A Russian-Turkish intergovernmental agreement to build the pipeline has not been signed. Gazprom has canceled a number of South Corridor infrastructure orders.
There has been a lot of speculation in Russian and foreign media recently about whether the Turkish Stream gas pipeline will be considerably reduced in scale or postponed. And to be sure, there is cause for concern.
A Russian-Turkish intergovernmental agreement to build the pipeline has not been signed. Gazprom has canceled a number of South Corridor infrastructure orders (South Corridor is a system of pipelines designed to deliver gas to Turkey and Europe across the Black Sea). Its subsidiary in charge of the pipeline’s undersea section has terminated the contract for laying the first leg of the pipeline with Saipem. In addition, a memorandum has been signed on building two additional North Stream pipelines, and talks on the German route for stepped-up gas deliveries to Europe, including Southeastern Europe, have gained momentum.
Russia’s main goal is to have infrastructure capable of delivering between 50 and 60 billion cubic meters of gas to South Europe and Turkey (which are currently supplied via Ukraine) by January 1, 2020, when Gazprom’s 11-year transit contract with Ukraine’s Naftogaz is due to expire. The Turkish Stream and related infrastructure projects in Europe are an option that emerged a mere seven months ago to replace South Stream, which was killed off by the Europeans.
But it is still premature to say that the project faces an all-round crisis. It shouldn’t be forgotten that large-scale initiatives of this kind require a lot of preparatory and organizational work. The “negative” news stories about the Turkish Stream that appeared in the last few weeks are not related to one another. A legally binding contract with Turkey could not be signed because the ruling party lost its parliamentary majority and the right to form a government in the June elections. In fact, now there is no one in Ankara to sign a contract with. The Turkish political system needs to find a new point of equilibrium, while the parliamentary parties must either form a coalition government or hold snap elections. Things will clear up in early August after the 45-day deadline for coalition talks expires. As I see it, Turkey is vitally interested in both getting direct Russian gas supplies without any transit risks and in strengthening its role as an energy transit state.
The fact that the European leg of the project does not depend on Ankara’s wishes is another matter entirely. It’s a prerogative of Europe, which has been applying unprecedented political pressure on Russia-sponsored projects, meaning that the risks are also very high. Russia, therefore, has been considering the possibility of delivering gas to Southeastern Europe via the northern route, although for Europe itself it would be preferable to develop infrastructure in the Balkans and this would be promoted by Russia delivering gas to the region across the Black Sea.
The Saipem situation looks more like a business dispute between customer and contractor. The contractor likely demanded too much compensation for a six-month delay following the scrapping of the Bulgaria-led South Stream (supposed to kick off in late 2014) and its replacement by the Turkish Stream. When Gazprom eventually gave the go-ahead, Saipem demanded additional compensation. Given that there is no urgent need to lay the pipe, the customer decided to fire the contractor, especially since it signed a contract for the second leg of the pipeline with Switzerland’s Allseas last year. Technologically, there is no difference between the two, and thus it will be Swiss pipe that will carry gas to Turkey.
The Balkans, Hungary, Austria and Italy will require between 30 and 40 billion cubic meters of gas a year. To ensure delivery, Russia will need another two Black Sea pipelines in addition to the first one. But for the gas to make it to market, infrastructure must be built in Europe, primarily on the Balkan Peninsula, which has practically no gas infrastructure at present. South Stream, the turn-key project with Gazprom funding infrastructure construction, has been killed by the intervention of the US and EU. The US and the European Commission will actively interfere with the Turkish Stream infrastructure project, although the individual EU countries (Greece, Hungary and Austria) and EU candidates (Macedonia and Serbia) are certainly keen on both receiving investment and transit payments and on strengthening their energy security.
The situation being what it is, it would be too rash to stake everything on the Turkish Stream. Hence the different transit options, including the delivery of gas from the Turkish and Greek border to the target markets, as well as deliveries to Baumgarten, Austria (the main gas distribution hub in Southeastern Europe) via the Baltic Sea, Germany and the Czech Republic.
The situation is made more complicated and confusing by the Iranian nuclear deal, which provides for the lifting of the international sanctions and thus opens the door for Iranian gas deliveries to European markets, primarily in the southeast. On the one hand, Iran has major untapped gas reserves that were inaccessible for European buyers because of sanctions. On the other, they cannot be brought to the European market overnight. It’s a project that may take decades, requiring investment in production and transportation as well as the building of trade ties and confidence. There are too many question marks on this route. But the main question for the Europeans is how are they going to develop the infrastructure to import gas from Iran and not let Russian gas in without violating their own competition laws and WTO rules?
