A. Grivach: Hybrid indexation with crude and gas spot prices seems to be the balanced solution for both producer and supplier

Alexey Grivach is the Deputy General Director of Gas Projects at Russia's National Energy Security Fund (NESF). He sat down for an exclusive interview with Enerji IQ Market Report to discuss the ongoing gas contract negotiations between Turkey and Russia in an exclusive interview.

(Enerji IQ – Dec. 10, 2021) Turkey’s gas market, with an annual consumption expected to reach a record-high of 60 bcm in 2021, is nearing towards a critical junction. The country’s 8-bcm/y of long-term gas contracts with Gazprom Export are due to end on December 31. Russia is Turkey’s largest supplier of imported gas, with a total of 30-bcm/y in long-term contracts, and, in the context of this year’s energy-supply crunch, has increased exports to Turkey by 83.7% year-over-year as of the end of November, according to Gazprom’s statement.

But Turkey is eager to resume the strategic plan that it began to implement in the mid of the 2010s to create a more flexible, competitive, and diversified suite of gas supplies, viewing this past year as one beset by extraordinary circumstances.

Speaking at a conference in Antalya on Nov. 23, Turkey’s Energy Minister Fatih Donmez stated that Turkey had agreed in principle to renew its gas contracts with Russia. "It will turn into a written agreement soon. Contracts that expire at the end of this year will also be renewed. The duration of these contracts will be between three and ten years, not as long as the previous ones. The contractual amounts are the same for BOTAS and private importers, but we will be able to offtake more gas if needed. This was not included in the previous contract but will be in the new contract for the first time," revealed Donmez.

However, no further information has been provided by Ankara or Moscow after Minister Donmez’s statements. Turkey’s gas traders and large-scale consumers thus face supply and price uncertainties in making their sales and procurement plans for the upcoming 2022 gas year. Turkey’s state-owned gas company BOTAS, importing approximately 95% of the gas consumed in Turkey, has also yet to announce its gas-sales contracts for the 2022 gas year, despite the transmission-capacity booking deadline having expired today (December 10).

In this context, Enerji IQ Market Report had the good fortune to speak with Alexey Grivach, Deputy General Director of Gas Projects at Russia's National Energy Security Fund, who offered unique insights into the ongoing gas contract negotiations between Turkey and Russia in an exclusive interview.

“Flexibility of contract volumes that Turkey is seeking should be subject to additional cost”

IQ: According to the most recent statements, Turkey and Russia have yet to agree on how to renew the expiring gas contracts. Would you please briefly tell us what your expectations are for a possible deal?

Alexey Grivach (AG): The market situation favors the supplier’s position in the negotiations. Yet Turkey is also a major market for Russian gas, and there is a need to secure demand for the years to come. The flexibility of contract volumes that Turkey is seeking should be subject to additional cost. And we are all aware of current price levels for those who have moved to spot indexation and added more spot-based contracts to their portfolios.

IQ: Due to the economic volatility in Turkey, is Gazprom Export more likely to prefer state- owned BOTAS as a counterpart rather than renewing contracts with private companies?

AG: Over the last three years, the private importers did not come close to meeting their take- or-pay obligations and thus owe Gazprom a huge sum of money, a problem that needs to be solved as part of the negotiations about new contracts. There is no evidence that the private importers will be able to pay for the gas, as import prices are much higher than internal tariffs. And the recent volatility of the Turkish lira makes this issue even more challenging.

IQ: According to statements, Gazprom Export has signed TTF + Brent-indexed hybrid contracts with Hungary and Moldova in the last couple of months and granted a favor to Serbia over the next six months. What would be the more likely price index to Turkey in your opinion?

AG: Hybrid indexation with crude and gas spot prices seems to be the balanced solution for both producer and supplier. But the duration and flexibility must also be taken into account.

IQ: Turkey is expected to consume over 60 bcm of gas this year, a record, while its base-load power production will rely on gas for the next five years due to balancing requirements for increasing the installed capacity of renewables. How will Gazprom respond to Turkey’s demand for pipeline gas?

AG: Gazprom is a very reliable partner. But it will not have the possibility to respond if there is not a certain contract.

IQ: As you are likely aware, Ankara insists on a flexible gas-supply model by promoting monthly, quarterly, and annual spot pipeline gas-capacity auctions. Does this model fit Gazprom’s sales strategy to Turkey? Do you expect Gazprom to offer seasonal spot pipeline gas volumes to Turkey via electronic sales platform (ESP)?

AG: When the market is tight, it really is better for the customer to cover with contracted quantities. And long-term agreements normally have flexibility for the off takers. For auctions, a liberalized market is needed, and Turkey is at a very early stage of achieving that.

IQ: A political question, but can you please outline the impact of diplomatic relations on the ongoing gas contract negotiations?

AG: Of course, overall diplomacy does matters. It may give additional advantages for commercial agreements, or make it more complicated.

(Enerji IQ would like to thank Mr. Aydin Sezer (@AydinSezer06) for his valuable contribution in arranging this interview with Mr. Alexey Grivach.)