Energy, Ukraine and the Turkish question

Multinational

Mehmet Öğütçü, CEO of Global Resources Partners and chairman of the London Energy Club, talks to The Energy Year about changes in the global energy picture brought about by the war in Ukraine, how the geopolitics of the energy transition have changed and prospects of the crisis leading to the expansion of Turkey’s European energy role.

What are the most fundamental elements of change and key crisis markers in the global energy picture brought about by the Russian-Ukraine war?
The war in Ukraine has dealt a major shock to commodity markets, altering global patterns of trade, production and consumption in ways that will keep prices at historically high levels through the end of 2024. Also, geopolitics have made a very strong comeback. A few years ago, we thought the commercial and technological interests would prevail in the international arena rather than geopolitics. We are now seeing its return in a very forceful way. No longer is it “the economy, stupid.”
Once this Russian-Ukraine dilemma and tragedy goes away, I think we will be facing a bigger conflict, this time a long overdue duel between Washington and Beijing. I always say: “Do not treat China only as the People’s Republic of China but see it as an ensemble with Hong Kong, Taiwan, Macau.” Asian countries like Singapore, Indonesia and Malaysia are countries where many powerful business leaders are of Chinese ethnic origin. This huge region, dubbed the Greater China Economic Area, is much bigger than the US or the European Union – hence, China should be seen as the economic superpower today and not several decades down the road.
We should also no longer see China as the low-cost manufacturing factory of the world, as in the past – the Chinese are currently upping their technological superiority in many areas including in particular artificial intelligence, space, ocean matters, renewables and electrical cars. It is, in my view, on the fast track to becoming a major power of technology and innovation, with many global brands.
And understandably the US, which came to see itself as the sole superpower since the collapse of the Soviet Union, is seriously worried about China’s unstoppable rise. The Belt and Road initiative, the 21st century’s only visionary project to date, could well shape the world dynamics in large measure the way China wants thanks to all of the connections it generates across the world.
That is the main reason why the US containment strategy came into being in an effort to at least limit the speed and scope of China’s growing power on a global scale in such a way that its march could be held back for a while to allow the West to regain its lost power.
The Russian invasion of Ukraine produced an unintended consequence of bringing back the EU and the US as a united “West” after so many decades of decoupling and divisions. Clearly, the West wants to contain Russia and China, seen as “hostile” and rapidly expanding powers, so that they won’t be allowed to come into the global governance and dominance which they believe in Western capitals can threaten their fundamental economic, societal and military interests.
In my eyes, this thinking is flawed and represents a major mistake. Failing to make room for Russia, China, even India and other emerging powers will only fuel further animosity in the global system. These are huge nations and, when combined with Indonesia and others, they amount to more than half of the world’s population and are larger than the G7 nations combined. If we do not accommodate them relative to their weight in the global order, there will be inevitable frictions, confrontations and hot conflicts. Revisionism will be the order of the day.
Geopolitically, regional powers can today alter the traditional balance of power in a multipolar system by shifting alliances to either US or China, depending on interests that may swing from one end to the other, unlike in the old rigid Cold War era.

How have the geopolitics of the energy transition changed?
Geopolitical competition occurs among great powers for control over territory, natural resources and other important geographical positions or places (such as ports and harbours, canals, river systems, pipelines and grids).
Russia’s invasion of Ukraine has abruptly transformed the world. Millions of people have already fled. A new Iron Curtain has been grinding into place since February 24, 2022. An economic war deepens, as the military conflict escalates, civilian casualties rise and evidence of horrific war crimes mounts.
As for the current structural transformation in the global energy landscape, there will no doubt be geopolitical and economic ramifications, particularly for those countries reliant on fossil fuel resources. The influence once enjoyed by OPEC and OPEC+ is likely to witness a sharp deterioration in the long term as the switch from fossil to non-fossil fuels continues to gather pace. Many oil-exporting countries provide highly subsidised yet high-quality public provisions such as education, health care, water supply and electricity.
However, a transition to renewable resources may lead to a considerable fall in the oil revenue for sustained periods, which would prompt these countries to prioritise public expenditure and cut down several subsidy components. Such unpopular and drastic measures can significantly challenge the authority of the state and instigate widespread protests and violence. Further, political unrest emanating from a country or a group of countries can trigger a domino effect and threaten the internal security of other countries.
Renewable energy is capable of what fossil fuels did to the 20th-century world order. Hence, the implication of the ongoing energy transition is not just about arresting the pace of global warming but also about redefining the global power equations. Greater use of renewable energy sources will allow economies that foster them to become more energy independent, since they will be able to consume energy that is generated within their own territory. Renewable energies, therefore, will make it possible to reduce energy dependency.
Currently, however, electricity that is generated using renewable sources, or indeed any other energy source, cannot travel long distances, making it hard to export and, consequently, to gain geopolitical influence. Increased consumption of natural gas to the detriment of coal and oil will allow gas exporting countries to gain prominence in international relations, while the main exporters of coal and oil will lose influence.

Where do China and Russia fit in this new picture of energy geopolitics?
China, the ultimate target for the West, is currently the world’s largest energy consumer, emitting nearly one-quarter of global greenhouse gases and outweighing the combined coal consumption of the rest of the world. The massive escalation in demand for energy and increased dependence on fossil fuels have evoked strict policy interventions from the Xi Jinping leadership.
As a result, a comprehensive plan placing renewable energy as one of the top priorities of the country was introduced and China became the world’s largest producer of wind energy, surpassing the United States. Today it generates at least one-third of global solar power. Further, thanks to more reliable and cost-effective batteries, there is an increasing number of electric vehicles on the road.
I think Russia and China are complementary in this game, but Beijing has more ambitious global interests than Moscow and therefore Xi Jinping will not let himself be used by Putin for his own goals.
Russia is a land of superlatives. By far the world’s largest country, it covers nearly twice the territory of Canada, the second largest. However, excluding oil, gas, coal, nuclear and minerals, Russia does not figure prominently in the world economy.
But do not forget: Russia is both a European and an Asian power. Besides sharing a common border with Eastern and Central European countries, it is a next-door neighbour to Central Asia, China and Japan. It must have looked so simple for Putin. Given his military superiority, a lightning strike by Russian forces would quickly overcome Ukrainian resistance and topple the regime in Kyiv. Even if the Western measures were tougher than expected, Russia had a huge USD 650-billion war chest of gold and foreign exchange reserves to support the economy.
On energy imports, the EU still has a big decision to make. Does it deploy the biggest economic weapon it has left: adding Russia’s oil and gas exports to the sanctions list, as the US has already done? There are grounds for not doing this. The reason for hesitancy is obvious. Western sanctions would result in oil and gas prices being higher – perhaps a lot higher – for longer. That would add to inflation and intensify an already acute squeeze on living standards.
On April 27, Russia announced that it had stopped supplying gas to Bulgaria and Poland, which had refused its demand to pay in roubles. Because the EU can easily buy oil, but not gas, from elsewhere, Russia is attempting to exploit its point of vulnerability. Europe is considering how to respond. Already it was entertaining the possibility of sanctions on Russian oil. But it fears that it has the weaker hand.
An embargo would plunge Europe into recession without doing much to hurt Putin and his war effort. The initial cost to Germany’s economy of a full energy embargo could be 5% of GDP, according to Germany’s central bank. Ultimately the West has to decide how badly it wants to defeat Putin. If it is to do so, certain things need to happen. Sanctions will have to be extended to Russian oil and gas exports. The transition to clean, homegrown energy must be accelerated. Last but not least, the West must not delude itself that sanctions will work quickly. It has to be ready for a long haul because even the toughest of sieges will take time to work.
The trade between Russia and China is about USD 150 billion, whereas China has much larger interests around the world. Its exports are around USD 3.3 trillion, mainly to the OECD markets. It’s not an equal relationship between the two either. However, they share a common view that the West is an existential threat. China finds it very convenient and in its best interests to work with Russia because they need Russian gas, metals, mines, grains and arms, but not so much Russian trade.
How the West responds to Russia’s aggressive actions in Ukraine and elsewhere in the former Soviet geography – including Kazakhstan, the Caucasus and the Baltics – will be a barometer for how they deal with the Taiwan issue. With the Russian invasion of Crimea or de facto South Ossetia and Abkhazia, there wasn’t much reaction from the West. China has every interest in Russia being reduced in power and having to depend heavily on China. Therefore, they can play with Russia as they wish.

Europe stands to suffer from this shift and see its need for energy grow ever more as growth returns post-Covid. How do you see this current crisis affecting Western European countries?
The United States has the luxury of imposing sanctions and embargoes because it has its own oil and gas reserves. Its external dependency is more related to Mexico and Canada rather than the Gulf region or Russia. Therefore, it’s easy for Biden to give orders on banning oil and gas imports from Russia.
The EU will lose in several senses. One is that it depends heavily on Russia for 40% of its gas, 26% of its oil and more on the metals and mining commodities. It can’t substitute those quickly no matter what it does. Yes, there’s a political will behind it to phase out imports from Russia by 2030, but how it will happen is a bit questionable. I don’t think there’s a homogeneous structure in the EU to deal with this matter. France gets almost 80% of its electricity from nuclear and Bulgaria gets almost 100% of its gas from Russia. Slovakia also depends heavily on it and Germany gets almost 50% of its energy, coal and gas from Russia.
We can’t change it overnight. I saw some figures given by the European Commission president that by 2030, the EU will be replacing 180 bcm of gas received from Russia through energy saving measures and new LNG imports from the United States. They are also going to talk to Qatar, Nigeria and Algeria and step up the renewable energy revolution. And they will perhaps rethink nuclear and coal-fired power plants. The EU may want to diversify further the sources of gas coming from Iran, the Kurdish region of Iraq or the East Mediterranean basin.

Will this current crisis redefine Turkey’s energy agenda and provide the basis for a further expansion of its European energy role?
I think that for Turkey, what’s happening in Ukraine and the humanitarian catastrophe under way is very sad; Russia also poses a great threat to the Black Sea region, the Caucasus and Southeast Europe. Putin is very assertive in Syria and Libya. It’s an OPEC+ nation with a huge impact on the world oil markets. The UAE and Saudi Arabia still express their interest to continue working with Russia as in the past.
Russia and Ukraine together provide 80% of grain imports for Turkey. One in every four tourists coming to Turkey is either Ukrainian or Russian. Russia is also building the Akkuyu Nuclear Power Plant in Mersin with the first reactor to be operational by 2023. There’s the Montreux Convention of 1936, which gives Turkey the right to control the movements of Russian and Ukrainian commercial and military ships across the straits.
The Black Sea constitutes a region where the interests of geopolitical entities intersect, namely, the EU with its “Neighbourhood Policy of the EU and new EU countries in the Black Sea”; the USA in search of a gateway to Eurasia, the “broader Middle East” and North Africa; NATO with three allied countries in the Black Sea; the Russian Federation and lastly Turkey; all having potential contradictory geopolitical interests which may lead to conflictual situations in this area.
Therefore, what is happening in Ukraine has deep implications for Turkey. The country officially belongs to the West – a member of NATO, the OECD, Council of Europe and an EU accession country, which looks now like it will never happen as things continue. However, Turkey is deeply disturbed and disillusioned by the West; it is also itself under certain sanctions imposed by the US and the EU. The financial and tourist flows aren’t happening as expected. The Customs union has not been modernised to include agriculture and services plus free movement of people.
Therefore, there are still deep-rooted problems between Turkey and the West. With this crisis, if a new world order is emerging and if February 24, 2022, will mark the beginning of the Cold War 2.0, then Turkey will be forced to make a fundamental choice. So far, it has managed this well with effective communications channels with Putin, Zelensky and also with the EU. That’s an asset.
Turkey’s economy is already in the gutter and so vulnerable that it can’t afford imposing sanctions on Russia and Ukraine because it would antagonise their relations.
I think that Turkey is doing well in terms of not mediating, but facilitating talks between Ukraine and Russia – first the Antalya Diplomatic Forum, then in Istanbul talking to each other and organising talking terms for NATO, Putin and Zelensky. No other nation can actually substitute for Turkey in this regard. There were talks about China doing it but it would have meant a heavy power coming into the picture and become one of the negotiators rather than a facilitator.

Turkey also depends on Russian gas. Can it either look for alternative sources of supplies or get more Russian gas that would be redirected from European supplies?
Turkey has the same fears around gas supply security. So far, Russia has never failed in fulfilling its commitments to Turkey under the long-term contracts. Russia has invested a great deal in Blue Stream, TurkStream One and Two, as well as the nuclear power plant. Turkey knows only too well that if you’re heavily dependent on one country, there’s a price to pay in foreign policy and security policy as well. We were so worried when a Turkish F-16 shot down a SU-24 Russian jet over the Turkey-Syria border in 2015. There was a concern that Russians might cut off the gas, but it didn’t happen.
Of course, Turkey isn’t without options. It gets 10 bcm of gas from Iran and 16 bcm from Azerbaijan of which 10 bcm is going to southeast Europe. It also gets a great deal of LNG from Nigeria, Algeria and Qatar. Turkey built two floating storage and regasification units (FSRUs) with another two under construction. Kurdish gas in Iraq and the Israeli gas in East Med might also be coming now.
These projects were pipe dreams but now, under duress, the EU might push for new sources of gas. Kurdish gas in Northern Iraq will require at least two or three years, but it will definitely be operational before 2030. There’s also Israel’s Leviathan, if money is poured in there and international disputes can be skirted. The Turkmen gas might be difficult to bring because Russia will stop it on the Caspian side. Iranian gas might come if they don’t consider stabbing Moscow in the back. Iran is quite keen to open to the international community. It has the gas available, which can be easily mobilised and there’s already infrastructure, so that’s a good opportunity.
In the new world, where gas supplies will be short, the EU will be able to pay the price for that both politically and financially. Turkey also needs to address the sanctions as there’s no money flowing to Turkey right now, whether as FDI or portfolio investments, and no serious foreign tourist inflows from Western European countries are on the horizon. It’s now shadowed by Russians, Ukrainians, Iranians and Arabs.
I expect that Turkey might emerge once again as a potential regional hub for energy flows from north to south and east to west but for this to happen, Ankara has to have a smart strategic brain and execution team that will inspire confidence and effectiveness. Energy infrastructure investments are there to stay for 30-50 years and it’s necessary to trust the government in power so that there won’t be any changing of policies according to the winds flowing in different directions.
There is a credibility problem for Ankara right now in the eyes of the West, and Ankara doesn’t trust the West either. There are also some groups in Turkey known as Eurasianists: their outlook is that the West messed up with Turkey; they never kept their promises and support Kurdish guerrilla groups the PKK and YPG. They also believe that the West does not allow Turkey’s legitimate rights in East Mediterranean or the Aegean Sea and supports Greece, and therefore Turkey should work with China, Russia and Iran.
This is a group likely still influencing the government circles, but it’s overall on the fringe.
With the world’s eyes fixed on Ukraine, the standoff between Armenia and Azerbaijan is shifting quickly, and Russia and the United States are uncertain about how to respond. Moscow theoretically has the most influence of any outside power to push peace forward. However, the populations of both Armenia and Azerbaijan have signalled their discomfort with Russia’s brutality in Ukraine and are supportive of the Ukrainian people, although opinion polls in the region are often unreliable.
Diplomatically, both countries are trying to hedge in an increasingly complicated geopolitical space. Yet Russia retains enormous influence in the region and could easily play the spoiler, especially to an EU-brokered agreement. Yet instability to the north in Ukraine is reshuffling dynamics in the South Caucasus and Eurasia overall, forcing Baku and Yerevan to talk to each other through new formats and negotiators. That is both a risk and a potential opportunity.
The Black Sea-Caspian region is critical because it connects not just to Central and Western Europe but through the Danube first and then to the Rhine, to Russia and to Commonwealth of Independent States (CIS) that once made up the Soviet Union, to the Middle East and, most significantly, to Central Asia. The region is on the road between the oil and gas suppliers and the western customers in the Caspian and Central Asia.
The region is both a stepping stone and a shield for Europe against the asymmetric threats that could emerge in those three regions, in a politico-military sense. This has culminated in the development in the region of a complex oil and gas transport infrastructure. To Western energy markets, both as a source and as a supply path, Black Sea and Caspian countries become more important.

Surely, the Russian invasion must have tilted the scales.
Definitely and let’s not forget the history between Turkey and Russia. They fought 13 times and Turkey lost almost all of these conflicts. Stalin also wanted to have control of the Eastern provinces of Turkey and the straits. I read an interview with Putin where he said that his historical role model is Peter the Great, who we call Peter the Mad in Turkish history books! That means going to the warm waters in Syria and Libya and the Akkuyu Mersin nuclear power plant is on the eastern Mediterranean coast.
I don’t think that Ankara fully trusts Putin, and vice-versa, but there’s a pragmatic collaboration now going on – not a strategic partnership in any way. The West should revisit its Turkish strategy. They were ready to lose Turkey somehow. Unknowing, down the road in five years, they’ll ask the question, who lost Turkey?
Russia is in effect a vital trading partner for the Turkish economy, providing 45% of its natural gas and a colossal 70% of its wheat. The latter is an especially high-priority import, seeing as escalating bread prices are a major source of discontent in Turkey. Russia is also Turkey’s biggest source of tourists, with its 4.7 million visitors accounting for 19% of all travellers to the country in 2021.
At the same time, Turkey has more extensive economic ties to Ukraine than most of those Western nations. Ukraine supplies 15% of Turkey’s all-important wheat imports, making it Turkey’s second-biggest provider. Some 2 million Ukrainians holidayed there last year, making them Turkey’s third-biggest source of tourism. Turkey’s burgeoning defence sector established major ties with Ukraine before Kyiv’s crisis with Moscow. The TB2 drone – Turkey’s most famous military export, is renowned for its effectiveness for Azerbaijan in the Nagorno-Karabakh war and now for Ukraine as it fights Russia.
Turkey closed the Dardanelles and the Bosphorus on February 28, a move endorsed by Russia following a Ukrainian request to close the straits the day the war started. Turkey refused to close its airspace, however, to Russian flights. Turkey has welcomed thousands of Ukrainian refugees and Russian arrivals as well. Turkey voted in the UN to condemn the invasion but has not agreed to join the NATO and EU sanctions against Russia.

Could this also be the impetus for a change of domestic investment policies? And could we see something like a collaboration between Turkey and Greece in Aegean exploration and production work and beyond?
If we’re now in a historic era of new breakthroughs, it’s possible because we’re witnessing things which were once considered to be impossible. Since Turkey is not a member of the EU, the EU countries altogether are taking a stance on the East Mediterranean and Aegean matters in favour of Greece and Cyprus because they are full members, so they can manipulate the system.
The US thinks that Turkey is neither as important for this global strategy nor a reliable ally. Therefore, it has even chosen to work with PYD in Syria ignoring all the warnings and requests from a fellow NATO member country. Therefore, all these things have to change. We need to revise the US and EU strategy vis-à-vis Turkey, but Turkey has some homework to do as well.
Turkey has a strategic autonomy: it’s not Malta, Cyprus or Bulgaria. Turkey has an imperial backbone and ambitions in the region where it sits. Looking at the country by any objective criteria, it is the biggest and most powerful nation of that region to be reckoned with. If we don’t treat Turkey like this, but as a second-class partner or ally, it won’t work.
It’s more important to see it as Turkey rather than concentrate on a political figure, because leaders come and go. To achieve this, I think you need a very democratic, liberal and smart strategic approach from Ankara. Russia, Ukraine, the West and China see Turkey as a bridge in the Belt and Road Initiative. Iran is trying to get out of its international isolation. The Cyprus problem is still there. There’s also the rapprochement with the UAE, Saudi Arabia, Egypt and Israel. This is quite a lot of work to do and the West needs to recognise that.
Otherwise, there will be a power shift away from the West to the East, led by China and India. Turkey might decide to gradually move towards the East, where the economic power is, and perhaps because of political and security issues. I don’t think Turkey sees it that way. Erdoğan has now shown his political will to work with the West without ignoring his well-established relationship with Moscow, Kiev, Beijing and other new powers.
Energy-wise, Turkey has done well in renewables, which account for 54% of its current installed capacity, featuring mostly hydro, with wind and solar catching up. It is the biggest producer of geothermal energy in Europe and the fourth largest globally with about 11% of the world’s geothermal production and it is also working on green hydrogen, building up its domestic base and reducing its need for imports and its heavy reliance on countries like Russia.
However, it needs lots of capital to make this happen. So perhaps tackling climate change, a green deal and the Turkish renewables revolution efficiency will have to go hand in hand. These political developments will also have to open the way for greater international collaboration with the West, especially in technology and finance, so that Turkey can emerge as a powerful renewables leader in that region. If the West doesn’t provide it, Turkey will have no other option than working with Russia on gas and with China and other nations on renewables.

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