David O'Byrne in Istanbul -

Russian President Vladimir Putin will fly to the Turkish capital on December 1, having opened up a new front in the rumbling gas war that threatens to plunge much of Europe into darkness.

High on the agenda of talks with Turkish President Tayyip Erdogan is sure to be the decision by Russian gas producer Gazprom to arbitrarily cut the volume of gas it sends to Turkey through Turkey's western import line, which runs through Ukraine and the Balkans, by over 40%.

Turkish Energy Minister Taner Yildiz told reporters on November 21 that for two weeks Gazprom had been supplying only 28mn cubic metres a day (cm/d) through the western line against the 42mn-44mn cm/d that is normal for this time of year and the current cold weather, with officials subsequently reporting that flows fell as low as 26mn cm/d. The cut threatens gas supplies to Turkey's northwestern economic heartland, with a Turkish official confirming to bne IntelliNews on November 29 that state gas importer Botas has already cut gas supplies to four large power plants in the region.

The reason for the cut in supply is unclear, with Gazprom's representative in Turkey declining to comment. Turkish energy ministry and industry sources have confirmed that Gazprom has given no reason for the cut and did not declare a "force majeur" as would be normal if the cut had been due to reasons beyond its control, such as the rumbling conflict in east Ukraine or a major technical failure.

Favouritism

Industry sources claim that the cut is in response to a wide range of issues, both geopolitical and commercial, citing widely differing positions on Crimea, Ukraine and Syria.

More immediately, many point to Turkey's long-running problems over its various gas import contracts with Gazprom. Many reports have clamed that the root problem is that Ankara has long been lobbying for a cut in the price it pays to Gazprom for the 4bn cubic metres a year (cm/y) of gas that Botas imports through the western line. However, this argument is undermined by the fact that the price Botas pays is calculated by a formula linked to the crude price on a six-month lag, and with crude prices having fallen by 30% since last June, Botas is already set to see that price fall as low as $275 per 1,000 cm from around $393 currently.

Rather the main problem relates to the 10bn cm/y being imported by seven private companies that industry sources report currently pay around $306 per 1,000 cm under two separate sets of contracts. Of the seven, one – Bosphorus Gaz – is a wholly owned subsidiary of Gazprom, which holds licenses from Turkey's energy market regulator and contracts with Gazprom to import a total of 2.5bn cm/yr.

Turkish officials confirmed last week that Gazprom has been supplying Bosphorus Gaz in preference to other importers, to the extent that it has already exceeded its maximum licensed volume for 2014, while other suppliers have received only a faction of theirs.

Speaking to bne IntelliNews, an official from Bosphorus Gaz confirmed he was aware that Turkey is complaining the volume of gas arriving has been cut and that other importers are complaining they are not receiving gas, replying only that the gas being exported is allocated by the seller (Gazprom) to the buyer at the Bulgaria-Turkey border. "We receive what is allocated to us at the border," he said, declining to confirm or deny whether Bosphorus Gaz had exceeded the maximum it is entitled to import and pointing out it is obliged to supply the gas to its customers who would otherwise face a gas shortage.

Certainly the situation for the six other private importers appears desperate. Their prices are fixed by annual negotiation rather than a formulae involving the crude price, meaning they will see no reduction in January. Worse, industry sources told bne IntelliNews that at the start of the year the six negotiated a reduction in the price they pay Gazprom to $306 per 1,000 cm for this year in return for agreeing to both waiving their "deficiency discount clause" and to a price increase for 2015 to $375. This means that not only are they due no compensation for the gas they are currently not receiving, but they will likely receive the gas next summer when Turkish demand, and wholesale gas prices, are low.

According to one industry source, Gazprom appears to be simultaneously trying to take over the imports through the western line, while at the same time undermining Turkey's nascent liberal gas market. With as much as 50% of Turkish electricity generated from gas, this is seriously affecting the power market too.

Blue news

The one spot of good news for Turkey is that Moscow appears to have finally agreed to expand the capacity of Turkey's second gas import line, the Blue Stream line across the Black Sea, from 16bn cm/y to 19bn cm/y.

Although the expansion is unlikely to be completed before next winter, it will help meet Turkey's growing gas demand which had been expected to exceed the maximum possible supply in the next two to three years. The downside is that the expansion increases Gazprom's share of Turkey's gas import portfolio from 57% to 60%.

With no other new sources of gas available to Turkey before 2018, and Turkey going to the polls in June next year, Ankara will be keen to avoid any major gas and power shortages this winter for fear of fall out at the polls. A situation analysts have likened to Moscow having Ankara over a barrel, while suggesting that the visit may, outwardly at least, be friendly but unlikely to yield any concessions.