The European Union recently renewed its economic sanctions on Russia over the invasion of Ukraine, but Russia remains a big energy source, albeit with one big “if” — if Russia can get its energy to market. And that becomes a question of pipeline geopolitics.
For Europe and Russia, this means the question of the “Turkish Stream” pipeline project under the Black Sea, a potential geo-economic game-changer if Europe ever accepted to import Russian gas through it. Because of the high symbolic political stakes as well, the project is of interest far beyond the world of energy policy.
South Stream becomes Turkish Stream
The European Union is unsympathetic to Turkish Stream, which is Russia’s last-minute replacement for the cancelled South Stream project that would have made landfall in Bulgaria. Yet Russia is desperate because physical pipeline for South Stream has lain in Bulgarian warehouses threatening to rust for months, and it has been paying the highly specialized pipe-layers to twiddle their thumbs and wait.
So this week Russia took the risk and began physically to lay the pipe for Turkish Stream in the Russian sector of the bed of the Black Sea, without even having in hand the required environmental permits from the Turkish side for construction to continue later in the Turkish sector. Indeed, there is no bilateral agreement for construction nor even any sales agreement for the gas.
Although Russian representatives have declared that gas will flow through Turkish Stream by the end of the 2016, the Turkish Ambassador to Russia has publicly asserted that the project could not be considered to have even reached the starting point, and that it was incorrect to fix any date for transmission of first gas.
The first Turkish Stream gas could conceivably be for Turkish consumption if Russia cuts the supply to western Turkey (through Ukraine, Romania and Bulgaria), as it has threatened to do before the end of the decade. But any gas from Russia supposedly targeted at the European Union will compete with gas from other sources under conditions favouring the buyer.
Russia — not Europe’s only source
Europe has other options, however. For example, gas from Azerbaijan will transit the Trans-Anatolian Gas Pipeline (TANAP) making landfall in Greece, with onward transmission through the Trans-Adriatic Pipeline to Italian and Central European markets. Azerbaijan already supplies 13 percent of Turkey’s gas imported for domestic consumption, and this continue will continue with TANAP in place. A further amount (10 billion cubic metres per year) will transit Turkey into the Trans-Adriatic Pipeline, running from the Turkish-Greek border under the Adriatic Sea to the heel of the boot of Italy. Contracts for this additional gas have already been signed with Italy, Greece and Bulgaria, and the volume could double for onward re-export.
Meanwhile, the sources of funds for the laying of the physical Turkish Stream pipe, estimated at nearly $20 billion, are far from clear.
In the cancelled South Stream project, half this cost was to have been borne by the Western partners of Russia’s Gazprom. Even the Russian deputy finance minister Sergei Storchak admits that restrictions imposed by the IMF upon sovereign borrowing by Athens mean that Greece probably cannot attract funding to build a follow-on pipeline from Turkish Stream through its own territory onwards into Europe. Not to mention that sanctions resulting from the invasion of Ukraine mean that EU banks would severely restrict Greece’s borrowing ability in international credit markets.
The existence of multiple sources for gas other than Russia for Turkish consumption also puts the prospect of increased Russian gas exports to Turkey into question. To name three, in decreasing order of likelihood: Azerbaijan, from which Turkey now already imports gas; Iraq, where Turkish firms are seriously exploring possibilities in the northern Kurdish region; and Turkmenistan, which continues to inch closer and closer to approving a Trans-Caspian Gas Pipeline.
The case of Azerbaijan
As mentioned, Azerbaijan already supplies 13 per cent of Turkey’s gas imported for domestic consumption. In principle, it would be able to increase that amount as TANAP is built and finished. That is because Azerbaijan would be better able to access more of the Turkish market, the further the pipeline is extended. It will eventually run all the way across Turkey to the border with Greece.
Azerbaijan has no fewer than five undeveloped offshore deposits in addition to Shah Deniz now in production. One of these, the Absheron deposit, is already producing for the domestic market. The decision was taken just a few days ago to develop it further jointly with the French energy firm Total. It is now expected to begin producing possibly for export in the early 2020s, several years ahead of the previous schedule.
More gas from Azerbaijan could follow from as early as 2019. At the same time, Turkey is exploring the possibility of transiting gas from Iraqi Kurdistan as well as from Turkmenistan. TANAP is designed to be “scalable,” so that the volume can easily be doubled if additional sources are found.
Of all the gas that the four different physical pipelines of Turkish Stream would carry, Turkey would take a maximum of one of these “strings,” which is equivalent to the quantity now flowing by the Western or “Transbalkan” route through Ukraine, Romania and Bulgaria into western Turkey.
But Russia has threatened, indeed promised, to cut off this flow because it transits Ukraine. That would leave the rest of Turkish Stream (if all the other strings would be built) having to have to find a market somewhere, in competition with gas from Azerbaijan, Cyprus, Iraq, Israel and Turkmenistan.
In Turkey’s hands
With Western sanctions in place, the Russian economy has entered decline. This decline has its roots in the failure to implement domestic economic reforms proposed by Dmitry Medvedev when he was president. But Russian energy companies, and the state gas behemoth Gazprom in the first place, have to deal with both the domestic Russian and the international situation
The Turkish government knows that the Russian company is in a bind, so it is negotiating very hard on the price. At the beginning of the year, it obtained a six percent discount, then delayed and postponed further negotiations until it received an 11 per cent discount, and only this week signed on the dotted line, but only for gas through another pipeline from Russia called “Blue Stream.” Reliable sources suggest that they are looking for at least a 16 per cent discount on Turkish Stream gas.
Having failed to strong-arm the European Union into accepting the South Stream pipeline for Russian gas, Russia is gambling on Turkey to help get its gas to Europe. The South Stream has been reborn as Turkish Stream, this time running from Russia to western Turkey rather than to Bulgaria. But Europe’s gas demand is not increasing much any time soon, and it has many other potential sources other than Russia, which has shown itself untrustworthy by cutting gas to Europe in the winters of 2006 and 2009 — a fact that the European public do not let their leaders forget.