PIPE TO EUROPE

Russia and Turkey have a long history of extremely complex and contradictory bilateral relations. Alternating periods of wars and friendship under constant and careful watch of the world community. Presently, cooperation between Ankara and Moscow is progressing well, supported by strong economic ties and large infrastructure projects.

At the same time, the energy sector has a special place in relations between the countries. Russian Rosatom continues the construction of the Akkuyu nuclear power plant in Turkey. Russia also supplies Turkey with hydrocarbons and coal, and is one of the largest suppliers of natural gas: in 2017, supplies increased from 24.7 to 29 billion cubic meters (bcm).

However, Gazprom is expanding its coverage of the Turkish market and, apparently, plans to settle here for a long time, starting the implementation of a very ambitious project, the construction of the Turkish Stream gas pipeline.

Unique project

In fact, the project started in December 2014, when Russian President Vladimir Putin announced cease of construction works on the South Stream gas pipeline, which was supposed to transport Russian gas to the EU bypassing Ukraine. Instead, Gazprom and the Turkish company Botaş Petroleum Pipeline Corporation agreed on the construction of the Turkish Stream gas pipeline under the Black Sea and leading to Turkey. It is planned to include two pipelines with 15.75 bcm annual transport capacity each. In the following stage, it is planned to construct an onshore gas pipeline, which will connect the offshore section with the existing onshore gas grid of Turkey near the city of Lüleburgaz and from there will pass to its final destination on the EU border.

In May 2017, Gazprom began construction of the offshore section of the gas pipeline, which was completed on November 19, 2018. Pioneering Spirit, the largest construction vessel in the world, conducted laying of offshore pipes.

"Turkish Stream is a unique project. It was the first time that a pipe with a diameter of 813 mm was laid at a depth of 2.2 km. Two gas lines were built between the Russian Anapa and the Turkish settlement of Kiyik (100 km west of Istanbul). The length of each of these lines exceeds 930 km. Annual capacity of the pipeline is 31.5 bcm of gas,” said the CEO of Gazprom, Alexei Miller.

Gazprom will also construct the onshore section of the pipeline. "We expect that these works will be carried out at the same accelerated pace in order to start the gas pipeline, as planned, until the end of 2019," the Russian president announced at the solemn ceremony held on November 19 in Istanbul to celebrate the completion of the installation of the Turkish Stream sea part.

According to Gazprom’s forecast, the first of the two gas pipelines will supply Russian gas to the west of Turkey, and the second will transmit the gas through Turkish territory to the countries of southern and south-eastern Europe.

As Vladimir Putin said, this project is not against the interests of third parties. "Projects of this kind are exclusively constructive. The objective is to develop relations between states, creating stable conditions for the development of the economy, and increasing the welfare of our countries on this basis,” Mr. Putin said.

Turkish President Recep Tayyip Erdogan called the pipeline project a historic achievement, pointing out its importance for Turkey and Europe. "When the pipeline works at it full capacity, it is planned to deliver at least half of this gas to the EU countries. As for Turkey, Istanbul, Bursa, Kocaeli, Izmir are critical production and export centres, which will get new incentives for development. That is why Turkey, without being exposed to transit risks, will be able to meet the needs of itself and the EU in natural gas in full,” Mr. Erdogan said.

Dividends

It is simple to understand the logic of the Turkish side, which easily agreed to the implementation of the Turkish Stream. On the one hand, Turkey will receive Russian gas at an agreed yet attractive price, on the other, it will turn into a hub supplying Europe with natural gas and getting additional revenues from transit to the Turkish economy. Naturally, all these factors will further strengthen the regional significance of Turkey, and most importantly, will allow Turkey to dictate its price terms to other gas suppliers in the Turkish market. Turkish Minister of Energy Fatih Donmez said during the Istanbul ceremony last November: "Turkey contributes to the competition in the energy market in terms of pricing, establishing fair conditions for the development of energy markets. We are doing everything necessary to achieve this. Thus, TANAP gas pipeline has been introduced not long ago. In September, we opened a market for the wholesale sale of energy resources."

The minister said that by 2020, Turkey's annual gas consumption will reach 60 bcm compared to 55 bcm in 2015. He added that Turkey ranks the fourth country in Europe due to energy consumption. In addition, he pointed to Turkey's potential for storing gas.

"Turkey is doing everything to become the regional energy hub. There is a strong political will behind this, of course. We have installed all the necessary infrastructure to ensure the sale of natural gas both at national and international levels. We will become one of the authoritative countries in this market. Now we take one more step towards the accomplishment of this project. Fifteen million households will satisfy their needs in natural gas annually as soon as the gas pipeline is fully operational,” Turkish Minister of Energy said.

It is also easy to guess the dividends that Russia expects to get when the Turkish Stream is operational. First, the pipeline will allow Gazprom to further strengthen its position in the Turkish market, and most importantly, to gain access to the European gas market bypassing Ukraine, to which Russia has been striving for the past few years.

Given the small volumes of gas planned for delivery to the EU via the Turkish Stream, Russia is mostly concerned with creating a new export route to Europe. In fact, Gazprom has even made some adjustments to the project to receive a green light for the project from the EU to continue construction on European territory. Indeed, the initial announced annual capacity of the Turkish Stream was 63 bcm (16 bcm for Turkey and 47 bcm for Europe).

Gazprom estimated the current cost of the project at $7 billion. In other words, the costs are small but the rewards are greater. It is enough just to open a small window to Europe now, and to increase the capacity of the pipeline in the future, if everything goes well and the European demand for gas increases.

Meanwhile, according to the Russian media, Gazprom has already decided on the route of gas supplies through the Turkish Stream, which will originate in Bulgaria and pass through Serbia, Hungary and Slovakia. Moreover, the company plans to begin deliveries to Bulgaria and Serbia from 2020, to Hungary - from 2021, and to Slovakia - in the second half of 2022.

The only alternative

Of course, any project that is commercially viable and meets the interests of all the parties has the right to be implemented. Turkish Stream is no exception. Currently, Turkey meets its needs for natural gas through various suppliers, including Russia, Iran, Azerbaijan, Algeria, Nigeria and others. Russia supplies the half (50%) of the total volume of gas imports to Turkey. Therefore, any talks about the competition of Russian and say Azerbaijani gas in the Turkish market are meaningless, and the emergence of the Turkish Stream will preserve this situation.

On the other hand, given the EU’s desire to reduce dependence on Russian gas and the extremely negative US attitude to the Turkish Stream, as well as to Russian pipeline projects in general, the prospects for a new gas pipeline in Europe seem to be vague.

"The US very clearly express disagreement with the construction of the second line of the Nord Stream and Turkish Stream gas pipelines. The reasons are obvious: the citizens of Europe and Ukraine should not become hostages to energy supplies from a single source." This statement was made by US Secretary of Energy Rick Perry during his meeting with Ukrainian Prime Minister Vladimir Groysman, which took place a week before the solemn ceremony in Turkey mentioned above.

The Kremlin does not hide the concerns about the imposition of sanctions by Washington against the members of the Turkish Stream. "The US is so actively imposing sanctions that no one is insured against them," Dmitry Peskov, Press Secretary of the Russian president, said.

The governments of the Balkan countries friendly to Russia actively support the construction of the Turkish Stream gas pipeline. But whether this support withstands the American pressure and brings the project to the end is still questionable.

The only pipeline alternative to Gazprom in Europe is the Southern Gas Corridor (SGC) project initiated by Azerbaijan with the annual capacity of 10 bcm (for European consumers) and the possibility to double the volume. At the same time, SGC enjoys great political support from both the US and the EU. It cannot be considered a serious competitor to Gazprom's Turkish Stream, since the volumes are incomparable. In 2017, Russian gas supplies to European countries reached 194.4 bcm (81% to Western Europe, 19% to Central Europe).

Apparently, the EU is trying to involve Turkmenistan in this project. This country has enormous gas reserves. EU even expressed its willingness to help attract investment in the construction of the Trans-Caspian gas pipeline through the Caspian Sea to Azerbaijan. Representatives of the European Commission announced this during the negotiations with the Turkmen delegation in Brussels in October. It is planned to supply 30 bcm of Turkmen natural gas annually to the European market for at least 30 years.

Currently, China is the main buyer of Turkmen gas. However, after a quarrel with Gazprom in early 2016 and with Iran in early 2017, Ashgabat began to explore the export route for gas supplies to the European direction. As part of this process, the state-run company Turkmengas is holding active negotiations with both the EU and a number of transit countries.

Should the Turkish Stream reach Europe, it will likely push the EU to implement more effective measures to create healthy competition for Russian gas, because EU is the most interested party.