Turkey’s floating LNG imports deliver cheaper gas and energy security
April 2017 | Anders Norlen
Turkish gas consumption is rising fast, but sharp seasonal demand swings and limited storage mean supply is tight during winter. The deployment of an additional FSRU is part of the solution.
The Turkish gas market has seen solid growth over the last 10 years, expanding from 27 bcm in 2005 to 48 bcm in 2016. About 70% of this demand growth has come from increased gas use in power and industry, driven mainly by robust economic growth over the last decade, and 30% from growing winter heating demand in the residential and commercial sector–as increased grid penetration has made gas available to a larger number of consumers. Natural gas also has a lower level of particle pollutants than wood and coal and a lower CO2 footprint than coal and oil, making it an attractive option for residential heating.
However, increasing seasonal swings in gas demand have created a dilemma for policy makers and regulators, as a lack of storage leaves Turkey reliant on additional imports during the colder months to meet demand spikes. The difference in demand between peak and through month has grown from 1 bcm 10 years ago to almost 3.5 bcm in 2016.
Seasonal supplies in turn are limited by import capacity, with flows through congested pipelines from Russia, Iran and Azerbaijan already operating at or close to maximum capacity during peak winter months. Turkey has limited storage largely for geological reasons, and only limited additional capacity is expected to come online over the next few years.
Exhibit 1: Rapid growth in Turkey's gas demand has created an increasing need for seasonal supplies
SOURCE: IEA Monthly Gas Service, McKinsey Energy Insights Global Gas Model
The current developments of the LNG market can provide Turkey with an opportunity to benefit from the global oversupply expected through 2024 and also create a more diversified set of sources from which it imports its gas. This can also help in renegotiations of long-term pipeline contracts maturing in the early 2020s.
Providing additional seasonal import capacity
This solution has attracted interest from Turkish importers and policy makers, prompting the addition of the Aliaga FSRU1 in late 2016. The new FSRU can provide a buffer for cold winters with an additional 0.6 bcm/month of import capacity, enough to relieve pressure on an import system that has been running at or above capacity in December of 2016 to supply gas for heating as Turkey experienced a cold snap across the country for an extended period of time (Figure 2). With a 6.5 month project development time from FID to deployment, it also highlights the speed at which FSRUs can be put into action.
Exhibit 2: New Turkish FSRU will increase monthly send out capacity by 55%, from ~1.2 to ~1.8 bcm per month
Source: SOURCE: IEA Gas Trade Flows Europe, McKinsey analysis, Press search
Aliaga FSRU will not only provide Turkey with additional seasonal import capacity, it also helps diversify import sources - providing additional leverage when renegotiating contract terms with existing gas suppliers.
In addition, adding import capacity in the form of FSRUs will help solve another issue that is closely related to covering seasonal supplies: daily supplies. In December 2016 Turkey experienced supply shortages due to very strong demand, pushing daily consumption to 230-240 mcm – in excess of what the system is capable of dealing with over more than just a couple of days. Investments into infrastructure that can help solve this is high on the agenda for TSO BOTAŞ and the regulator EMRA. Plans have recently been announced to add up to two more FSRUs, in Iskenderun on the south coast and/or Saros close to Istanbul, to help build sufficient buffers in a case of very high daily demand. Together with other planned infrastructure investments, this should leave the Turkish system much more resilient to supply- or demand shocks (Exhibit 3).
Exhibit 3: Turkish daily peak supply capacity can be lifted from 210 to 430 mcm per day with planned investments in additional infrastructure
Source: SOURCE: Gas infrastructure Europe, Press search, McKinsey Energy Insights Global Gas Model
Diversification of sources of supply
The Aliaga FSRU allows for a diversification of import sources, and can accommodate opportunities that may arise in what most expect to be an oversupplied LNG market for the next 5-7 years. Without existing contracted volumes, it will be able to look for the best deals in the market, which should help lower the average gas import price for Turkey.
Currently, Turkey imports by pipeline from Russia, Iran and Azerbaijan, and under long term LNG contracts from Nigeria, Algeria and Qatar. LNG supply to the new floating facility could come from anywhere, and it could potentially develop a regular supply from a new source country such as the US.
An FSRU is a flexible option in times of uncertainty, helping mop up the best deals in what’s expected to be an oversupplied market, while adding to supplier diversity.
Stronger negotiation position
The addition of Aliaga FRSU to the infrastructure mix should enhance Turkey’s bargaining power in upcoming contract renegotiations. Turkey currently sources about 80% of its supplies under long-term oil-linked contracts, with 20 bcm of these contracts maturing by 2025. The signal effect from adding new import capacity with a different associated pricing structure will provide the Turks with additional bargaining power when contract renegotiations start. A similar effect has been witnessed recently in Lithuania, which successfully managed to negotiate discounts to its gas contracted price with its key seller by more than 20%2.
The deployment of Aliaga FSRU will provide Turkey with additional seasonal import capacity and the opportunity to diversify its sources of supply to the global LNG market. This should make Turkey less vulnerable to peak winter demand outstripping import capacity, thus adding to the overall energy security of the country. It should also help reforming the pricing structure in upcoming contract renegotiations with exporters of pipeline gas to Turkey.
(1) Aliaga FSRU is ‘Neptune’ with a 145,000 m3 of storage; under long-term time charter from Engie
(2) Interfax Energy, May 28th 2014
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About the author
Anders Norlen is a Senior Analyst with Energy Insights in McKinsey's London office.
McKinsey’s Energy Insights provides a unique insight into the ways in which the behaviour of key players is changing. We bring unbiased access to a panel of 40+ LNG buyers and experts from 24 countries, with market insights covering more than 80% of the world’s LNG trade. When combined with our proprietary knowledge of LNG contracts and proven B2B marketing expertise—along with our market analytics and risk management skills—we are very well placed to support buyers and sellers in maximising trading value.
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