Turkish elections unlikely to solve Ankara's energy dilemma

Turkey goes to the polls on May 14 in twin presidential and parliamentary elections. The country's control of the Bosphorus Strait -- a key chokepoint for global commodities -- and its role as a corridor for Kurdish oil supplies make Ankara an important geopolitical player in world markets despite its own lack of energy resources.

Sitting president Recep Tayyip Erdogan and Kemal Kilicdaroglu are the front runners in a tight race, but whoever wins, their options to solve Turkey's risky dependence on imported energy, especially from Russia, will remain limited. And a key question will be how the country manages payments for imports and domestic supplies with a volatile currency and inflation above 40%.

"The most immediate impact could be on 470,000 b/d of shuttered pipeline exports from northern Iraq to the Turkish port of Ceyhan, as a contentious campaign and tight race have created additional headwinds to a compromise deal between Ankara and Baghdad," said Paul Sheldon, chief geopolitical advisor for S&P Global Commodity Insights.

Related factbox: Turkish elections see energy in focus

Iraq is a major crude supplier to Turkey, accounting for 30.2% of its 2.017 million mt imports in February -- before import infrastructure was shut. The closure is increasing Russia's importance as a supplier, a role that has grown steadily since the Kremlin ordered troops into Ukraine in February 2022.

Turkish refiners are capitalizing on discounts for Russian crude, while Moscow is redirecting volumes away from traditional markets lost due to western sanctions.

Russian crude has been trading at major discounts since it invaded Ukraine, leading non-sanctioning countries, including Turkey, to take advantage and increase imports. Platts, part of S&P Global, assessed Russia's key crude grade Urals FOB Primorsk at $51.33/b on May 10, a $25.6/b discount to Forward Dated Brent.

For much of the period since the Russian invasion began this discount has been even greater, peaking at $42.86/b on April 14, 2022. Before the war it was trading at a discount of under $10/b.

Turkey's monthly imports of Russian crude more than doubled from April last year, with product imports also surging. Russia supplied 35.7% of Turkey's crude imports during 2022, more than double 2021 and only narrowly behind Turkey's regular main supplier Iraq. It supplied 53.3% of product imports in 2022, up from 37.6% in 2021.

Gas dependence

Erdogan remaining in power could see Turkey drift closer to Russia's sphere of influence. Ahead of the polls, Moscow has been supplying Turkey with gas on credit and discounted crude oil and petroleum products.

Russia supplied 39.5% of Turkey's 54.66 Bcm of gas imports last year. Most of these imports are carried out under long-term, crude-indexed legacy contracts. Its two biggest contracts -- for 16 Bcm from Russia, and 9.6 Bcm from Iran, expire at end of 2025, and July 2026 respectively.

Turkish energy minister Fatih Donmez last week confirmed Russia had allowed Turkey to postpone payments for "some" of its gas imports. The Kremlin's support has helped Erdogan to continue subsidizing retail gas sales by up to 80%, and power by up to 50% ahead of the vote at a time when Ankara has faced twin economic pressures of rampant inflation and a plummeting lira.

Victory for the six-party coalition opposing him could shift Turkey back towards the west and its NATO allies but the challenge of renewing expiring gas deals will remain. Failure to do so risks a repeat of February 2022 when Iran stopped gas exports to Turkey, causing gas and power blackouts.

Ankara was forced to scramble for LNG cargoes to keep the lights on. Turkey has a little leeway, having recently expanded gas storage and LNG import capacity, and commissioned the Sakarya gas field, which is slated to produce 14-15 Bcm/year by 2025, but growing domestic gas demand and recent promises to transit gas to Southeast Europe mean it will still need all the gas it can get.

Bulgargaz is already using Turkey's northern LNG terminals for imports to replace lost Russian volumes, while Ankara hopes to establish a gas trading hub close to its interconnectors with Bulgaria and Greece. Plans for a trading hub -- announced late last year and supported by recent legislative changes, are supported by Turkey's opposition parties.

However, they remain opposed to plans for unbundling state gas importer, transit grid, storage and LNG terminal operator Botas. That unbundling is likely to proceed unless global gas prices drop to a level where Turkey's generous retail subsidies are no longer necessary. Turkey goes to the polls again next year in nationwide local elections, which are sure to be seen as a test of whatever administration wins on May 14. Energy prices are again likely to play a significant role in the outcome.