Turkish Stream: Scenarios of Bypassing Ukraine and Barriers of European Commission
VYGON Consulting - June 2015 June 2015 Turkish Stream: Scenarios of Bypassing Ukraine and Barriers of European Commission
AUTHORS Grigory VYGON Managing Director, Ph.D. Econ [email protected]
Vitaly ERMAKOV Research Director, Ph.D. Phil [email protected]
Maria BELOVA Senior Analyst, Ph.D. Econ [email protected]
Ekaterina KOLBIKOVA Junior Analyst [email protected]
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CONTENT
Key Conclusions 3
Introduction 6
Supplier View: Russian Strategy 8 Challenges to Russia’s Gas Export Strategy 8 Relationships with Ukraine 10 Struggling with the Southern Gas Corridor 14
Consumer View: Strategy for Gas Supply Source Diversification 16 EU Energy Legislation: Transition Period Risks 16 Competiton Incentives 19
Ukraine- Dependence For European countries 23
Transit Country Outlook: Turkey’s Strategy 27 Gas Balance: from Oversupply to Gas Deficit 27 Turkey’s Transit Role: Bridge or Roadblock 30
Future Configuration of Turkish Stream 34 Options to implement a European extension of the pipeline 34 Solutions for the 2020 problem 40
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Key Conclusions The Turkish Stream gas pipeline project shall modify the Russian gas export strategy in response to the European Commission (EC) discriminatory treatment of Russian gas exports to Europe. Deliveries of Russian gas to the Turkish/Greek border instead of gas transit via Ukraine will eliminate potential blackmailing of Russia. Gazprom has not just gradually been moving towards reducing the Ukrainian transit but even waiving its equity interest, and hence, building up a gas transportation system in the European Union. In fact, Russia will simultaneously solve three strategic objectives: minimize transit risks, create new market niches and block competing supplies.
Following its official gas supply diversification course, the European Commission strongly opposes the Turkish Stream project. Since there is no viable alternative to Russian pipeline gas in the medium term, the EC may have to carry Russian gas from the Turkish/Greek border to end-user countries. Notably, the current EU legislation does not stimulate investment in the construction of internal gas pipeline.
In 2014, more than half out of 24 European countries (including Turkey) purchasing natural gas from Gazprom Group received it via Ukraine. The most “Ukraine-dependent” countries (the share of Russian gas imports via Ukraine is 100% of total imports) are Romania, Bulgaria, Greece, Macedonia, Serbia, Bosnia and Herzegovina, Slovenia and Italy.
The situation with Italy is the most controversial, since the security of Russian gas supply may become a critical issue for Italy by the end of the decade. It is therefore in the interest of Italy to seek common solutions with Russia of the “2020 problem” – either by promoting the construction of the European extension of Turkish Stream or motivating Gazprom to sign a new gas transit agreement with Ukraine.
If the Turkish Stream is implemented, the presence of Turkey as another transit country might carry some imminent risks for Russia:
• Turkey is a candidate country for EU membership and NATO member state, which casts doubt on its independence and, therefore, reliability as a potential transit country for Russian gas.
• Complex experience in implementing infrastructure projects, which did not fully meet the Turkish interests was accumulated. The Blue Stream is a striking example of how Turkey violated the agreements reached earlier.
• Turkey tends to seek “package arrangements” when
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negotiating on the specific energy projects. if there is no compromise reached on any of the currently unsolved issues, the implementation of the Turkish Stream can be significantly hindered.
Bringing the Turkish Stream pipeline to the European Union border means that Gazprom accepts the European Union’s rules of the game thus practically eliminating the South Stream inherent risks off the new project:
• European legislation requirements: Russia had signed intergovernmental agreements with the South Stream member countries on project implementation and establishment of joint ventures; while this was in contradiction with the Third Energy Package rules (prohibition of the exporter’s right to own internal gas pipelines).
• “Europhobia” of Russian gas: let us remind that one of the reasons for the Southern Gas Corridor emergence (SGC) was an intention to diversify not only destinations, but also sources of gas supply, and thus the so-called anti-Russian projects were adopted under this initiative. If Russian gas reaches the EU border and then proceeds to final consumers via new Southern Corridor pipelines, for example, TAP, ITGI or Nabucco-West, this may somewhat reduce the tension.
Developments around the Turkish Stream, particularly, the joint declaration signed by the Ministers of Foreign Affairs of Serbia, Greece, Macedonia, Hungary and Turkey on supporting the project (7 April 2015) and agreement on the construction of gas transportation facilities in Greece by the Russian-European Consortium (21 April 2015), to our opinion, indicates that the “Stream” would not end in a gas hub on the Turkish/Greek border.
Supplies of Russian gas to Europe via Turkey will be carried out via the Southern Gas Corridor pipelines (this, however, undermines the very idea of the diversification of the gas supply sources) or via any new gas pipeline to be built in Europe in full compliance with the EU domestic legislation.
The main goal of Turkish Stream project is to minimize the Russian gas transit via Ukraine by 2020. Therefore, the time factor will be crucial for Gazprom in solving the problem. Another goal is maximizing capacity utilization of Turkish Stream lines and delivering gas to final consumers (transfer of ownership points under the existing contracts).
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We assume the following frontier scenarios by 2020:
• Pessimistic scenario suggests laying just the first line of the Turkish Stream, loading the OPAL pipeline (onshore part of Nord Stream) and concluding a new transit agreement with Ukraine to transport about 28-36 bcm of natural gas per year. This scenario maintains high transit risks and lower economic efficiency for the Turkish Stream.
• Under the optimistic scenario even with the construction of three lines of the Turkish Stream, ulitization of Trans-Balkan pipeline in reverse mode, reanimating some of the Southern Gas Corridor projects such as ITGI and Nabucco-West, and OPAL loading, Gazprom fails to completely solve the problem of gas delivery to its final consumers by 2020. Yet, around 10 bcm of gas cannot be delivered to Austria, Slovenia, Serbia and Bosnia within the new infrastructure and will have to be supplied via Ukraine.
However, we consider that the best option is available after 2020 is the “Optimum -2024” scenario which comprises the Optimistic scenario options and moreover includes the TAP partial loading as well as supplies via the Greece-Austria gas pipeline. This option envisages the construction of four lines of the Turkish stream project by 2024 and provides spare capacity reserves in case Gazprom would eventually be forced to yield part of the OPAL capacity to another supplier.
Within a year or two the feasibility of our Optimistic Scenario-2020 will be defined and by 2019, Gazprom will come up with a clear understanding of the timeline and quantities of the next transit contract to be signed with Ukraine. According to our estimates, this agreement can be concluded for a period of up to 4 years, while the transit volume would be greatly reduced, with Russia unlikely to agree to “ship-or-pay” clauses.
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Introduction Announcing the Turkish Stream gas pipeline project in December 2014, Gazprom declared that it would sell gas on the trading platform on the Turkey/EU border. The goal of Europeans is to create the needed transport infrastructure in the European Union in order to receive the gas volumes. Purchases of Russian gas at a hub instead of a fixed delivery point, the reverse of existing gas pipelines, investments of the European system operator into construction of new gas pipelines via supply contracts are all the principles corresponding to the ideology and rules of the 3-rd Energy Package. Russia is sort of telling European partners: we sell gas in Turkey, the rest is up to you.
Gazprom’s demonstrative compliance with the 3-rd Energy Package in the case of the Turkish Stream can be regarded as reductio ad absurdum, proving the inconsistency of the European regulatory system by demonstrating absurd controversies arising from their application.
Paradoxically, the rules of the 3-rd Energy Package have never been fully applied in the construction of the new gas infrastructure in the European Union. In order to attract investors, the European Commission was forced to make exemptions from mandatory third- party access (TPA) to transmission capacity. A good example is the Trans-Adriatic Pipeline (TAP) with a capacity of 10 billion cubic meters a year, which will transport Azeri gas to Europe that gained 100% exemption from the TPA rules.
Unfortunately, Russia’s attempts to get a similar exceptional status for the South Stream met stiff resistance from the European Commission, which be all means sought to reduce its dependence on Russian gas. Moreover, Russia’s willingness to begin the construction of the Southern Stream pipeline based on intergovernmental agreements with the South-Eastern European countries that displayed a genuine interest in project implementation prompted the United States and EU to exert unprecedented pressure on them. The last straw was the Bulgaria’s decision, which despite the reached agreements refused to grant permission for its subsea construction after the US senator visit.
As a result, Russia was forced to abandon the South Stream project announcing that instead it would implement the Turkish Stream (in the same 4-line design and annual capacity up to 63 bcm). The offshore part of the pipeline will pass 660 km along the same old South Stream corridor, followed by 250 km in the direction of the European part of Turkey (the new corridor). Gazprom will build the offshore section of the pipeline independently.
Gas transportation capacities in Turkey will be set up jointly with Botas, an authorized Turkish counterpart. On May 6, 2015 Gazprom
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announced that Turkey agreed on a project timeline, and the first gas deliveries would begin in December 2016. The first line capacity (15,75 bcm) will fully supply the Turkish market to replace the gas volumes currently delivered to Turkey via Ukraine through the Trans- Balkan pipeline (13,7 bcm in 2014) and might also cover the expected future demand growth .
Still the pipeline reverse from the Bulgarian to the Turkish coast was not a fully surprise. Russia’s decision makers notified in advance, that in case of the South Stream construction fails due to the position of Brussels, Russia would redirect the pipeline to a non-member country of the European Union, and then Europe would have to deal with another transit state.
Initiatives to establish an internal gas infrastructure shifted to the European Commission. Now, instead of obtaining Russian investment, EU bureaucrats will have to find ways and means to solve this problem independently. Moreover, according to the adopted the 3-rd Energy Package rules, European system operators are obliged to invest in infrastructure development under the existing contracts and vendors applications in place. Therefore, setting up an interconnector between the Turkish Stream and the EU gas infrastructure will in fact become a verification experiment to test the new rules in the European gas market for adequacy and durability.
The study concerns possible scenarios for the future development of the situation in terms of dynamic balance of interests between the three parties: Russia as the gas supplier, key transit countries (Ukraine, and Turkey in the future) and European countries as natural gas consumers.
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Supplier View: Following the collapse of the Soviet Union, Russia’s gas trade with Russian Strategy Europe faced some challenges that required answers to shape the Russian gas export strategy that was in place over the last 25 years.
Challenges to Russia’s • Transit risk. The major and foremost challenge has become Gas Export Strategy unprecedented dependence of the Russian gas exports on Ukrainian transit route. The early 1990-s saw over 90% of the Russian gas exports to Europe coming via the pipelines built in the Soviet time in Ukraine.
• Changing the rules of the game in Europe. The second challenge was the establishment of a common European economic space and liberalization of the gas market that altered the traditional relationships between Gazprom and its European partners and resulted in the European customer’s attempts to modify traditional long-term contracts.
• Competition from alternative suppliers. The third challenge was the advent of alternative competitive suppliers against the backdrop of the EU stated objective to diversify sources of gas supply and reduce dependence on Russia.
Liberalization of European Gas Market and Interdependence Model
In early 2000-s, the European vertically integrated energy companies – traditional Gazprom’s counterparts in Western Europe – were forced to unbundle their businesses as part of the overall EU market reforms.
To ensure safety of its gas demand, Gazprom under these new conditions tried to build vertically integrated chains in Europe allowing it to sell gas directly to end-users based on the model of its successful cooperation with Wintershall since the beginning of the 1990-s.
Under these objectives, the Russian gas corporation started building up its direct sales in Western Europe, as well as acquiring gas storage and distribution assets in addition to those it had acquired in Eastern Europe and Baltic states in the 1990-s as part of gas debt settlements.
At the same time Gazprom offered the Western companies to participate as minority equity holders in its upstream projects in Russia, trying to build a new stable integrated model of cooperation with European partners under bilateral agreements.
The adoption of the EU 3-rd Energy Package with unbundled business activities as one of the fundamental principles in fact undermined the idea of creating integrated added-value chains.
After a series of unsuccessful attempts to find a compromise solution in 2014, Gazprom announced that it discarded the model of interdependence in principle, and started to withdraw from its joint projects in Europe.
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Each of these challenges required adequate and timely response.
Gazprom was trying to:
• both strengthen its positions in key markets and minimize risks, especially transit;
• open new market niches and develop export potential;
• set up barriers to its competitors to impede their strategies by staying ahead and blocking their actions.
The most striking example of such strategy was the construction of offshore gas export pipelines. Implementing these projects brought Russian gas directly to target markets and was a technological answer to the challenges faced by Russia. Each of these projects was a unique engineering solution for that time: the Blue Stream that lead Russian gas directly to Turkey in 2003 became the world’s first deep-water gas pipeline, while the Nord Stream (with total capacity of 55 bcm, completed in 2012) was the longest subsea big diameter gas pipeline to directly connect the Russian gas transportation system with the German market.
Besides reducing transit risks, the new pipelines solved another task - to conquer new market niches: in the case of the Blue Stream Gazprom reached Central Turkey (Ankara and neighboring regions), while the Nord Stream Russian gas not only came directly to Germany, the largest market in Western Europe, but also got access to the UK gas market (via a system of European interconnectors and swap operations). The South Stream, an subsea gas pipeline in the Black Sea with a capacity of up to 63 bcm, was supposed not only to solve the Ukrainian transit problem but also to discover new niches for Russian gas in the South-Eastern Europe and Balkans.
The key goal of the Russian gas strategy was a proactive counter- game against the competing gas supplies from Central Asia and Caucasus, as well as from Middle East to Europe within the so-called Southern or Fourth gas corridor1 (see the section “Struggling with the Southern Gas Corridor”). Due to the geographical position of Turkey, most gas projects of the Southern Gas Corridor (SGC) pass through its territory turning the country into a potentially significant transit hub.
1 1st gas corridor – pipeline gas supplies from Northern Sea; 2nd gas corridor – gas supplies from USSR (Russia); 3rd gas corridor – supplies from Northern Africa. Lately, LNG supplies to Europe were metaphorically called the 5th gas corridor.
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So far, Gazprom had only a partial success in this area: although company failed to prevent future gas deliveries of Azeri gas to Turkey through the Baku-Tbilisi-Erzurum and further to Europe via Trans- Anatolian gas pipeline (TANAP), this deliveries vere scheduled to 2020, while the construction plans for a Trans-Caspian gas pipeline which could open the SGC for Turkmenian gas were never implemented.
Relationships Russia’s recent decision to completely abandon gas supplies through with Ukraine Ukraine upon the expiration of the existing transit contract in 2019 was the result of a long and difficult adaptation to new geopolitical and economic realities of the two elements of the once unified system of Russian gas supply to Europe. Geographical location of the Ukrainian gas transit corridor was a huge benefit made it the most preferred and low-cost route to supply natural gas from the unique Nadym-Pur-Taz deposits to Central Europe. That was the reason why in the 1980-s the Soviet Union decided to build the world’s largest gas export system within the Ukrainian corridor using big-diameter pipes.
After the collapse of the USSR, Russia and Ukraine found themselves in a situation where both were extremely dependent on each other in the gas sector. Ukraine’s economy was one of the world’s most energy- intensive and sought supplies of cheap gas. At the beginning of 1990-s, Russian gas could only reach the premium European market via Ukraine. As a result of Ukraine’s failure and reluctance to pay commercially reasonable prices for Russian gas, this interdependence has become for both sides a permanent source of concern and problems2. Russia was dissatisfied about non-payments, unauthorized over-the-limit gas offtake during the winter period, Ukraine’s non-recognition of soaring debts and failure to follow the debt restructuring programme3. Ukraine used its transit monopoly to maintain artificially low prices for Russian gas and get other subsidies from the Russian side. In the 1990-s, the price of Russian gas for Ukraine was $40-50 per 1,000 cubic meters which was significantly lower than the Gazprom prices for Europe.
2 For a long time, Russia exported gas to Ukraine at extremely low subsidized price, while these deliveries included even gas treated as in-kind transit payments; however, such barter was largely inefficient for Russia, and in 2006 the Russian gas supply contract with Ukraine and transit contract via Ukraine for Europe were separated. 3 Gas debt of US$ 1.4 bln was restructured in 1995 to be repaid over a 10-year period (from 1997 to 2007). However, non-payments and debts went on to grow, and by 2000 Gazprom estimated Ukraine’s gas indebtedness, including penalties and interest, at US$ 3 bln, while Ukraine messed around with numbers and was prepared to recognize just part of its debt. Particularly, Naftogaz of Ukraine in 2000 assessed its debt at US$ 1.4 bln, while Ukrainian Government mentioned US$ 2.8 bln.
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Prior to 2006, Ukraine received its gas transit fee as a payment in kind, as there was no separate transit contract. The main reason for this was the linkage of gas prices for Ukraine and stability of gas transit supply to the EU. Russian gas supplies as a payment- in-kind for the gas transit over the most part of the 1990-s were around 30 bcm per year and then decreased slightly in the first half of the 2000-s, down to 25 bcm on the average, i.e. almost equal in those years to the entire supply of Russian gas to Germany, Europe’s largest gas market. In fact, Russian subsidization of the Ukraine’s economy can be estimated in tens of billions of dollars over the period from the Soviet Union desintegration until 2006, when supply and transit were separated and subjected to individual contracts on a fully commercial basis.
Standardization and commercialization of Russian-Ukrainian gas relations became one of the top priorities during the first presidential term of Vladimir Putin. In 2000, the Russian President made an attempt to reach a mutually beneficial deal with Ukraine that assumed, firstly, settling the problem of Ukraine’s debts and non- payments, and secondly, establishing a joint consortium to manage the Ukrainian gas transportation system (GTS). Such a consortium, especially in the case of European investor’s participation among the Russian gas consumers, could have provided a stable compromise for all the parties in the chain (supplier – transit country – consumer) and besides the 2006 and 2009 gas crises also prevent the current crisis.
In 2000, President Putin held eight meetings with the Ukrainian President Kuchma to discuss the gas issue among others, thus showing how crucial for the Russian decision-makers was to normalize mutual relations. In October 2001, the Ukrainian gas debts were restructured, and in October 2002 Gazprom and Ukraine Naftogaz signed incorporating documents to set up an international consortium designed to manage and develop the Ukrainian GTS. However, this consortium agreement was never implemented as the Orange Revolution in Ukraine resulted in a need to negotiate it all over with a new administration. In fact, during the talks with Putin in March 2005, the newly elected President Yuschenko actually spurned all previous agreements and claimed that the Ukrainian pipelines would remain the property of Ukraine.
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Ukraine’s Gas Transportation System
Ukrainian GTS is one of the largest in the world. It is 39,800 km long, of which 22,000 km are high-pressure pipelines. The Ukrainian GTS operates 74 gas-compressor stations. Nominal input capacity is 288 bcm (eastern part) and ouput capacity (western part) is 179 bcm.
Ukrainian GTS is owned by the government and managed by UkrTransGaz. The system has three main transit corridors:
• Central: Urengoy- Pomary - Uzhgorod
• Bratstvo / Brotherhood: Bryansk/Tula - Kiev
• Soyuz / Union: Orenburg – Novopskov - Uzhgorod
• Gas flows to Ukraine from Russia and Belarus following the territories of European countries and Turkey.
Besides, the Ukrainian GTS includes the world second largest system of underground gas storages (UGS), consisting of 12 UGS with a total capacity of about 30 billion cubic meters.
Most of the gas storage facilities are located in Western Ukraine in depleted gas fields (6 UGS), 3 UGS in Central Ukraine near Kiev and 3 UGS in Eastern Ukraine.
Ever since President Viktor Yanukovych came to power, Russian- Ukrainian dialogue on the gas transportation consortium resumed but quickly stalled due tothe exaggeration of its GTS4 value, as well as attempts to exclude a number of pipelines and UGS from the asset list.
Having faced Ukrainian non-constructive position on the gas consortium, Russia doubled its efforts to reduce its transit dependence by setting up new bypass pipelines.
Thus, at the end of 2011, by providing serious gas price discount for Belarus5 Russia managed to reach an integral agreement and obtain
4 in 2011 Ukraine preliminary estimated its GTS value and announced that it was around $20 bln while the system had almost completely exhausted its operating resource: many pipelines were over 40 years old with the rated service life of 33 years. The Ukrainian Minister of Energy Boyko said that setting up the consortium would need an internationally performed valuation of the GTS, but this hasn’t been done yet. 5 Besides the $2.5 bln payment for Belarus-owned 50% stake in Beltransgaz (50% was purchased by Gazprom earlier), Russia adopted the price for Belarus-imported gas of $165 per 1,000 cm in 2012 with a slight increase in 2013 and 2014. From 2015, the gas prices for Belarus is determined on the basis of Russia’s Western region regulated gas prices with a small transportation premium.
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ownership rights in respect of Beltrasngaz, the owner of the GTS in Belarus, another very important transit country. This allowed Russia to normalize the potentially stressful transit corridor and secure supplies of 33 bcm of gas per year via the Yamal-Europe pipeline through Belarus and Poland, thus bypassing Ukraine.
In addition, Blue Stream and Nord Stream projects were implemented. As a result, the share of Russian gas deliveries to Europe through Ukraine started to steadily decline from 90% since the early 2000-s to reach 39% in 2014 (see Fig. 1).
Increasing its independence degree from Ukraine, Russia meanwhile used the continuing Ukraine’s dependence on Russian gas imports as leverage to switch to more commercial relationships, control transit costs and prevent transit monopolist’s dictate.
Fig. 1. Russian gas supplies to Europe by destination
200 bcm
160 Baltics and Finland 120 Blue Stream 80 Belarus (transit)
Nord Stream 40
Ukraine (transit) 0 2000 2002 2004 2006 2008 2010 2012 2014
Source: Gazprom, State Statistics Committee of Ukraine, IEA, VYGON Consulting
Transition of Russian-Ukrainian relations to a commercial basis meant a sharp increase in import prices for Russian gas and caused fierce resistance on the Ukrainian side. This resulted in two gas crises, in 2006 and especially 2009, that led to temporary suspension of gas deliveries to Europe, but eventually Russia managed to divide the contracts for gas supply and gas transit in 2006, and in 2009 Russia was able to sign beneficial long-term contracts until the end of 2019 on gas supplies with oil indexed prices and on gas transit to Europe linked to European gas prices.
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Struggling with the Initially, the Southern gas corridor projects (SGC) included Nabucco Southern Gas Corridor gas pipeline, Trans-Anatolian pipeline (TANAP), Trans-Adriatic pipeline (TAP), White Stream pipeline6, Turkey-Greece-Italy pipeline (ITGI), however, as this concept developed, a bigger number of competing pipelines designed to deliver gas to the EU came into force.
Nabucco became the major pipeline project under SGC in the second half of the 2000’s, promoted by a consortium of European companies and actively supported by European Union7. The Nabucco project assumed gas deliveries from Azerbaijan, Egypt, Iran and Iraq via Turkey to the European Union through Bulgaria, Romania, and Hungary to the trading hub in Baumgarten (Austria). The Nabucco Consortium consisting of Botas, Bulgargaz, Transgas, MOL and OMV planned to start gas deliveries in 2011 and bring them up to 23- 25 bcm a year by 2020.
Fig. 2. Existing, under-construction and planned gas pipelines in Southern Europe
SLOVAKIA UKRAINE RUSSIA
CHT AUSTRIA MOLDOVA D HUNGARY
ITALY RUSSIA SLOVENIA
CROATIA ROMANIA GEORGIA
BOSNIA AND AZERBAIJAN HERZEGOVINA 5 7 SERBIA 8 ARMENIA
MONTENEGRO BULGARIA
6 MACEDONIA 1 ALBANIA IRAN 2 1 TURKEY 4 3
G REECE
SYRIA
IRAQ
1 TANAP to Greece (16 bcm) 3 IGI (10 bcm) 6 IGB (3-5 bcm) 1 TANAP to Bulgaria (16 bcm) 4 Poseidon (8 bcm) 7 Trans Balkan Pipeline (16 bcm) 2 TAP (10-20 bcm) 5 Nabucco-West (10-23 bcm) 8 Тurkish Stream (15,75-63 bcm)
Source: VYGON Consulting
6 white Stream,a Ukrainian gas pipeline project, designed to bypass Russia and supply Turkmenian gas via Azerbaijan and further across Black Sea to EU member states. 7 in early 2012, Turkish Prime Minister refused to support Nabucco with the emergence of less capital-intensive alternative routes. Soon after, Hungarian MOL left the project. In the same year, the Consortium offered a new (European) option of Nabucco-West, three times shorter than the initial version.
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The main challenge of the project was lack of secured resource base as the potential gas suppliers were not ready or could not provide guarantees for the Nabucco project. Turkmenistan had already launched its strategic gas cooperation with China and did not intend to invest in the Trans-Caspian gas pipeline, which would likely create problems with Russia and Iran due to the unresolved legal status of the Caspian Sea. Europe joined anti-Iran sanctions what made it impossible for Nabucco to develop cooperation with Iran.
Russia’s response to Nabucco early plans in June 2007 was an attempt to enter the SGC with its own project. Unlike Nabucco, the South Stream was secured by Russian gas resource base and allowed Gazprom to bypass both Ukraine and Turkey as transit countries heading directly to the EU, virtually the same market in the South- Eastern Europe where was planned to bring Nabucco. This option maximized two export strategy elements to Russia – bypassing transit countries and entering a new market, but did not let it effectively control competitive supplies via Turkey. At the moment, it seemed to be a remote threat, while the opportunity to directly access the EU market overweighted the importance for Russia to fight its potential future competitors within the Turkish transit corridor.
To implement the South Stream, Russia established joint ventures in the European countries where it planned to build the pipeline and signed bilateral intergovernmental agreements. Originally, it was assumed to construct two European branches of the South Stream, the North and the South branches. The South branch should have brought gas flows through Bulgaria to Greece and further to southern parts of Italy. The North branch should have come through Bulgaria, Serbia and Hungary to Austria, with an offshoot from Hungary to Slovenia and Northern Italy. A short offtake to Croatia was also planned on the main route.
While promoting the South Stream, Russia simultaneously kept in mind an option to redirect the offshore gas pipeline to Turkey instead of Bulgaria. As a matter of fact, to efficiently block gas deliveries from Turkmenistan and Middle East to Europe via Turkey, Russia had to stake its position in the Turkish corridor and reduce potential transit gas volumes of alternative suppliers. The South Stream wasn’t the right choice to solve this problem.
Perhaps the European Commission made Russia a favor having spoiled the implementation of the project, in the long run, and particularly, in connection with possible lifting of the international sanctions on Iran, it appears that being able to block Middle East gas deliveries via Turkey would be much more important to Russia than any direct offshore gas pipeline to Bulgaria, where Russia could have become a hostage of European regulators.
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Therefore, the redirection of the planned Russian offshore gas pipeline from the Bulgarian Black Sea coast to Turkey didn’t turn to fail for Russia. Moreover, Russian government was awared of this possibility. Particularly, in spring 2014, well before the Russia’s formall refusal to build South Stream, President Vladimir Putin said: “If we encounter further problems with South Stream and Brussels keeps creating obstacles for the project, we will look at other possibilities such as going through countries that are not EU members. This would simply mean that the European Union ends up with yet another transit country8.
Implementation of a single line of Turkish Stream, not to mention two lines, puts Ukraine in an extremely difficult situation by the expiry of the current transit agreement and will force it to negotiate over possible maintaining of Russian gas transit from much weaker position. Ukraine’s situation is compounded by the fact that, decline in gas transit vulumes through the Ukranian GTS below 35-37 bcm a year, according to V.Chuprun, Vice-Chairman of the Board of “Naftogaz of Ukraine”, makes the system unprofitable9.
Consumer View: Following its official course for the diversification of gas supply Strategy for Gas sources, the European Commission (EC) radically opposes the Turkish Supply Source Stream project. In turn, Russia steadily moves towards eliminating Diversification the Ukrainian gas transit and equity participation, and therefore, quitting any projects on GTS construction on the European territory. Since Europe has no viable alternatives to Russian pipeline gas in EU Energy Legislation: the medium term, the EC may have to bring Russian gas from the Transition Period Risks Turkish-Greek border to final users on its own, while the EU’s current legislation has nothing in place to stimulate investments in internal gas transportation infrastructure.
After the Soviet Union collapse , Russia for a very long period was associated with a country “in transition”, and foreign investors
8 see the report on V.Putin’s interview with heads of leading international news agencies , 24 May 2014 http://en.kremlin.ru/events/president/news/21090 9 http://www.rbc.ua/rus/news/-naftogaz-esli-tranzit-gaza-ponizitsya-do-35-37- mlrd-kub-m--24092013131400
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(primarily in high-cost and long-term oil and gas projects) required special exemptions from the current legislation (for example, PSA and/or “grandfather clause”) due to the high risks of legislation change. At the end of the last century, Europe launched its gas market liberalization. Since then, the EU’s energy legislation has been “in transition” thus carrying high transition risks for both internal and external gas players.
In particular, construction of new gas transportation capacities under the Third Energy Package is regulated by Art. 13.2 of the 3-rd Gas Directive, which provides that “Each transmission system operator shall build sufficient cross-border capacity to integrate European transmission infrastructure accommodating all economically reasonable and technically feasible demands for capacity”10.
However, there are no legally defined procedures for carrying out the provisions of this article. They are currently being developed in the context of amendments11 to the Capacity Allocation Mechanisms Network Code12 approved by Regulation 984/2013 of 14.10.2013, which are expected to be adopted in 2017-18.13 So far, all pipeline capacities (existing and new) are subjected to the current rules on granting the mandatory third-party access (TPA) unless they received relevant exemptions.14
It turns out that any investing in the new gas capacity construction before that time should be conducted in legal vacuum, which is obviously does not encourage investor’s involvment.
The current EU energy legislation needs to be improved in terms of the rules for internal gas transportation infrastructure. Virtually all the major projects in the EU (LNG terminals and gas pipelines) since the adoption of the 2-nd Gas Directive in 2003 were implemented in violation to the law, by obtaining individual exemptions from the EU rules.15
10 Directive 2009/73/EC. 11 The revised ENTSOG proposal for Incremental Capacity. 12 specifically, these include an ‘open season’ procedure that will define long-term market demand for new capacity, see “Pipe-End Compromise...”, Andrey Konoplyanik interview, Neft Rossii, №3, 2015. 13 does the cancellation of the South Stream signal a fundamental reorientation of Russian gas export policy? - OIES (2015), p.4. 14 in accordance with the art. 36 of the 3-rd Energy Directive. 15 under the Second Gas Directive (Directive 2003/55/EC), exemptenions were regulated by article 22 (which contained 5 criteria to comply with for getting exemptions). Under the 3-rd Gas Directive 2009/73/EC - art.36 (the role of ACER, European energy regulator agency, was added to the 5 criteria for cases where the infrastructure in question was located in more than one EU state. Besides, it is stipulated that exemptions may be issued by the regulators only rather than member states as it was under the Second Gas Directive).
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NORD Stream Unutilized Capacity as a Result of Changing Rules
The Nord Stream gas pipeline project was designed well before the adoption of the Third Energy Package. As it had to meet 25% of the EU’s extra needs for imported gas, the EC granted the project with status of TEN (Trans-European networks) in 2000.
This meant that Europe recognized Nord Stream as a key project for the establishment of major cross-border transportation capacities aimed at ensuring sustainable development and energy security. Nevertheless, under the Third Energy Package in 2009, OPAL pipeline operator Gastransport (BASF / Gazprom joint venture) was only able to get 50% exemption from the TPA rules for 22 years. The reason for a higher capacity utilization of the pipeline could become a 3 bcm Gas Release Program (market-based gas sales) that Gazprom couldn’t approve.
In February 2014, Gastransport and Germany’s Federal Network Agency (BNetzA) agreed on the terms for granting Gazprom the 100% OPAL capacity right: the operator had to sell up to half of its gas transmission capacities through European capacity auctions on the PRISMA exchange platform. The EC competition authority agreed with this decision.
Formal approval by the EC of the 100% exemptions was to be held in March 2014, however, the Commission delayed this decision due to the need to clarify some of the technical details and because of deteriorated relations between Russia and EU following the events in Ukraine.
The exemption approval period by the national regulators expired at the end of 2014, which meant restarting this procedure all over, with Gazprom having to file a new application to BNetzA. In spring 2015 Gazprom was to enter the second round.
The 50% capacity ban on OPAL (35 bcm) and utilization restrictions on NEL (20 bcm) - the Nord Stream’s onshore extensions created capacity problems for the latter. In 2014, the capacity utilization level of Nord Stream was about 67%.
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Competiton Incentives Southern Gas Corridor (SGC)
SGC is one of the most important projects for EU that shall diversify gas supply routes and sources, thus enhancing EU member states energy security. The EU management never made a secret that the Southern Corridor’s key objective would be creating an alternative- to-Russia channel of gas imports from Caspian region and Middle East.
Once SGC became a program concept to the European Commission, and niether the cost of the project, nor the lack of the resource base, the political risks in potential supplier and transit countries and the shortage of investment could make the EU leadership reconsider its attitude to SGC.
Noteworthy is the fact that all the SGC projects have a “projects of common interest” status (PCI). Four years ago, in an effort to accelerate the implementation of the stalled Southern Corridor concept, the EC strengthened its regulatory support. In the fall of 2011, the EC published its proposals for the Regulation on Trans- European Energy Networks (TEN-E) Guidelines, the so-called infrastructure package that offered a reassessment of objectives set in the “Guidelines ...” in accordance with the EU goals towards the completion of the internal energy market.
The Regulation on the basis of these proposals that entered into force on January 1, 2013, describes the procedure of approving the so-called ‘projects of common interest’, which include priority trans- European energy infrastructure projects. Specifically, the document provides general criteria for projects selection based on a regional approach and the Pan-European 10-year infrastructure plan that are required by the EU to achieve its energy objectives. The Regulation mentions SGC among priority gas corridors that are designed “to ensure gas supplies from the Caspian basin, Central Asia and Middle East for the diversification of import sources”.16
Projects that receive the PCI status can count on the following tangible economic preferences:
• accelerated issuance of permits that allows the European Coordinator to interfere in case of any complications;
• cross-border cost allocation: capital costs will be distributed not only between transmission system operators (TSO), on
16 regulation (EU) № 347/2013 of the European Parliament and of the Council of 17 April 2013.
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whose territory the project is implemented, but also those who will actually benefit from this project. transportation fees (to reimburse capital costs) will be determined by the national regulators on the basis of cost-benefit analysis (a methodology developed by the European Coordination Council of System Operators of Natural Gas Networks, ENTSOG);
• financial support of research carried out to promote this project, and possibly, release of grants to subsidize the project, subject to certain criteria.
The European Commission decision on granting the PCI status to a project takes about six months. The project promoter shall first obtain the consent of the Member State in whose territory the project will be implemented, and then make a proposal to the “regional group” (which is to be formed and should include, for example, EU Member States, system operators, representatives of EC etc., one group for each priority Corridor). The regional group shall draft proposals on the list of priority projects in the corridor and submit them for consideration (within a 2-month period) to the Agency for the cooperation of energy regulators (ACER), set up under the Third Energy Package. Then this list is sent to the EC, which has four months to make a final decision.
The first PCI list was approved by the EC in October 2013, and it included about 100 projects on the EU gas transmission infrastructure development17. The list is updated every 2 years. The publication of the second list is expected in late 2015, while the European extension of the Turkish Stream can get only on the third list of PCI projects, i.e. no earlier than in 2017.
Development of LNG receiving terminals
The EU continues to rely on reducing dependence on Russian gas through alternative supplies, above all, LNG. The stake is made on the structural gas surplus which may occur after 2016 when the American and Australian LNG supplies are expected to enter the world market.
As a result, Europe consistently creates substantial excess capacity of LNG receiving terminals. At present, European regasification capacity has already reached half of the pipeline gas import capacity, amounted to 190 bcm by the end of 2014 (see table 1).
17 see Projects of common interest - https://ec.europa.eu/energy/en/topics/ infrastructure/projects-common-interest
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Table 1. LNG receiving terminals in Europe: existing and under construction
Capacity utilization in 2014 Existing Capacity, Country and under bcm construction* bcm %
Bilbao 7.0 1.55 22.1
Murgardos 3.6 1.17 32.5
Huelva 11.8 1.88 15.9 Spain Cartagena 11.8 1.09 9.2
Sagunto 8.8 1.46 16.6
Barcelona 17.1 2.81 16.4
Teesside 4.6 0.00 0.0
South Hook 21.0 9.80 46.7 United Kingdom Dragon LNG 6.0 0.30 5.0
Isle of Grain 20.1 1.22 6.1 Montoir de 10.0 0.77 7.7 Bretagne France Fos sur Mer 5.5 5.22 95.0
Dunkerque* 13.0 - -
Panigaglia 3.4 0.07 2.1
Italy Adriatic LNG 7.6 4.45 58.8
Livorno* 3.8 - -
Marmara Ereglisi 6.2 5.59 90.2 Turkey Izmir 6.0 1.99 33.2
Netherlands Gate 12.0 0.48 4.0
Belgium Zeebrugge (LNG) 9.0 1.21 13.5
Portugal Sines 5.2 1.14 21.9
Greece Revithoussa 5.3 0.59 11.1
Poland Swinoujscie* 5.0 - -
Lithuania Klaipeda 4.0 0.04 1.1
Existing 186.0 42.84 24.0 Total: Under 21.8 - - construction
Source: GLE – LNG database 2015, IEA, VYGON Consulting
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As receiving terminals capacity increase, average utilization of LNG regasification terminals in Europe has been dropping steadily: from 45% in 2011 to 24% in 2014. Current spare capacity is about 140 bcm, i.e. comparable with the total Russian gas exports to Europe.
However, having the lowest utilization level in the world, every European coastal country tends to have at list onereceiving LNG terminal. Moreover, the EU is actively developing a cross-country gas transportation infrastructure, the lack of which is still a “bottleneck” in the LNG supply system in Europe.
European countries are willing to pay a higher price for gas just to get rid of Russian gas dependence. Thus, with current Henry Hub prices of $ 2.8/MBTU, the US LNG would cost around $ 300 per 1,000 cm in Europe and would be unable to compete with Russian pipeline gas and other sources marketed under oil-indexed contracts. Anyway, the premium Asian market would remain a top priority for the US LNG. Same goes for more expensive Australian gas which is already 80% contracted in the Asian-Pacific region.
The above can be illustrated by the example of Lithuania. In late 2014, after the launch of floating LNG receiving terminal “Independence” (4 bcm capacity), Lithuania could import gas from sources other than Russia and signed a five-year contract with Norwegian Statoil (0.7 bcm per year). According to Lithuanian gas operator Litgas, Norwegian LNG will cost the company around $ 400 per 1,000 cm during 2015 (10% more expensive than Russian pipeline gas).18 Further, everything will depend on oil prices which Russia uses in its contract pricing, as well as NBP gas spot price which is linked to the Statoil gas pricing.
18 see “Lithuania to pay more for Norwegian LNG than Russian gas” - http://www. reuters.com/article/2014/11/13/lithuania-lng-idUSL6N0T268X20141113
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Ukraine- Dependence Many countries in South and South-Eastern Europe are heavily For European dependent on Russian gas supplies via Ukraine and interested countries to reduce the respective transit risks. However, the European Commission has indicated that it opposes the Turkish Stream. Is there any logic in the EU position and who supports it in Europe?
Fig. 3. Ukraine-dependence of European countries (share of Russian gas transited via Ukraine to total gas imports of the relevant country, in %)
R USSIA
B ELARUS NETHERLANDS 100 > 50 > 0 P OLAND
GERMANY B ELGIUM
LUXEMBOURG
CZECH REPUBLIC UKRAINE
RUSSIA SLOVAKIA FRANCE
AUSTRIA MOLDOVA
SWITZERLAND H UNGARY
RUSSIA SLOVENIA ROMANIA ITALY CROATIA
G EORGIA
BOSNIA AND AZERB HERZEGOVINA
SERBIA ARMENIA
MONTENEGRO BULGARIA F RANCE
IRAN MACEDONIA
A
ALBANIA ITALY
TURKEY
GREECE
SYRIA IRAQ
Source: Gazprom, IEA, VYGON Consulting
There is a number of countries in the EU, who can keep a neutral or destructive position against the Turkish Stream, because the stoppage of Russian gas deliveries via Ukraine is not an issue for them. For instance, Slovakia and Czech Republic located on the exit side of transit gas supplies from Ukraine prefer to transit it further to the West while purchasing Russian gas for own use from the Nord Stream.
France that is also using the Nord Stream instead of Ukrainian transit as well as the Baltic countries that never depended on it may lobby for blocking the construction of bypassing Ukraine pipelines as much as long.
In 2014, more than half of the 24 European countries (including Turkey) purchasing gas from Gazprom Group received it via Ukraine. The most “Ukraine-dependent” states (with a 100% share of gas delivered via Ukraine in the Russian gas imports) are Romania, Bulgaria, Greece,
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Macedonia, Serbia, Bosnia and Herzegovina, Slovenia and Italy. The share of Russian deliveries in total gas consumption in these countries varies from about 3% (in Romania) to 100% (in Macedonia).
Table 2. Amounts and percentages of Russian gas deliveries in 2014*
Country Russian gas deliveries, bcm Share of Russian gas in total demand, %
Romania 0,33 2,6
Bulgaria 2,79 93,3
Greece 1,75 54,7
Macedonia 0,14 100
Serbia 1,36 56,2
Bosnia and Herzegovina 0,16 58,0
Slovenia 0,43 53,5
Italy 21,7 36,2
* according to Russian gas standard Source: Gazprom, Eurostat, VYGON Consulting
The situation with Ukraine-dependent countries seems ambiguous. Despite their seeking to stable gas supplies and correspondingly to minimising the Ukrainian transit, these countries continue to push their own commercial interests during contract negotiations in respect of prices and terms.
In 2012, Gazprom signed a contract with Bulgaria to supply 2.9 bcm annually for 10 years granting Bulgaria an extra 20% discount on the gas price. On the same day Bulgaria approved the South Stream investment decision, being the last of the transit countries.
After the expiration of the previous Russian-Serbian agreement, the two countries signed a new contract in 2013 to supply 1.5 bcm annually up to 2021 providing a 13% price rebate ($399/1,000 cm) and gradually bringing it to $ 370/1,000 cm. In addition, starting from 2016 (when the South Stream pipeline was originally scheduled to start up) the gas supply shall be increased to 4 bcm.
In 2014, Gazprom agreed to extend the contract with the Greek company DEPA for another 10 years, which was due to expire at the end of 2016. The parties also agreed on retroactive price reductions
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from June 2013. Like many Gazprom customers, Greece continues to insist on adjusting the pricing formula to account European hubs’ spot quotations.
Though almost every new agreement concluded by Gazprom provides significant price discounts, the contract terms are also shrinking. For instance, the expired 20-year contract with Bosnia and Herzegovina (annual delivery of 300 MM cm) was replaced in early 2015 with a new two-year contract for 106 MM cm a year.
The end of 2015 will see an expiry of 8 bcm/y gas supply contract for Russian gas deliveries to Hungary, which in 2014 was 80% dependent on the Ukrainian transit. The coordinated contract terms provide a five-year agreement as well as reduced minimum TOP volume. In return, the Hungarian has pledged to abandon the Ukrainian reverse operations and to halt the EU Energy Union support.
The most challenging situation for Russia appears towards Italy. Russian gas deliveries under seven long-term contracts in 2014 covers about one third of the Italian demand. The largest contract with ENI for annual supply of 23.5 bcm of gas expires only in 20 years. In 2020, Italy could face gas shortages of 11 bcm (see Fig. 5) as the contracts with Algeria and Netherlands expire, while their extension seems unclear because of existing negative gas production projections for those countries.
Fig. 4. Expiration of Russian gas contracts in Ukraine-dependent countries of Europe
Bosnia and Herzegovina 25 bcm Slovenia
Greece 20 Bulgaria
Turkey 15 Romania
Poland 10 Macedonia Macedonia
Austria 5 Italy Bosnia and Herzegovina Serbia 0 Hungary 2015 2016 2017 2020 2021 2022 2025 2026 2027 2030 2035 2042
Source: Cedigaz, corporate data, VYGON Consulting
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Fig. 5. Contracted gas volumes and gas demand in Italy to 2030
Other contracts 120 bcm
Azerbaijan (Shah-Deniz II, 2019) 100
Lybia (Green Stream, 2004) 80
Qatar (LNG, 2009) 60 Netherlands (Transitgas, 1974) 40 Algeria (Trans Mediterranean Pipeline, 1994; LNG,1999) 20 Russia (7 contracts)
0 Gas demand 2012 2015 2018 2021 2024 2027 2030
Source: Сedigaz, Eurostat, EU, VYGON Consulting
Therefore, the vital issue for Italy will be to ensure uninterrupted supplies of Russian gas in the current volume (with average contract offtake level of 72% in 2014). With a higher gas offtake of 100%, the projected gas shortage can be reduced by 3 bcm. That is why the country is interested to seek solutions for the 2020 problem jointly with Russia – either intensify construction of the Turkish Stream’s European extension or motivating Gazprom to sign a new transit agreement with Ukraine.
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Transit Country Turkey’s gas market strategy is aimed at solving several tasks. Firstly, Outlook: Turkey’s to ensure guaranteed gas supplies to the domestic market along Strategy diversified routes and at the smalest prices. Since the late 1980-s the Turkish Government conducted an active policy of replacing coal-based Gas Balance: from power generation in the electicity sector, and as a result the share of Oversupply to Gas Deficit natural gas in electricity generation in 2013 reached 43.6%, according to IEA (compare with 17.7% in 1990)19.
With steady Turkish economy growth (average annual GDP growth was about 6.5% over the last decade except the recession in 2008- 200920) and modest energy resources (Turkey can only cover one forth of domestic demand with own coal and renewables), Turkey’s requirements for imported hydrocarbons continue to rise.
Secondly, Turkey strengthens its position in the international gas market by changing its status from net consumer to transit country or even gas supplier. In particular, the Government underlines that its priority is becoming a “fourth corridor” for gas deliveries to Europe. If all of the currently examined gas pipeline projects via Turkey were implemented, the total transit capacity in Turkey would amount to more than 50 bcm a year21.
Turkey meets its gas import demand by long-term pipeline contracts with Russia, Iran and Azerbaijan. In addition, there are long-term LNG contracts in place with supplies from Algeria and Nigeria as well as spot LNG deliveries from Qatar, Norway, Egypt and other countries.
Russian gas is delivered to Turkey along two routes: Trans-Balkan pipeline via Ukraine (total contract amount 14 bcm) and subsea pipeline Blue Stream (25-year contract with Botas for 16 bcm/year). Physical offtake of Russian gas in 2014 was 90% of the contracted quantities.
About 7.5 bcm of gas came through two LNG terminals at Marmara Ereglisi and Izmir, with total capacity of 12.8 bcm. Iranian gas comes to Turkey via 14 bcm/y Tebriz-Ankara pipeline where only 9 bcm of its capacity is utilized. Futurе extensions of Iran gas supplies seem questionable as Iranian gas appears the most expensive option for Turkey so far being 15% higher than Russian gas price (490 $/1,000 cm in 2014).
19 iea Electricity information 2014. 20 The World Bank database. 21 inclusive of the following projects: nterconnector Turkey – Greece – Italy (ITGI), TransAdriatic gas pipeline (TAP), interconnector Greece - Bulgaria (IGB) and Nabucco.
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Fig. 6. Turkey’s gas pipeline infrastructure, capacity utilization in 2014* and projected gas pipelines, bcm
Russia (Trans Balkan gas pipeline) Russia (Turkish Stream) Russia 16 14 12,7 (Blue Stream) Azerbaijan
16 16 14,2 10 6,66,1 Alkoklar Kıyıköy Samsun Posof
Tekirdağ Аnkara
LNG Iran Bazargan 14 10 8.9 6,5 ** 5,6 Aliaga Turkey
LNG
6,3 ** 2 Kilis Syria
Existing gas pipelines ТransArabic (plan) Capacity ______Throughput ТransAnatolian (u/constr.) Тurkish Stream (plan) Contracts
* EU gas standard (IEA) ** LNG contracts
Source: IEA, Gazprom, VYGON Consulting
Ankara repeatedly filed suits with international courts trying to bring Iranian gas prices down. Currently, Turkey is asking for a 25% discount. Originally this pipeline was designed as part of a large-scale project Pars (37 bcm) that was designed to connect Iranian gas field Southern Pars with Europe throught Turkey. However, the project was stranded due to the Western sanctions.
In 2007, the South-Caucasus gas pipeline was brought on stream (Baku-Tbilisi-Erzrum) with a design capacity of 20 bcm a yearto enable Azeri gas deliveries to Turkey. Currently, about 6 bcm of gas is annualy exported, while big construction activity has been underway since January 2015 to enlarge its capacity. The launch of the project second phase under the contract signed in 2014 is expected in 2018.
Turkey pursued an active supply source diversification policy in the last 20 years thus contracting surplus gas quantities. In 2010, Turkey consumed only 72% of total contracted gas volumes. Besides, Turkish national company Botas repeatedly released overestimated internal demand forecasts in order to reinforce its negotiation position towards gas suppliers under long-term contracts and obtain not only price discounts but also significant consessions with related infrastructure projects.
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Nevertheless, domestic gas consumption in Turkey grew by nearly one third over the last 5 years. In 2014 tt became obvious that the excessive gas supply to the domestic market will soon be replaced with a nearly 100% gas offtake under the long-term contracts. Moreover, our estimates show that Turkey may face an imminent shortage of contracted gas quantities by 2017-2018 if the current domestic gas demand grows at the same pace.
Apparently, this imbalance was also an evident for Russia, and therefore, agreements on the Turkish Stream implementation and Blue Stream capacity extension were reached on 1 December 2014. Currently, Gazprom is the one who can provide Turkey with extra gas quantities within such a short period. Modernization of Blue Stream compressor stations will increase total pipeline capacity from 16 to 19 bcm by early 2016.
2019 will see Azeri gas supplies from Shah-Deniz Phase II that will help to satisfy Turkey’s rising demand. Even if all the existing gas contracts to be extended , there will be a 7 bcm niche in the Turkish market by 2025 to gain a foothold for Russia’s Turkish stream.
Fig. 7. Turkey’s contracted gas quantities and gas demand to 2030
80 bcm
LNG contracts
60 Iran, 1996
Azerbaijan (Shah-Deniz II, 2011) 40 Azerbaijan (Shah-Deniz I, 2001) Russia 20 (Blue Stream, 2002) Russia (TransBalkan, 8 contracts) Gas demand 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Source: Cedigaz, OIES (2014), ВР, Botas, VYGON Consulting
29 VYGON Consulting June 2015 Turkish Stream: Scenarios of Bypassing Ukraine and Barriers of European Commission
Turkey’s Transit Role: Turkey’s geographic location is been the countries’ absolute advantage Bridge or Roadblock as it may serve both as a bridge between the European customers and Caspian/Middle East gas suppliers and as a roadblock. In most cases, it is hardly possible to bypass Turkey when planning gas export routes to Europe excepting offshore pipelines (e.g., planned East Med pipeline from Cyprus to Greece across Mediterranean Sea) or LNG supplies.
The integration processes between Turkey and EU started in the last century, followingthe Turkish gas market liberalization were prerequisites for the development of regional gas infrastructure. For the Southern Gas Corridor projects, the Turkish route appears to be almost irreplaceable. In other words, Turkey has got all the chances to strengthen its position as a gas bridge and hub for Europe.
First Turkey attempts to position itself as a gas hub dates us back to the late 1980-s, when the potential Qatar gas transit supplies through the planned Qatar-Iraq-Turkey-Europe pipeline over the early 1990-s was discussed. The negotiation process was unsuccessful and Qatar changed its export strategy in favor of LNG supplies22.
In 1992, Trans-Caspian gas pipeline discussions began in respect of Turkmen gas deliveries, but in spite of the reached agreement on 16 bcm Turkmenian gas imports signed in 1999 the project faced too many political hardships caused by Caspian Sea unregulated law status.
Besides, Turkey itself has had certain gas export ambitions. In 2007, following the launch of Turkish-Greek section of ITGI interconnector Botas started gas supplies of 0.7 bcm to Greece (under the 2002 contract). Although this gas was of Azeri origin and could not be re- exported according to the Azeri-Turkish contract, Turkey adopted the European trend to refuse the so-called destination clausе in its own contract to become a real gas exporter.
Today, Turkey possesses a developed gas infrastructure and at the same time encourages excess transport capacities to become a transit state for Russian, Azeri, Iran, Iraqi and Central-Asian gas. In 2018-2020, it plans to add new international gas projects: Trans- Anatolian (TANAP), Trans-Adriatic (TAP) and interconnector Turkey- Greece-Italy (ITGI) included in the PCI list. The revival of Nabucco- West pipeline project23, still lobbied by the European Commission and Romanian and Bulgarian authorities (the latters especially active
22 see in more detail: “Is the Qatar-Iraq-Turkey-Europe natural gas pipeline project feasible? An analysis with regards to international energy market policies and risks”, ORSAM, Ankara - TURKEY 2011. 23 The project was closed due to lack of resource base.
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after the cancellation of the South Stream), aslo cannot be excluded. Among these projects only TANAP gas pipeline is actually being implemented with the construction started in March 2015.
While supporting the idea of SGC, Europe expected to get a much bigger flow of gas than mere 10 bcm of Azeri gas via TANAP24. Given the fact that TANAP was designed for 31 bcm capacity with two branches towards Greek and Bulgarian borders25 and recently 16 bcm line is being constructed, it is possible that both Turkmenian, Iranian and Russian gas may enter the EU market in case of a sufficient demand for this capacity and appropriate investors.
In 2014, Turkey and Turkmenistan signed a framework agreement on gas deliveries via TANAP, but there was no specification on volumes and timeline. The very concept of Trans-Caspian deliveries as it was mentioned before appears unlikely.
In the medium term (if gas embargo is lifted), TANAP seems to be the only option to transport initial, very small volumes of Iranian gas to the European market. This can be accelerated if Iran buys TPAO’s interest in TANAP. Remarkably, in April 2015, Turkish Energy Minister T.Yildiz said just a few days after the Turkey’s President R.Erdogan visit to Iran, that “if we have a good commercial offer, Turkey may consider partial privatization of its interest in TANAP (footnote - 30%)”26. He also added, that “a number of countries already showed interest in this project”27.
TANAP with its 31 bcm/y capacity (and a connection with Nabucco- West or jointly with the growing TAP) could be a logical onshore extention of one of the Turkish Stream lines.
However, any transit component carries certain risks for Russia, that’s why the potential pressure from Turkey should be also accounted.
24 tanap’s resource base is Shah-Deniz II field. A long-term contract for 6 bcm/y for Turkey was concluded in 2011, while the rest of quantities of 10 bcm were contracted by Italy, Greece and Bulgaria (respectively 8 bcm; 1 bcm; 1 bcm). 25 a pipeline branch is being built for Greece, as TAP was elected as European continuation. Bulgarian offspring was designed for the case of Nabucco’s implementation -see an engineering firm site: ‘Sebat Proje Engineering’ - http:// sebatproje.com.tr/en/portfolio/ trans_anatolian_natural_gas_pipeline_project_tanap/ 26 http://bloknot.ru/v-mire/turtsiya-prodaet-svoyu-dolyu-v-gazoprovode- tanap-204434.html - with a link to Turkish media agency Haberturk. 27 Ibid.
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Firstly, Turkey has been a candidate to join the EU for the last 16 years as well as it is the NATO member state. This puts a big question about its independence and therefore reliability as a potential transit country for Russian gas supplies.
Secondly, there was accumulated a complex experience in infrastructure projects implementing, which did not fully meet the Turkish energy strategy. For example, Samsun-Ceyhan oil pipeline project that was primarily targeted to unload the Bosporus and Dardanelles straits. Initially the project’s feasibility was doubtful, but the Russian Transneft agreed to join it. In return, the Turkish counterparts promised to approve the South Stream’s laying across Turkey territorial waters. As a result, the permission was granted, but Samsun–Ceyhan project was suspended.
The Blue Stream project is the most striking example of how the Turkish party violates earlier agreements. In February 2003, commercial gas shipments started, but already on the 12th of March Turkey suspended gas selection, siting that the “take-or-pay” clause could only come into force after 1 July 2003 (before that date the contract provided an “initial shipment period” without firm quantity commitments) and applied for a lower price and revision of contract conditions. Notably, Gazprom made concessions in autumn 2002, prior to the Blue Stream start of operations, cutting both the planned volumes for 2003 (by two times) and gas prices (by 9%).
The ensuing negotiations brought a compromise solution: Russia promised to lower the annual gas export volumes, while Turkey had to pay for all delivered gas regardless of its own requirements. Besides, the new agreement provided the gas price to be lower in the summertime than that in winter.
In 2005, Gazprom raised the question about laying the third line of the Blue Stream (Blue Stream-2) to Turkey’s southern coast and further along the bottom of the Mediterranean Sea to the Southern Europe states and Middle East, especially, to Israel. After Ankara required entitlement to set the price for Russian gas when sold to third parties, an alternative South Stream project emerged.
Thirdly, when negotiating specific energy projects Turkey tends to conclude package deals. Besides the mentioned deal with Russia’s participation in Samsun-Ceyhan project in exchange for South Stream offshore construction permission, complex solutions aretraced for the Turkish Stream. Apart from providing gas price discounts with potential further price reductions as joint projects develop, nuclear power projects can also become the source of bargaining.
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Currently, the first Turkey’s nuclear power plant Akkuyu (four units with total capacity 4.8 GW) is under construction. Rosatom is now constructing the first power unit to be completed in 2019.
Therefore, the implementation of the Turkish Stream might be seriously impeded in case of failure to reach a compromise on any of the current projects.
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Future Developments around the Turkish Stream, including a joint declaration Configuration of signed by the foreign ministers of Serbia, Greece, Macedonia, Turkish Stream Hungary and Turkey in support of the project (7 April 2015), and agreement on the construction of gas transportation facilities in Options to implement Greece by the Russian/European consortium (21 April 2015), to our a European extension opinion indicates that the Turkish Stream would not end at a hub on of the pipeline the Turkish/Greek border.
Russian gas will be delivered to Europe via Turkey either through the Southern Gas Corridor infrastructure (thus devaluing the very idea of supply sources diversification) or through the new pipelines to be built in Europe in full compliance with the EU legislation. Maximizing the existing infrastructure utilisation is vital due to the tight timeframe for abandoning the Ukraine transit and respectively gas supply redirection via Turkish Stream.
Thereby, the following optional schemes for an onshore pipeline system to transport Russian gas from the Turkish/Greek border to the EU could be identified:
Trans-Balkan pipeline reverse, that will enable Gazprom to fulfill its contract obligations completely in respect of Bulgaria, Greece, Macedonia, Romania and Moldova for a total of 13.1 bcm (see Table 3). If gas supply to these countries and Turkey equals the 2013 level, i.e. corresponding to all contracted gas quantities, it will be realistic to achieve about 85% capacity utilization of the two Turkish Stream lines. This level could be even higher given the growing gas demand in Turkey and assuming reverse supplies to Ukraine along this route.
Table 3. Actual* and contracted Russian natural gas exports via Trans Balkan Pipeline, bcm Страна 2013 2014 Contract quantity Moldova 2.4 2.8 3.0 Romania 4.3 0.3 4.0 Bulgaria 3.5 2.8 2.9 Greece 2.8 1.7 3.0 Macedonia 0.1 0.0 0.2 Turkey 13.8 13.7 14.0 Total: 26.9 21.5 27.0 Two-string option, % 84% 67% 84%
* in Russian gas standard Source: Gazprom, Cedigaz, VYGON Consulting
34 VYGON Consulting June 2015 Turkish Stream: Scenarios of Bypassing Ukraine and Barriers of European Commission
This option has an obvious advantage, as it does not require any extra large investments, and respectively, secures prompt delivery of gas to the European market28. Some difficulties may arise due to suchreverse operation compliance with the Third Energy Package provisions. On the one hand, the reverse option is compliant with the EU legislation as Gazprom will use the same capacity that has already been reserved under the existing contracts29.
However, this is only true if the pipeline capacity utilization in the reverse mode does not require serious amendments in the existing contracts, which will be considered as the ground for its termination or extension. This would automatically require to bring these contracts into conformity with the Capacity Allocation Mechanism of Network Code (CAM NC) provisions, i.e. shifting to the input/output tariffication, holding capacity auctions and gas supplies to the hub30.
However, this route may not fully solve the problem of Ukrainian transit as it covers only 20% needs of the Ukraine-dependent countries. Lack of the European cross-border infrastructure capacity makes it impossible to transport the reverse gas via Romania further to the southwest. In particular, the “bottleneck” is the Romanian- Hungarian Csanadpalota pipeline with a capacity of around 2 bcm.
The SGC gas projects revival, in particular Nabucco-West and ITGI - , which at the time were at an advanced stage of implementation but frozen due to the lack of resource base. Thus, in May 2013 Nabucco-West pipeline obtained TPA exemptions (50%) for both phases of the project. If Russia obtaines up to half of the pipeline capacity (5 bcm of the initial capacity and 11.5 bcm of the final), Gazprom would be able to fulfil its contractual obligations to supply gas to Hungary (8 bcm contracted, actual delivery 5.3 bcm in 2014) and Austria (7 bcm contracted, actual delivery 4 bcm)31 without changing the delivery point. Since the project’s preparatory phase is completed and there’s no alternative to Russian gas resource base, Nabucco-West reanimation can only take place as a European extention of Turkish Stream.
28 according to Regulation (EU) № 994/2010 of the European parliament and of the Council of 20 October 2010 concerning measures to safeguard security of gas supply and repealing Council Directive 2004/67/EC), system operators must provide for possible gas reverse operations in all trans-border connector points between EU member states 29 Third Energy Package rules are not valid in respect of any gas supply and transportation contracts concluded prior to its entering in force 30 does the cancellation of the South Stream signal a fundamental reorientation of Russian gas export policy? - OIES (2015), p.8. 31 where Austria can receive over half of these quantity from other than via Ukraine; Hungary – less than 20%.
35 VYGON Consulting June 2015 Turkish Stream: Scenarios of Bypassing Ukraine and Barriers of European Commission
However, half of the Nabucco-West capacity will be insufficient to bring gas to Italy. In the case of open season procedure and absence of alternative capacity applications, Gazprom could apply for a 100% utilization and bring gas to Italy at the amount of 3.5 - 16.5 bcm (from 16 to 76% of the current supply)32 or from 0 to 13 bcm (up to 43% of the existing contractual obligations to Italy)33 . Under this scenario, gas will come exactly to the traditional delivery point, Tarvisio in the north of Italy.
A drawbackof this option is the low probability of its implementation by 2020. Unfortunately, it is only technically possible to connect the Turkish Stream line to the Nabucco-West starting from Bulgarian border if TANAP capacity is expanded and a Bulgarian branch is built.
Construction of TANAP started recently (March 2015) and Azeri gas supplies will begin in 2019-2020, so the Bulgarian branch can be completed after 2020. An good alternative could be Gazprom’s initiated construction of a interconnector between the Turkish Stream and the Bulgarian border, Nabucco-West starting point. This option would require additional investments (as Gazprom committed to finance any infrastructure construction in Turkey under of Turkish Stream project) but can be completed by 2020.
Italian-Greek gas pipeline (ITGI) is another alternative for the Russian gas supplies to Italy to Ukraine transit route. As well as Nabucco, this project is frozen but its shareholders earlier expressed interest in Russian gas transit.
When ITGI was excluded from the list of applicants for Azeri gas at the beginning of 2012, the head of the project company E. Ruggieri stated that the Consortium was ready to use the gas sources in any producing country, including Russia and undeveloped gas reserves in the territorial waters of Israel and Cyprus34. Thus, cooperation with ITGI consortium corresponds to Russian interests.
ITGI offshore section operators, Edison and DEPA (IGI Poseidon project), have gained their national regulator’s TPA exemption for the entire 100% capacity over 25 years. In fact, if the agreement with the Russian side is reached, the planned pipeline could transport Russian gas in full capacity given no alternative suppliers (after the open season procedure is fulfilled). This would bring about 8 bcm of gas to Italy, although to the southern part of the country rather than its traditional gas delivery point (Tarvisio).
32 With Russian gas exports to Europe to be maintained at 2014 levelsг. 33 at 100% gas offtake under contracts with countries along the pipeline route. 34 see “ITGI ready to deliver Russian gas to EU market”, 29.02.2012 - http://www. azernews.az/oil_and_gas/41861.html
36 VYGON Consulting June 2015 Turkish Stream: Scenarios of Bypassing Ukraine and Barriers of European Commission
Filling the second stage of the Trans-Adriatic pipeline (ТАР). In 2013, the European Commission granted the TAP consortium the right to reserve 100% capacity of the first phase for 10 bcm, which was already contracted for Azeri gas. 8 bcm will come to Italy under seven supply contracts, 1 bcm to Greece, and another 1 bcm of gas to Bulgaria under contract with Bulgargaz via interconnector Greece- Bulgaria (IGB).
Hopefully, after the second phase launch35 for another 10 bcm, Russia will be able to qualify for part of this capacity and supply 2 bcm to Italy. However, there is a risk that the consortium will manage to obtain the 100% exemption for the second phase as well.
Utilizing the maximum of the available SGC pipeline capacity, Russia could redeploy from 20 to 35 bcm of gas from the Ukrainian route and secure end-user sales for the third line of Turkey Stream. Particularly, Russia could send from 13.5 to 26.5 bcm of gas annually to Italy (with current offtake level of 22 bcm and contract obligations of 30 bcm). However, about 10 bcm would come to the south part of Italy where demand for Russian gas is not big.
In this context and taking into account the inherent risks (see Table 4), an alternative option of Turkish Stream “own extention” to Europe should be considered.. Moreover, all the above-mentioned options do not provide the contractual obligations to Serbia36.
Pipeline Greece-Macedonia-Serbia-Hungary-Austria37, as an option for Gazprom’s implementation of the Turkey Stream’s extention to Europe. In the long run, this project would be able not just to cover the Italian demand but also to bring gas to the most “difficult” countries in terms of existing infrastructure. Especially as the Third Energy Package envisages additional internal gas capacity construction by system operators if there are supply contracts in place (according to art. 13.2 of the 3-rd Gas Directive), while Gazprom does have such contracts.
However,as it was mentioned above, the procedures to build up new pipeline capacity will be legitimized no earlier than in 2017-18. That is why Russia may not only provide guaranties for substantial quantities of transit (allowing the Russian-European consortium to borrow funds for the project construction), but also considers an option to
35 the current project configuration assumes no extra compressor station in Albania, and therefore, no expansion of undersea part of TAP (to Italy) up to 20 bcm – see http://www. tap-ag.com/the-pipeline/route-map 36 in theory, there is the option of building a branch to Serbia from Nabucco-West. 37 gazprom declares of a 47 bcm capacity, however, we believe that basic throughput of the pipeline Greece-Austria would be 16 bcm given the availability of alternative options and a risk of getting exemptions from the TPA rules only for 50% of total capacity.
37 VYGON Consulting June 2015 Turkish Stream: Scenarios of Bypassing Ukraine and Barriers of European Commission
finance the Greek section of the pipeline for future transit revenue. Gazprom’s equity participation in the project in accordance with the 3-rd Energy Package is not supposed. However, while Gazprom is already negotiating with the Greek side on establishing and financing the required transportation capacity, there is yet no project understanding with any other countries lying on the further pipeline route.
Serbian foreign affairs minister I.Dacic consistently stated his country’s readiness to participate in the Turkish Stream implementation. In April 2015, he signed the joint declaration of the Foreign Affairs Ministers of Serbia, Greece, Macedonia, Hungary and Turkey in support of this project. Serbian President Т.Nikolic adheres to the following standpoint: “Turkish Stream implementation on the territory of Serbia is impossible, and we will not receive gas from that route”38. Obviously, Serbia is balancing between Europe and Russia, making efforts to join the EU, while unwilling to neglect mutually beneficial cooperation with Russia.
Probably that is the main reason of such conflicting statements made by Serbian government officials concerning the Turkish Stream. Notably, since Serbia is not a EU member state, it seems to have more freedom in choosing partners than, for example, Bulgaria (which position became a formal pretext to cancel the South Stream), and there is much less leverages from the EU. Thus, it was the Bulgarian Government that during the summer of 2014 suspended the South Stream construction after the European Commission stated that Bulgaria had violated European legislation in the way the gas pipeline construction tendering had been organized. The EC believed that Russian and Bulgarian companies had obtained certain priviledges.
The similar is developing around the third countries on the Turkish Stream’s route. Despite the fact that in April 2015, as mentioned above, Macedonia expressed support to the Turkish Stream, in May its Prime Minister N. Gruevski said that there was the onnly condition for Macedonia to take part in the project: “Our position … is that when Brussels and Moscow will reach agreement on this project, we would participate in it We are a country that is geared towards the Euro-Atlantic community, and when making decisions of strategic importance it’s guided by this objective”39.
It remains unclear what kind of Russian-EU agreement the Prime Minister of Macedonia expected on Turkish Stream, but it is obvious that as the geographic location opening the gates of the three
38 from a Serbia’s President interview to Interfax on the 8th of May 2015 http://www. interfax.ru/440662 39 from Macedonian Prime-Minister interview to information web-site Press24 on 27 May 2015 – cited as per http://www.interfax.ru/business/444036
38 VYGON Consulting June 2015 Turkish Stream: Scenarios of Bypassing Ukraine and Barriers of European Commission
continents has made the Balkans a permanent goal of the great powers”40 the negotiations on Turkish Stream extention would face many obstacles.
Table 4. Turkish Stream risks and utilization options Project Benefits Risks Trans Balkan • quick implementation • solves less than 20% of Ukraine problem Pipeline re- • needs no extra investment • If transmission contracts are amended, verse option their consistency with 3-rd Energy Package may be required
Nabucco-West • high development grade • requires TANAP capacity increase to rated • PCI status 31 bcm or build a branch from Turkish Stream to the Turkish-Bulgarian border • inquiry to System Operator under art. 13.2 of 3-rd Gas Directive • low implementation probability by 2020 • European consortium • 50% exemption from TPA available • brings gas to Tarvisio (northern Italy)
ITGI • PCI status • brings gas to southern Italy • inquiry to under art. 13.2 of 3-rd Gas Directive • high development grade • European consortium • 100% TPA exemption available at offshore section Poseidon • highly interested customers to get Russian gas ТАР • PCI status • 100% exemption from TPA • inquiry to System Operator under available for Phase 1 (probable art. 13.2 of 3-rd Gas Directive extension for Phase 2) • European consortium • participation only possible in Phase 2 (i.е. not earlier than in 2022-2023) • construction to begin in first half 2016 • phase 2 assumes no bigger capacity of undersea section ro Italy • 8 out of 10 bcm of pipeline capacity to Italy already contracted by Azeri gas
• depending on capacity, it can cover most • political uncertainty of Balkan states of Gazprom’s contract obligations leaders Greece- • inquiry to System Operator under art. 13.2 • considerable extra investments Austria of 3-rd Gas Directive • high probability not to get exemptions • it is the only alternative if SGC projects fail from TPA to implement
Source: VYGON Consulting
40 m.Skakun’s quotation is made as per article of P.Iskanderov “Balkans: Past, Present and Future” for web-site “Perspektivy” http://www.perspektivy.info/print. php?ID=56918
39 VYGON Consulting June 2015 Turkish Stream: Scenarios of Bypassing Ukraine and Barriers of European Commission
Solutions for the Turkish Stream’s main goal is to abandon Russian gas transit 2020 problem supplies via Ukraine. Since the existing transit contract expires by the end of 2019, time factor shall be the main guideline for Gazprom in developing scenarios for the 2020 problem. The second factor would be maximization of Turkish Stream lines utilization and bringing gas to final consumers (delivery points where gas ownership rights are transfered under existing contracts).
We believe that the following frontier scenarios will be possible by 2020 (see Fig. 8):
Pessimistic Case suggests laying the first line of the Turkish Stream heading to the Turkish market by replacing these gas quantities from the Trans-Balkan route. With insignificant investment in the expansion of the existing infrastructure it will also be possible to supply gas to Greece and Bulgaria (redirection of Trans-Balkan pipeline transit supplies).
This scenario assumes that permission will be obtained for a 100% linepack of the OPAL pipeline (deliveries will increase by 16 bcm) and throughput capacity at Lanzhot point will be expanded to allow for doubling the gas flow from the Czech Republic to Slovakia, from current 25 to 50 bcm per year41. If the 50% restriction on the OPAL utilization is lifted, redirected gas flows from Germany to Czech Republic and Slovakia will allow the Russian Nord Stream gas to come to Baumgarten and reach Italy, as well as Hungary, Slovenia and Serbia. Besides, Lanzhot expansion may secure enough capacity for reverse-mode supplies of Russian gas to Ukraine.
Under Pessimistic Case, a need for a new transit agreement with Ukraine remains in a range from 28 bcm/year (if Russian gas deliveries to Europe are preserved at the 2014 actual level) to 36 bcm/ year (with 100% gas offtake by European countries under currently existing contracts to be extended to 2020).
Optimistic Case, in addition to the above described options, assumes a reverse mode of the Trans-Balkan pipeline that will secure gas supplies to Moldova, Romania, Bulgaria, Greece and Macedonia in the range from 7.6 bcm (equals the 2014 actual supplies) to 13 bcm (Gazprom contract commitments to these states). Also, ITGI pipeline project with 8 bcm/y capacity can be realized with a 100% Russian gas linepack. Another potential option can be Nabucco-West pipeline with initial capacity of 10 bcm where Gazprom may get half of the throughput. However, the Optimistic Case cannot fully solve the
41 This was proposed in May 2015 by the Slovak gas transmission system operator, Eustream. System expansion can be completed by 2018 – see http://www.eustream.sk/ en_media/en_news.
40 VYGON Consulting June 2015 Turkish Stream: Scenarios of Bypassing Ukraine and Barriers of European Commission
task of bringing all the gas volumes to the delivery points fixed in the current contracts.Still about 10 bcm of gas that will not be delivered to customers in Austria, Slovenia, Serbia and Bosnia.
Fig. 8. Scenarios for the “2020 problem” and the optimum option of Turkish Stream implementation
2020 2024
Ukraine transit 90 bcm 90 bcm (contracts for 2020 г.)* 80 80 Ukraine transit (2014) 70 70 Linepack OPAL 60 60 Greece-Аustria 50 50
Nabucco-West 40 40
TAP 30 30
ITGI (IGI + Poseidon) 20 20 10 10 Тrans-Balkan reverse 0 0 Turkish Stream-1st line Pessimistic case Optimistic case Optimum Case
* incl. current Gazprom’s contract commitments to Ukraine-dependent states given the contract prolongation beyond 2020 and preserving current proportion among gas supply destinations (i.е. share of Ukraine transit to a given country is fixed at 2014 level)
Source: VYGON Consulting
Therefore, under the Optimistic Case by 2020 Gazprom fails to completely solve the task of gas delivery to its final consumers even if it builds three lines of the Turkish Stream. As a matter of fact, the second line used for the Trans-Balkan pipeline reverse will not be completely utilized42, as the countries along the route do not have sufficiently high gas demand, and it will be impossible, due to the lack of European cross-border infrastructure, to supply Russian reverse gas via Romania and further down to the South-West.
In our opinion, the best option to be safely implemented after 2020 would be the Optimum Case-2024 (see Figure 8), which enables the construction of four lines of the Turkish Stream and provides extra capacity in case Gazprom would eventually be forced to yield part of the OPAL capacity to another supplier.
A four-year delay assumption will secure another 2 bcm capacity
42 unless it is used for gas transmission to Ukraine.
41 VYGON Consulting June 2015 Turkish Stream: Scenarios of Bypassing Ukraine and Barriers of European Commission
as a result of the TAP second phase implementation, and it will be possible to increase Nabucco capacity to the highest designed 23 bcm (and thus, boost Gazprom’s capacity share), as well as implement the initial project phase of Greece-Austria pipeline (though under a 50% capacity condition).
A little more than six months passed since the Turkish Stream was established and even though it was largely the successor to the South Stream, so far there was too much uncertainty to say for sure what its ground configuration in time and space would be. The course taken by Gazprom to initiate talks on the European extention of the Turkish Stream, in particular, negotiations with Greece on the establishment of a European-Russian consortium and construction in Greek pipeline section is a step forward. This should be followed by negotiations with member countries of the SGC “frozen” projects.
It will become clear in the next year or two how realistic is, for example, our Optimistic Case-2020. Therefore, by 2019 Gazprom will come up with a better understanding of the period and gas volumes to sign the next transit contract with Ukraine. According to our estimates, its validity period could be up to 4 years, while the transit volume of will be reduced greatly, with Russia unlikely to agree to take-or-pay clause.
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