Oil and natural gas production in Turkey has remained negligible while the country’s demand for hydrocarbons has risen rapidly. The country’s population, currently in excess of 73 million, is growing at an annual rate of nearly 2 percent. Moreover, while Turkey is tempering its economic growth expectations as it copes with lower European demand, robust economic development will continue to drive Turkish energy demands.

Turkey’s Geographic Challenge

Because Turkey’s domestic energy resources are limited, the country cannot easily escape a large import bill and, consequently, a growing account deficit. Turkey imports nearly all of the liquid fuels, hard coal and natural gas it consumes. Coal, which makes up about 26 percent of Turkey’s energy consumption, will remain a significant part of Turkey’s energy mix as the country tries to exploit more of its domestic reserves. However, domestic coal production continues to fall short of demand. Unable so far to attract the needed investment to boost coal production at home, Turkey has been importing roughly 16 million metric tons of hard coal each year from Australia, Colombia, the United States, Russia and South Africa.

Natural gas will be the biggest contributor to Turkey’s energy import bill. About half of Turkey’s electricity comes from natural gas-fired power plants, and this amount will likely grow as Turkey seeks out cheaper and cleaner modes of power. Turkey’s energy consumption has already risen from 129 billion kilowatt hours in 2002 to 240 billion in 2012 (for comparison, Italy produced about 295 kilowatt hours in 2012). Most industry estimates see Turkey nearly doubling its electricity consumption over the next decade. In fact, Turkey is second only to China in its growing demand for electricity and natural gas for its power generation.

Russia is by far Turkey’s largest natural gas supplier, currently supplying nearly 60 percent of Turkey’s natural gas imports — and that percentage is expected to grow. Iran comes second, supplying close to 20 percent of Turkish natural gas. Thus, Turkey depends heavily on two historical regional rivals for the bulk of its energy needs. This is obviously not ideal, especially for a country attempting to capitalize on its geographic position to re-establish its influence in its near abroad. Though Turkey has a strong imperative to loosen these bonds, it faces an array of obstacles to its efforts to diversify its energy supply and thus develop a more flexible foreign policy.

Russia’s Grip on Turkey

Turkey is Russia’s second-largest energy customer, and Russia has every intention of keeping its business. Most Russo-Turkish trade is dominated by Turkey’s imports of Russian natural gas, though Turkey also imports significant amounts of Russian coal and oil. Turkey receives most of its natural gas from Russia directly through the Blue Stream Pipeline, which runs beneath the Black Sea and has a capacity of 16 billion cubic meters annually. (Russia has proposed a line parallel to Blue Stream that could carry an additional 16 billion cubic meters to markets beyond Turkey, but there has been little movement on this plan.) Blue Stream supplements another pipeline that runs through Ukraine, Romania and Bulgaria before reaching Turkey’s large population centers in and around Istanbul. In 2012, this pipeline carried approximately 11 billion cubic meters to Turkey. In total, Russia supplied 27.3 billion cubic meters of natural gas to Turkey in 2012, compared to the 33 billion cubic meters it delivered to Germany. As Turkey’s demand continues to grow, Russia expects Turkey to overtake Germany as its biggest energy client.

Russia charges Turkey around $406 per thousand cubic meters — less than Turkey pays Iran and slightly more than Russia charges its main European customers (for instance, Russia charges Germany about $380 per thousand cubic meters). Turkey has tried to achieve more competitive pricing with Russia in its long-term natural gas contracts by having smaller private firms negotiate better terms in place of the state-owned Turkish pipeline corporation Botas. However, Russia is the only nearby natural gas producer that can reliably and (relatively) cheaply provide the large volumes of natural gas Turkey requires. Russia values Turkish business, but Turkey cannot function without Russian energy. Moscow thus retains the upper hand in energy negotiations with Ankara.

Russia is also actively trying to reinforce Turkey’s energy dependence in a variety of ways. Turkey has highly ambitious, if not entirely realistic, plans to construct 23 nuclear power plants by 2023 in order to diversify the country’s energy supply. Russia made sure to be the first to sign a contract to construct Turkey’s first nuclear power plant near Mersin on the Mediterranean coast by 2019, with an expectation that Russia would be the primary supplier of nuclear fuel to the plant. This project is likely to face numerous technical and financial delays, but the deal alone shows that Russia has a hand even in Turkey’s boldest diversification plans. More important, Russia is in talks with Ankara for the construction of natural gas storage facilities in Turkey. Storage facilities are among the most strategic of energy assets that Russia has pursued across Europe to maintain its leverage on the Continent. Thus, even if Turkey pursues projects to circumvent Moscow, Russia will try to insert itself somewhere along the chain to influence those alternative energy flows.

Russia has applied the same energy strategy to the Caucasus, a historical battleground between the Russians and the Turks and a region that Europe has long eyed as means of loosening Moscow’s energy grip. For much of the past decade, Europe’s energy standoff with Russia has been embodied in two main projects: the proposed European-led Nabucco pipeline (and its downsized variation, Nabucco West) that would carry 10-31 billion cubic meters of natural gas from anywhere in the region but Russia including Azerbaijan, Turkmenistan, Iraq, Iran and Egypt) on to Europe, and the rival Russian-led South Stream pipeline that would cross the Black Sea to carry up to 63 billion cubic meters of Russian natural gas to Europe.

 Turkey — the critical transit state for these similarly ambitious pipeline projects — supported both proposals, claiming it could be a neutral bridge between East and West, while waiting to see which would prove most feasible. But Turkey’s attempt at impartiality eventually ran into complications. The Nabucco project already faced numerous financial, logistical and political obstacles, but these difficulties grew when the European economic crisis took root in 2009. By 2013, two projects were left on the table to transport Azerbaijan’s natural gas to Europe: the downsized Nabucco West project, which would run 1,300 kilometers (roughly 800 miles) from Turkey to Central Europe carrying 23 billion cubic meters of natural gas, and the much more economically feasible Trans-Adriatic pipeline, which would run 500 kilometers from Turkey across the Balkans to Italy. The Trans-Adriatic pipeline would supply 10 billion cubic meters of natural gas from Azerbaijan’s Shah Deniz II field. In the end, the consortium of energy companies developing the Shah Deniz II field in the Caspian basin — including BP, Total and Azerbaijan’s state-owned SOCAR — chose the Trans-Adriatic pipeline, abandoning Nabucco altogether.

Economic considerations naturally factored heavily into the decision, but Moscow also had a hand in influencing this outcome. The smaller volume and end consumers of the Trans-Adriatic pipeline project were much less threatening to Russia than the Nabucco plans, which would target Central Europe on the Russian periphery. It was probably no coincidence that just prior to the decision on the Trans-Adriatic pipeline, Russia withdrew its bid for a controlling stake in Greek natural gas transit firm DEFSA, allowing SOCAR to win the bid. The move, which followed visibly closer interactions between Moscow and Baku, boosted the Trans-Adriatic pipeline’s chances and has been followed by other signs of enhanced Russo-Azerbaijani energy cooperation. Russia and Azerbaijan are already in discussions to transport Russian oil through the Baku-Tbilisi-Ceyhan pipeline (the entire goal of which was to circumvent Russia) and to reverse the Baku-Novorossiysk pipeline to send Russian oil to Azerbaijan. A heavier Russian presence in the Caucasus will only reinforce Turkey’s energy dependence on Russia.

Similar constraints apply to Turkish (and European) hopes of transporting natural gas from Turkmenistan across the Caspian Sea through the Caucasus and Turkey and onward to Europe. This plan directly conflicts with Russia’s imperative to maintain its position as the middleman for the transit of Central Asian energy to Europe. The Turkmen government is even less willing than Azerbaijan to provoke Moscow by getting involved with such a project. Even if the technical, political and legal obstacles to building a trans-Caspian underwater pipeline were resolved among the littoral states, Turkmenistan already has significant and growing interest from China for its natural gas through much more economically and politically feasible means.

Turkey’s Options and Obstacles in the Middle East

Having historically ruled the Middle East for four centuries, the Turks felt well positioned to exploit the region’s abundant energy resources. However, Ankara is coming to realize that its ambitions of securing a stable energy supply from the Middle East will not be met anytime soon.

 Much of Turkey’s focus in the Middle East has been on Iraqi Kurdistan, where the Kurdistan Regional Government and Ankara have agreed to put their past conflicts aside to pursue a mutually beneficial partnership. The Kurdistan Regional Government is desperate to export its oil and natural gas against the wishes of Baghdad, which has its own imperative to keep Kurdish energy ambitions — and political ambitions — tightly contained. Turkey typically would be aligned with Baghdad in this goal, but has shifted its strategy under the Justice and Development Party. Instead of containing Kurdish separatism solely by force, Turkey is using Iraqi Kurdistan’s growing economic dependence on Turkey as an energy market as its containment policy. Just as important, Turkey hopes to use a closer relationship with the Iraqi Kurdish government to facilitate peace negotiations with Kurds in Turkey.

This strategy held promise in theory, but has struggled in practice. Turkey’s peace negotiations with the Kurdistan Workers’ Party have stalled, while Ankara faces an even more urgent problem on its border with Syria, where militant Kurdish separatists are battling jihadists. Meanwhile, the political landscape in Iraqi Kurdistan is returning to a familiar, fractious state, with the Patriotic Union of Kurdistan party under Jalal Talabani in an internal crisis and Massoud Barzani’s Kurdistan Democratic Party trying to take advantage of its rival’s weakened state.

Baghdad’s Objections to Kurds’ Turkey-Backed Pipeline Plans

These factors threaten an ambitious project Turkey and the Kurdistan Regional Government have pursued: the construction of a pipeline from northern Iraq to export some 250,000 barrels per day of Kurdish crude to Turkey. The pipeline would supplement the Kirkuk-Ceyhan pipeline operated by Baghdad, which is operating at one-fifth of its official capacity of 1.6 million barrels per day due to frequent bombings, poor maintenance and lower output overall. From Baghdad’s point of view, the new pipeline project is a gross violation of Iraq’s territorial sovereignty, and the Iraqi central government has made clear to both Turkey and the Iraqi Kurdish leadership that there will be a price to pay if they attempt to finish the pipeline without Baghdad’s consent. With the pipeline already in an advanced stage and investors pressuring Ankara to see it through, Turkey now has to decide how far it is willing to go in provoking Baghdad’s wrath. Any compromise that Turkey makes on this project to satisfy Baghdad will mean that Ankara will continue to face repeated delays and disruptions to energy shipments from Iraq due to Baghdad’s ongoing row with the Kurds and a persistent jihadist and Kurdish militant threat to energy infrastructure.

A developing dialogue between the United States and Iran will weigh on Turkey’s decision. The United States does not want Turkish pressure on Iraq’s already fragile ethno-sectarian relationships through a contentious pipeline project. Iran also does not want to see its historic Turkish rival undermine the influence of its Shiite allies in Baghdad. Turkey will gradually acknowledge this reality and will likely moderate its position to avoid further alienating Baghdad and Tehran.

Moreover, if Washington and Tehran can reach an agreement, Turkey could receive substantial energy flows from Iran if and when foreign investment revives the country’s flagging energy sector. Turkey currently has a long-term annual contract with Iran to receive 10 billion cubic meters of natural gas through the Tabriz-Ankara pipeline, but this supply line is subject to frequent disruptions due to Iran’s own technical, logistical and demand constraints. Whenever Iran falls short of supplying Turkey natural gas, Russia is always prepared to make up the difference — a reminder that there is no other dependable supplier in Turkey’s periphery that can supply the volume of energy Turkey needs. However, this could change dramatically if Iran and the United States reach a settlement that would lead to the repair of Iran’s fields and energy infrastructure. Turkey would welcome Iranian oil and natural gas flows for its own use and for export to Europe, but this scenario is still several years away.

Meanwhile, to Turkey’s west, Israel and Cyprus have taken the lead in trying to develop their offshore natural gas reserves in the eastern Mediterranean, sidelining Turkey. Greece, Cyprus and Israel all have antagonistic relationships with Turkey. Of the three, Israel has the greatest incentive to repair ties with Ankara, allowing it to regain a strategic ally in an increasingly volatile neighborhood. Israel has thus raised the possibility of extending an underwater natural gas pipeline to connect Israeli and Cypriot natural gas fields to Turkish infrastructure that could then transit natural gas to Europe. Such a plan would take the place of trying to build a much more logistically complicated underwater pipeline through deeper waters or an expensive and technically complex floating liquefied natural gas terminal in the eastern Mediterranean.

To get involved into the eastern Mediterranean energy plans, Turkey would need to find a political resolution with both Israel and Cyprus. Even then, a number of complications remain, including determining the amount of energy available for export, finding funding for the project and Lebanon’s claims that Israel is encroaching on its exclusive economic zone with exploration efforts. For now, Turkey is simply trying to make its presence known in the region by sending vessels to explore off the coast of northern Cyprus and threatening to send warships if Cyprus proceeds with energy production in the area. Turkey hopes to coerce a financially stricken Nicosia into a settlement over the status of northern Cyprus in the interest of assuring investors that Turkey will not interfere with its energy development plans. But the Turkish strategy has so far failed to achieve the desired effect. There is little Turkey can do to affect energy development in the region, but the challenges in exploiting and exporting these reserves are enough that Turkey does not need to do much anyway. In short, the eastern Mediterranean will not significantly threaten or aid Turkish energy security anytime soon.

Ankara’s Troubles in Attracting Investment

Turkey has courted a number of energy supermajors to explore for energy in the Black Sea and for shale gas potential in the Anatolian basin in the southeast and the Thrace basin in northwest Turkey. It is still far too early to determine whether these exploration activities will yield results, however. Turkey has been exploring for energy in the Black Sea since the early 1970s and has spent much of the past decade working in joint ventures with Chevron, Royal Dutch/Shell, ExxonMobil, Petrobras and BP for deep-water exploration. So far, these efforts have been underwhelming and investor interest has drifted instead to Romania’s Black Sea coast.

Joint hydraulic fracturing efforts with Royal Dutch/Shell have indicated that Turkey could be sitting on some 651 billion cubic meters of natural gas (although these estimates are unconfirmed). As Turkey seeks out Western technology and investment to undergo these technically challenging and costly exploration activities, it has all the more incentive to contain Kurdish militancy in the southeast, where many of these operations will be concentrated. The Kurdistan Workers’ Party is so far holding off on a resumption of insurgent attacks while trying to pressure the government to follow through with more substantial concessions, but a politically constrained government — particularly in the lead-up to parliamentary and presidential elections in 2014 — will continue to stumble in trying to achieve a comprehensive peace with Kurdish militants in Turkey.

 Turkey is also trying to figure out whether an eventual U.S. entry into the global liquefied natural gas export market and natural gas production in North Africa will make it worthwhile for Turkey to expand its liquefied natural gas import capacity. Turkey currently has two liquefied natural gas import terminals — one at Marmara Ereglisi that has an annual capacity of 8.2 billion cubic meters and a maximum send-out capacity of 22 million cubic meters, and another in the town of Aliaga on the Aegean coast with an annual capacity of 6 billion cubic meters and maximum send-out capacity of 16 million cubic meters. Liquefied natural gas imports from Algeria, Nigeria and Qatar and smaller amounts from Norway and Egypt accounted for roughly 14 percent of Turkey’s total natural gas imports in 2012, with most of this supply consumed by industrialized areas in and around Istanbul in the Marmara region.

Turkey is considering building additional liquefied natural gas import terminals on the Gulf of Saros near the Dardanelles and in Iskenderun on the Mediterranean coast. In theory, increased liquefied natural gas imports could give Turkey a more diversified pool of suppliers and give Ankara flexibility in buying liquefied natural gas on the spot market to make up for supply disruptions. But Turkey would have to invest substantial capital in building the import terminals and regasification facilities and in extensive upgrades and expansion to Turkey’s distribution and networks beyond the Marmara core. Turkey’s relatively young but rapidly growing natural gas-powered industry will also require significant investment into storage facilities (currently, Turkey can only store roughly 3 billion cubic meters of natural gas).

 That investment will be difficult to secure, especially as Turkey is now battling to preserve its title as an emerging market worthy of foreign investment. Deeper political rifts that surfaced in the Gezi Park protests now have prospective investors questioning whether the Justice and Development Party will be able to see multi-year infrastructure projects to fruition.

In this global environment of growing investor uncertainty, wide currency fluctuations and rising interest rates overall, projects in Turkey with long payback periods are facing difficulty in securing loans. This has prompted Turkish government leaders to accuse European companies that have lost out on previous tenders of pressuring banks to withhold loans, but such conspiratorial accusations have only served to further undermine investor confidence in Turkey. Turkey’s massive energy appetite will continue to attract some investor interest, but even more bullish investors are likely to exercise additional caution. Turkey will also face stiff competition for liquefied natural gas imports as producers look primarily to Asia in search of higher profits.

Though piped natural gas does not give Turkey the diversification it has been seeking, Russian supplies via pipeline are still much more cost-effective and stable than the other types of energy investments Ankara is exploring. Under an array of political, economic and security constraints, Turkey will eventually temper its ambitions of becoming an energy nerve center for the region. Right now, Ankara’s need to keep the lights on will outweigh its efforts to chart out an independent foreign policy.