserves does not make Azerbaijan an unimportant player. Looking at the

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consumption figures, we can see that Azerbaijanis consume only 10 percent of their domestic production. The consumption/production ratio of gas in Azerbaijan is much higher when compared to oil. Nearly 60 percent of the domestic gas production is consumed in Azerbaijan. However, this means that 90 percent of oil and 40 percent of gas production in Azerbaijan is meant for exports. Compared to Azerbaijan, Iran and Russia have much higher reserve, production, and consumption figures. In fact, Iran and Russia have the fifth and seventh largest proven oil reserves and the second and first largest proven gas reserves, respectively (British Petroleum, June 2018). This does not mean that both are successful in producing and exporting their resources. While Russia is able to produce large quantities of oil and gas and export 71 percent and 33 percent, respectively, Iran lags behind. Compared to Russia, the oil and gas production of Iran were at 44 and 50 percent. Regarding the export, Iran sees to struggle most with its gas exports. In fact, it is only 1.3 times larger than that of Azerbaijan, rendering Iran a country that is far below its potential.

Table 3.1: Proven oil and gas reserves of Azerbaijan, Iran, and Russia, and their global shares in 2017

Countries Azerbaijan Share (in %) Iran Share (in %) Russia Share (in %) Oil (billion bbl) Reserves 7 0.4 157.2 9.3 106.2 6.3 Production 0.29 0.9 1.8 5.4 4.1 12.2 Consumption 0.03 0.1 0.66 1.8 1.18 3.3 Export 0.26 1.14 2.92 Gas (bcm) Reserves (’000s) 1.3 0.7 33.2 17.2 35 18.1 Production 17.7 0.5 223.9 6.1 635.6 17.3 Consumption 10.6 0.3 214.4 5.8 424.8 11.6 Export 7.1 9.5 210.8

Source: British Petroleum (June 2018)

Having such energy-rich neighbors, Turkey is in a unique position to secure a por-tion of the oil and gas resources of AIR. Contemporary Turkish energy policy has been constructed by two SPs (SP1 [2010-14] and SP2 [2015-19]). These plans are a reaction to two developments. Firstly, the SPs are the extension of Vision 2023. This Vision is the foundation of a series of reforms in vital policy areas of the country with the aim to achieve a higher level of overall development in 2023, during which Turkey celebrates it centennial. Ultimately, Vision 2023 resembles Turkey’s political desire to increase its power in world politics and become an important member among the advanced industrial countries. The main objective of the Vision is to increase GDP until it belongs to the top 10.1 _{The policy areas in which the Vision stipulates} im-provements and upgrades include economy, transport, health care, education, defense, judiciary, and energy. Secondly, the SPs should be seen as a reaction by the Turkish government to the changing domestic and international environment regarding energy. MENR (unknown) starts by mentioning global population growth, industrialization,

Turkey’s energy supply security from Azerbaijan, Iran, and Russia

Master Thesis