BACKGROUND: According to the Framework Agreement between Ankara and Ashgabat on supply of Turkmen gas to Turkey, natural gas will be supplied via the proposed Trans-Caspian pipeline to Baku and from there via Georgia to Turkey and further to Europe. The Trans-Caspian pipeline will be linked to the already confirmed TANAP pipeline, which started construction in 2014. The 300 km under-sea Trans-Caspian pipeline with a capacity of 30 billion cubic meters (bcm) annually is estimated to cost US$ 5 billion. An additional 30 bcm from Turkmenistan via the trans-Caspian pipeline, combined with a projected increase of Azerbaijani supplies from Shah Deniz II, will seriously undermine Russia’s energy dominance in the region.
During his official visit to Turkey in December 2014, Putin announced the termination of the South Stream project, designed to transport Russian natural gas under the Black Sea to Bulgaria and further to Central Europe. At the same occasion, he revealed plans to construct an alternative pipeline to Turkey. The so-called “Turkish Stream” will cross the Black Sea into Turkey and proceed to the Greek border, where European purchasers could connect. It will consist of four pipelines, each with the capacity of 15.75 bcm, thus reaching 63 bcm of natural gas per year. The Turkish company Botaş Petroleum, which signed a memorandum of understanding with Gazprom, can collect 14 bcm for its own needs and the rest will to continue to Europe via Greece. The price of the whole project is estimated at US$ 40 billion.
Taking into account the decreasing demand for natural gas in Europe, it is clear that Kremlin now backs Turkish Stream in competition with the Trans-Caspian pipeline. In presenting Turkish Stream, the Kremlin seeks to achieve two goals. The first is to undermine Turkmenistan’s attempts to diversify its export routes and consumers, as well as the EU’s diversification of suppliers. Its second goal is to demonstrate superiority and push the EU to take on part of the financial burden in constructing new gas infrastructure which that will effectively by-pass Ukraine.
Representatives of Gazprom have termed the EU’s unwillingness to participate in the South Stream project (and to commit financially) a main reason for its abolition and replacement by Turkish Stream. The part of Turkish Stream running under the Black sea will not only be shorter than South Stream leading to EU; unlike the EU, Turkey appears more willing to finance the construction of pipelines on its territory in exchange for revenues. By putting pressure on the EU, Moscow aims to force European countries to share the financial burden. Yet from the EU’s point of view this is not necessary, since sufficient infrastructure for Russian gas exports to Europe already exists.
IMPLICATIONS: The Kremlin holds two trumps vis-à-vis the EU. It can threaten to reorient its energy export to China, symbolized by the “Power of Siberia” pipeline. And it can pursue Turkish Stream as a declaration of Russian ability to provide the EU with gas, by-passing Ukraine despite its objections, and where infrastructure to border with Turkey would have to be constructed by European countries.
Regarding its reorientation to China, Gazprom indeed signed a 30-year contract with Chinese company CNCP in May 2014. Based on this US$ 400 billion contract, Gazprom will provide 38 bcm of gas annually by 2018. The “Power of Siberia” pipeline is estimated to cost US$ 55 billion. Although construction started in September 2014, the 3200 km pipeline will not be finished earlier than 2019 and therefore, Russia’s partial re-orientation to the Chinese market will be a long term process.
However, the reorientation to China as a counterweight to European markets also has a financial dimension. The fact that China agreed to co-fund the project by US$ 20 billion in exchange for lower gas prices, and that Gazprom will obtain the additional needed funding from government reserves, indicates a significant shortage in Gazprom’s budget. This is taking place in the context of generally decreasing demand for natural gas in Europe and Turkey, where demand in 2014 declined to 147.2 bcm from 161.5 bcm in 2013. Gazprom’s own extraction of natural gas decreased by 43 bcm last year. This shortage of finances could also explain the Kremlin’s need to coerce the EU into sharing pipeline construction costs, and is possibly an even stronger motivation than geostrategic considerations.
A wholesale reorientation to the Chinese market will be a costly, long-term project. However, under existing conditions the Kremlin does not have either the time or the financial resources to attain such a goal. Therefore, Putin’s threat to turn to the energy hungry Chinese market is rather weak under current circumstances.
Several conditions undermine the otherwise bold statements from the Kremlin and Gazprom representatives. Despite the existing memorandum of understanding between Gazprom and Botaş Petroleum, Ankara signals a rather restrained attitude towards the project. Until now, Turkey has not even signed a contract on supply of natural gas from Russia with Gazprom, although Putin declared a discount of 6 percent on natural gas for Turkey from the current US$ 420 per thousand cubic meters. Currently Russia provides Turkey with 16 bcm of gas annually, which is the maximum capacity of the Blue Stream pipeline.
Ankara is also critical toward Russia’s role in the Ukraine conflict. Turkey’s Minister of Foreign Affairs Mevlut Cavusoglu declared that despite good cooperation with Russia in many areas, Ankara does not recognize the annexation of Crimea and condemns the Kremlin’s support of the rebels. Crimean Tatars in annexed Crimea remains an especially hot topic, where Moscow instead of fulfilling promises to allow the Tatar minority representatives in the government and language rights, continues to crack down on their activists. In Turkey, such oppressive measures against their ethnic kin are viewed with great concern.
Putting these issues in context of the TANAP pipeline, which is dubbed a priority by representatives of Ankara, it is yet far from certain that Turkish Stream will become a reality, and a significant competitor to the Trans-Caspian pipeline.
CONCLUSIONS: In order to understand why Turkish Stream endangers the Trans-Caspian, it has to be viewed in the wider context of a game of supply and demand for natural gas, played from the EU to China, in which Putin presents himself as a player who can dictate the rules. However, deeper analysis of his “trumps” suggests that the Kremlin’s position in this game is far from strong – besides its ability to bluff. Turkish Stream itself appears to be a result of Gazprom’s and Russia’s precarious financial situation, which does not allow Russia to launch major gas-pipeline projects on its own, rather than a declaration of strength. The Trans-Caspian pipeline represents a serious competitor to Turkish Stream and the Kremlin’s agenda linked to it. However, many questions remain unanswered, which could considerably alter the outcome of the game. The most significant appears to be Turkey’s final position.
AUTHOR’S BIO: Juraj Beskid, Ph.D., works at the Institute of Security and Defence Studies (Armed Forces Academy) in Bratislava. Tomáš Baranec is a graduate of Charles University in Prague. His research interests include nationalism and factors of ethnic conflicts and separatism in the Caucasus. He works at the Institute of Security and Defence Studies (Armed Forces Academy) in Bratislava.
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