DEEP IN THE BLACK SEA

On January 8, the leaders of Turkey and Russia launched the Turkish Stream gas pipeline amid the growing political tension in the Middle East and the ongoing discussions on the situation in Libya, Syria and Iraq.

The organisers of the ceremony on the stage of the Halic Congress Centre in Istanbul installed two converging pipes with the inscription 'Turkish Stream' in two languages. The pipes were connected with the third piece of pipe with a symbolic red valve, which Vladimir Putin and Recep T. Erdogan turned together with Bulgarian Prime Minister Boyko Borisov and Serbian President Alexander Vucic, thereby starting the operation of the gas pipeline.

'Historical Signature'

Turkish Stream is the second large-scale pipeline project after the Trans-Anatolian Gas Pipeline (TANAP) implemented in Turkey over the past ten years. The 930-kilomtre gas pipeline runs from Anapa, Russia to Kiyikoy, Turkey through the seabed of the Black Sea. The Turkish Stream is designed to deliver to the region up to 31.5 billion cubic meters (bcm) of natural gas annually. At the same time, the first Turkish Stream line is intended for the Turkish market, the second - for gas supply to the countries of Southern and Southeast Europe. The throughput capacity of each line is 15.75 bcm annually.

"May this project be successful to everyone!" said the Turkish president at the ceremony, pointing out the historical significance of the project. Mr. Erdogan noted that the pipeline will meet the needs of millions of people in natural gas delivered to Turkey directly, without any mediation. "We hope that Turkey and Russia will follow the same path as two good companions," the Turkish president said, recalling the Russian proverb "Smart travel companion means that half of the way already passed."

Erdogan recalled that Russia is one of the main suppliers of natural gas to Turkey. "Over the past 33 years, we have received about 400 bcm of Russian natural gas. This is the best example of mutually beneficial relations between our countries," he said.

Vladimir Putin noted that the Turkish Stream construction project is a result of the Russian-Turkish strategic partnership and is important for the whole of Europe. The Russian leader called the pipeline "unprecedented in scale." "We have gathered here to witness an important project. The supply of Russian gas through the Turkish Stream will contribute to improving the energy security of Europe as a whole," Putin said.

In his address, Gazprom CEO Alexei Miller assured the participants that the gas reserves in the Yamal fields of the company will be enough to supply gas over the next century.

Russian Energy Minister Alexander Novak called the Turkish Stream gas pipeline one of the largest infrastructure projects in the world, which was implemented in record time and even ahead of schedule. According to Novak, the commissioning of the Turkish Stream will make a significant contribution to the energy security of not only Turkey, but also the countries of South and South-East Europe, significantly increase global energy sustainability.

His Turkish counterpart Fatih Donmez added that the project will contribute to the stability of the region. "This is a historical signature left in the depths of the Black Sea," he said.

Expected dividends

The construction of the Turkish Stream and TANAP is of particular importance for Turkey, which is an importer of natural gas. The implementation of these projects increases the strategic position of the country in the region, turning it into the most important energy hub between East and West.

Gazprom will allow Turkish Stream to improve the company's weak position in the Turkish market, as well as diversify Russian gas supplies to Europe.

"After the launch of the TANAP, which delivers Azerbaijani gas to Turkey, as well as the Turkish Stream, Turkey is in a winning position and can count on competitive prices. Its portfolio includes pipeline gas from Russia, Azerbaijan, and Iran, as well as liquefied natural gas (LNG)," Dmitry Marinchenko, Director of Corporate Affairs at Fitch said. "For Gazprom, this means that in order to maintain market share in Turkey, it will have to offer competitive prices, as is the case in many other European countries. The high price policy for countries that are not able to purchase it from alternative suppliers is a thing of the past," Marinchenko added.

Meanwhile, analysts of VTB Bank believe that the commissioning of Turkish Stream will not significantly change Gazprom's position in the Turkish market, where the Russian company already has enough competitors. According to VTB, due to a decrease in gas demand in Turkey, Gazprom's deliveries to this country for the first 9 months of 2019 fell by 35% compared to the same period last year (up to 11.7 bcm). In addition to the general drop in demand, this was the result of fierce competition from LNG companies and the gas from TANAP.

"Gazprom model does not imply any significant restoration of gas exports to Turkey, since we believe that the first line of the Turkish Stream will only replace gas transit through Ukraine. In addition, the gas supplied by Gazprom is probably the most expensive on the Turkish market, and in order to maintain the market share, the company will have to reduce the margin of supply, which is a fundamentally negative factor for Gazprom in the long term," VTB analysts say.

By the way, the full utilisation of the European branch of the gas pipeline and its overall feasibility are also doubtful, as the original idea was to stop the transit of Russian gas through the territory of Ukraine to the Balkan countries to make the Turkish Stream profitable. In fact, from January 1, 2020, gas through Ukraine is only supplied only to Romania and Moldova. The loss of Ukraine from gas transit through its territory due to the launch of the Turkish Stream gas pipeline has been estimated at about $450 million per year. But the question is whether the operation of the two branches of the Russian gas pipeline will cover the costs of construction. Moreover, natural gas prices in Europe are declining, and experts believe that this trend will continue.

The project cost declared by Gazprom is about $7 billion. However, analysts say that the actual costs of the project significantly exceed this amount making the Turkish Stream a lost project for Gazprom. Thus, according to the calculations of Sberbank CIB analyst Alex Faek, Turkish Stream will not pay off in the next 50 years and will bring Gazprom $13 billion in losses.

Nevertheless, a number of European countries are still waiting for Russian gas through the new pipeline.

Gas demand

Following Greece and Bulgaria, Serbia also expects the delivery of Russian gas through the Turkish Stream. On December 25, 2019, Gastrans, a joint venture of the Serbian state-owned company Serbiagas and Russian Gazprom, announced the completion of the construction of a 403-kilometer pipeline through Serbia between Bulgaria and Hungary.

"This pipeline will allow us to receive gas at decent prices, better than they have been so far. The construction of the 403-km pipeline and its branches through Serbia to deliver gas to Vladicin-Khan, Lubovia, Bayina-Bastu (remote regions of the country) and other places, is of great importance for attracting investments and developing industrial production," the Serbian leader said.

The first deliveries to Serbia through Bulgaria are expected in May 2020. Initial shipments will be 8.7 mcm daily, or more than 3 bcm annually to meet the growing domestic consumption and partial exports to Bosnia and Herzegovina.

Hungary is also planning to join the Turkish Stream. Currently, Open Season procedures are underway in the country in preparation for planning the construction of the national segment of the gas pipeline.

Possible cooperation

Baku also welcomes the launch of the Turkish Stream. Azerbaijan's position regarding the project was clearly outlined by President Ilham Aliyev, who said in his interview with Russia 24 that the energy projects jointly implemented by Russia and Azerbaijan are not competitors to each other.

"Energy projects implemented by Azerbaijan or Russia have never been the subject of any serious debates. Both Russia and Azerbaijan support these projects. As for the Turkish Stream, we know how important it is for Russia and Turkey. Both countries are our close partners, therefore we have supported the project from the very beginning," Aliyev said.

Mr. Aliyev does not even exclude a possibility of joint operation of the Turkish gas infrastructure together with Russia. "When we initiated the construction of a railway link between Azerbaijan and Turkey (Baku-Tbilisi-Kars), it seemed to many that the project was focused only on shipment companies from China and Central Asia. However, today the Russian shipping companies are already transporting goods in this direction. That is why I do not exclude the possibility that at some stage, the existing gas transportation infrastructure that we create, which Russia creates and which concentrates on Turkish territory, may become a common infrastructure," I. Aliyev notes.

Azerbaijani Energy Minister Perviz Shahbazov admitted the possibility of transporting Russian gas via TANAP. According to him, at a certain stage, this option is one of the possible scenarios.

"It is difficult to say anything concrete about this at the moment. I think that all countries will be able to access existing infrastructure if there is a desire and opportunities. TANAP and Turkish Stream do not compete with each other. On the contrary, both projects will contribute to the energy security of the region, both Turkey and Southeast Europe," P. Shahbazov said.

Unexpected competitor

While existing gas suppliers are realising opportunities to strengthen their positions in international markets, new actors also want to take positions in the same market. Thus, in addition to the U.S. and Qatar, Israel has now decided to enter the European gas market by supplying gas from the Leviathan and Tamar fields in the east of the Mediterranean Sea. Recoverable gas reserves of Tamar and Leviathan amount to about 307 bcm and 453 bcm, respectively. To realise export ambitions, Israel plans to build the East Mediterranean Gas Pipeline (EastMed) with a design capacity of 10 bcm annually at the initial stage.

On January 2, 2020, Greece, Cyprus and Israel signed an agreement in Athens to begin construction of the EastMed gas pipeline. The 1900 km EastMed is expected to be the longest underwater gas pipeline in the world. The expected operation of the pipeline is 2025-2026. Via the new gas pipeline, Israeli gas will go to Cyprus, then to the Greek island of Crete and mainland Greece. Moreover, it is expected that EastMed will play the most important role for gas supplies to Italy and other southern European countries.

At the end of 2015, the European Union granted EastMed the status of Common Interest Project (CIP) and has already paid €2 million for feasibility studies. It is expected that in 2022, the latest, a decision will be made in Brussels on whether the EU will take on 50% of the total cost of the project, estimated at $6-7 billion. The Greek gas company DEPA and Italian Edison through its joint venture IGI Poseidon are ready to take on the other half of the costs.

Turkey opposes the construction of a new pipe since there is a TANAP, through which gas flows from Azerbaijan to Greece through Turkey and Georgia.

Now it is time to move from words to deeds. If the EastMed project is implemented, both Russian and Azerbaijani gas may have a serious competitor in the Mediterranean.