One of the greatest challenges we face today is to understand the trends and reap the benefits of change in a rapidly evolving world.
Just a decade ago, leaders in south and southeastern Europe believed that breaking away from Gazprom’s monopoly meant they needed to connect to the Caspian Sea gas finds. The second phase of the Shah Deniz-2 project was considered the Holy Grail of energy independence for SEE countries – a belief that led to the strategic project of the Southern Gas Corridor, the development of the second phase of the Shah Deniz gas field and the construction of costly transport infrastructure, worth in total more than $45 billion.
In the original plan these investments were meant to be recovered via gas sales with 9 major EU importers. The long distance from source to destination judged against the established reserves resulted in moderate hopes for exports of 20-30 billion cubic meters, which was considered a mitigable risk at the previous high price levels for natural gas. No more. Gas prices, in line with oil, dived from almost $450 per tcm to less than $150 per tcm.
Four years after signing the Final Investment Decision in December 2013, the shareholders in Shah Deniz-2, and all the participants along the project chain, are faced with a completely different situation. What was deemed certain is now considered probable, with a plethora of constants turned into variables along the supply chain, making good forecasting and planning next to impossible. The EU gas market, in the meantime, shifted from a seller’s to a buyer’s advantage, from long-term oil indexation to short-term gas-to-gas pricing formulas and liberalized markets.
One of the outstanding advantages of Shah Deniz gas at the time seemed to be the price formula, which was referenced below Gazprom pricing. Today and in the foreseeable future – all prices will be EU hub benchmarked.
Estimated gas reserves — relevant for export from the Caspian Sea to Southeast Europe and the EU market in general — exceed 1.5 trillion cubic meters (Shah Deniz – 1.2 trillion and Absheron – 350 billion cubic meters), against which production and exports of 20 billion cubic meters hardly impress.
In the Eastern Mediterranean zone, the estimates for recoverable gas are set above 2 trillion cubic meters, which should generate higher gas exports than the ones from the Caspian Sea. Forecasts for gas exports from the East Med to the EU could start at a modest 20-30 bcm per year and reach as high as 100 billion cubic meters, making up for any production decline in the North Sea.
The Black Sea has a much lower potential – yet it could reach well over 100 billion cubic meters.
The Caspian Sea gas is cheaper to produce at 600 m sea depth, but could lose some of its appeal due to substantial transportation costs over the almost 2000 km-long journey to the EU border. East Med gas is more expensive to produce, coming from deeper wells drilled deep below 5000 m (Leviathan – 1500 m water depth, Tamar – 1700 m, Aphrodite – 1700 m, Zohr – 1450 m). Transportation costs to EU markets should be at par with the gas from the Caspian Sea as most delivery options are more expensive than land routes. However, exorbitant high total developments and transportation costs might in time cloud the future and limit the competitiveness of both Caspian and East Med gas against Black sea and LNG.
Around the time of the expected arrival of Shah Deniz-2 gas to EU borders – the end of 2019 – new deliveries of natural gas are due from Iraq, Iran, the Eastern Mediterranean – including from the Black Sea -, from onshore wells in Romania and, of course, from a sharp increase in LNG deliveries through new and existing terminals in Greece, Turkey and Croatia.
The total annual gas consumption of the Balkan countries (without Turkey) today oscillates around 25 billion cubic meters. Estimates for future economic growth and consequent growth in natural gas consumption, albeit set above the EU average of 1 percent, do not offer ample reason for optimism that new gas supplies will be matched by adequate demand.
In 2020 and 2021, new supplies to SEE will be well over 10-12 billion cubic meters, without factoring in indigenous gas production or aggressive gas offering from Russia.
From the Black Sea and Romania – there should be almost 3-5 billion cubic meters of new gas flows coming on market. The Shah Deniz–2 contracts of DEPA and Bulgargaz would add 2 bcm to the regional gas balance.
If LNG imports are also accounted for using existing or new terminals, allowing for competitive LNG prices during this period, we can safely assume that at least 3-5 bcm should also enter the regional gas market, without calculating LNG imports to Turkey.
Assuming the most optimistic scenarios for new gas demand coming from countries like Albania, Montenegro and Bosnia and Herzegovina, the projected gas surplus of unmet supply toward 2021 will be at least 5 billion cubic meters.
The conclusion is that the Southeast European gas market on its own cannot justify highly capital intensive new transport infrastructure for fresh gas flows, unless the SEE countries integrate their gas transit systems and service greater gas demand destinations — Italy (Western Europe) and Central and Eastern Europe – Austria, Hungary and above all Ukraine — which have substantially suppressed and unmet demand due to artificially high Gazprom prices. Ukraine’s unrivaled in the EU gas storage facilities could prove essential in balancing peak demand, which could justify international traders’ interests in using gas transit routes in the SEE.
As far as the Italian destination is concerned, it would be well served by the TAP and all other gas flows entering Greece. The chances for loading up the idling 80% transport capacities in Macedonia (via the Bulgaria pipeline) are connected to new gas fired generation capacities in Macedonia and Kosovo. The ISB interconnector could bring gas to Hungary and Croatia, whereas the IRB could potentially feed into gas supplies to Hungary, Austria, Slovakia, Moldova and Ukraine.
Turkey’s pivotal role as a conduit for gas flows into the EU and the SEE should also be re-examined with regard to political risk and alternatives.
On one hand, President Erdogan’s policy runs counter to the interests of his country as a gas hub, which calls for zero problems with neighbors and low political risk. Turkey’s recent flirts with Russia, has raised eyebrows in the capitals of Georgia and Azerbaijan. Whatever Erdogan’s arguments for engaging in Putin’s power play might be, Turkey’s strong cards as a future gas house for Europe have been compromised.
The repayment of the $8 billion TANAP credits rests on Caspian gas reaching Italy and the EU in the planned volumes. By allowing Gazprom to enter into the backyard of the SGC, potentially “flooding” the Turkish natural gas market with cheaper gas, Erdogan has essentially betrayed the trust of his Shah Deniz–2 partners, threatening to undermine the economy of these transit projects.
Being aware of the grave consequences of a coming storm, Turkey’s Energy Minister Berat Albayrak, the son-in-law of President Erdogan, has recently sought to allay fears, repeating that if his country had to choose, it would pick TANAP over Turkish Stream. But the damage had already been done, and the countries in the region have started looking into alternatives, not involving Turkey.
Greece has been particularly active in exploring options and positioning itself as a possible alternative in managing Erdogan’s political risk in the Southern Gas Corridor.
President Erdogan keeps the energy geopolitics of his country under tight personal control, promising to finalize by the end of the year the contract for the gas pipeline from Israel to Turkey. His saber-rattling on exploration for oil and gas in the EEZ of Cyprus, as well as the power diplomacy to control gas pipelines in the area, can hardly bring fresh dividends to Ankara.
Not accidentally Prime Minister Netanyahu, along with his Cypriot and Greek counterparts, signed an MoU in mid-June, activating the Mediterranean subsea gas pipeline project that would connect the largest deposits in the Eastern Mediterranean directly to the European gas market, bypassing Turkey. Although the economy of this project with an estimated cost above $7 billion is up in the air and the LNG option is still a valid alternative, managing the Erdogan political risk could be something the EU might consider investing in.
The main policy line of President Erdogan seems counter intuitive for a country that looks to host all major gas flows from the Caspian Sea, the Mediterranean and the Middle East – including the over land projects from the Gulf. The main geopolitical ally and supporter of these projects, the United States, also seems disenchanted with Ankara’s internal and foreign policy zig zags – with more discontent emerging following Turkey’s new air attacks on US allies in Syria and support for the Qatari emir. This adds to an existing list of open issues – the use of the air base in Incirlik, Washington’s refusal to extradite Fethullah Gullen and most recently Turkey’s plans to buy new S-400 air defense systems from Russia.
According to recent polls in the Turkish media, people believe the largest enemy of the country is the United States – 66.5%, followed by Israel – 37.4% and the European Union – 24%, which is profound evidence of Erdogan’s persistent and systematic efforts to present the West as an opponent of Turkey.
Further discontent has been fueled as Washington supports the exploration and production of oil and gas in the EEZ of Cyprus.
If he persists in these policies, President Erdogan could experience the gravity of the law of unintended consequences and eventually lose the EU’s interest in Turkey’s role as a gas hub for Europe, forcing Brussels to look into alternative supply options. Only a naive person can think that the climate of deteriorating relations with Germany, France and the European Commission will not impact the ability of Turkish companies to sell gas in the EU or Turkey to transit natural gas to third parties. This particularly concerns natural gas from Russia through Turkish Stream to the EU border – Greece or Bulgaria.
Back in December 2013, when the FID on Shah Deniz-2 was signed, Turkey showed few signs that it will engage in a civil war with the Kurds or put at risk its strategic transit infrastructure.
In short, with his often reckless and senseless policies, trying to service immediate political needs and maximize individual returns at the expense of his partners, President Erdogan is about to jeopardize the rare chance that Turkey has to play an important, or even crucial role as a transit center for energy resources to Europe.
This in turn could trigger a radical rethinking of options and strategies in European capitals, looking in earnest for a plan “B” without Erdogan’s Turkey.