Showing posts with label Turkish Stream. Show all posts
Showing posts with label Turkish Stream. Show all posts

Monday, November 26, 2018

25/11/18: Russian South Stream 2.0 Comes Out of the Shadows


Russia and Turkey have announced that the two countries have reached significant progress in reviving the November 2014-shut down South Stream gas pipeline intended to land Russian gas across the Black Sea. The project is the part of the already secured open tender contracts for purchases of gas signed between Gazprom, Bulgaria, Serbia, Hungary, Slovakia and Austria.

Source: Kommersant

The new Black Sea gas pipeline Turkish Stream will run under sea from Krasnodar to a landing hubv just west of Istanbul. On November 19, presidents Vladimir Putin and Recep Tayyip Erdogan met in Istanbul to announce the completion of pipeline's off-shore section.

Pipeline capacity is for 30 bullion cubic meters, bcm, although initial phase capacity will be closer to 17bcm (the first pipe). Currently, Gazprom supplies the above volume (30bcm) to Turkey (ca 16bcm), Bulgaria, Serbia, Slovakia, Hungary and Austria. Turkish market has been supplied via Blue Stream pipeline, and the other countries are supplied via Ukraine.

Based on reports from Russia's Kommersant (https://www.kommersant.ru/doc/3806415), Gazprom has managed to achieve two feats:

  1. Gazprom has completed laying two (not one) pipes for Turkish Stream, one intended to supply Turkey and another, to supply Southern Europe, 
  2. Gazprom secured tenders for purchases of gas from all EU states to be connected to the South Stream project (Bulgaria's open tender closes in December 2018, but all other countries have already signed onto supply agreements).


Significantly, the tenders were secured in compliance with the EU Energy Directives. This means that Gazprom latest venture has addressed the main cause of the EU's original objections to the same pipeline prior to 2014. In the case of open tenders process, Gazprom used exactly the same scheme to secure capacity orders for its Nord Stream 2 pipeline to Germany, Czech Republic and Slovakia back in 2017. According to the experts cited by Kommersant, this makes in impossible for the EU to shut down the project.

Of course, history reminder due, South Stream was primarily killed off not by the EU, but by the U.S. keen on protecting Ukraine's near monopoly on Russian gas transit. The Obama Administration exerted massive pressure on Bulgaria and other South Stream-receiving countries to prevent landing Russian gas in Southern Europe. So far, there has been little indication what Washington's position on the latest iteration of the South Stream might be, but I doubt it will be welcoming.

Kommersant-quoted stats on South Stream are impressive: according to the paper sources, Gazprom signed delivery tenders with Slovakia for seven years from October 2022 for 4.3bcm, of which Austria will get 3.8bcm, 4.7bcm will go to Hungary, 2bcm to Serbia, and 4.8bcm to Bulgaria. So, comes October 2022,  the South Stream (or Turkey Stream, or whatever you want to call this) will be pumping into Southern Europe the equivalent of the current transit through Ukraine.

Between two new pipelines, Gazprom can easily deliver its current supply contracts to Europe by-passing Ukraine, although, if European demand continues to expand at the current rates, it is likely that Gazprom will need to retain some Ukrainian transit capacity into the future. Even in 2021, before South Stream comes fully on stream, Russian gas transit via Ukraine can fall to below 10bcm per annum.

These developments are undoubtedly a major concern for Ukraine - the country already raised criticism of the South Stream on November 19 - as transit of Russian gas via Ukraine is a major revenue earner for Kyiv. Based on the European Council on Foreign Relations data, between 1991 and 2000, Ukraine accounted for 93 percent of Russian gas transit to Europe; by January 2014, this amounted to 49 percent. Naftogaz, Ukrainian State gas company, tried repeatedly to extract monopoly-level revenues from Gazprom. Back in 2008, Naftogaz tried to charge Gazprom $9 per tcm/100km in transit fees - triple the price charged for transit by Slovakia and Poland, and more than double the fee charged by the majority of the Western European states. This pricing came on top of Ukrainian authorities expecting Gazprom to supply gas to Ukraine for domestic consumption at severely subsidised prices. It is, of course, worth noting that Gazprom itself is a monopoly and has, in the past, used its dominant market positions to exercise market power. There are no innocents (other than European buyers of gas) in the long-running disputes between Naftogaz-Ukraine and Gazprom-Russia.

Nonetheless, the situation is asymmetric. Russia currently continues to rely on Ukraine for transit of its main traded commodity, while Ukraine continues to rely on Russia for a large share of its economic activity. In a recent note, Bruegel (http://bruegel.org/2018/01/the-clock-is-ticking-ukraines-last-chance-to-prevent-nord-stream-2/) estimated that Nord Stream 2 coming on line can cost Ukrainian economy ca 2-3 percent of GDP in foregone Russian gas transit earnings. South Stream is likely to add another 1.5 percent.  In the longer run, overall cost to Ukraine of losing Russian gas transit routes can cost as much as 5-6 percent of GDP.

Note: the latest developments in the Sea of Azov can put significant political pressure on the South Stream project, if the EU and the U.S. choose to significantly escalate their pressure on Russia in the wake of the Russian blockade of trade routes through Kerch Straits and in response to the naval incidents reported today. Both, the reported blockade and the naval incident, are worrying developments, and the onus is on Russia to rapidly de-escalate the already volatile situation in the Azov Sea. There are no justifiable reason for restricting Ukraine's access to trade routes, and for increasing military tensions in the region.

Wednesday, January 14, 2015

14/1/2015: Gazprom to Europe: See You in Turkey


And we have it... from the mouthpiece of Moscow, the Rossiyskaya Gazeta (link to Russian version here).

Head of "Gazprom" Alexei Miller announced new strategy in response to the changes to the EU energy policy. This involves:
1) South Stream pipeline is dead. Permanently.
2) South Stream is to be replaced by Turkish Stream, crossing Black Sea and landing in Turkey, with no plans for connecting to Europe.
3) If Europe wants Russia gas, it will have to build its own connection from Turkey.
4) All gas supplied via Ukraine - currently 63 bcm of gas going to Europe via Ukraine transit - will be shipped via Turkish Stream.
5) Shipments of gas via non-Ukraine transit will continue (in 2013 total Russian gas supplies to Europe were 161.5 bcm and in 2014 these were down roughly 10 percent).

All of this is a response to the EU plans to monopolise purchasing of energy from outside the EU. The EU is aiming to increase its bargaining power both vis-a-vis prices of delivery and delivery channels (pipelines access). Understandably, Russian objective is to retain some pricing power and control over transit systems (remember, these systems are built either using Russian funds or a combination of funds involving Russian funds).

The implications of Miller's announcement are wide-ranging. In effect, Russia is calling Europe's bluff on both Ukraine and Energy Union.

If Ukraine is shut out of transit of Russian gas, Kiev will be forced to lock into European supply systems. The risk of non-payments - a very material risk given Kiev's track record over the 1990s and 2000s - will fall squarely onto European system. Alternatively, Ukraine will be exposed to the risk of Gazprom dictating its terms on gas supplies to Ukraine. Ukraine will also lose lucrative billions in transit fees (ca USD3bn in 2013 alone) and will face new costs for shipments of gas - cheaper via direct route from Russia, more expensive via European system link up.

Turkey is a big winner here as it gets to become the dominant key hub (ahead of Nord Stream) for transit of gas to Europe (including Central Asian gas).

EU is not necessarily a loser in this, however. Owning the pipe from Turkey to Europe, the EU will be able to negotiate transit of Central Asian gas as a substitute for Russian gas with minimal capital expenditure.