While few people in the world have warm feelings for energy companies beyond perhaps their stockholders, Russia's state-owned natural gas monopoly Gazprom has shown an unrivalled and unique capacity to alienate is customers over the past two decades since the collapse of the USSR.

Nations unhappy with Gazprom's bludgeoning tactics include virtually all of the new nations composing the post-Soviet space and beyond. Issues range from aggressive low-balling of purchase prices for natural gas exports (Central Asia post-Soviet states) through transit countries getting screwed on both prices and transit fees (Belarus, Ukraine and China) to end consumers from Eastern and Central Europe to Asia.

Gazprom's customer base is nervously contemplating if the monopoly's obnoxious buccaneering capitalist tactics will cause further disruptions in continued supplies of natural gas if the energy giant pushes their transit neighbors too far.

One of Russia's customers has had enough of being regarded as Gazprom's milch cow, and unlike Ukraine or Belarus, Moscow may suddenly find that Turkey has both the inclination and wherewithal to fight back, and it is a fight that Gazprom would be foolish to pursue.

The storm flags were raised in Ankara on 29 September when Turkish Energy Minister Taner Yildiz told a symposium on the exploitation of mineral resources that Turkey may sever its natural gas contracts with Russia if discounts on fuel supplies cannot be resolved. Taner said, "The operation of our agreements for the supply of gas through the western corridor is expiring later this year. We import much of our oil and gas. In this regard we have requested from the Russian side a discount on the gas being supplied along the western corridor. If Russia does not offer a discount that will satisfy us, we intend to raise the question of terminating the contract" before reminding his audience that over the past 29 months the price of Gazprom natural gas imports had risen by 39 percent.

Yildiz stated that in view of the rising prices the Turkish government intended to seek a partial rebate for the country's purchase price of Russian oil and natural gas via the Balkans, commenting, "Specifically, we shall analyze every agreement in this area that is expiring.

Among them contracts for supply through the western corridor" before reiterating that without a discount Turkey would not renew the purchase agreements.

Now Ankara has upped the ante, as on 2 October the Turkish state gas pipeline operator Botas informed Gazprom that it will end its contract with them for the delivery of natural gas to Turkey through the Balkans. Sources in the Turkish Energy Ministry, speaking on condition of anonymity said, "Russia has failed to take steps that would satisfy the Turkish side. Proceeding from this, Botas has officially informed Russia that it will not extend the agreement."

Turkey is seeking a 20 percent natural gas price reduction on its Balkan purchases. On 2 October Turkish Energy Minister Taner Yildiz said, "Russia is the most important country in our import of natural gas. Our annual natural gas import from three different channels in Russia is nearly 30 billion cubic meters. The Western Line provided an annual 6 billion cubic meters of natural gas. End of inflow of 6 billion cubic meters of natural gas will not cause any problem. Turkey also imports natural gas from Iran and Azerbaijan. Our annual natural gas consumption is 35-37 billion cubic meters. On the other hand, Turkey is able to import 45 billion cubic meters of natural gas under its agreements,"

The view from Moscow is that it has the whip hand in its negotiations with energy-poor Turkey, which currently imports about 90 percent of its energy needs. In 2010 Gazprom provided bout 60 percent of Turkey's total domestic gas imports for domestic consumption.

That, however, is half the story.

Turkey and Russia are already connected with pipelines not only through the Balkans but also by the Blue Stream 754 mile-long, $3.2 billion, natural gas pipeline, which runs across the bottom of the Black Sea from Russia's Beregovaia Compressor Station to Turkey's northeastern Black Sea Durusu Terminal. While gas flows from Russia to Turkey started in February 2003, pricing disputes delayed the official inauguration ceremony at Durusu until November 2005. Turkey took some criticism from the U.S. for the pipeline prior to its opening, as Washington publicly criticized the pipeline, calling upon Europe to avoid becoming any more dependent on Russia for energy. Despite the cost wrangles, relations were running sufficiently well that in March 2009 discussions were held in Ankara between Turkey's previous Energy Minister Hilmi Guler and Gazprom CEO Alekhsei Miller about a parallel Blue Stream 2 undersea pipeline project.

What Miller and his cohorts seem to fail to understand is that Gazprom is not the sole significant player in the Turkish market that it used to be. Iran, which contains the world's second-largest gas reserves, currently provides nearly one-third of Turkey's domestic demand and is eager to expand sales, while neighboring Azerbaijan, which currently supplies roughly 5 percent of Turkey's imports, is also seeking to expand its market share, particularly given its recent massive offshore Caspian natural gas discoveries. Last but not least, Turkey also receives liquefied natural gas (LNG) supplies under contract with Algeria and Nigeria.

Earlier this year, Turkey's natural gas reserves were estimated at roughly 218 billion cubic feet, nearly all of which is undeveloped, as the country currently only produces approximately 25 billion cubic feet per annum. There are 14 gas fields in Turkey, the largest one of which is Marmara Kuzey, an offshore field in the Sea of Marmara in the Thrace-Gallipoli Basin and Turkish and foreign companies have been exploring for oil and natural gas in Turkish territorial waters from the Black Sea to the Mediterranean.

So, Turkey is hardly bereft of longer-term energy options should Moscow continue to put the financial screws to its natural gas prices. While a cessation of Russian natural gas imports would undoubtedly cause some interim dislocation to the Turkish economy, there are the options enumerated above that could in short order begin to take up the slack.

Gazprom accordingly should listen very carefully to Ankara's pricing concerns.

Source: http://oilprice.com/Geo-Politics/International/Turkey-and-Russia-Spar-Over-Natural-Gas-Prices.html

By. John C.K. Daly of Oil Price