Valdai Club

The delivery of Russian gas to Europe occurs via pipelines through Belarus, Ukraine, and the Baltic Sea. The transit contract with Ukraine expires December 31, 2019 which marks a time when deliveries via Nordstream 2 and TurkStream are scheduled to begin. TurkStream is not merely a by-pass route for the Ukrainian pipeline, but also a turning point for Russian gas deliveries to Europe marking a new term of reversed flows and economic opportunities. Energy economics is key for European gas markets; reliable and affordable supply is actually the ultimate aim of all the market restructuring activity and energy packages introduced in the EU. And that is exactly what the two projects offer: a route that provides supply security at affordable prices. Prices are not known yet, but are expected to be competitive as their investment costs are relatively low against which other suppliers need to compete with.

The proposed EastMed pipeline, for example, whose feasibility studies are being conducted, could hardly compete with gas from either Nordstream 2 or TurkStream because of a very expensive offshore section that costs possibly several-fold of the Nordstream 2 or TurkStream pipelaying costs. Whatsoever, EastMed is identified as a Project of Common Interest (PCI) in the EU because it is a key cross-border infrastructure project that links the energy systems of EU countries, and has a significant impact on energy markets and market integration in at least two EU countries including Greece, Italy and the Greek Cypriot Administration of Southern Cyprus. A €2 million fund has been allocated by the European Commission for the pre-feasibility studies to a Greek-Italian consortium. The pre-feasibility study is expected to be finalized soon and is expected to declare the obvious economic fact if based on techno-economic reality.

Economics matters and should be guiding investment into energy projects, rather than politics. Otherwise the economic rational is lost and it becomes hard if not impossible to achieve economic efficiency. Typically, energy projects lead to strategic partnerships and guide foreign policy. NordStream 2 is a good example for expanding cooperative relations between Germany and Russia. Likewise, TurkStream is a good example for strengthening the strategic partnership between Turkey and Russia. On the other hand, it appears that these projects also strengthen the strategic partnership between the United States and Ukraine. On November 16, 2018, three days before the official ceremony on the occasion of the completion of TurkStream’s offshore section, a Joint Statement on U.S.-Ukraine Strategic Partnership has been released by the governments of the United States of America and Ukraine. The statement directly targets the two pipeline projects stressing the importance of continued coordination to stop Nord Stream 2 and the second line of TurkStream. While the laying of deep water pipes for Nord Stream 2 has started a few months ago, the pipe welding of the final joint of TurkStream’s second line was done on November 19, commanded jointly by Vladimir Putin, President of the Russian Federation, and Recep Tayyip Erdoğan, President of the Republic of Turkey. Hence both projects, Nordstream 2 and TurkStream, are going ahead rapidly to supply gas to Europe at the end of next year and appear to be unstoppable.

Earlier this year, in a joint statement dated July 25, European Commission President Jean-Claude Juncker and Donald J. Trump, President of the United States, agreed to strengthen EU-U.S. strategic cooperation with respect to energy. In fact, since the arrival of the first shipment in Portugal in April 2016, U.S. exports of liquefied natural gas have increased from zero to 2.8 billion cubic meters and it is agreed that the growing exports could play an increasing and strategic role in EU gas supply if priced competitively. Southeastern Europe is among the target markets for U.S. exports and Poland has already signed a 20-year deal to buy LNG from the United States. Southeastern Europe, as a region where demand is expected to grow rapidly, is also a target market for Russian gas, as well as gas from the Eastern Mediterranean and the Caspian. As such, a time with intense energy diplomacy, geopolitics and geoeconomics around Southeastern Europe is ahead.

At the same time, the International Association for Energy Economics (IAEE) is launching a strategic outreach in Southeastern Europe starting with the IAEE Sofia Symposium on 6-7 December 2018, and providing a policy-neutral forum for professional, multinational discussion to advance the knowledge, understanding and application of economics across all aspects of energy and foster communication among professional energy analysts.