Erdogan’s Israel-Bashing Imperils Turkey’s Energy Hub Dreams

Photographer: Adem Altan/AFP/Getty Images

Recep Tayyip Erdogan, Turkey's prime minister, center, waves to the crowd as he stands among Justice and Development Party (AKP) members during a meeting at the party's headquarters in Ankara on Aug. 20, 2013. Close

Recep Tayyip Erdogan, Turkey's prime minister, center, waves to the crowd as he stands... Read More

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Photographer: Adem Altan/AFP/Getty Images

Recep Tayyip Erdogan, Turkey's prime minister, center, waves to the crowd as he stands among Justice and Development Party (AKP) members during a meeting at the party's headquarters in Ankara on Aug. 20, 2013.

Turkish Prime Minister Recep Tayyip Erdogan’s anti-Israel rhetoric is jeopardizing his ambition to make Turkey a regional energy hub.

Erdogan linked Israel on Aug. 20 to the Egyptian army’s overthrow of Islamist former President Mohamed Mursi, prompting rare condemnation from the U.S. of its only Muslim-majority ally in the North Atlantic Treaty Organization. Turkey cut diplomatic ties with Israel in 2010 after Israeli soldiers raided an aid ship seeking to break the blockade of the Gaza Strip in 2010, killing nine Turks on board.

Rising tensions between the former allies risk the ability of Israel’s Delek Group (DLEKG) and Turkey’s Zorlu Holding AS to negotiate a pipeline from Israel to Turkey that could feed markets in Europe. While trade has been resilient to the souring of diplomatic ties, building the $2 billion pipeline requires inter-government cooperation for a long-term commercial agreement. Their inability to complete a pipeline deal would hurt Turkish ambitions to become a regional transit center and mean continued dependence on Russia and Iran for gas.

“When the politics go wrong, the whole project breaks down,” Robin Mills, head of consulting at Manaar Energy Consulting in Dubai, said by phone yesterday. “Even if it’s done by private investors, they would want government protection.”

‘Offensive, Unsubstantiated’

Erdogan lashed out against Israel this week for promoting the argument that elections alone don’t make a democracy, an argument he said was behind the fall of Mursi’s elected government in Egypt on July 3.

“What are they saying about Egypt?” he asked members of his ruling Justice and Development Party at an Ankara meeting. “That democracy is not about the ballot box. Who’s behind this? Israel.” He said he had documents proving the link between the coup and Israel. Erdogan’s adviser Yigit Bulut published a column in Star newspaper the next day saying the prime minister had revealed a “very important truth.”

An official in Israeli Prime Minister Benjamin Netanyahu’s office, asking not to be identified because he wasn’t authorized to comment on the record, dismissed the remarks as nonsense. The Egyptian cabinet said in an e-mailed statement that Erdogan’s statements on Israel’s involvement were baseless. In Washington, White House Deputy Press Secretary Josh Earnest condemned the remarks, saying they were “offensive, unsubstantiated and wrong.”

Political Feasibility

Israel’s Delek is talking with potential partners for a gas export pipeline to Turkey under the Mediterranean Sea. While the proposal aligns with Ankara’s ambitions to serve as a regional gas hub and secure energy sources for its expanding economy, Erdogan’s government says a resolution of political problems after the aid ship killings is key to its feasibility.

“It’s good that the private sector is taking responsibility for this project,” Turkish Energy Minister Taner Yildiz said in a televised interview on August 14. “However, the project’s commercial feasibility will only be possible after the political feasibility is established.”

Strategic Considerations

Trade ties between Turkey and Israel, excepting canceled military contracts, have escaped the turbulence unscathed, with trade volume up 18 percent during the two years that followed the flotilla killings. Trade in the first six months of this year grew by a third to $2.4 billion as Israel’s Netanyahu apologized for the deaths on March 22. Turkey still demands compensation for the victims and an end to the blockade of Gaza before restoration of diplomatic ties.

“We’ve seen that the political disagreements over the past few years have been kept separate from business dealings,” Menashe Carmon, chairman of the Tel Aviv-based Israel Turkey Business Council, said by phone yesterday. “However, projects such as a pipeline involve governments, not just the private sector, and there are strategic considerations involved in whether Israel will sell Turkey gas.”

While Turkey’s almost $800 billion economy is the biggest in the Middle East, it imports almost all of its energy. Natural gas imports account for more than 95 percent of total gas supplies and almost half of the electricity it produces. Imports will increase by 20 percent through 2023 from last year’s 43 billion cubic meters, according to the Energy Ministry.

New Sources

Turkey’s imports from Iran usually remain below the contracted amount of 10 billion cubic meters annually due to winter cold snaps in Iran. Without Israel, Turkey may need to turn to Qatar or potential future exporters the U.S. or Iraq for more gas. Turkey also imports from Azerbaijan, Russia, Algeria and Nigeria.

“The only way to reduce domestic natural gas prices is to find new sources of gas,” Energy Minister Yildiz said on Aug. 14. “That could be Israel or Iraq or someone else.”

Delek, one of the firms developing the 29 trillion cubic feet offshore gas fields Tamar and Leviathan in Israel, is in negotiations for the pipeline project with Turkey’s Zorlu Enerji (ZOREN), a Turkish energy ministry official familiar with the talks told Bloomberg on Aug. 14. Both Zorlu, which has stakes in three power plants in Israel, and Delek declined to comment on the talks. Turkish energy group Turcas Petrol AS (TRCAS) is also working to import gas from Israel, Turkey’s Dunya newspaper reported today, citing Chief Executive Officer Batu Aksoy.

Israel Policy

The Israeli government’s gas policy puts aside 14 trillion cubic feet of its total 33 trillion cubic feet of reserves for export, Martijn Murphy, a Wood Mackenzie Ltd consultant, said by phone Aug. 15. While the policy is being challenged by the Israeli opposition in court, the export amount probably won’t be revised as the opposition’s chief concern is the lack of transparency in setting the policy, Murphy said. Israeli gas is sweet and dry, which means production costs are lower than gas produced in most countries in the Gulf region, Murphy said.

Israel could export most of that gas, about 10 billion cubic meters annually, through Turkey in the second half of this decade, an Israeli government official said by phone from Jerusalem, asking not to be named citing political sensitivity around the issue. Exploration in offshore fields could increase that amount in the case of new gas discoveries, he said.

While the pipeline with Turkey is a priority, selling the gas takes precedence and Israel will find other markets if Turkey doesn’t move, he said.

Erdogan’s recent outburst against Israel doesn’t help, according to Gilad Alper, a senior analyst at Ramat-Gan, Israel-based Excellence Nessuah Brokerage Ltd.

“Erdogan’s speech blaming Israel for the coup in Egypt pours cold water on the option of Israel cooperating with Turkey on the gas pipeline,” he said by phone yesterday.

To contact the reporter on this story: Onur Ant in Ankara at oant@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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