GGP: Turkish Stream Déjà Vu
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.
This article by Mikhail Krutikhin was originally published by Bulgaria Analytica on June 8, 2017.
Gazprom again is launching its mothballed project of bypassing Ukraine with Russia’s own version of a ‘Southern Gas Corridor’. On May 4 the Audacia pipe-laying vessel, run by Allseas Group, reached Anapa on the Russian coast of the Black Sea. Ten days later, another vessel of Allseas, the world’s largest pipe layer Pioneering Spirit, also made it to the Black Sea through the Bosporus to join the operation.
Allseas had been contracted by Gazprom in April 2014 to build the second string of the South Stream pipeline project after Italy’s Saipem had been awarded a contract for the first string. After the failure of the South Stream idea, Gazprom severed the contract with Saipem but asked Allseas replace the Italians in building the initial string of the pipeline, this time to Turkey instead of Bulgaria. The contract for the first string was signed in December 2016, and for the second string in February 2017.
Initially, Gazprom intended to build four strings of the South Stream pipeline across the Black Sea to the Bulgarian coast with the ultimate annual capacity of 63 Bcm a year, and extend it all the way to the Baumgarten hub in Austria where this pipeline could tie into a spur from another Russian bypass, the Nord Stream, form a ring and leave Ukraine without Russian gas transit altogether.
The ambitious two-pronged project was clearly motivated politically rather than economically. The capacity of Gazprom’s pipes to Europe could already handle twice the volume of gas Russia delivers to Europe (slightly over 164 Bcm in 2016), and the Ukrainian route was shorter, cheaper than any other alternative, and technically reliable. Whatever disruptions occurred in gas supply (the major cutoffs and decreases happened in 2006, 2009 and 2014-2015), political decisions of the Kremlin caused them, not any actions or intentions of the Ukrainian transit regulator.
To deprive the Ukrainian budget of the annual gas transit fees, estimated to total about €2 billion, the Kremlin instructed Gazprom to invest heavily in the northern and southern bypasses. It took the Russian gas monopoly over $12 billion to build the Nord Stream plus even a larger sum to lay new, and upgrade old, pipelines from the Yamal Peninsula in Arctic. The cost of the South Stream, sunk in the project even before any permissions from the European Commission were obtained to extend it within the EU, reportedly have exceeded $17 billion.
Political ambitions are an expensive luxury and, when the South Stream had to be canceled due to the absence of the EU permits, only the pipeline building contractors, personal friends of Vladimir Putin, such as Arkady Rotenberg and Gennady Timchenko, actually benefited from the politicized project.
Pursuing the fixed idea of punishing Ukraine for its unwillingness to follow the political course of Russia, the Kremlin wanted to expand the capacity of the Nord Stream and bypass the Ukrainian territory from the north rather than in the Black Sea, regardless of the huge costs of delivering gas from the Baltic Sea to such places as Italy, Greece, Balkan nations, and Turkey. In the meanwhile, negotiations with Turkey continued since December 2014 to replace the South Stream with a Turkish Stream, and finally Gazprom was able to announce that the construction of the undersea segment of the project was ready to get underway.
One still cannot be absolutely sure of success. The presence of the pipe-paying vessels of Allseas in the Black Sea is hardly a solid guarantee, considering the previous experience of similar vessels of Saipem: they remained idle for almost a year. Nevertheless, at least one of the strings of the Turkish Stream seems a plausible option, and this string, when it is commissioned, will make a big impact on the pattern of gas supply in Southeastern Europe.
To begin with, one string with the annual capacity of 15.75 Bcm will be enough to replace the current Trans-Balkan route across Ukraine, Moldova, Romania and Bulgaria and make it redundant — and, possibly, decommissioned. An intergovernmental agreement signed in March 2017 between Russia and Turkey states unequivocally that Gazprom would cease supplying gas to Turkey via Romania and Bulgaria. In 2016, Turkey bought 24.7 Bcm of Russian gas, and about half of it came from the Blue Stream pipeline across the Black Sea, built in 2002.
Gas consumption in Turkey is not growing. It stays at the annual level of about 46 Bcm, and the government has evidently dropped the forecast of 63 Bcm a year by 2030. This target has been substituted with the idea of making Turkey a gas hub for Europe: collect incoming flows from Azerbaijan (and, in the future, Turkmenistan), Iran, Iraqi Kurdistan, Israel, and Russia and send this gas to the EU. The Europeans, however, are not particularly eager to see a hub beyond the EU borders, especially in view of the tensions between Europe and Ankara.
For transit nations along the current gas route, such as Bulgaria, the future is uncertain. Since Moscow is determined to shut down the Ukrainian route (its continuation depends on Gazprom’s ability to find an alternative way of delivering gas to Italy), the Bulgarians will have to consider new options. One is a spur from the TANAP/TAP pipeline, which is under construction right now. It will carry gas from Azerbaijan to Turkey, Greece, Albania and Italy, and a 170-kilometer interconnector is being planned between Komotini in Greece and Stara Zagora to bring Azeri gas to Bulgaria. A contract for 1 Bcm a year has already been signed with the supplier from Azerbaijan.
Another option is to use the same future interconnector for buying gas from the Greek LNG terminal, which might be expanded. And it will probably become possible to buy some gas from Turkey, if/when it becomes a regional distribution hub.
Organizational reforms of the EU gas market, along with a new strategy of Gazprom, which is demonstrating a new degree of commercial flexibility in its relations with clients, may be a solution as well. Gazprom Export, a trading arm of the Russian gas monopoly, is looking for direct contracts with new consumers all over Europe (they have to be new because the Russians are unwilling to make a mess by mixing old-style long-term contracts with new scheming). Such new entity might strike a deal with Gazprom Export to receive gas from the nearest hub in Europe at a comfortably low price.
The second string of the Turkish Stream, which Allseas has been contracted to build too, adds both to uncertainties and to potential solutions.
It is the European Commission that will make the decision on the destiny of the second string because the target of this part of the Turkish Stream is the EU. The decision is far from certain. Any of the EU member states may voice concerns about the Russian project. If. For example, Bulgaria or Romania claim that the switch from the Trans-Balkan route to the Turkish Stream deprives them of a steady inflow of gas and transit fees, the Commission will have to act and protect interests of these EU members by refusing to grant permission to the whole Turkish Stream idea—at least where it affects gas supply to the EU.
Russia’s attempt to reach agreement with Greece on extending the second string from Turkey into this country has not been a success so far. In February 2016 Gazprom signed a memorandum with Greek DEPA and Italy’s Edison to facilitate a ‘South European Gas Pipeline’ and in June of the same year another memorandum was signed between the energy ministers of Greece and Russia. The Greeks, however, pulled back saying in September 2016 that everything would depend on the European Commission’s opinion about the idea.
Currently, the second string of the Turkish Stream exists only as a vague idea. Various options are being discussed: linking it to the TANAP/TAP route, forming a joint venture for a new line within the EU formally independent of Gazprom — and reach Austria and Italy from Greece, etc. If any of such options becomes practical, Balkan nations would be able to get their share of Russian gas from the new infrastructure.
Experience shows that Gazprom even may have it actually built, without any guarantees from the EU regulator, just as it did with the original South Stream, and try to make interested consumers ‘materially interested’ in it in the final run. As President Vladimir Putin said in December 2014, ‘we’ll bring it to a hub on the EU border and you will be able to take gas from it if you want.’
By Mikhail Krutikhin
Mikhail Krutikhin is with RusEnergy, an independent consultiancy specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.