Shortly after the ratification of the intergovernmental agreement between Russia and Turkey on Turkish Stream, analysts embarked on understanding the implications of Russian gas entering the Southern Gas Corridor. The emphasis was placed on the role and interplay between the Russian gas monopoly and its European partners in marketing and selling surplus gas flows that emerge at Turkey’s borders with EU states Greece and Bulgaria. There is an even more specific angle to explore – the impact of Russian gas on the Trans-Adriatic Pipeline, which starts on the Greek-Turkish border and ends up in Italy.
TAP plays an instrumental role in the EC’s drive to diversify and liberalize the SE and SEE regional gas markets and more poignantly to attract alternative gas supplies across a wide range of producers from the Caspian to the East Med region. The project is deemed strategic and rated ‘priority’ at EC level, evidenced in its exemptions from regulatory restrictions imposed by the Third Energy Package. The obvious aim is to boost incentives and reduce project risks to the project initiators. The potential entry of substantial volumes of Russian gas offered by Turkish proxies into TAP will undoubtedly generate fresh tensions between the main shareholders in the key new transit infrastructure in Georgia, Turkey and Greece, on one hand, and Russia and Turkey on the other, as well as the European Commission, the third party.
The demarcation line between different interests is blurred as the motivations of the gas producers in the Azeri gas fields will not necessary overlap with the interests of the traders and the transit country governments that seek to optimize supply options. Many years ago when the Southern Gas Corridor was conceived, there were few alternatives to Azeri gas – today the competition between gas producers is fierce.
Gazprom, the Greek DEPA and Italy’s Edison, which is part of the EdF group, discussed last week in Moscow the work in progress following the February 2016 Rome Memorandum of Understanding on cooperation to bring Russian gas from the Black Sea to the South EU market. The meeting was held at the highest possible level – Chairman of the Board of Gazprom Alexey Miller, CEO of Edison and vice president of EdF, Mark Benayuna, and CEO of DEPA, Theodoros Kitsakos.
The press release, that followed the meeting contained all the trivial code words that are duly expected in such exercises of business diplomacy, such as the contribution to the energy security of Southern Europe through the diversification of routes.
Indeed Edison and especially its parental group of companies, EdF, are deeply interested in securing sustainable and competitive supply of gas for its own power generation needs and its clients across various markets in Italy and beyond. Edison’s gas in Italy itself accounts for more than one-fifth of the entire market – 15.8 billion cubic meters in 2015. After the demise of the Poseidon project, Edison had been left empty handed without gas suppliers via the Southern Gas Corridor. Only the Italian Enel and Hera agreed to import Shah Deniz–2 gas into Italy via TANAP and TAP.
The top management of Edison considers Turkish Stream as a unique opportunity to revive the Poseidon project as a continuation of Turkish Stream after Greece. However, they have few alternatives but to use TAP for the Greek part of the transit.
Edison’s participation as a shareholder in the Greek-Bulgarian interconnector has long been viewed as an insurance policy in case Russian gas passed through Bulgaria via South Stream. So far the company has opened offices in Bulgaria, Romania, Hungary and Croatia, but most are engaged in power trading rather than natural gas. The main focus of the company, though, is selling natural gas to its customer base in Italy.
It is not clear yet how much Russian gas may end up being “redundant” in the Turkish gas market and who exactly will sell Russian gas at the Turkish-Greek border. If one should trust recent agreements between presidents Erdogan and Putin, the chances that Turkish companies will act as traders of Russian gas at the EU border and that Turkey will represent in effect Russian gas interests in trade relations with EU, then we are bound towards a totally new level of gas cold war. No wonder Messieurs. Putin and Erdogan have hardened the tone.
Put another way, the gas volumes at the exit of the Turkish transmission system that companies will be offering as excess gas have yet to be matched with a corresponding demand and Edison and DEPA are stepping. News from Turkey confirms that Turkish energy companies are already preparing to act as proxies for the sale of Russian gas in the Southern Gas Corridor.
The second open question is: how to reconcile Russian gas flows with those of their competitors in the Southern Gas Corridor?
A massive influx of Russian gas will make meaningless the efforts of the European Commission, adversely affecting the interests of the promoters of the Southern Gas Corridor and exploration and production project in the Caspian starting with Shah Deniz-2 itself. Some of the EU companies taking part as shareholders are already seeking exit, preferring to focus on other alternatives, questioning the viability of initial project assumptions and the likelihood of the return of invested capital ranging in the tens of billions of dollars.
At one point Gazprom could simply engage in below-cost pricing, offering large volumes of natural gas in key transit infrastructure crossing Turkey and Greece, thus blocking Azeri and any other competitive gas from accessing the EU market.
If this scenario develops, the chances for a steep reduction of gas sales in key markets and a drop in revenues might trigger downward revision in project revenues for Shah Deniz–2, leading to a further downgrading of business prospects in the resource extraction sector in Azerbaijan over many years to come. Against a median scenario for the entry of renewables into the energy sector with oil and gas further losing weight, this might pour a cold and freezing shower on Baku’s ambitions.
Shrinking demand blended with an increase in alternative supplies of natural gas, including from the Eastern Mediterranean, Iraq and Iran could also lead to market overcrowding with latecomers unable to identify safe niches for their gas in the Southern Gas Corridor – against a potential background of Turkish companies brokering Russian gas. Besides the 10 billion cubic meters expected from Shah Deniz-2, up to 10 billion cubic meters of gas from Iran and Iraq could end up targeting the EU market at the entry point at Turkey’s border with Greece.
This bird’s eye view of future gas balances in the Southern Corridor should accommodate, as well, substantial fresh at par supplies of gas from the Eastern Mediterranean and other destinations, including imports at LNG terminals, all appearing as “excesses” at the exit of the Turkish transmission system.
The game initiated by Gazprom, DEPA and Edison could seriously shatter the logic and the raison d‘étre of the Southern Gas Corridor.
Besides fresh risks and potential losses, Turkish Stream opens new and largely unique opportunities to Bulgaria and Romania, particularly in relation to freeing up unused capacities in the Trans-Balkan Pipeline, booked exclusively for Gazexport and destined for transport of Russian gas to Greece and Turkey – at present set at 14 billion cubic meters per year, leaving almost 7 billion cubic meters instantly available for shippers.
The first scenario for a future use of TBP in the event of a substantial drop of Russian gas, should Turkish Stream proceed, could be for reverse flows from Turkey to Ukraine or Central Europe. This would require some time, some re-work and investments to build and put into operation a new reverse mode infrastructure at the border interconnecting the gas systems of Bulgaria and Turkey.
The fate of the long-term contracts that the Bulgarian TSO Bulgartransgaz has with Gazexport regarding the capacities in the Trans-Balkan pipeline that nominally expire in 2030 remains uncertain. The Russian company could opt out and reroute all supplies via the new Turkish Stream, discontinuing payments for transit services.
What is certain at this moment is that Gazexport will be unable to block the alternative use of the TBP capacity by its competitors – including gas producers operating the Black Sea offshore fields, where international oil and gas majors continue work.
The TSOs will have a strong incentive to beef up marketing of the newly released capacities to hedge against potential future loss of revenues associated with Turkish Stream. Such a line of reasoning becomes mandatory as Gazexport will have the proper excuse to walk away from contractual obligations with the TSOs in Romania and Bulgaria citing new EU regulation for release of unused capacity in transit infrastructure.
Ultimately, instead of inflicting damage, rerouting Russian gas destined to the region via Turkish stream, might boost further gas market liberalization and diversification, with free capacities release translating into lost market shares for Gazprom.
The final balance sheet of this geopolitical interplay for both Bulgaria and Romania is likely to ultimately be very positive.
In terms of gas transit revenues – even lower capacity take-up would generate greater income as Gazexport transit fees were kept well below market benchmarks for far too long. In the mid to long-term, TBP will enjoy a clear competitive edge over other routes in the region when it comes to offering competitive gas transit costs for gas both north-south and south-northbound.
Opening up access to TBP and offering both long and short term products should positively impact capacity booking in most interconnectors at Bulgarian and Romanian borders, including the new Greek-Bulgarian gas interconnector.
Instead of scratching out eyes in countries it chooses to bypass with Turkish Stream, Gazprom might instead shoot itself in the foot.
Nothing new, the Kremlin has always excelled in short-term planning with a focus on quick wins to impress the public, suffering in the mid and long term.
Turkish Stream is mostly good news, if we are able to read beyond the big headlines. However, the good scenarios are neither the only, nor the most likely option. They won’t materialize unless action is taken.