Wednesday, 13 May 2015

Will Turkish Stream Compete With the Southern Gas Corridor?

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By Natalia Konarzewska (05/13/2015 issue of the CACI Analyst)

The Turkish Stream pipeline, envisaged to transport Russian natural gas via the Black Sea to the Turkish-Greek border, is again gaining political momentum and raises interest in the region. On April 7, during a meeting in Budapest, the Foreign Ministers of Hungary, Serbia, Macedonia and Turkey expressed their countries’ interest in participating in the project and discussed possibilities of building European infrastructure for Turkish Stream. As this Russian-backed project targets the same region and is intended to supply roughly the same markets as the Southern Gas Corridor, the question arises whether Turkish Stream will eventually compete with TANAP and TAP in natural gas deliveries to Turkey and Southeast Europe.

BACKGROUND: Turkish Stream will transport substantially larger volumes of gas than the Southern Gas Corridor (SGC) and will be directed at roughly the same South European and Turkish markets. Upon completion, both projects have the capacity to be expanded. Turkish Stream’s route can be extended to supply Greece and other South and Central European states with natural gas. On the other hand, the European Union and Azerbaijan have taken steps to attract additional gas suppliers for the Southern Gas Corridor, which can in the future be expanded as soon as Shah Deniz II and other Azerbaijani gas fields are fully operational. Hence, both projects can possibly compete in terms of gas volume, market share in the consumer states along their routes and geopolitical significance in the region.

Turkish Stream’s envisaged annual capacity is 63 billion cubic meters (bcm), of which 16 bcm will supply the Turkish market, and the remaining 47 bcm will be delivered to a hub located in the Epsila region near the Greek-Turkish border and made available to interested European customer states. Turkish Stream will therefore terminate at roughly the same location as TANAP, raising questions about possible competition over the market share. In comparison, Azerbaijan can at this stage export a modest 6 bcm of natural gas annually via TANAP to the Turkish market, whose annual demand stands at 45 bcm and is predicted to grow to 81 bcm by 2030. Moreover, Greece, which is also participating in the SGC project, has already expressed interest in buying Russian gas from Turkish Stream, hoping to enhance the country’s role as one of the main gas hubs in the continent and attract international investors.

Following Russia’s annexation of Crimea in March 2014, Baku intensified its diplomatic efforts to attract new gas producers to the SGC to make it more commercially viable and geopolitically significant, viewing Turkmenistan as one potential participant. If successfully implemented, the Trans Caspian Pipeline (TCP) can carry around 30 bcm of natural gas annually, which will significantly increase the SGC’s capacity. Moreover, the EU considers Iran as a possible natural gas supplier for the SGC. If sanctions are lifted, Iran may acquire a stake in TANAP and supply an additional 40 bcm of gas annually. Regardless of whether additional suppliers are found for SGC, Azerbaijan plans to expand its input into TAP and TANAP respectively from 10 to 20 bcm/a, and 16 to 31 bcm/a. The additional supplies will be available from 2020 when the Shah Deniz II gas field is further developed and several other gas fields become operational to supply the small niche markets in the Western Balkans and even Central Europe via the interconnector network.

IMPLICATIONS: Russia’s current precarious economic situation might not allow it to finance such a large scale infrastructure investment as Turkish Stream without external help, which will be hard to obtain given the Western sanctions on Russian companies. Moreover, it is at this stage unclear which infrastructure will be used to transport the gas delivered via Turkish Stream to the interested European consumer countries. It is highly unlikely that Moscow will agree to sell its gas at the border as a crude net producer, because that would give consumer countries too much leverage. Thus, it appears that this issue will be left at the interested consumers’ disposal.

There are several possibilities to deliver gas from the Turkish hub to the European markets using interconnectors such as the previously proposed Italy-Greece-Turkey Interconnector or the planned Bulgaria-Greece Interconnector. However, due to the deterioration in EU-Moscow relations, Brussels will unlikely agree to allocate any funds for infrastructure intended to transport Russian gas or allow transit of Russian supply via EU co-financed interconnectors. Moreover, Greece’s catastrophic economic situation prevents Athens from financing a dedicated pipeline on its own. Greece and Hungary may potentially play the role of brokers between Brussels and Moscow to reach an energy deal, however their chances for success are slim given both Athens’ and Budapest’s tense relations with Brussels. It is widely believed that Moscow is seeking to capitalize on its close ties with Greece and Hungary and both states’ fragile position in the EU to jeopardize the EU’s common policy towards Russia.

Turkey does not have such constraints. Not being an EU member, it is not bound by Third Energy Package regulations and this will allow Russia to avoid costly disputes with the EU. Ankara has already signed on both to the SGC and Turkish Stream projects, hoping to become an important gas hub for Europe and find long term solutions to meet its booming domestic demand for natural gas. Its participation in two competing large-scale energy transit projects will allow Turkey to enhance its position vis-à-vis potential suppliers, making the Turkish market more competitive for external suppliers in the long-term perspective.

Nevertheless, the SGC, a modestly scaled project in comparison to Turkish Stream, is in a more advanced stage of development. Both TAP and TANAP already have volumes of gas under contract to supply European customers, whereas Turkish Stream is still only a political project. However, at this stage, the prospect of expanding the SGC by adding more suppliers looks grim. Several obstacles exist to Turkmenistan’s participation in the SGC. Among them is the still unresolved dispute between the Caspian littoral states over the Sea’s boundaries, delaying the construction of the TCP. Moreover, Ashgabat has shifted the majority of its export capacity to China. In Iran’s case, the existing infrastructural constraints, such as location of the resources, the project will demand substantial additional funding in order to be successfully implemented. Even with additional volumes of Azerbaijani natural gas, at this stage the SGC’s impact on the markets along its route is modest at best.

Nevertheless, the SGC project is strongly backed by the EU, which aims to diversify its gas supplies away from Russia. Simultaneously, the unresolved dispute between Russia and the EU over Gazprom’s non-compliance with the Third Energy Package regulations and the recent standoff between Moscow and Brussels over the Ukraine conflict may seriously undermine the construction of European infrastructure for Turkish Stream.

CONCLUSIONS: It is far too early to tell whether Turkish Stream will compete with the SGC in terms of market share and geopolitical significance. At this stage, Turkish Stream is only a political project, whose commercial viability and implementation is uncertain given Russia’s precarious financial situation. Even if this additional natural gas supply route from Russia to Turkey becomes a reality, the prospect of selling additional volumes to the European market are unclear. Europe already has a surplus of gas import infrastructure and both Turkish Stream and the SGC are targeting well diversified and economically stagnant South European markets. Turkish Stream therefore appears primarily to be a Russian political maneuver to undermine the EU’s efforts to diversify its natural gas suppliers and Azerbaijan’s strategy to build gas transit infrastructure bypassing Russian territory.

Yet the Russian-backed pipeline project could tighten competition between suppliers for shares of the Turkish natural gas market, which will in turn affect gas prices. Given the booming demand for natural gas on the Turkish market, Ankara, which is seeking to ensure its long-term energy security, will welcome a surplus of supply from the Caspian or Russian direction.

AUTHOR’S BIO: Natalia Konarzewska is a graduate from University of Warsaw’s Doctoral Programme in Political Science and a freelance expert and analyst with a focus on political and economic developments in the post-Soviet space.

Image Attribution: Wikimedia Commons

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