The Black Sea: Energy Security Fault Line?

An unfortunate consequence of lofty expectations, past optimism for the Black Sea to become the “next North Sea” has wilted with time. Now, the latest hopes for a Black Sea energy bonanza now lie with a fresh deal inked between the Turkish Petroleum Corporation (TPAO) and Royal Dutch Shell to explore 1,500 square kilometers with hundreds of millions of dollars at stake.

But Turkey, which spent some $60 billion for energy last year, remains tenacious in seeking out domestic and regional alternatives to the country’s overwhelming dependence on farther-flung external sources. While the jury is still out on the ultimate viability of the Black Sea as an energy source, the impetus to develop locally is catching on beyond Turkey and throughout the region. Partially spurred in no small part by the shifting economics of energy, the more urgent -- if generally muted -- rationale lies with geopolitical realities.

For the most part, the states that hug the littorals of the Black Sea are overwhelmingly dependent on Russia for a significant portion of their energy needs, and especially natural gas. The one major exception in Georgia, which has recently had poor relations with its giant northern neighbor, resulting in gas cutoffs and embargoes in 2006 and a war in 2008. Georgia today imports its gas from Iran and Azerbaijan -- the latter via the Baku-Tbilisi-Erzurum pipeline, which ferries large quantities of Azerbaijani gas to Turkey and European markets via Georgia. And at the moment, energy transit through Georgia is currently the only Westward artery that isn’t under Russian control.

Famous for practicing “pipeline diplomacy,” Moscow has never been shy about leveraging its extensive delivery network in the service of political aims. Recent case studies of this phenomenon include Georgia’s spat with Russia, which led to the Kremlin hitting the off-switch in gas mid-winter in 2006. Similarly, Ukraine under the previous, pro-West government was hit by similar situations in 2005-2006 and again in 2009. The latter was particularly damaging because it affected downstream distribution to other European states which were supplied via Ukraine’s expansive distribution network, which Moscow has repeatedly sought to purchase by hook or crook.

For Turkey, its energy relationship with Russia has had its own complications. Despite being one of the largest buyers of Russian hydrocarbons, periodic trade disputes have plagued the partnership. In 2008, shortly following the 2008 war between Russia and Georgia, Turkey-bound exports were unexpectedly curbed by Russia, which many analysts said was a punitive measure for Ankara’s permission for two U.S. warships to transit the Bosphorus. And in 2011, Turkish state gas pipeline operator Botas canceled its contract with Russian state gas giant Gazprom over the latter’s stubbornly above-market rates and rigid terms. Though imports were soon resumed, both these situations underscored Turkey’s massive vulnerability to Moscow’s mercurial approach to energy supply.

These various episodes have not gone unnoticed throughout Europe, either, which has been affected either directly or indirectly by periodic energy-related drama. Among the Black Sea states, this sensitivity has been especially heightened, as they are generally the most directly-affected by the extended uncertainty posed by Russian energy delivery. Ironically, Moscow’s hard-line approach to energy deal-making has been a driving force for diversification efforts by the Black Sea states away from Russian sourcing.

Turkey’s exploration efforts in the western Black Sea isn’t the only bid for diversification in the region. Ukraine recently announced its own decision to move ahead with a long-stalled project to explore a 13,000 square kilometer area by the Kerch straits, where preliminary estimates peg gas potential at 10.8 billion cubic meters. Ukraine is also looking to tap the Skifska field -- also in the Black Sea and estimated to hold as much as 250 bcm of gas -- which is being operated by a consortium led by ExxonMobil. Off Romania’s coast, ExxonMobil is also leading exploration of a field that may hold a further 85 bcm.

But the biggest prize may actually be shale. In Ukraine, estimates and optimism in the country’s shale gas reserves are soaring, with the U.S. Department of Energy’s Energy Information Administration (EIA) estimating shale gas reserves in the 42 trillion cubic meter range, leading to a $10 billion deal between Kyiv and Shell. In neighboring Romania, Bulgaria, and Hungary, EIA estimates about 540 bcm of shale gas -- about the annual consumption of the entire European Union. Even Turkey is getting into the act, with expectations building for Turkey’s own shale potential in its expansive southeast. Even Armenia and Georgia may be headed in the same direction.

Between Black Sea reserves, the promise of shale, and the flexibility of liquefied natural gas, the pipeline regime favored -- and dominated by -- Russia is quickly unraveling and giving way to disaggregated supply architecture. While this may have always been inevitable to some degree, Moscow’s approach -- recently exemplified by its apparently-punitive $7 billion bill against Ukraine -- seems to be only hardening resolve among Black Sea states to diversify and localize.

From an energy security perspective, the interregnum between Russia’s near-monopoly and a truly disaggregated regional energy architecture is likely to be dominated by frequent spats between Moscow and its buyers. While the latter look to use the rise in local and unconventional plays to strengthen their bargaining power, Russia, in response, will likely opt to crack down in response. This could mean increasing instability in the short term before new sources are developed and come online, but Russian intransigence will only hasten this process.

For investors, however, that intermediary period could present a prime opportunity. Black Sea states, and especially countries like Ukraine and Turkey, will be increasingly motivated to incentivize domestic or local energy sources to wean their economies from Russian hydrocarbons. This is likely to translate into preferred terms and generous latitude in pursuing energy sources. As the recently agreed-upon Trans-Anatolian Pipeline as well as Ankara’s aggressive exploration efforts in the Black Sea and Mediterranean Seas well-demonstrate, a more favorable energy portfolio is considered a national strategic priority. This is no less true in Ukraine, where the need to bring new sources online remains urgent.

The Black Sea may or may not earn its erstwhile moniker as the next North Sea. But a rapid-changing energy game is well-afoot in the region, which will make it a massive test case for energy security as well as concomitant geopolitical considerations. How Black Sea states adapt to the increasingly new energy regime -- including Russia itself -- will not only be a major determinant of Europe’s energy fortunes, but the future of the region’s checkered geopolitical alignments.

by Michael Cecire