In late August, Turkey’s president Recep Tayyip Erdogan announced that the Turkish Petroleum Corporation (TPAO)’s FATIH drilling ship discovered a 320 billion cubic meters (bcm) i.e. 11 trillion cubic feet (tcf) of natural gas reserves in the Black Sea, within the western part of Turkey’s Exclusive Economic Zone (EEZ). The reserve — identified to be within the Tuna-1 exploration zone — was discovered some 4,525 meters below the sea bottom, at near 2 km depth. News of the discovery has been welcomed in Turkey as a game-changer with regards to the country’s expensive natural gas import bill.
While certainly a promising development for Turkey’s energy security, important unknowns remain surrounding the economic viability of Tuna-1 (aka ‘Sakarya’). According to investment banks, the main issue is the economic extractable reserve value of the well and whether this value would justify costly deep-water upstreaming operations.
Sakarya is an ultra-deep-water exploration well within block AR/TPO/KD/C26-C27-D26-D27 that is 100 percent TPAO equity which is 7000 square kilometers in all. The formation is located some 150 kilometers off Turkey’s western Black Sea coast, and is at the perimeter of Bulgaria’s and Romania’s maritime borders. Tuna-1 is located around 100 kilometers south of Romania’s Neptun Deep block (84 bcm) – the previous largest gas find in the Black Sea discovered eight years ago by Petrom and Exxon.
This physical proximity indicates that Turkey may face production difficulties similar to Neptun’s in the extraction of Tuna-1 reserves: Wood Mackenzie researcher Thomas Purdie stresses that the Black Sea has a unique morphology:
“The basin center is deep, cold, and highly anoxic (lacking oxygen – A.C.). These harsh, challenging conditions require specialist experience, not currently at TPAOs disposal. The Sakarya development will almost be at the deepest limits of the Black Sea. This is an ultra-harsh environment.”
Experts also stress that Turkey needs to work with a major exploration and production (E&P) company to exploit the new find. A cooperation with an E&P major may be even more needed if TPAO discovers additional reserves deeper down.
Turkey’s Energy Minister Fatih Donmez said that there are still around 1,000 more meters of drilling to be conducted: “Seismic data shows two more layers of similar reservoir structures below… currently, we are 3,500 meters deep and have cut [into] second important reserve.”
However, Turkey doesn’t seem very keen on working with international E&P majors, at least not along the production sharing model. Instead, they may just contract for services. Donmez stressed that they Turkish Petroleum (TP) will carry out the entire drilling independently, while the segment of pipeline connection to the shore may be subcontracted to an international company.
Indeed, Turkey’s well-established oil and gas services sector would likely help TPAO maximize local content in the initial development phase. Yet, TPAO has no deep-water experience, suggesting that international support for the subsea operations is a must. Wood Mackenzie’s Dr. Andrew Latham, Vice President of Global Exploration, says that the market is becoming more cost efficient but more selective at the same time:
“Deep-water exploration and production is expensive, but that spending has become far more efficient. The oil price crash of 2015-16 and the price plunge earlier this year tightened operators’ focus on costs. Only the best prospects will be drilled, and only the best discoveries will be developed. By targeting only the most-productive reservoirs in deep-water, E&P companies aim to maximize reserves added per well.”
A windfall for the Turkish economy?
Turkey relies heavily on piped natural gas and LNG to meet domestic demand. In 2019, the country purchased over 45 bcm of natural gas at the cost of $41 billion. While the geostrategically positioned country connecting Asia with Europe is still far from achieving President Erdoğan’s goal of becoming a net energy exporter, the 320 bcm gross reserve estimated in Tuna-1 would serve to substantially minimize Turkey’s import volumes and costs.
Turkey currently has four long-term take-or-pay pipeline contracts with Russia (Blue Stream until 2025 and Bati Hatti until 2021), Azerbaijan (until 2021) and Iran (until 2026). Even beyond these dates, Turkey will continue to import from these suppliers. However, Sakarya can provide bargaining power for Turkey to renegotiate the pricing in these agreements. If and when Sakarya comes online, energy experts argue that Turkey can convince Russia to index its current gas prices to spot natural gas price—a proven strategy of European countries.
The Sakarya field is certainly going to change Turkey’s energy security posture. It is highly likely that with further drilling its reserves will be enhanced. Yet, Turkey needs to analyze its options for this project sensibly – if mismanaged the Tuna-1 field could transform from boon to burden for Ankara.
Turkey’s emerging economy still does not enjoy a strong country risk ranking, and FDI for large hydrocarbon projects does not come easy these days. To attract international majors to Sakarya, Turkey needs to prove attractive geology and reserve data, and offer an array of economic incentives. Only then can it confidently hail the game-changing prospects of this new find.
With Assistance from Talya Yuzucu