DOES EUROPE NEED TURKSTREAM? The new Russo-Turkish friendship revives the gas pipeline

Turkish President Recep Tayyip Erdoğan announced in early August, during the visit to the Russian Federation, that the TurkStream pipeline will be built as soon as possible in order to expand it to Europe. Turkish Stream had been announced in December 2014 as a replacement project for South Stream, whereas the new rapprochement between the two countries - occurred after President Erdoğan apologised for the shooting down of a Russian warplane by the Turkish army on the border with Syria - has revived the project.

For the giant Gazprom, Turkey is the second sales market after Germany, in the past decade its gas consumption more than doubled. The supply with Russian gas is currently provided through the Blue Stream trans-Balkans pipeline. For Russia, the construction of this new pipeline would be a breath of oxygen, given that its deliveries were reduced in recent years. The Russian energy giant could lose a share of the market or of the profit in Europe in the medium term, although ‘the severity of the loss will depend on how the company will be able to adapt to the buyers needs,’ Fitch rating agency report on the European natural gas market warned, a report released in July this year.

THE PIPELINE&RSQUO'S ROUTE

The new Russian export facility, the TurkStream pipeline, would cross underneath the Black Sea, having as starting point the CS Russkaya complex (the largest natural gas compression station in the world), near Anapa, will reach Kiyikoy, on the European side of Turkey and continue through Lüleburgaz to Ipsala, on the border between Turkey and Greece, wherefrom it could reach the consumers in Southern Europe. The pipeline will have an offshore route of 660 kilometres, which will overlap the old route of the late South Stream project, and 250 kilometres in the European part of Turkey. According to the preliminary agreement concluded in December 2014 between Gazprom and the Turkish company Botas, the overall capacity of the TurkStream project is estimated at 63 billion cubic meters per year, of which a capacity of nearly 16 billion cubic meters is intended exclusively for Turkey.

MOSCOW'S INTERESTS

“Turkey is interested in the direct supply of gas, bypassing other transit countries. In this regard, at least one of the TurkStream lines is dedicated to the consumers in Turkey. In general, currently we are talking about the construction of two lines. The second line, dedicated to consumers in South-Western Europe, can also be placed on the bottom of the Black Sea, in Turkey’s territorial waters,” the Russian Energy Minister Alexander Novak recently said in an interview with Rossia 24 TV. For Russia, the building of this pipeline would be extremely important because, on the one hand, it will take Kiev away of the game and on the other hand it will enable the transport of natural gas from Turkey to Europe, avoiding the anti-monopoly legal framework of the European Union, international analysts note. They draw the attention that an important aspect of the future project is also the number of lines to be built.

THE NUMBER OF PIPELINES DILEMMA

One sole pipeline, which would have a capacity of 15.75 billion cubic meters, would put Gazprom at disadvantage because it would end in Turkey and would overlap the Blue Stream pipeline, by which this state is currently supplied. A second pipeline would not make TurkStream more efficient in terms of costs, but it would increase Gazprom’s revenues as it could supply Greece and Italy through the IGI Poseidon pipeline, which is currently a project. Turkish Deputy Prime Minister Mehmet Simsek envisaged a single pipeline during a recent visit paid to Moscow. Last but not least, a single pipeline would also benefit Azerbaijan, the country close to Turkey, which is carrying out the TANAP project, a gas pipeline that will also reach Greece via Turkey. As TurkStream has Greece as endpoint and further on its connection to other pipelines to carry gas to Europe, the competition for Azerbaijan is obvious.

Brief history of the project

On December 1, 2014 Gazprom and Turkish Petroleum Pipeline Corporation Botas signed the memorandum of understanding for building the Turkish Stream gas pipeline. In February 2015 the key reference points of the route and the technical solutions to build the pipeline on Turkish territory and the point of crossing into Greece (Ipsala) were approved.

Economic arguments

The contract with Naftogaz Ukraine for the transit of Russian gas is valid until the end of 2019, the current transmission tariff is USD 2.5/thousand cubic meters on a distance of 100 km. Gazprom chief Alexei Miller announced at the Sankt Petersburg Economic Forum in June 2016 that the tariff for gas transmission through the Nord Stream 2 pipeline bypassing Ukraine will be USD 2.1/thousand cubic meters on a distance of 100 km, which means that transit through Ukraine is by 20% more expensive.

UKRAINE EXPECTS THE EU REACTION

Ukraine, the main transit country for Russian gas to the EU, hopes EU would intervene to block this project, as it did in the case of South Stream pipeline. Naftogaz Ukraine board chairman, Andrey Kobolev, quoted by RBK Ukraine, noted that the levers that could stop the construction of the TurkStream pipeline are quite simple. “Neither Turkey nor Russia have technologies for deep works. This can be done only by the foreign companies, so if they really want to, both the European Union and the Western countries can stop this project by means of sanctions. The question is whether there will be political will for this,” Kobolev warned in his address on the hazards posed by the gas pipeline to Ukraine and the EU. “This construction may have a negative impact. For Ukraine, the project represents a certain risk. We will lose part of the transit volume. The gas quantities that crossed Ukraine and brought money to the economy will be directed to another direction,” Kobolev explained.

LOWER PROFIT, BUT INCREASING DELIVERIES

In the second quarter this year, Gazprom registered a net profit of 245 billion rubles (EUR 3.4 billion), down by 17% on annual basis due to the growth in operating costs by 16% and to the unfavourable exchange rate developments. Instead, the quarterly turnover increased by 5% to 1.327 billion rubles (USD 18.3 billion). Gazprom’s revenue growth is all the more notable as the Russian group had previously warned that in the second-quarter the gas price, indexed by the developments on the oil market, will reach its lowest level.
The Russian group said that its exports to Europe have grown strongly, despite the European Union’s intention to diversify the supply sources, and may reach a record high this year. In the first six months this year the Gazprom gas sales increased by 8% to 1.755 billion rubles (EUR 24 billion) thanks to a 19% advance in sales to Europe. On the other hand, Gazprom is losing ground on the Russian market and has not sold gas to Ukraine since winter on the background of the crisis between Moscow and Kiev, which makes it possible that in 2016 the Gazprom production to reach the lowest level since the setting up of the company in the ‘90s.

DISCOMFORT IN BRUSSELS

The European Union (EU) has expressed concern about the statements made by Moscow and Ankara regarding a possible resumption of the works on the Turkish Stream pipeline. The reason: its completion would increase Europe’s dependence on Russian gas, according to international media quoting EU diplomatic sources. EU officials fear that TurkStream will be expanded to bypass Ukraine as a transit route for supplies to Europe, increasing dependence on Russian gas export monopoly Gazprom and shutting in alternative supplies from the Caspian region. “Turkey’s new friendship with Russia might become an issue if Russia tries to replace Turkey for Ukraine,” a senior EU official said. He also added that Ankara is interested in cheap gas from Gazprom.
But the biggest concern is still related to the new friendship that comes with increasing regional power for Russia.

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