Turkey's gas find comes at a time when economy faces pressure

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Hind Al Soulia - Riyadh - Turkey’s recent discovery of natural gas reserves in the Black Sea has the potential to transform the country into a net exporter of hydrocarbons, as opposed to one with a huge fuel import bill, at a time when its economy faces increased pressure, with ratings agency Fitch lowering its outlook on the country's sovereign rating last week. So how significant is this discovery and what are the implications for its economy and for other gas producers in the region?

Sizeable reserves

The find of a new gas field is the biggest in its history. The 320 billion cubic metre reserve field in the Black Sea could transform the country into a net exporter by 2023.

The announcement comes during a difficult period for the Turkish economy, with finance minister Berat Albayrak last week forecasting the country's GDP would fall between 1 per cent growth and 2 per cent contraction. Citigroup analysts have forecast a 3 per cent contraction, according to Reuters.

Fitch Ratings lowered its outlook based on its view that interventions made to shore up its currency, which has dropped by 16 per cent against the dollar since March, has weakened its foreign exchange reserves.

"Gross FX reserves (including gold) fell to $88.2 billion (Dh323.9bn) in mid-August from $105.7 billion" at the end of last year, the ratings agency said, despite a $40.5bn boost from regulatory changes shrinking the size of the offshore swaps market and a $10bn increase in swap lines agreed with Qatar in May.

The country is currently heavily reliant on energy imports, which reached $41 billion last year. The potential for self-sufficiency in energy as well as the possibility of reaching export potential in three years could provide a boost to its revenues as well as reducing its debt burden from importing energy.

Choppy waters

Extracting the gas may not be straightforward. Turkey, which has a large Eastern Mediterranean coastline, has adopted a more aggressive stance to foreign policy in recent years and is embroiled in a dispute with Greece over the rights to explore for oil and gas. The neighbours are no stranger to conflict and increased tensions in the seas led to France deploying additional military presence to stave off conflict. Turkey has also previously ramped up drilling for oil and gas off the coast of Cyprus, but the latest discovery in Turkish waters could potentially redirect Ankara’s efforts towards its own patch rather than drilling in more contentious waters.

A map of the competing maritime zones in the East Mediterrenean. Roy Cooper / The National
A map of the competing maritime zones in the East Mediterrenean. Roy Cooper / The National

Regional success

Turkey will look to Egypt’s successes in monetising its large Zohr gas find. Egypt's find in 2016 is transforming the country from a gas importer into an exporter and the biggest player in the Eastern Mediterrenean. Its discovery prompted a search for additional reserves by Cyprus, Israel, Greece, Turkey and Lebanon. Israel has been successful in developing the massive $3.6 billion (Dh13.2bn) Leviathan field and signing export deals with Jordan and Egypt, which have peace treaties with Tel Aviv. Greece has also awarded contracts to energy majors to help develop its unexplored hydrocarbon resources. Cyprus, meanwhile, has been searching for potential partners to help develop its Aphrodite field as well as liquefaction infrastructure. Lebanon, which launched licensing rounds for hydrocarbon assets in 2017 and awarded contracts to a consortium led by Total, has not been successful in exploration so far.

President Recep Tayyip Erdogan takes part in a video conference with Turkish drilling vessel 'Fatih' before announcing the biggest natural gas discovery in history, in Istanbul, Turkey. EPA

President Recep Tayyip Erdogan takes part in a video conference with Turkish drilling vessel 'Fatih' before announcing the biggest natural gas discovery in history, in Istanbul, Turkey. EPA

Turkish Finance Minister Berat Albayrak and Energy Minister Fatih Donmez pose with members of Turkish Petroleum (TPAO) on the deck of drilling vessel Fatih in the western Black Sea, off Turkey. REUTERS

Turkish Finance Minister Berat Albayrak and Energy Minister Fatih Donmez pose on the deck of drilling vessel 'Fatih' in the western Black Sea, off Turkey. Reuters

The Turkish drilling ship, 'Fatih', had been carrying out exploration operations in the Tuna-1 sector in the western Black Sea for the past month. Reuters

President Recep Tayyip Erdogan said the natural gas reserve, at 320 billion cubic metres, is the biggest in Turkish history. EPA

Turkey's President Tayyip Erdogan addresses the nation. Reuters

Turkey aims to bring the find to use in 2023 and to become a net energy exporter, Mr Erdogan said. EPA

The announcement comes as tensions between Turkey and Greece, and EU nations, are running high over oil and gas exploration in disputed waters in the eastern Mediterranean. Reuters

Mr Erdogan listens to Finance Minister Berat Albayrak and Energy Minister Fatih Donmez on a live video feed about the find. Reuters

People watch the TV at a coffee house while Turkish President Recep Tayyip Erdogan announces the biggest natural gas discovery in history in Istanbul, Turkey. EPA

People watch the at a cafe TV while Turkish President Recep Tayyip Erdogan announces the biggest natural gas discovery in history in Istanbul, Turkey. EPA

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What next?

Turkey's find means it has joined what Hasnain Malik, head of equity research at emerging markets specialist Tellimer Research, described as the "Hydrogen Hail Mary" club – in reference to the last-minute American Football play where a losing team attempts a "a long pass with potentially heroic consequences but, generally low probability of success".

"It is perhaps too cynical an observation but the announcement of transformative oil and gas projects often occur when there is a degree of economic and, particularly, external account distress," Mr Malik said in a note to clients last week.

In some instances, such as Egypt and Brazil, energy finds have had a transformational effect from an energy perspective, but not from an economic perspective. Egypt's recovery came after the devaluation of its pound and reforms put in place to coincide with an IMF programme, Mr Malik said. In other countries including Bahrain, Kenya, Lebanon and Pakistan, progress following the initial excitement of a find has been slow, for varying reasons.

"But in no country has an oil and gas discovery alone rescued the macroeconomy. Market-friendly, consistent policies remain the best route to economic growth, irrespective of natural resources," Mr Malik said.

Updated: August 24, 2020 12:56 PM

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