GAS PATIENCE GAME

A game of gas patience played on the European energy market is taking a more concrete shape. And Turkey begins to play a special role in this game, concentrating on its territory the main transit routes including the Southern Gas Corridor (SGC) and Turkish Stream. However, while the Russian project is still an idea, the SGC has entered the phase of active construction.

In September 2014, a ceremony of laying the SGC foundation took place in Baku, and in the middle of March this year, the presidents of Turkey, Azerbaijan and Georgia announced a ceremony of groundbreaking the Trans-Anatolian Gas Pipeline (TANAP) in Kars, which is the cornerstone of the Southern Corridor.

Azerbaijani President Ilham Aliyev said that the Southern Gas Corridor creates a new format of cooperation in the Eurasian region based on partnership involving Turkey, Georgia and Azerbaijan. "Today, we are expanding this format. Other countries such as Greece, Bulgaria, Albania and Italy are joining this work. In the future, Azerbaijani gas will be delivered to Balkan countries. I am sure of that. At the same time, Bulgaria, which is a member of the Nabucco project, is already involved in our project too. Romania and Hungary, I am sure, can and should join these projects as well," Aliyev said at the TANAP groundbreaking ceremony in Kars.

He noted that the implementation of the SGC will provide benefit to all countries involved - producing countries, transit countries and consumer countries - on the basis of a balance of interests. "Additional large volumes of gas will be transported to Europe and Turkey from the new source. Currently, the only new source of gas for Europe is the Azerbaijani gas field of Shah Deniz [Sah Daniz]. In the future, there will be other sources but now this is the only new source. The demand for gas in the world, in particular in Europe, will gradually increase. Traditional sources, of course, are depleting. There should be a new resource base. Currently, Azerbaijan is this resource base," the head of state said.

Meanwhile, for Turkey, TANAP is a project that contributes to the country's plans of becoming a regional power distribution centre. According to Turkish President Recep Tayyip Erdogan, TANAP stands out in terms of its route and its goals among all projects being implemented by Turkey. "Just as this project is not an alternative to any other project, there is no alternative project to TANAP, either. In this context, after the final implementation of all phases of the Southern Gas Corridor, which is really special, we will establish a strong link between Europe and the Caspian region," Erdogan said, noting that this project is needed by Eurasia on the whole, not just Azerbaijan, Georgia and Turkey.

The Turkish Stream project proposed by Russia's Gazprom also contributes to the transformation of Turkey into a regional energy hub. However, neither Turkey nor Azerbaijan views the Southern Gas Corridor and Turkish Stream as competitors.

"We continue our negotiations with Russia on Turkish Stream, about which we immediately expressed our positive opinion, and maintain our interest in this project. There is no question about any competition, we need both projects - TANAP and Turkish Stream," Minister of Energy and Natural Resources Taner Yildiz said.

In the meantime, Azerbaijani Minister of Energy Natiq Aliyev said that, while Russia plans to supply Europe with about 50bn cu m of gas along the Turkish Stream route, Azerbaijan is going to deliver just 10bn cu m of gas along the SGC.

Nevertheless, the attitude to the SGC project in the Russian Federation is becoming increasingly jealous. While earlier scepticism about the TANAP and TAP projects was expressed at the level of experts, now they are also criticized by officials of the Russian Federation. In his interview to the Interfax news agency, Vladimir Chizhov, Russia's permanent representative to the EU, expressed doubts about the economic viability of the TANAP project. "This pipeline has to be run from Azerbaijan through Georgia, across the entire of Turkey and further to Europe, which involves the construction of the pipe under the Bosporus. It is extremely challenging from a technical point of view and exorbitantly expensive in the terms of money," the diplomat said. With respect to the TAP project, Chizhov said that it "will come to life if connected with our Turkish Stream".

However, certain analysis of the two routes reveals that the SGC has advantage in comparison with Turkish Stream.

In less than three years since the signing of the construction agreement, TANAP has covered a distance from a project on paper to the stage of physical development. Pipe suppliers, consortia that will build the pipeline and pumping stations have been identified. Construction work proper will begin in April, so as to establish the supply of gas to Turkey already in 2018. Meanwhile, Europe is going to receive gas in 2020, when the Trans-Adriatic Pipeline to Italy via Greece and Albania is completed. A two-year gap between the completion of the TANAP construction and the beginning of gas deliveries to Europe gives cushion time against possible construction delays. 

For Europe, the Southern Gas Corridor, as noted above, is a new route to new sources of gas. That is why the SGC is included in the new strategy of the European Energy Union, and Azerbaijan, in the list of the EU's potential partners in energy supplies. By the way, Turkmenistan and Turkey were specially identified as partners, while Iraq and Iran were identified as such in the longer term. It is clear that the Southern Gas Corridor, and in particular TANAP, may become a gas transport route for all of these countries. There may be different routes of gas supply from Greece including via TAP or the reconstructed Nabucco route to Bulgaria and then to Romania, Hungary and Austria.

In the meantime, Gazprom's project is still at the stage of discussion, and the initial plans to lay the first leg of the Turkish Stream pipeline over the Black Sea bottom as early as 2016 seem to have been postponed at least for a year. As was recently reported by Turkish and Russian media, Gazprom and Botas cannot agree on a gas discount for Turkey, which was part of the arrangements for Turkish Stream. As a result, Gazprom has not yet received permission to carry out project work in the Turkish sector of the Black Sea. While Yildiz denied reports about the existing problems, a telephone conversation between Turkish President Erdogan and Russian President Putin, which took place after such reports, leads to certain reflections.

In fact, it was known from the start that Ankara would try to get the most of benefits in the process of harmonizing the conditions of the Turkish Stream project. Along with Moscow, Brussels is also actively trying to come to terms with Ankara. Notably, the ceremony of the beginning of the construction of TANAP in Kars was attended by Vice President of the European Commission for the Energy Union Maros Sefcovic. Within the framework of his visit, a memorandum on cooperation in the field of energy was signed between the EU and Turkey. While in Turkey, Sefcovic noted that the decision on whether or not to build a gas pipeline for supplying Russian gas through Turkey should be taken with due regard for the opinion of the European Union.

He underscored the need to ensure that the new gas pipeline, Turkish Stream, is economically feasible and that its construction will not violate the existing legal obligations, Reuters reported. "When we speak about some big supplies for European customers, you cannot adopt such a decision without talking to them, without talking to the EU and without talking to the European Commission," he said at a press conference in Ankara.

The official also expressed concern about the possibility of closing the existing routes of gas supplies through Ukraine in favour of Turkish Stream.

Another advantage of the supply of Azerbaijani gas via the SGC is the fact that natural gas is delivered to the end user pursuant to fixed-term contracts. For the development of gas fields, it is of paramount importance to have gas sale contracts. In the case of the Shah Deniz field, contracts have already been signed with nine companies for the sale of 10bn cu m of gas per year in Europe. In contrast, Turkish Stream envisages that consumers themselves should ensure the routes of delivering gas to the Turkey-Greece border. Furthermore, no specific contracts for the supply of gas under the Turkish Stream project have been concluded with any company as yet.

Finally, the price factor plays an important role too, as Azerbaijani gas is the cheapest on the Turkish market, whereas Russian gas is the most expensive. "The rising cost of Russian gas production and transportation make Russian gas uncompetitive. Azerbaijani gas is delivered to Europe after being transported over a distance of about 2,000 kilometres. Meanwhile, gas delivered by Gazprom is coming from the Yamal Peninsula, i.e. it will have to travel more than 6,000 kilometres before reaching the border of Greece and Turkey across the sea," expert Mikhail Krutikhin said in an interview to the Deutsche Welle radio station.

In principle, Europe will not be able to significantly reduce the share of Russian gas in the overall balance any time soon. Furthermore, the volume of supplies of Azerbaijani gas (10bn cu m at the first stage) cannot be compared with 130-140bn cu m of Russian gas supplies. Thus, supplies of Azerbaijani gas are aimed more at meeting the growing demand for natural gas rather than replacing supplies from Russia. The realization of this fact can lead to mutually beneficial cooperation rather than competition in the huge market.

AT FIRST HAND

"Today, a very serious and new alliance is about to emerge in the Eurasian region. Both political and economic impact of this will be very large. The history and culture of these countries are different as we belong to different civilizations. But we share good intentions as well as specific projects. Therefore, the Southern Gas Corridor is not simply an energy project or a pipeline; it is a serious political initiative"

Ilham Aliyev, President of Azerbaijan

"If the economic resources do not serve people, then, as we know, this leads to disaster: we have lived through two world wars, countless other large and small wars, and conflicts. With this project, we concurrently express our will, which is to make these resources of benefit to our citizens as well as all the peoples of the region, the whole of humanity"

Recep Tayyip Erdogan, President of Turkey

"Despite the fact that Georgia is a transit country, it attaches great importance to its responsibilities and obligations under this project. We will be fulfilling our obligations to the very end to ensure the security of the corridor. This project will benefit not only Georgia but also our neighbours"

Giorgi Margvelashvili, President of Georgia

The Southern Gas Corridor is of great strategic importance for Europe. At the moment, this is the only project that will provide Europe with new routes, new gas sources. The European Commission and the European Union pay much attention to this project"

Maros Sefcovic, Vice President of the European Commission for the Energy Union

"If you look at the TANAP project today as a starting point, and at TAP as its follow-up, and at the gas stream which will be delivered to Europe, you can realize that the governments of Azerbaijan and Turkey, together with their partners - Georgia, Greece, Albania - will become important elements of new realities in the energy security in Europe and the world"

Amos Hochstein, Special Envoy, Bureau of Energy Resources, US Department of State