Is it a beautiful dream? Russia and Greece will begin building a Greek extension of the Turkish Stream gas pipeline before the year is over and complete the job in 2019. This could be true if people trusted a memorandum the energy ministers of both countries signed in June. It seemed a foolproof solution that appeared eligible for implementation under the strict antimonopoly rules of the notorious Third Energy Package, which requires cross-border infrastructure within the EU to be independent from gas suppliers. Gazprom will neither own nor operate the future pipeline.
The ministers pledged to assist a proposed 50-50 joint venture of Russian and Greek investment banks, with initial Russian financing, to prepare a feasibility study and design a ‘South European Gas Pipeline’, a Greek segment of the Turkish Stream, which Gazprom wants to build to the Thracian part of Turkey. The four-string line across the Black Sea with the ultimate annual capacity of 63 Bcm will leave 16 Bcm of gas in Turkey and deliver the remaining 47 Bcm a year to Greece, to be distributed then to Italy, Balkan nations and to the Baumgarten hub in Austria. At the Austrian hub, the pipeline will finally connect to an extension of Gazprom’s Nord Stream system and make it unnecessary to transport any amounts of Russian gas to European consumers via Ukraine.
It would be a triumph for the Kremlin, where the idea of bypassing Ukraine with the Nord Stream and South Stream (later transformed into the Turkish Stream) was born. The plan, estimated to require at least $70 billion of investment in new gas transportation infrastructure in Russia and in Europe, was targeting ‘unruly’ Ukraine, which would lose some $2 billion of annual income it collects from transit of Russian gas.
Officially, the bypass ‘Streams’ are being built to make gas supply to Europe more secure because, as Moscow alleges, the Ukrainian transit is not safe enough both technically (the Ukrainian pipes are ageing) and politically. Evil tongues, however, say that the real beneficiaries of the plan are personal friends of Vladimir Putin, such as Arkady Rotenberg and Gennady Timchenko, the contractors for Gazprom’s pipeline projects—the projects that are sometimes unnecessary but carried out at grossly exaggerated costs.
Earlier, in February this year, Gazprom started promoting the idea of the South European Gas Pipeline by signing another memorandum—with Greek DEPA and Italy’s Edison companies. The parties promised to facilitate supply of Russian gas ‘across the bottom of the Black Sea via third countries to Greece and from Greece to Italy’. Observers wondered about ‘third countries’ suggesting that they could be either Bulgaria or Turkey. Moreover, the proposed route would run parallel to the TAP pipeline between Greece, Albania and Italy (already under construction) and would become redundant.
The June memorandum made it clear that the proposed Greek infrastructure was to become a segment of the Turkish Stream. Bulgarian options have been abandoned by Moscow.
The Greek project is not free of snags. To begin with, the memorandum was signed at the St. Petersburg Economic Forum, which is famous for the abundance of signed documents with huge investment promises in them, but very few of these papers are actually binding. Most of them are just expressions of good intentions, overhyped to make Russia’s political leadership cast a happy and benevolent look at future investors who seem to be prepared to defy Western economic sanctions and cooperate with the Russian regime. Later on, the optimistic promises are either forgotten or trimmed down to make the result ridiculously modest.
This apparently is what is happening to the South European Gas Pipeline.
On September 11, 2016 Greek Minister of Productive Reconstruction, Environment and Energy Panos Skourletis said in an interview to Russia’s governmental news agency, after a meeting with his Russian counterpart Alexander Novak, that Greece was interested in Gazprom’s pipeline project that could run from Turkey to Italy. He added that Italy and Austria were also interested but (and this is a very big ‘but’) ‘everything would depend on the attitude of the European Commission.’ The Greek minister was rather evasive about these three European nations’ willingness to participate in talks with the European Commission about the project. ‘We’ll see,’ he said.
Another snag is the shape the negotiations on the Turkish Stream are taking.
The idea or replacing the abortive South Stream with a pipeline across the European part of Turkey to the Greek border (and then allow the EU nations to pick up Russian gas from a hypothetical hub on that border) was born in early December 2014, when Vladimir Putin admitted in public it was impossible to build a Russian pipeline from Bulgaria into the heart of the EU disregarding antimonopoly rules of the Third Energy Package. The Turks were surprised with the new concept of Gazprom’s southern pipeline but hastened to embrace the offer as a chance to enhance Turkey’s role as an important energy supply hub for the EU.
However, Gazprom and Turkey could not come to terms on the planned capacity of the route. Ankara agreed to accept one pipe with the annual capacity of about 16 Bcm, which could replace gas deliveries from Russia via Ukraine, instead of four strings with the capacity totaling 63 Bcm a year, as Moscow had originally planned. Gazprom argued that proceeds from gas sales via one single line would not be enough to reimburse the costs of the huge South Stream project. In addition, Gazprom and its Turkish clients kept haggling about price discounts associated with Turkey’s agreement to host the Russian pipeline on its soil.
These discussions continued for almost a year before they were interrupted by a conflict in relations of Russia and Turkey (a Russian military plane was downed on its mission in Syria). Another chance for resumption of negotiations opened in August 2016 after reconciliation of these countries.
Today, the negotiations again focus on a one-string option of 15.75 Bcm a year. If this small pipeline is built, Gazprom will be able to cover at least a portion of earlier expenses on the South Stream, estimated to total between $14 billion and $17 billion.
According to the Russian energy minister, Russia could negotiate a second string of the project, which might cross the Turkish-Greek border, only if the European Commission guarantees consumption of that additional gas. It is a somewhat weird demand because the European Commission has no authority to guarantee anything of that kind and Gazprom has not asked the European Commission for endorsement of either its South Stream or Turkish Stream projects.
So far, the negotiations with Ankara on a possible resumption of work on the Turkish Stream do not involve any technical or economic experts. They continue on a political level, mainly through diplomats. Gazprom announced on September 9 it had obtained ‘first permits’ from Turkey (‘via diplomatic channels’) to launch the construction of the Turkish Stream gas pipeline project. It is not clear what sort of permits they are, but in fact Gazprom has not made any moves to perform engineering or environmental surveys and prepare a feasibility study for the Turkish part of its abandoned South Stream project.
While government officials keep making declarations on prospects of Turkish Stream, in late August Gazprom eliminated its Project Management Department in its managerial structure. The department, established in 2009, was in charge of the South Stream (later repositioned as Turkish Stream) project. The employees, some 100 persons, were given two months to find new jobs.
No negotiations are underway with possible contractors for the underwater segment of the Turkish Stream pipeline. In November 2015 Saipem Stream Transport B.V., a subsidiary of Italy’s Eni, sued Gazprom for €759 million of damages for severing the contract for building the underwater segment of the South Stream. No settlement has been reached even though Gazprom reportedly keeps negotiating another contract with Saipem, on building the underwater segment of the Nord Stream 2 pipeline in the Baltic Sea.
The improving political and economic relations between Moscow and Ankara have not yet pushed Gazprom toward resumption of full-scale preparatory operations for building the Turkish Stream pipeline. Negotiations are still limited to diplomatic contacts rather than engineering, environmental and feasibility studies.
A limited one-string solution appears realistic although it is not clear at this moment whether Gazprom is prepared to hire expensive pipe-laying vessels again: it is not economical to earmark such a huge budget for a simple one-string project. On the other hand, it would be able to use at least some of the pipes Gazprom has accumulated for the South Stream and keeps paying for their storage in Bulgaria.
From a political angle, even a small-scale pipeline across the Black Sea could be presented to the world as another victory of the Russian regime in defiance of Western sanctions. Such showcase events are extremely important for the Kremlin, regardless of their costs. And the idea of removing Ukraine from the transit chain of gas deliveries from Russia to southern Europe (Italy, Greece, Balkan nations) and Turkey remains on the political agenda of Moscow.
The most probable scenario appears to be as follows. Once the political disagreements are over and the negotiations on price discounts lead to a mutually acceptable result, the parties may start feeling practical about the project. Moscow and Ankara would sign an intergovernmental agreement endorsing and facilitating the project, issue the remaining permits and then Gazprom could resume the work.
One string of the Turkish Stream may become operational before 2020, allowing Gazprom to reroute a significant portion of Ukrainian transit to the new Black Sea pipeline. An outlook for a second string is uncertain as Gazprom’s plans to compete with the ongoing TANAP/TAP project and it would require a resolution of complex regulatory issues with the European Commission.
The status of EU-Turkey and EU-Russia political relations will be important in determining whether and when the second string of Turkish Stream would be built.
The EU wishes to preserve Ukraine’s transit role, and is therefore opposed to any pipelines that would enable Gazprom to reduce that role. However, the EU might not want to increase a transit role of Turkey beyond that which it will play in respect of Azeri gas to be delivered to Europe via TANAP, given that its regulatory power vis-à-vis Turkey is non-existent (as Turkey does not subscribe to the EU acquis), and its political power vis-a-vis Turkey appears to be deceasing in the aftermath of the failed coup.
This balance, or misbalance, of European interests will definitely affect the fate of the second string of the Turkish Stream. In the meanwhile, South European consumers of Russian gas will still depend on the transit route across Ukraine.