European Centre for Energy and Resource Security ‘Reflections’

Working Paper Series Volume 3, Spring 2017

EUCERS ADVISORY BOARD

Chaired by Professor Michael Rainsborough, Head of the Department of War Studies, King's College London

Marco Arcelli, Executive Vice President, Upstream Gas, Enel, Rom

Professor Dr Hüseyin Bağci, Department Chair of International Relations, Middle East Technical University Inonu Bulvari, Ankara

Andrew Bartlett, Managing Director, Bartlett Energy Advisers

Volker Beckers, Chairman and non-Executive Director of Reactive Technologies Ltd, Vice Chairman (since October 2016) and Member of the Board of Directors (non-Executive Director) of Danske Commodities A/S, Denmark and Chairman, Chair Audit Committee of Albion Community Power Plc

Professor Dr Marc Oliver Bettzüge, Chair of Energy Economics, Department of Economics, University of Cologne; Director of the Institute of Energy Economics at the University of Cologne (EWI) and President of the Supervisory Board, ewi Energy Research & Scenarios

Professor Jason Bordoff, Professor of Professional Practice in International and Public Affairs, Founding Director, Center on Global Energy Policy, Columbia University, New York

Professor Brahma Chellaney, Professor of Strategic Studies, Centre for Policy Research, New Delhi, India

Dr John Chipman, Director of the International Institute for Strategic Studies (IISS), London

Iain Conn, Group Chief Executive, Centrica plc

Professor Dieter Helm, University of Oxford

Professor Dr Karl Kaiser, Director of the Program on Transatlantic Relations of the Weatherhead Center for International Affairs, Harvard Kennedy School, Cambridge, USA

Frederick Kempe, President and CEO, Atlantic Council, Washington, D.C., USA

Thierry de Montbrial, Founder and President of the Institute Français des Relations Internationales (IFRI), Paris

Chris Mottershead, Vice-Principal (Research & Development), King's College London

Hildegard Müller, Chief Operating Officer (COO) Grid & Infrastructure of Innogy SE

Janusz Reiter, Center for International Relations, Warsaw

Professor Dr Karl Rose, Senior Fellow Scenarios, World Energy Council, Vienna/London

Jonathan Stern, Chairman, Natural Gas Research Programme and Senior Research Fellow, the Oxford Institute for Energy Studies (OIES), University of Oxford

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EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 2

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European Centre for Energy and Resource Security (EUCERS), Department of War Studies, King's College London

The European Centre for Energy and Resource Security (EUCERS) was established in the Department of War Studies at King’s College London in October 2010. The research of EUCERS is focused on promoting an understanding of how our use of energy and resources affects International Relations, since energy security is not just a matter of economics, supply and technological change. In an era of globalization energy security is more than ever dependent on political conditions and strategies. Economic competition over energy resources, raw materials and water intensifies and an increasing number of questions and problems have to be solved using holistic approaches and wider national and international political frameworks. www.eucers.eu

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© 2017 EUCERS. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. Please direct all enquiries to the publishers.

The opinions expressed in this publication are the responsibility of the author(s) and do not necessarily reflect the views of EUCERS.

EDITORIAL Dr Slawomir Raszewski, Editor ‘Reflections’ Working Paper Series, EUCERS Ms Rose Armitage, Editorial Assistant, ‘Reflections’ Working Paper Series, EUCERS

European Centre for Energy and Resource Security (EUCERS) Department of War Studies, King's College London, Strand, London WC2R 2LS, UK

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About EUCERS Professor Michael Rainsborough (Head Department of War Chair, EUCERS Advisory Board Studies, King’s College London) Professor Dr Friedbert Pflüger Executive Director, EUCERS Dr Frank Umbach Research Director, EUCERS Dr Adnan Vatansever Associate Director, EUCERS Carola Gegenbauer Operations Coordinator

Senior Research Associates Professor Nick Butler (King’s College London) Dr Tomas Maltby (King’s College London) Dr Petra Dolata (University of Calgary) Androulla Kaminara (European Commission)

Research Associates Jan-Justus Andreas Flavio Lira Alexandra-Maria Bocse Philipp Nießen Jose A. Bolanos Philipp Offenberg Kalina Damianova Marina Petroleka Arash Duero Dr Slawomir Raszewski Moses Ekpolomo Aura Sabadus Thomas Froehlich Dr Chunping Sue Xie Maria Kottari Dr Kaho Yu Dr Maximilian Kuhn Shwan Zulal

About the Working Papers Series EUCERS ‘Reflections’ Working Papers Series (WPS) focuses on promoting an understanding of how use of energy and natural resources affects international relations. The Series seeks to contribute to questions including but not limited to economic competition over energy resources, raw materials and water through multidisciplinary approaches which are academically-rigorous and policy-oriented. The WPS intends to stimulate debate and exchange of research ideas including those in an early stage of development. The WPS intend to provide a space for scholars and practitioners to present their work to a broad readership and connect with established expert community working on issues related to energy and resource security.

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 3 Foreword

The third volume of the EUCERS Working Paper Series ‘Reflections’ takes on board a selection of key developments in the energy and resource security domain that are closely linked to Europe.

Ole Gunnar Austvik, a professor at Lillehammer University College and Gülmira Rzayeva, a senior research fellow at the Center for Strategic Studies under the President of the Republic of Azerbaijan, outline the role of Turkey in the geopolitics of natural gas. Austvik and Rzayeva point out to a number of factors, including commercial, infrastructural and, political factors, which increasingly elevate Ankara’s regional energy role as both key transit country for current and future projects and, at the same time a major natural gas demand centre in its own right.

Recent oil and gas discoveries in Eastern Mediterranean have placed the region in the spotlight of international energy diplomacy. Lebanon-based Mona Sukkarieh, a political risk consultant at Middle East Strategic Perspectives, critically evaluates these developments pointing out the positive role of outside actors in setting the ground for regional cooperation. Sukkarieh urges a well-defined and result-oriented policy by the regional actors that would allow for establishing a set of shared interests and creating new dynamics in the ‘EastMed’ region.

Drawing on mining in developing countries, Dr Edvard Glücksman explores emerging trends within lending institutions and risk management frameworks explaining how these affect the work of international practitioners. With the emphasis on business ethics, Glücksman explains the potential these trends have in promoting international cooperation in the quest for natural resources.

Developments in the Black Sea Region are discussed by Gökçe Mete, a researcher at Dundee University, who provides a detailed legal analysis of the Turkish Stream (TurkStream) natural gas pipeline project. Set to connect Russia with Turkey with a potential of changing geopolitics of natural gas in Europe, Mete emphasizes the demand projections and political concerns are ultimately the key determinants of the future of this pipeline project.

I would like to thank Ms Rose Armitage for her excellent editorial assistance on this volume. The responsibility of views and opinions expressed in the papers remains with their authors.

Dr Slawomir Raszewski Editor of EUCERS ‘Reflections’ Working Paper Series

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 4

Contents

Turkey and the Geopolitics of Natural Gas By Ole Gunnar Austvik and Gülmira Rzayeva………………………………….…………………6

The Fragile Dynamics of Establishing a New State of Affairs in the Eastern Mediterranean By Mona Sukkarieh ……………………………………………………………..………………..…….…18

For Responsible Investment and Successful Corporate Social Responsibility, Interdisciplinary Approaches Will Prevail By Edvard Glücksman ……………………………………….………………………………..………….25

TurkStream Pipeline Project: An Analysis of Legal, Financial and Technical Aspects By Gökçe Mete …………………………………………….………………………………………………….35

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 5

Turkey and the Geopolitics of Natural Gas Ole Gunnar Austvik and Gülmira Rzayeva

Abstract

This paper outlines Turkey as an increasingly more important natural gas consuming country, while being strategically located as a transit country between major consuming areas in the EU and suppliers in the Middle East, Central Asia and Russia. Turkey’s ability to import additional volumes of gas to meet growing demand and renew contracts after they expire 2020s is fraught with daily send out capacity constraints of the state-owned Boru Hatları İle Petrol Taşıma A. Ş. (BOTAŞ), BOTAŞ system entry points and legal limitations in its Natural Gas Market Law. The long- term contracts with all its current pipeline gas suppliers – Russia, Azerbaijan and Iran – expire in the 2020s. Contract renewals could be beneficial for all parties, but price uncertainty and concerns about the ongoing Turkish market liberalisation, new gas suppliers, liquefied natural gas and political developments make the import picture more viable. As a transit country Turkey may transport additional volumes of natural gas from Iran and other Middle East countries (especially Iraq) from the next wave of production in Azerbaijan, or from new gas production in the Eastern Mediterranean (Israel/Cyprus) to Europe via the Trans-Anatolian gas pipeline operational from 2018. Commercial, financial, infrastructural and politics constrain this potential. Turkey is most likely to have an increased role as an east-west transit country if its domestic market continues to develop and grow, and when legal and infrastructural constraints are solved.

Introduction physical hub between producers in the Middle East, Central Asia and With a rapidly growing economy and a Mediterranean on the one side, and population of 80 million people, the European Union (EU) on the other. Turkey has been one of the fastest Turkey’s priority to secure energy for growing energy consumers in the its own market coincides with the aim world. It must import some three of becoming an international physical quarters of its total energy needs and hub and transit corridor for natural almost all of its oil and gas. Turkey has gas, and determines its geopolitical some domestic coal and hydro role in the natural gas market. resources for electricity production. Investments in SGC capacity are Around two-thirds of these resources dependent on domestic Turkish are located in the Eastern part, while demand. The difficult domestic most demand is in the more populated political situation creates uncertainty Western part of the country.1 For the about how decisions will be made for future, there may be significant shale energy demand and energy transit. The oil and gas reserves under the Aegean great political risks it faces in its Sea, the Black Sea and in the Dadas neighbourhood may also prevent it shale in the southeast of Turkey in from launching new pipeline projects Diyarbakir Province.2 Located and exploiting supply options. strategically between two continents, This paper will identify the drivers of Turkey is also an important oil and gas Turkish demand growth from a long- transit destination, decisive to its own term perspective. Second, the import dependence and for regional expiration of the long-term contracts energy security. Currently, Azerbaijani (LTCs) with Azerbaijan, Iran and and Kurdish oil is transported from the Russia that expire in the 2020s and east Turkey to Ceyhan by the their possible renewal is reviewed. Mediterranean Sea. In 2018, natural Third, domestic market liberalisation gas will be transmitted from efforts and impacts on future gas Azerbaijan to the Greek border demand and transit growth are through the 3,500 km East-West outlined. Fourth, the possibilities for natural gas pipeline project, of which Turkey to purchase gas from new 2,000 km is on Turkish territory, sources such as Iraq, Israel/Cyprus referred to as the Southern Gas and Turkmenistan liquefied natural Corridor (SGC). The SGC could make gas (LNG), or through pipelines such Turkey a significant international and as the TurkStream from Russia, are regional gas transit country and discussed. Last, we assess Turkey’s potential as a future consumer and transit hub for natural gas. 1 Turkish Ministry of Foreign Affairs, Turkey’s Energy Profile and Strategy, Ankara: Ministry Turkey’s Natural Gas Demand of Foreign Affairs, 2016 2 Energy Information Agency, Turkey. The most important fuel in Turkey’s Country Analysis. Washington DC: US energy mix is natural gas. Its share of Department of Energy, 2015

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 7 total energy demand is around 35 per through Georgian territory to Turkey, cent. Natural gas is also one of the in the form of delivered gas. Apart most important strategic industrial from the contracted volume of 0.3 segments due to its impact on bcm/year, the gas delivered to Georgia economic development, growth and depends on the gas volume imports. The energy sector and the transported through the SCP for energy intensive industries remain Turkey.4 under government control and/or regulation. According to estimates Figure 1: Turkey’s gas import outlook, from state-owned BOTAŞ demand for 20155 natural gas is projected to increase on average by 2.3 per cent/year from 2014 till 2030, implying that demand will grow from some 48 billion cubic meters (bcm) in 2015 to 70 bcm by 2030, down from the 80 bcm BOTAŞ estimated in 2012.3 This is driven mainly by industrial consumption, but also by domestic and commercial sectors, and gas-fired electricity generation. In 2012, BOTAŞ itself predicted that the share of gas in the electricity sector would reach 45 The Turkish Government intends to bcm/year by 2030. reduce the share of gas in the Currently, Turkey imports gas from electricity generation sector, replacing Azerbaijan, Russia and Iran by it with domestically produced lignite pipeline, and LNG from the world coal, renewable energy and nuclear market (Figure 1). The Baku-Tbilisi- energy. This policy has been driven by Erzurum Natural Gas Pipeline (690 high oil prices and expensive contracts km) became operational in 2007 for gas imported from Russia and Iran following an intergovernmental persisting from 2008 to mid-2014.6 A agreement between Turkey and Azerbaijan, and between BOTAŞ and the State Oil Company of Azerbaijan 4 (SOCAR) to transport 6.6 bcm of Shah Gülmira Rzayeva, The Outlook for Azerbaijani Gas Supplies to Europe, Oxford Deniz Phase-I (SD1) gas to Turkey. The Institute for Energy Studies Paper NG 97, Shah Deniz consortium pays Georgia June 2015, transit fees for transportation of gas https://www.oxfordenergy.org/wpcms/wp- content/uploads/2015/06/NG-97.pdf 5 Source: Okan Yardımcı, Energy Expert, Energy Market Regulatory Authority of Turkey 3 Gülmira Rzayeva, Natural Gas in the Turkish 6 All Turkish long-term contracts are linked to Domestic Market, Oxford Institute for Energy end-user oil product prices with a lag of 6 to 9 Studies Paper NG 82, February 2014, months. For an overview of how natural gas https://www.oxfordenergy.org/wpcms/wp- prices have been set in European LTC see: Ole content/uploads/2014/02/NG-82.pdf Gunnar Austvik, Gas pricing in a liberalized

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 8 decline in consumption of gas in the observed in the industrial sector, with electricity sector is encouraged by the consumption reaching 13.4 bcm in expiration of BOTAŞ contracts to 2015. Taken together, gas demand in supply gas-fired power stations Turkey to will continue to grow over between 2018 and 2020, which are the next two decades modestly but most likely to be replaced by private steadily. companies generating electricity from Demand projections have led to coal and renewable sources. The share concerns in the Turkish Government of natural gas in power generation on how to find 20 bcm/year of declined from 48 per cent in 2014 to additional gas volumes over the next 39.8 per cent in 2015. However, the two decades, from current or new current gas price in Turkey is suppliers. Ankara’s main strategy is to averaging around US$150- import gas from multiple sources to 160/thousand cubic meter7 which is reduce dependency on any one around $5.1/MMBtu, making natural supplier. Turkey’s long-term sales and gas preferable to petroleum products purchase contracts with the three and low quality locally mined coal (low existing land based gas suppliers, like calorific value) in all non- Azerbaijan through the Baku-Tbilisi- transportation energy uses8. The low Erzurum line, Russia through the Blue prices give less incentive to reduce the Stream and Trans-Balkan lines and share of gas in the electricity sector. Iran through the Tabriz-Dogubayazit Although gas for electricity is route, will expire in the 2020s. This declining, residential gas demand is affects some 40 bcm/year, or 80 per growing. The number of households cent of current gas demand.9 connected to natural gas grids is close Extension of these contracts depends to 13 million, which means that both on commercial and political approximately 40 million people have issues, as Turkey has either political or such access. Based on expansion and pricing controversies with both Russia growth in the residential and service and Iran. Relations with Russia have sectors, each year 1 million new users been strained following the downing of hook up to natural gas in Turkish a Russian jet in the spring of 2016, but cities. A similar growth rate was seem to be recovering after the meeting of Presidents Putin and Erdoğan in St. Petersburg on August 9, European market: Will the rent be taxed away? 2016. Domestic infrastructure is not Energy Policy Vol 25, No. 12, pp. 997-1012, 1997, in particular pages 1001-1003. sufficiently developed to handle the 7 This is the average price of piped gas only, average 1.5 bcm/year demand growth which includes Russian, Azerbaijani and Iranian gas (and excluding LNG). 8 To give a frame of reference, the current (as of November 2016) gas price in JKM (Japan 9 The rest comes to the Marmara Ereğlisi and Korea Market) hub is around $6.2/MMBtu, in Aliaga LNG terminals in the Western part of HH (Henry Hub) of the U.S. is around the country, which receives gas from the $2.4/MMBtu and NBP (National Balancing international LNG market, mostly from Point (UK)) forward price is around $4.7 Nigeria and Algeria as well as direct imports by MMBtu (Source: www.platts.com) private companies from Gazprom

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 9 anticipated over the next few years. reimburses BOTAŞ through Import of LNG could mitigate the subsidies.10 problem for a while, but the limited capacity of regasification terminals, The Extension of Long Term and the BOTAŞ storage and Contracts transmission system, especially during peak winter seasons, are significant Turkish contracts that expire in the constraints. 2020s are: The Turkish Government is keen to 1) 6 bcm/year of gas imported from increase the LNG regasification Azerbaijan's SD1 expiring in April 2021 capacity of the Egegas and Marmara (concluded in March 2001, became Ereğlisi terminals (current total operational in 2007); regasification capacity of both 2) private contracts with Gazprom to terminals is 12.2 bcm/year) and is import 4 bcm/year through the negotiating with Qatar for LNG Western pipeline, expiring in 2021; terminal expansion investments. It is 3) a LTC with Algeria to import 4.4 also considering using floating storage bcm/year of LNG ending in 2021; and regasification units, which would 4) a contract between BOTAŞ and be the fastest capacity increase option. Gazprom to import 16 bcm/year Floating terminals could create through the Blue Stream pipeline that mobility and deliver LNG in a flexible expires in 2025; and; manner. However, increasing Turkey’s 5) a LTC between BOTAŞ and Iran to LNG regasification capacity is not a import 9.6 bcm/year that expires in practical solution to the diversification 2026. of supply sources and increase of In total, these contracts represent import volumes. The transfer capacity almost 40 bcm/year of gas supply that of BOTAŞ is the main impediment to will expire by 2026 (Table 1, Figure increasing gas volume imports to the 1).11 country. Theoretically, each LNG terminal can feed around 20 million 10 Gülmira Rzayeva, Natural Gas in the Turkish cubic meter (mcm)/day into the Domestic Market, 2014 system. The LNG terminals have been 11 Capacity in the BOTAŞ gas transmission shown to be working at near 100 per system is around 197 mcm/day (including all cent capacity between 1 November pipelines, LNG terminals and storage), yet the 2015 and February. Another problem peak daily demand on the grid was around 240 mcm/day in 2015, and in winter 2016/2017 is with LNG is BOTAŞ and government likely to be around 250 mcm/day. The major pricing policy. Only BOTAŞ and problem for BOTAŞ is the limited capacity of Egegas are importing LNG due to the all its import entry points. Turkey imports pricing strategy of BOTAŞ, which sells around 90 mcm/day from the north-west via the Blue Stream and Western lines. If gas gas to the domestic market at heavily northwest flows stops, partly or entirely, this subsidised prices. BOTAŞ has to amount cannot be replaced with another subsidise domestic gas prices, option on the south or east entry point. This is especially from Iran (whose prices are anticipated to be solved with the completion of the highest), and the Government TANAP in 2018. This scalable pipeline will potentially, transport 31 bcm/year to the

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 10 Table 1: Natural Gas Purchase Contracts cancellation of South Stream, some ideas have been put forward to build a Turkish Stream directly to the Istanbul area (see Map 1). Russian gas imports by private companies via the Western Line constitutes 22 per cent of the total market, which partly resulted from the liberalisation of the natural gas market. However, the extension of 4 bcm/year of private Turkish

Source: BOTAŞ12 companies with Gazprom is fraught with pricing difficulties. Private There is no doubt that Turkey and its companies must buy this gas from gas suppliers are all interested in the Gazprom for a lower price than extension of the sales and purchase BOTAŞ, which benefits from agreements after their expiry dates. subsidisation of gas prices to Turkey wants to provide a secure households, industrial and electricity supply of natural gas given a possible generation. Private companies do not supply squeeze that could occur in five get this subsidy and must therefore sell years when 15 bcm/year of gas in the domestic market at a loss, if the contracts will expire. Turkey’s supply imported gas price is not lower than sources of contracted natural gas are the BOTAŞ imported price. Gazprom is not sufficient and the country has to the only company that sells gas to meet any, even small, demand growth others than BOTAŞ at a lower price. and seasonal fluctuations with the help Gas export companies may want to sell of spot LNG. these volumes to BOTAŞ for a better price. As a response, Gazprom could In light of these realities, Turkey decline to renew the existing contract cannot afford to lose any imported and demand the price difference volumes of Russian gas, whatever the between BOTAŞ and private political situation seems to dictate. companies. However, given that Since 2011, private companies in Gazprom has a direct or indirect Turkey have directly imported 10 interest in the shares of the private BCM/year from Gazprom through the companies, it may be in the Russian Western Line pipeline. Piped gas monopoly's interest to continue this otherwise comes across the Black Sea practice. through Blue Stream from For Russia and Gazprom, Turkey is the Novorossiysk to Samsun. After the second biggest market after Germany, with a yearly export of 27 bcm, which

represents a 55 per cent share of the

Turkish market, with two exit points at Turkish market. In the current low Eskisehir and on the Turkey-Greece border price environment, Gazprom faces 12 BOTAŞ, Gas Supply Contracts, BOTAŞ enormous financial losses. Moreover, Official Website, 2016, it has lost one of its biggest markets, http://www.BOTAŞ.gov.tr/

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 11 Ukraine, to which it exported only 4 6 bcm/year to the Turkish domestic bcm in 2016, in comparison with market beginning in 2018. Given that around 15 bcm in 2014.13 Gazprom’s the SD1 field started producing in late sales in the Russian market have 2006 and reached a plateau in 2010, reduced by 83 bcm/year between 2011 the field’s geological tail-off period and 2015. This is because independent should begin in 2025-2027. During the suppliers in Russia have started to tail-off period, production levels may supply base demand leaving Gazprom decrease to around 2 bcm/year or to meet the seasonal peak demand in more, depending well productivity. the cold months, which is fraught with There may not be enough gas to renew additional expenses for Gazprom.14 the SD1 contract for a longer term. The Turkey, meanwhile, has no binding 15-year sales and purchase contract agreements for alternative short- and signed between the SD consortium and mid-term sources of supply to replace BOTAŞ to import 6 bcm/year of SD Russian gas, with the exception of a 15- Phase 2 gas could simply replace the year contract to import 6 bcm/year of SD1 6.6 bcm/year, rather than being gas from SD2 through Trans-Anatolian an additional volume. Another gas pipeline (TANAP). It is, however, scenario is that the remaining volume most likely that this volume will only from SD1 could be added on top of the replace the 6.6 bcm/year of gas from contracted 6 BCM/year of Shah Deniz Phase 1 of the Shah Deniz field. In light Phase II (SD2) gas. Realization of this of these realities, both Russia and scenario will strongly depend on Turkey will be keen to renew contracts. whether both seller and buyer would Azerbaijan is Turkey’s only gas be interested financially and legally in supplier that has not been subject to a the exchange of SD1 volumes under the serious price conflict with BOTAŞ or SD2 contract. other political or geopolitical tensions. The Iranian contract expires in 2026. Given the cultural, ethnic and historic Iran is the owner of the world’s largest ties between the two nations, they are proven gas reserves, holding 37 tcm of cooperating to realise the US$40 gas, but historically the country has billion SGC project. The most not been able to fully benefit from its important segment of the value chain, huge potential and become a major the US$9.5 billion TANAP passing player in the global gas trade, through Turkish territory, will deliver primarily because of U.S. and other international sanctions and an

unfavorable legal and contractual 13 Gazprom, Ежеквартальный Отчет investment regime within Iran. In [Quarterly Report], May 2016, addition, its rapidly growing domestic http://www.gazprom.ru/f/posts/36/607118/g demand, which has surged because of, azprom-emitent-report-1q-2016.pdf among other factors, government 14 James Henderson and Tatiana Mitrova, The Political and Commercial Dynamics of Russia’s subsidies, is important. Turkey is Gas Export Strategy, Oxford Institute for currently the only Iranian export Energy Studies Paper NG102, 2015, destination, with a contract for 9.8 https://www.oxfordenergy.org/wpcms/wp- bcm/year. The price for Iranian gas to content/uploads/2015/09/NG-102.pdf

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 12 Turkey is the highest that BOTAŞ pays for pipeline gas, much higher than Potential gas suppliers to average European gas price. Iran Turkey would not easily be able to develop an alternative outlet for its gas, and has TANAP will play a crucial role for already invested heavily in pipelines. It Turkey both in covering its own currently has four operating contracts demand and in becoming a transit with neighbouring countries, four hub.17 The capacity of TANAP will be concluded but not yet operational, and 31 bcm/year, which can be extended in four under negotiation. three stages. Azerbaijan may have Turkey does not have any choice other unallocated gas above SD1 and SD2 than to renew its sales and purchase volumes by the 2020s and 2030s, and contract with Iran upon expiry. Gas may potentially produce an additional and other relations between the two 15 bcm/year from just three fields – countries have always been Absheron, Umid/Babek, and Azeri- complicated and encountered many Chirag-Guneshli deep layer gas18, plus problems. Delivery shortfalls during a possible extra 15 bcm/year if Shah the peak seasonal demand in Iran has Deniz Phase III (SD3) is implemented. been one issue, but also BOTAŞ's In total, the Absheron field operator inability to take all contracted volumes plans to start production in 2019 and due to transmission system capacity reach a plateau level of 5 bcm/year. constraints in the eastern part of the There are three potential markets for country and temporary reductions in this gas: the domestic Azerbaijani, the demand during the low demand Turkish and the European market. A seasons is important. Turkey has main issue will be whether the SCP will sought a 30 per cent price reduction, a increase its capacity, as currently all is removal of the ‘take or pay’ clause in booked for SD1 and SD2, and whether contracts signed in 1996, and there will be a favorable pricing operational in 2001. It has taken the environment and marketing case to arbitration twice. In both cases, arrangement. Future potential supplies Turkey won, receiving US$800 to the SGC also include some countries million15 and US$1 billion16 in in the Middle East, Central Asia and compensation respectively, because of the Eastern Mediterranean. recovering 13-15.8 price reductions. First, Iran with the biggest gas reserves in the world could become a substantial global gas exporter now 15 ‘Turkey wins gas price row against Iran in court’, Hürriyet Daily News, 2 February 2016, http://www.hurriyetdailynews.com/turkey-wins- 17 Bulgargaz has already signed a gas purchase gas-price-row-against-iran-in- contract with the Shah Deniz consortium of 1 court.aspx?pageID=238&nID=94643&NewsCatID= bcm/year from 2020. Preparations for a 348 Greece–Bulgaria Interconnector (IGB) are 16 Begüm Gürsoy, ‘Turkey prevails in Iran made, supported by the EU under the arbitration’, Hürriyet, 27 February 2009, Connecting Europe Facility (CEF) fund. http://www.hurriyet.com.tr/turkey-prevails-in- 18 Gülmira Rzayeva, The Outlook for iran-arbitration-11094366 Azerbaijani Gas Supplies to Europe, 2015

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 13 that sanctions have been lifted. The and become an LNG exporter, rather main priority of the Rouhani than investing in very costly pipelines Government has been to develop the to Turkey, or elsewhere in the near remaining 14 phases of the giant South future. Pars offshore field in the Persian Gulf, Iraq’s Kurdistan region (KRG) appears which is expected to add to be a stronger option for new supply approximately 172 bcm/year of natural to Turkey. Development of the Miran gas to the current 210 bcm/year. The and Bina Bawi fields with 350-400 timeframe of the 12 phases and other bcm of gas reserves by Turkish-British onshore fields will strongly depend on company Genel Energy is ongoing with Iran's ability to attract multibillion an estimated cost of US$2.9 billion.20 dollars of foreign investment in the The financing of a US$2.5 billion, 250 upstream and midstream industry, as km pipeline remains unresolved, well as to create a favourable legal and although the tender process for contractual framework. Despite the construction of the stretch on Turkish low-cost environment in Iran, it may territory has already begun, and the take several years before the country is construction can be accomplished able to deliver. Most produced gas will within a relatively short timeframe. be consumed domestically due to Turkish officials have repeatedly rampant demand growth, leaving little referred to the fact that if the transport excess for export. Iran will have to solution materialises, Iraqi gas would choose whether to increase injection be the cheapest option for imports to into aging oilfields to produce more oil Turkey. However, the main obstacle and petrochemical products and thus lies in the security issues in Iraq. restore its market share, mainly in Companies need increased financing to Europe and elsewhere; or export either fund security in Northern Iraq, and the power generated from gas or more gas. influx of refugees to KRG combined However, the maximum capacity in the with terrorist attacks in the country Iran Gas Trunk line I that exports gas has led companies to holding back to Turkey is 11-16 bcm/year depending from investment in the upstream and on compressor stations, of which mid-stream business. currently 11 bcm/year is used, which Israel and Cyprus may soon be new gas leaves little space for additional producers in the Eastern volumes.19 Iran has signed Memoranda Mediterranean region. The of Understanding and sales and reconciliation of Turkey with Israel purchase agreements on gas exports and ongoing negotiations on the with different neighbouring countries. reunification of Cyprus create For Iranian gas exports in general, the opportunities for Turkey to import gas country will more likely copy Qatar

20 Genel Energy plc, Audited results for the 19 Gülmira Rzayeva, Post-sanction Iranian year ended 31 December 2015, Genel Energy, natural gas production and export potential: 3 March 2016. challenges and opportunities, Cedigaz http://www.genelenergy.com/media/1909/ge (available for subscribers), 2016 nel-energy-fy-2015-results-03-03-16-final.pdf

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 14 from the Eastern Mediterranean region. Potentially, 10-20 bcm/year of Conclusions gas can be exported from Israel and Cyprus to Turkey through subsea Turkey is an increasingly important pipelines once reunification is natural gas and energy consuming resolved. Having access to a large and country, and is strategically located as growing market with appropriate a transit country for oil and natural gas prices can make the development of for major consuming areas in the EU the Israeli Leviathan field and suppliers in the Middle East, commercially viable and justify the Central Asia and Russia. building of a subsea pipeline to Turkey Around Turkey, there are large tapped through the exclusive economic zone and untapped gas reserves that can of Cyprus. Israel can benefit not only ensure the country’s future energy economically, but can also gain needs and supply security. politically from enhanced trade Infrastructural problems and capacity agreements with Turkey. constraints in the BOTAŞ system, and Rapprochement between Israel and legal limitations in its natural gas Turkey could restrain Iranian market law, may create regional gas influence in the region in which both shortages, especially at times of peak sides are interested. Such development demand. Turkey’s ability to import would put Turkey at the centre of the additional volumes of gas is fraught Easter Mediterranean regional with technical and legal constraints. geopolitical and energy network. For Turkey to meet the forecasted Russia, acknowledging Turkey as its natural gas demand growth over the second largest market, would prefer next two decades of almost 3 per cent, that Israeli gas not only penetrate the or 1.5 bcm/year on average, two Turkish market, but also, through primary goals need to be achieved. Turkey, the European market. It seems First, to solve the internal political, that this fact plays no minor role in the legal and technical impediments; and repeated attempts of Gazprom to enter second to make the necessary Israel’s gas market and upstream cooperation with potential partners in projects although Gazprom’s attempts neighbouring countries. The latter to bid for a 30 per cent share in the includes actively promoting a solution Leviathan field and to sign a deal to of the Cyprus problem; rapprochement export LNG from Tamar have failed to with Israel; contributing to security materialise.21 efforts in Iraqi KRG; and solving its gas price disagreements with Iran. Turkey’s role in the geopolitics of 21 Charles Ellinas et al. Hydrocarbon natural gas is determined by its Developments in the Eastern Mediterranean: domestic situation, the political The Case for Pragmatism, Washington DC: Atlantic Council Global Energy Center and surroundings develop and how Turkey Dinu Patriciu Eurasia Center, 2016. relates to these, and the development http://www.atlanticcouncil.org/images/public of transit routes for gas. The Turkish ations/Hydrocarbon_Developments_in_the_ Government has set a number of Eastern_Mediterranean_web_0801.pdf

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 15 strategic objectives, including TurkStream can mitigate this problem liberalising and creating a competitive in the Western part of the country, as domestic market and ensuring security will also TANAP when it becomes of gas supply. It also wants to operational in 2018. If TurkStream minimise and gradually nullify the becomes the solution, both Turkey and state budget deficit and BOTAŞ’s the EU will suffer from stronger losses, and shift risk and investment dependency on Russian gas. Thus, responsibilities from the state to Turkey’s foreign relations to and private companies. Finally, it wants to balance between the EU and the U.S. transform Turkey into an international on the one side, and Russia on the natural gas trading hub, playing the other, in addition to its relations to role of a bridge for hydrocarbon flows countries in the Middle East, Central from the East to the West. Asia, and Mediterranean, can become Turkey’s long-term contracts with all important for the scale and scope of its its current pipeline gas suppliers - roles as natural gas consumer and Russia, Azerbaijan and Iran - expire in transit country. the 2020s. Contract renewals are beneficial for all parties, but price uncertainty and concerns with the About the authors ongoing market liberalisation, new gas suppliers, LNG and political Ole Gunnar Austvik is a senior developments make the import picture researcher focusing on international more open. The natural gas market law political economy and European restricts this process, since BOTAŞ integration. He is professor at cannot sign new contracts or renew Lillehammer University College (HiL). expired agreements. Furthermore, Previous employment includes BI private companies cannot buy gas from Norwegian Business School and countries from which BOTAŞ is Statistics Norway. Austvik holds a currently importing. To speed up doctorate in political science from processes, this legal impediment needs University of Oslo, a Master in Public to be lifted, or exemptions should be Adminstration (MPA) from John F. made. Another obstacle for private Kennedy School of Government, companies is subsidised gas prices in Harvard University, and a master in Turkey, as they have to sell gas to economics (cand.oecon) from households below the state-subsidised University of Oslo. price. In addition, the capacity of BOTAŞ’s gas transmission system is Gülmira Rzayeva is a senior limited on all its six entry points. If, for research fellow at the Center for instance, any supply interruption Strategic Studies under the President occurs from the northwest route from of Azerbaijan, research associate at the Russia, it will not be possible to Oxford Institute for Energy Studies substitute this gas from other import and Advisor at World Energy Council - directions, for instance, from the east Global Gas Center. (Azerbaijan or Iran). Russian

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 16

The Fragile Dynamics of Establishing a New State of Affairs in the Eastern Mediterranean

Mona Sukkarieh

Abstract

The discovery of substantial gas reserves in the Eastern Mediterranean is infusing new dynamics in a region that has for a long time been defined by conflicts, uneven socio-economic development and limited intra-regional cooperation. The hype that surrounds these discoveries in the countries of the region contrasts with the more measured response beyond the Eastern Mediterranean. The difference in perspective is noteworthy because it explains how various actors view the added value behind these resources, and how this, in turn, defines their policies. For many, the newly discovered reserves propel the region into the league of large oil and gas producers. This perception has triggered a flurry of diplomatic activity and grandiose ambitions. Beyond the Eastern Mediterranean, the added value of these resources is perceived as having the ability to foster unprecedented political cooperation and economic integration.

Introduction with more measured responses beyond the Eastern Mediterranean. The The discovery of substantial gas difference in perspective is noteworthy reserves in the Eastern Mediterranean because it explains how various actors is infusing new dynamics into a region view the added-value behind these that has long been defined by conflicts, resources, and how this, in turn, uneven socio-economic development defines their policies: for many in the and limited intra-regional cooperation. region, the newly discovered reserves Located north of the prolific Nile Delta propel the region into the league of Cone, the Levant Basin – a mostly large oil and gas producers. For those offshore area covering approximately outside, because of their modest size 83,000 km2 in the Eastern the added-value of these resources lies Mediterranean – is estimated to hold a elsewhere: for the United States (US) mean of 1.7 billion barrels of in particular, the successful recoverable oil and a mean of 122 exploitation of these natural gas trillion cubic feet (tcf) of recoverable resources “will require exactly the gas1. This is significant for the small political cooperation and economic and resource-poor countries of the integration that the United States has region, but is not a global game- long supported in the region. This changer. This is compounded by the remains a top foreign policy priority fact that these resources are spread for the United States”.2 over various countries and How do these differences in perception jurisdictions, their extraction is costly translate on the ground? and their exploitation rendered even more difficult by the lack of relevant At the regional level: Grandiose infrastructure. ambitions and an unprecedented The hype that surrounds the discovery of hydrocarbon resources in the region is how one would expect resource-poor 2 Amos J. Hochstein, Special Envoy for countries to welcome the discovery of International Energy Affairs, Bureau of Energy hydrocarbon wealth, and contrasts Resources, U.S. Department of State, Joint Subcommittee hearing by the Committee on Foreign Affairs’ Subcommittee On the Middle East and North Africa and the Committee on 1 Christopher J. Schenk et al., ‘Assessment of Science, Space and Technology’s Undiscovered Oil and Gas Resources of the Subcommittee on Energy, Washington, 8 Levant Basin Province, Eastern September 2016, Mediterranean’, in: U.S. Geological Survey http://docs.house.gov/meetings/FA/FA13/20 Fact Sheets, No. 2010-3014, March 2010, 160908/105275/HHRG-114-FA13-Wstate- http://pubs.usgs.gov/fs/2010/3014 HochsteinA-20160908.pdf surge in diplomatic activity… project was not commercially viable4 both lacking a strategic vision due to a lack of enough gas in Aphrodite and Israel not committing The discovery of gas resources in the to send gas, which forced a refocus of Eastern Mediterranean has initiated a the Island’s energy policy. surge in diplomatic activity in the Attention then turned to the East region. Trilateral tracks have been Mediterranean pipeline, a mostly launched, at the core of each we find subsea pipeline intended to carry the same duo: Cyprus and Greece Israeli and Cypriot gas to Greece, and pursuing different – but not entirely from there to European markets. separate – tracks with Israel, Egypt, While technically feasible, the pipeline and to a lesser degree Jordan and carries an exorbitant price tag that Lebanon. The flurry of diplomatic strips it of any commercial viability at activity is unprecedented. Cypriot this point5. President Nicos Anastasiades, Greek Gas exports to and via Egypt appeared Prime Minister Alexis Tsipras and for a while to be the most viable Egyptian President Abdelfattah al-Sisi option. But the global LNG glut and held a total of four summits since falling prices would make Israeli or November 2014. The Cypriot and Cypriot gas liquefied in Egypt’s LNG Greek leaders also met with Israeli plants uncompetitive in Europe, at Prime Minister Benjamin Netanyahu least until the market rebalances and in Nicosia in January 2016 after which prices adjust. As for supplying the the three heads of State announced a Egyptian market with gas, the second tripartite summit would be discovery of Zohr in 2015, and the organised in Israel in the second half development of several other projects of 20163. That is not counting the by 2020, will reduce and probably numerous bilateral summits or eliminate the need for imports by the ministerial – and director general-level early 2020s, according to Egyptian meetings over the past few years. officials6. The short timeframe makes On the energy front, several projects have been put forward, although their viability has not always been 4 Government Spokesman Nicos confirmed. Following the discovery of Christodoulides in Spokesman: Natural gas Aphrodite, the Cypriots made the terminal a primary goal, CAN, 11 November construction of an onshore LNG plant 2014, http://www.cna.org.cy/webnews- en.aspx?a=86b03395a30847e094728faf50692 in Vasilikos that would process Cypriot ea4 and Israeli gas a priority. It took some 5 Charles Ellinas et al. Hydrocarbon time for Cypriot officials to admit the Developments in the Eastern Mediterranean: The Case for Pragmatism, Washington DC: Atlantic Council Global Energy Center and Dinu Patriciu Eurasia Center, 2016. http://www.atlanticcouncil.org/images/public 3 Cyprus – Israel - Greece Trilateral Summit ations/Hydrocarbon_Developments_in_the_ Declaration, Nicosia, 28 January 2016, Eastern_Mediterranean_web_0801.pdf http://www.mfa.gov.cy/mfa/mfa2016.nsf/All/ 6 Ehab Farouk, ‘Egypt chases own energy 225D5758514728BBC2257FA000459B4B sources as government struggle to meet

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 20 this option challenging, particularly This is the strategic edge that Ankara that two of the three gas fields in can still provide. question, Aphrodite and Leviathan, are not expected to be developed before Israel has made efforts to nurture 2020. In the rush to supply the local relations with Athens and Nicosia, but Egyptian market before the need for stopped short of a full-commitment imports dissipates, Israel’s Tamar gas that would jeopardise its relationship field, already in production, appears to with Turkey8. No Israeli gas was have an advantage, although committed to the proposed LNG plant challenges remain. in Vasilikos, rendering the project While energy is one important driver unfeasible at the time, and making the behind this flurry of diplomatic development of Aphrodite a activity, the troubled relationship each challenging endeavour. Similarly, no of these countries has had with Turkey unitisation agreement has been signed at one point or another over the past between Cyprus and Israel9, further few years, has been a decisive factor. complicating the development of For Israel in particular, the prospect of Aphrodite, a small part of which improved relations with Turkey has extends into the Israeli Exclusive limited the extent of its involvement Economic Zone. Israel’s commitment with Greece and Cyprus. Israel, which is not the only reason why Aphrodite views its gas resources as a strategic has not been developed, but it is a commodity, is hoping the resources significant contributor. give Israel a geopolitical advantage In terms of resource development in that would strengthen its position in the region, the results of increased the region7. The idea is to weaken diplomatic activity have so far been animosity towards it by creating underwhelming. The countries shared interests with its neighbours, involved have yet to translate their specifically those countries and political wishes into actual projects. societies that have a tendency to Political convergence alone is not question the legitimacy of the State of enough. Solid partnerships require Israel. For years, Turkey was the only more robust foundations, which do not Muslim-majority country maintaining solely rely on circumstantial factors, ties with Israel, breaking a near perfect Arab and Muslim boycott of Israel.

8 ‘Keeping an eye on Turkey, Israel pursues rapprochement with Cyprus’, Middle East Strategic Perspectives, 12 November 2015, demand’, Reuters, 23 October 2016, http://www.mesp.me/2015/11/12/keeping-an- http://www.reuters.com/article/us-egypt-oil- eye-on-turkey-israel-pursues-rapprochement- idUSKCN12N0M2 with-cyprus/ 7 Stuart Winer, Marissa Newman, ‘Grilled by 9 Hedy Cohen, ‘Cypriot President to visit Israel lawmakers, PM says gas deal vital for Israel’s for gas talks’, Globes, 10 November 2015, future’, Times of Israel, 8 December 2015, http://www.globes.co.il/en/article-cypriot- http://www.timesofisrael.com/knesset- president-to-visit-israel-for-gas-talks- committee-to-grill-netanyahu-over-gas-deal/ 1001080015

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 21 but on a strategic vision. Effective the U.S. put its weight behind energy cooperation requires a long- amending the ties between two of its term stabilisation of political relations, key allies in the region, Turkey and not just a partnership based on Israel; and it also played an important provisional circumstances and role in restarting negotiations between positions vis-à-vis a third state at a Greek and Turkish Cypriots to settle certain point in time. the decades-old dispute that has divided the island in two. Up until this point, the size of gas discoveries in the Levant Basin, and the size of the local markets, did not Beyond the region: Fostering grant the countries in question the political cooperation and autonomy they would have wished for economic integration to exploit and export these resources. Although not an instrument for peace, Perhaps because of their nature and by their very nature these resources modest size, the added-value of these will impose cooperation. This is resources is perceived from a different convenient if the objective of angle outside of the Eastern developing the resources is to create Mediterranean. The U.S. is a case in “physical interdependency”10. point. While intra-regional cooperation, and in particular the Promoting economic integration gradual integration of Israel in the region, has been a priority for There is considerable attention to Washington’s Middle Eastern foreign support Israel’s economic integration policy, the U.S. administration sees into the region - especially with its recent discoveries as an additional Arab and Muslim neighbours – which instrument that can be used to achieve has encountered resistance despite a this objective. number of Arab countries signing peace agreements with the Jewish Encouraging political State. The U.S.-brokered Israeli cooperation apology to Turkey in March 2013 has revived chances of energy cooperation The maritime border dispute between between the two countries. A pipeline Lebanon and Israel, which emerged in linking the two countries is being 2010, triggered a U.S. mediation considered, with the active backing of activity between both sides, first led by the U.S., although significant special coordinator for regional affairs in the Department of State’s Office of the Special Envoy for Middle East

Peace, Frederic Hof, and then by Amos 10 Barbara Plett Usher, ‘US election 2016: Hochstein, currently serving as Special America’s Great Game as energy superpower’, Envoy for International Energy Affairs BBC News, 26 October 2016, in the Department of State. In parallel, http://www.bbc.com/news/election-us-2016- 37722140

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 22 challenges persist, including the instrumental in facilitating two Cyprus Problem. contracts to supply Jordan with Israeli Due to their functional nature, gas. In February 2014, the Tamar countries do not enjoy full sovereignty partners signed a deal to provide two over their Exclusive Economic Zone Jordanian companies, Arab Potash (EEZ). Third states enjoy the and Jordan Bromine, up to 2.2 billion “freedoms of navigation and overflight cubic meters (bcm) of natural gas over and of the laying of submarine cables a period of 15 years, for a total of and pipelines and other internationally US$500 million. The deal required lawful uses of the sea related to these Amos Hochstein to hold 14 meetings freedoms”, as long as they “comply with the parties involved over a period with the laws and regulations adopted of 18 months13. It was a prelude to a by the coastal State”.11 Theoretically, much larger agreement, once again passing the pipeline through the facilitated by the Americans and Cypriot EEZ may be possible, but it is requiring several rounds of secret unlikely to go ahead against an negotiations. It was signed in outright Cypriot refusal. A September 2016 between the breakthrough in the negotiations Leviathan partners and Jordan’s between Greek and Turkish Cypriots National Electric Power Company. would be helpful. Absent that, the Under the terms of the agreement, the Cypriots may be encouraged to move consortium will provide the Jordanian forward with a comprehensive company with 45 bcm of natural gas settlement, at a faster pace than they over a period of 15 years, thus turning would have wished. Israel’s reluctance Israel into Jordan’s main gas to commit gas to the Vasilikos field supplier.14 and to sign a unitisation agreement Negotiations with Egypt are ongoing with Cyprus has contributed to the on whether to supply the local market Aphrodite gas field not being – knowing that the need for imports is exploited, and can be seen as indirect expected to dissipate in the early pressure on Nicosia. Indeed, Aphrodite 2020s – or to liquefy the gas in one of will be harder to exploit if the island the country’s two LNG plants for re- remains divided12. exports. Once again we find the U.S. The same logic of economic integration applies to Jordan. The U.S. was

13 Amiram Barkat and Koby Yeshayahou, ‘Tamar partners sign Jordan gas deal’, Globes, 11 UN General Assembly, Convention on the 19 February 2014, Law of the Sea, 10 December 1982, article 58. http://www.globes.co.il/en/article-tamar- 12 ‘The chances of a Cyprus settlement look partners-to-sign-jordan-gas-deal-today- better than ever’, The Economist, 2 November 1000918429 2016, 14 Irina Slav, ‘Major Deal Turns Israel Into http://www.economist.com/news/europe/217 Jordan’s Leading Gas Supplier’, Oil Price, 26 09503-turkeys-mercurial-president-nothing- September 2016, http://oilprice.com/Latest- ever-certain-chances-cyprus- Energy-News/World-News/Major-Deal- settlement?fsrc=scn%2Ftw%2Fte%2Fbl%2Fed Turns-Israel-Into-Jordans-Leading-Gas- %2F Supplier.html

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 23 facilitating diplomatic talks.15 Market accomplishment. It has taken intra- conditions and Egypt’s decision to regional cooperation, which was freeze gas import talks following a previously insignificant until the ruling by the International Chamber of discovery of offshore resources, to a Commerce requiring Egyptian new level. Shared interests, including companies to pay US$1.7 billion to the but not limited to hydrocarbon wealth, Israeli Electric Corporation stand in is creating new dynamics. This natural the way of a final decision16. While it wealth could provide the economic might be difficult to overcome the first, incentive needed and might indeed the second appears to be within play a role in cementing a new state of reach.17 affairs in the Eastern Mediterranean.

The above showcases the differences between regional actors and outside About the author actors in their approach to newly Mona Sukkarieh is a political risk discovered resources in the Eastern consultant working on the oil and gas Mediterranean: regional actors have sector in the Eastern Mediterranean. lacked a strategic vision but have She is co-founder of Middle East shown willingness to cooperate; whilst Strategic Perspectives (MESP), a the U.S. has established a defined Beirut-based political risk consultancy policy and attainable goals. The region focusing on strategic sectors in the has more to gain if energy issues are MENA region where she heads the addressed in a sober, pragmatic and Energy unit. result-oriented way. That said, diplomatic activity and the determination to establish regional obliging mechanisms is in itself an

15 Amiram Barkat, ‘US special envoy: Gas fields must be developed quickly’, Globes, 5 January 2015, http://www.globes.co.il/en/article-us- energy-envoy-gas-fields-must-be-developed- quickly-1000998337 16 Ari Rabinovitch, Steven Scheer, Ehab Farouk and Lin Noueihed, ‘Egypt to appeal $1.76 billion award to Israel in gas dispute, freeze gas import talks’, Reuters, 6 December 2015, http://www.reuters.com/article/us-iec-egypt- natgas-appeal-idUSKBN0TP0HL20151206 17 David Wainer, Yaacov Benmeleh, Jonathan Ferziger, ‘Israel, Egypt Said Nearing Compromise on Natural Gas Dispute’, Bloomberg, 18 May 2016, http://www.bloomberg.com/news/articles/20 16-05-18/israel-egypt-said-close-to-accord-on- natural-gas-dispute

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 24

For Responsible Investment and Successful Corporate Social Responsibility, Interdisciplinary Approaches Will Prevail Edvard Glücksman

Abstract

The demand for social accountability in industry has never been greater. In the financial sector, Corporate Social Responsibility propels corporate entities to behave responsibly and improve society. Leading financial institutions now recognise that the development projects they fund carry environmental and social risks, and can incur financial losses and reputational damage if improperly managed. This holds particularly true for large industrial projects in developing countries where domestic laws, regulations, permits and oversight may be lacking. This growing concern with reputation management - and the need to obtain a ‘social license to operate’ – has pushed project financiers to require that sponsors and operators comply with a range of internationally recognised standards of environmental and social best practice.

Introduction developing countries, this paper explores emerging trends within The demand for social accountability lending institutions’ risk management in industry has never been greater. In frameworks and how these affect the the financial sector, Corporate Social work of international practitioners. Responsibility (CSR) propels These frameworks are evolving in corporate entities to behave content, from conventional discourse responsibly and improve society. around singular environmental and Leading financial institutions now social aspects to the integration of recognise that the development comprehensive and interdisciplinary projects they fund carry areas such as ecosystem services, environmental and social risks, and climate change, gender and human can incur financial losses and rights. These broader, cross-cutting reputational damage if improperly issues are affected by a series of managed. This holds particularly true interlinked factors and cannot be for large industrial projects in addressed in isolation. Their developing countries where domestic deployment within CSR programmes laws, regulations, permits and and adaptation to the unique oversight may be lacking. This challenges of developing countries growing concern with reputation can improve society. They can management - and the need to obtain promote international relations and a ‘social license to operate’ - has facilitate cooperation between nations pushed project financiers to require that host lending institutions and that sponsors and operators comply those representing our common with a range of internationally frontier in the global quest for natural recognised standards of resources. environmental and social best practice. These include the Equator Social Responsibilities Principles, International Finance of Business Corporation’s Environmental and Social Sustainability Framework and What responsibilities to the European Bank for society may businessmen Reconstruction and Development’s [sic] reasonably be expected Environmental and Social Policy. to assume?1 These ‘soft laws’ represent a form of applied cross-border CSR. They are Howard Bowen’s book Social widely used by practitioners to guide Responsibilities of the Businessman Environmental and Social Impact (1953) is widely seen as having Assessments and stakeholder stimulated the modern era of CSR. engagement programmes that are required by project financiers as benchmarks within risk management 1 Howard R. Bowen, Social Responsibilities of frameworks. Focusing on mining in the Businessman, University of Iowa Press, 1953

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 27 Then known as social responsibilities these processes.4 As CSR initiatives (SR), early CSR theory was based on became more mainstream and civil the idea that the private sector had society groups began calling on banks obligations to pursue policies, to account for the environmental and decisions, and actions that were seen social impacts of some of the more as desirable by society. controversial projects they financed – Environmental sustainability and the the construction of dams, forestry, oil wider impact of industry on society and gas pipelines and mining – was thus assumed but not explicitly financial institutions began to stated. recognise that the projects they fund As Volkswagen, Abercrombie & Fitch carry environmental and social risks.5 or Samarco (a subsidiary of mining Realising that a failure to mitigate giant BHP Billiton) have recently against negative environmental and experienced, CSR has never been social risks could incur financial more vital for companies worldwide. losses and reputational damage, Their reputation hinges on the spread leading commercial and investment of positive news and information. banks developed initiatives to help With the penetration of the Internet address their environmental and and social media across the globe, social responsibilities. misconduct can quickly become Some of the most widely used of these apparent.2 A few broad categories of initiatives are sustainability CSR that many of today’s businesses frameworks created by the private are practicing include environmental sector. These include the Equator efforts, philanthropy, ethical labour Principles (EPs) for banks, the practices and volunteering.3 International Finance Corporation’s As they emerged during the 1990s, (IFC) Environmental and Social CSR initiatives became a cornerstone Sustainability Framework and the of social accountability within the European Bank for Reconstruction financial sector. In particular, lending and Development’s (EBRD) and investment frameworks Environmental and Social Policy. developed towards increased These ‘best practice’ benchmarks aim transparency, integrating and to help companies actively address reporting environmental, social and governance (ESG) criteria within

4 Niamh O’Sullivan, ‘The Global Reporting Initiative Guidelines and External Assurance of Investment Bank Sustainability Reports: 2 Karen Wendt, ‘Editor’s Contribution’, in: Effective Tools for Financial Sector Social Karen Wendt (ed.) Responsible Investment Accountability?’ in Karen Wendt (ed.), Banking, CSR, Sustainability, Ethics & Responsible Investment Banking, 2015 Governance, Heidelberg: Springer, 2015 5 O’Sullivan and O’Dwyer, ‘Stakeholder 3 Sammi Caramela, ‘What is Corporate Social perspectives on a financial sector legitimation Responsibility?’, Business News Daily, 27 process: The case of NGOs and the Equator June 2017, Principles, Accounting, Auditing and http://www.businessnewsdaily.com/4679- Accountability Journal Vol 22, No. 4, 2009, corporate-social-responsibility.html pp. 553-587

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 28 their environmental and social subsequently brought together multi- responsibilities in an era of growing stakeholder working groups to public scrutiny on where and how develop a set of indicators for money is invested. They are voluntary financial sector sustainability and intended for application in reporting. These initiatives carried emerging economies where domestic out between 2003-05 comprised laws, regulations, permits and representatives of the financial sector, oversight may be lacking. civil society, ratings agencies and This article focuses on the ‘soft laws’ – academics that produced a draft set of recommendations and best practice environmental indicators to assist methodology – that guide reporting on the indirect impacts of sustainability initiatives for the banking, asset management and private sector in developing countries insurance activities. The result of and emerging economies. In these actions and the initiatives they particular, it presents an overview of inspired led to the GRI Financial current trends, guiding the Services Sector Supplement (FSSS), application of these frameworks as which consisted of indicators aimed at they develop in their scope from an improving the reporting of emphasis on singular environmental environmental and social and social aspects to a more holistic performance of retail products and and integrative approach. This work services, corporate and commercial argues that, with each iteration, bankers, insurers and asset initiatives such as the IFC managers.7 Its use became obligatory Performance Standards or the on 1 January 2010. EBRD’s Environmental and Social At the same time the EPs, which were Policy increasingly represent an developed in 20038, aim to help example of truly interdisciplinary banks address their environmental applied science with global reach and and social responsibilities. EPs use large-scale financial impact. the IFC’s Safeguard Policies, which were redrafted in 2006, to become the Sustainability and the finance IFC PSs and incorporated into the sector EPs as the basis for project From the mid-1990s, some pioneering assessment. The EPs also incorporate banks started producing environmental and later sustainability reports about their direct, in-house www.globalreporting.org/resourcelibrary/FSS ecological impacts. The United S-Complete.pdf Nations Environment Programme 7 Niamh O’Sullivan, ‘The Global Reporting Finance Initiative (UNEP FI) and the Initiative Guidelines and External Assurance of Investment Bank Sustainability Reports: Global Reporting Initiative (GRI)6 Effective Tools for Financial Sector Social Accountability?’ 8 The ten founding signees were ABN AMRO, Barclays, Citigroup, Crédit Lyonnais, Crédit 6 Global Reporting Initiative, Financial Suisse, HypoVereinsbank, Rabobank, the services sector supplement, 2008, Royal Bank of Scotland, WestLb and Westpac

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 29 the World Bank Group’s The EPs are the foundation on which Environmental, Health and Safety many instruments for the (EHS) Guidelines, which provide management of non-technical risks industry-specific good practice levels for international lending. In practice, in the protection of the environment, they provide methods requiring the worker and community health and identification of environmental and safety. EPs have drastically improved social risks and impacts and a the environmental credentials of complementary assessment process, projects being financed, particularly and are applied within environmental the standard of impact studies and and social impact assessments (ESIA) action plans as well as the quality of and stakeholder engagement stakeholder engagement with affected programmes. They guide operators in populations. the development of a comprehensive Today, the EPs form the basis of many management framework through CSR systems of international financial presenting the risks and opportunities institutions. Now in their third within each aspect of a project iteration since January 2014 and throughout its lifetime, including adopted by 80 private sector lenders beyond closure. Environmental in 35 countries, covering over 70% of aspects incorporate air and water international project finance debt in quality, noise, soils and land use, emerging markets, they provide a whereas the social elements of a minimum due diligence framework venture include archaeology and for determining, assessing and cultural heritage, economics, managing environmental and social demography, health, education and risk for participating private sector infrastructure. banking institutions.9 They also Though broadly similar in content, provide a pathway for clients- each framework differs slightly in borrowers to analyse and manage the terms of application and context. The impact of their projects in accordance IFC PSs, which were one of the with the World Bank’s environmental earliest frameworks to be deployed and social standards10 across different industries and sectors worldwide, can be applied even when IFC and EBRD sustainability there is no intention to apply for frameworks project finance.11 The PSs cover human resources aspects, resource efficiency and pollution prevention, community aspects such as health and 9 Nigel Clayton, ‘The equator principles and safety, land rights and protection of social rights: Incomplete protection in a self- regulatory world, Environmental Law Review, Vol 11, No. 3, 2009, pp. 173-195 10 IFC Performance Standards: http://www.ifc.org/wps/wcm/connect/Topics 11 Victor Galaz et al. ‘Why Ecologists Should _Ext_Content/IFC_External_Corporate_Site/ Care About Financial Markets’, Trends in IFC+Sustainability/Our+Approach/Risk+Man Ecology & Evolution, Vol 30, Issue 10, 2015, agement/Performance+Standards pp. 571-580

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 30 indigenous peoples, biodiversity and themes have progressively emerged to cultural heritage. the fore of sustainability frameworks. The EBRD’s Environmental and Issue areas within these Social Policy comprises ten specific interdisciplinary areas, which include Performance Requirements (PRs) and climate change, biodiversity and works in conjunction with other bank ecosystems services, gender and policies, particularly the Public human rights, increasingly shape the Information Policy and the Project interpretation of standards and Complaint Mechanism, to provide a requirements as well as the high level of assurance, transparency, deliverables they provide guidance and accountability. Projects are for. They cannot be addressed in usually assessed 1-2 years after the isolation and require an integrated final disbursement of finance, with approach and actions, and multi- assessments made against project disciplinary expertise. objectives, the requirements of the Ecosystem services refer to the bank’s Environmental and Social benefits that people derive from Policy and relevant country and sector nature and are a prime example of a strategies.12 As with the IFC, the theme that bridges the environmental EBRD also places a strong emphasis and social components of a project’s on stakeholder engagement. It seeks impact management framework.13 outcomes that protect and benefit Ecosystem services, exemplified by society and the environment as well the provision of potable water, are as addressing the business case for well-researched by scientists and are sustainability as a contributor to widely featured in policy agendas14 business growth. but have only recently been introduced to financial institutions Emergence of cross-cutting and developers. Their complex nature themes makes it difficult for non-specialists to understand how impacts to Environmental and social issues were ecosystem services can affect the conventionally addressed as stand- bottom line of their business. By alone topics within the sustainability adopting what is called an ecosystem frameworks that guided ESIAs and services (or the broader ‘catchment- stakeholder engagement based’) approach, each component programmes. However, in response to stakeholder’s heightened awareness and a shift in the formulation of 13 Elena Amirkhanova and Raimund international and domestic policy Vogelsberger, ‘Challenges and advantages of priorities, a series of crosscutting IFC Performance Standards: ERM Experience’ in Karen Wendt (ed.) Responsible Investment Banking, 2015 14 Houses of Parliament, Biodiversity 12 Dariusz Prasek, ‘EBRD Environmental and Offsetting, Parliamentary Office of Science & Social Governance Standards and their Impact Technology POSTnote, 2011, on the Market’, in: Karen Wendt (ed.) http://www.parliament.uk/documents/post/p Responsible Investment Banking, 2015 ostpn_369-biodiversity-offsetting.pdf

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 31 and every stage within the Gender is also a key factor in development of an ESIA is assessed in stakeholder engagement strategies, light of interlinked ecological for example in areas where men and components of ecosystems, human women do not traditionally attend well-being and a consideration for all public events together. In the mining other industrial activities in the area.15 industry, gender was one of the first The intrinsic value of these aspects is interdisciplinary issues to be now well established and integrated within sustainability sustainability frameworks of financial frameworks and has also been further institutions require that negative formalised by some of the major impacts to ecological components are mining operators.17 minimised whenever possible. In With total greenhouse gas (GHG) practice, this means that developers emissions from industry having and lenders should consider a broad almost doubled over the past 40 years variety of alternatives within their and most scenarios predicting that project design to ensure sure that global demand for industrial products natural resource use or destruction is will continue to rise, climate change is avoided or minimised throughout increasingly prominent within project life.16 sustainability and risk management Gender is another aspect that cuts strategies.18 They address climate across environmental and social change both directly and indirectly dimensions of sustainability through environmental and social frameworks. Working with gender assessments, commitments and issues is complex because they are reporting. Within the 2012 iteration characterised by their context-specific of the IFC PSs, apart from directly nature based on local legislation, assessing GHG emissions of a project, beliefs and values. Apart from the an emphasis is placed on maximising different risks and impacts of a resource efficiency and understanding project on gender relations, good community health and safety in light practice frameworks also examine the of climate change. Likewise, in the differential opportunities that a EPs (iteration III), an annex was project may offer to men and women. included to provide guidance on climate change and reporting on GHG

15 Sonal Pandya Dalal, Curan Bonham and 17 Rio Tinto: ‘Why Gender Matters’, 2010, Augustin Silvani, ‘An Investigation on http://www.riotinto.com/documents/Reports Ecosystem Services, the Role of Investment Publications/Rio_Tinto_gender_guide.pdf Banks, and Investment Products to Foster 18 CISL, Climate Change: Implications for Conservation’ in Karen Wendt (ed.) Extractive and Primary Industries, Key Responsible Investment Banking, 2015 Findings from the Intergovernmental Panel on 16 A detailed report on the relationship Climate Change Fifth Assessment Report, between biodiversity and ecosystem services 2014, http://www.cisl.cam.ac.uk/business- and industry, with the mining sector as a case action/low-carbon-transformation/ipcc- climate-science-business- study, was produced in 2013 by the ICMM: briefings/pdfs/briefings/IPCC_AR5__Implica https://www.cbd.int/development/doc/Minin tions_for_Extractive_and_Primary_Industrie ing-and-Biodiversity.pdf s__Briefing_WEB__EN.pdf

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 32 emissions.19 In emerging economies, languages, consulting with where domestic GHG emissions communities as early as possible in regulations are not as stringent , the assessment process and including companies seeking international them in decision-making processes. finance have to adopt more carbon- For indigenous peoples, whose efficient project models than is the culture and traditions may be local norm. particularly sensitive, the guidance Finally, human rights remain one of recommends acquiring their free, the most difficult concepts to quantify prior and informed consent (FPIC) to in terms of its impact, yet they are a ensure their rights are adequately vital component of the sustainability represented. frameworks that guide lender actions. Human rights are closely related to, Responsible mining – an and interlinked with, ecosystem oxymoron? services, gender and climate change, and are based on a starting point of Mining is a prime example of an maintaining close relations with the industry that is increasingly engaging communities that live near a project in CSR programmes to ensure that development.20 Taking human rights projects obtain a Social License to into account is particularly important Operate (SLO). Although mined for work with indigenous peoples but materials support roughly 45% of the also within broader stakeholder world’s economic activities, the engagement initiatives comprising industry’s historical reputation NGOs, civil society organisations and amongst the broader public is largely development operators. In this negative, in particular regarding its context, the EPs explicitly environmental legacy. The nature of acknowledge a number of mining activities – characterised by international conventions on human industrial energy and water use, land and worker rights, and the IFC PSs take, changes in access to natural and EBRD PRs broadly cover human resources and sometimes the need for rights within stakeholder engagement resettlement of local populations – guidance. Practical consideration for has a direct bearing on each of the human rights involves disclosing cross-cutting aspects mentioned here. information about a project 21 development to all members of local In 2001, the International Council on communities clearly and in local Mining & Metals (ICMM) was created to improve the social and

19 The Equator Principles, Annex A, June 2013, http://www.equator- 21 Ucilia Wang, ‘Sustainable mining: an principles.com/resources/equator_principles_ inherent contradiction in terms?’, The III.pdf Guardian, 5 January 2015, 20 Manuel Wörsdörfer. ‘10 Years’ Equator https://www.theguardian.com/sustainable- Principles: A Critical Appraisal’, in: Karen business/2015/jan/05/sustainable-mining- Wendt (ed.) Responsible Investment Banking, business-poverty-environment-new- 2015 framework

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 33 environmental performance of the as a collective way of linking clear mining and metals industry based on national development indicators with the idea that the industry can play a mining.30 significant role in catalysing social By raising CSR standards, these and economic development. This initiatives are transforming the global industry-specific CSR initiative reputation of mining, an industry that brings together 23 of the largest is increasingly reliant on developing mining and metals companies, which operations in emerging economies are represented on the ICMM’s where host country environmental Council of CEOs, and 34 national and and social awareness is still under regional associations, represented by development. In December 2016, the nominated representatives.22 EBRD announced record investment In addition to the ICMM, a host of in Kazakhstan for a third consecutive initiatives now exist for improving the year, having spent between design and delivery of CSR within the USD$898-951 million on more than mining industry. These include the 30 projects across the country, Initiative for Responsible Mining including agricultural business, public Assurance (IRMA23); Alliance for utilities, infrastructure, energy, Responsible Mining24; International financial institutions and small and Cyanide Management Code25; the medium-sized enterprises.31 The Partnering Against Corruption future of sustainable industry in Initiative26; Voluntary Principles on countries like Kazakhstan and, Security and Human Rights27; specifically, that of responsible Towards Sustainable Mining28; and mining, relies on nesting best practice the Extractive Industries approaches within profitable business Transparency Initiative29. This models to ensure that the benefits of growing number of voluntary business are maximised and negative responsible mining initiatives has impacts reduced as much as possible. been reviewed at length by the World Future iterations of both IFC PSs and Economic Forum, which views them EBRD PRs will certainly address cross-cutting, interdisciplinary themes such as those mentioned here 22 ICMM: https://www.icmm.com/en- in greater detail than ever before, gb/about-us/our-organisation 23 IRMA: http://www.responsiblemining.net/ 24 ARM: http://www.isealalliance.org/online- community/organisations/alliance-for- 30 ‘Voluntary Responsible Mining Initiatives: A responsible-mining review’, World Economic Forum White Paper, 25 ICMC: https://www.cyanidecode.org/ August 2015, 26 PACI: http://www3.weforum.org/docs/Voluntary_R https://www.weforum.org/communities/part esponsible_Mining_Initiatives_2016.pdf nering-against-corruption-initiative 31 Yerbolat Uatkhanov, ‘2016 EBRD 27 Voluntary Principles on Security & Human Investment in Kazakhstan Breaks Record for Rights: http://www.voluntaryprinciples.org/ Third Year’, Astana Times, 13 December 2016, 28 TSM: http://mining.ca/towards- http://astanatimes.com/2016/12/2016-ebrd- sustainable-mining investment-in-kazakhstan-breaks-record-for- 29 EITI: https://eiti.org/ third-year/

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 34 providing a platform for practicing interdisciplinary applied science with a level of potential impact that is unprecedented. Interdisciplinary expertise will be vital within this context. Further, when applied to facilitate the funding of development with an eye on sustainability, the international guidelines, such as those provided by the IFC or EBRD, will strengthen relations and facilitate cooperation between nations that host lending institutions and those representing our common frontier in the global quest for natural resources. Sustainable investment frameworks can forge new and stronger diplomatic ties based on truly interdisciplinary, applied science.

About the author

Edvard Glücksman is a Senior Environmental & Social Specialist at Wardell Armstrong and Stakeholder Affiliate at the Environment & Sustainability Institute, University of Exeter. He is a Chartered Scientist and a member of the Atlantic Council and Ecologic Institute's Emerging Leaders in Energy and Environmental Policy Network and the Friends of Europe 2016 class of European Young Leaders. Edvard holds a DPhil and MSc in Biology from the University of Oxford, a BSc in Environmental Biology from the University of St Andrews and a BA in Sociology from McGill University.

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 35

TurkStream Pipeline Project: An Analysis of Legal, Financial and Technical Aspects Gökçe Mete

Abstract

In October 2016, Turkey and Russia signed an intergovernmental agreement for the construction and development of the TurkStream natural gas pipeline connecting Russia to Turkey via the Black Sea. There is no international law governing the offshore section of the pipeline other than the intergovernmental agreement, as Turkey is not party to the United Nations Convection of Law of the Sea, and Russia is not party to the Energy Charter Treaty. This paper will endeavour to provide a synopsis of different aspects of the TurkStream pipeline project, addressing legal, policy, fiscal and technical challenges, and concludes with some reflections on the event that the project is realised.

Introduction The lack of significant increase in In October 2016, Turkey and Russia demand that would necessitate new signed an intergovernmental pipeline infrastructure investment, agreement (IGA) for the construction coupled with the public perceiving it as and development of the TurkStream increasing Turkey’s dependence on natural gas pipeline. The project, Russia, challenges the need to build which was first announced in 2014, more pipelines. Yet, as the following will have a 31.5 billion cubic meters sections will reveal, there are financial, (bcm) total per annum capacity, political and strategic motivations for divided into two separate lines to be both sides to come to an agreement constructed from Anapa in Russia to regarding a new direct pipeline Turkey via the Black Sea. The first line between Russia and Turkey. The of the pipeline is designed to supply rationale is so important that it even the Turkish market and the second overcame the political dispute that line, construction of which is followed the shoot down of a Russian dependent on a firm commitment from jet by the Turkish air force in the European Union (EU), is planned November 2015. to supply Southern Europe. The project requires an estimated Turkey already has the Blue Stream €11.4 billion investment and, as it is an natural gas pipeline from Russia, and a offshore project, these costs could transit pipeline, the Western Line, increase in the implementation stage. through Ukraine, Moldova, Romania There is no international law and Bulgaria. The TurkStream pipeline governing the offshore section of the project will substitute 14 bcm of pipeline other than the IGA, as Turkey Russian gas that currently flows is not party to the United Nations through the Western Line. The Blue Convection of Law of the Sea Stream transit-avoidance pipeline - (UNCLOS)2, and Russia is not party to which was based on a 1997 IGA the Energy Charter Treaty (ECT)3. This between Russia and Turkey and was paper will endeavour to provide a commissioned in 20031 - has an synopsis of different aspects of the annual capacity of 16 bcm.

2 United Nations Convention on the Law of the 1 Factual information on Blue Stream pipeline Sea, 10 December 1982, 1833 UNTS 3 is available at: (UNCLOS). http://www.gazprom.com/about/production/ 3 Energy Charter Treaty, 17 December 1994, projects/pipelines/active/blue-stream/ reprinted in: ILM 34 (1995), 360. TurkStream pipeline project, conflict between Gazprom and the EU addressing legal, policy, fiscal and Commission, Russian President Putin technical challenges, and concludes announced Russia and Turkey’s joint with some reflections on the event that intention to construct a new pipeline the project is realised. that would bypass Ukrainian gas transportation infrastructure and realise Turkey’s long-standing ambition of becoming an energy hub. The new pipeline, which could Background theoretically provide Gazprom and the Kremlin a blockage to diversified gas The TurkStream pipeline project flows from Azerbaijan, Turkmenistan, revives the previous South Stream the Eastern Mediterranean and Iraq, pipeline project, which was planned to will compete with Nabucco’s successor, bypass Ukraine en route to European the Trans-Anatolian Natural Gas markets from Russia to Central Europe Pipeline (TANAP) project. On 25 via the Black Sea and the Balkans. The October 2011, Azerbaijan and Turkey onshore section of the pipeline was to signed an IGA on the “Sale of Natural cross Bulgaria, Serbia, Hungary, Gas to Turkey and the Transit Passage Slovenia and Italy, with gas branches of Natural Gas through Turkey and the going to Croatia and Serbia. A set of Development of a Standalone Pipeline bilateral IGAs between Russia and the for the Transportation of Natural Gas respective countries were signed across the Territory of Turkey”. The between 2008 and 2010. It was two states then signed another IGA, on originally designed to compete against 26 June 2012, specifically for the the EU-backed Nabucco project4. After TANAP Pipeline, which will transport the cancellation of the South Stream natural gas from the Eastern border of project in 2014 due to regulatory Turkey to the Western border, stretching to a length of almost 2,000

km.

4 The Nabucco project aimed connect the European Union with Caspian Sea and Middle When the TurkStream pipeline was East States. The Nabucco-West pipeline was a first proposed the capacity of the proposed natural gas pipeline from the pipeline was 63 bcm, the same as Turkish-Bulgarian border to Austria. It is a South Stream, and it was planned to modification of the original Nabucco Pipeline project, which was to run from Erzurum in consist of four parallel lines, two of Turkey to Baumgarten an der March in which were to supply Europe at the Austria. A number of important factors led to Turkey-Greece border through a the demise of Nabucco including geopolitics, physical gas hub on the Turkish side. A waning interest of external actors in the natural gas hub is a distribution tool Caspian region, as well as commitment of business partners, low prospects for between upstream and downstream production and, finally, the Shah Deniz segments of the natural gas value chain Consortium’s decision to favour the for short, medium and long-term TAP/TANAP route instead regarded as more supplies. It can be physical by viable and acceptable vis-a-vis Moscow.

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 38 connecting to multiple pipelines, or a The TurkStream pipeline will not bring virtual balancing point for financial new and additional gas to Turkey, but transaction of gas. As a rule, gas hubs will instead replace the transit volumes promote and facilitate the trading of it is receiving through the Western gas and creates a competitive market Line. However, if the two lines of the based on transparent prices. To enable pipeline are commissioned, then the a functioning platform, ideally the pipeline would increase transit national regulator should ensure non- capacity in Turkey, hence serving discriminatory access to the gas hub by Turkey's long-standing ambition to be all sellers and buyers. For this, the hub a hub for natural gas supplies to operator should be an unbundled, Southern European consumers. The independent legal entity and separate direct link from Russia to Turkey from the hub participants. Finally, by increases Turkey’s energy security and establishing a competitive market, increases its political leverage. clear regulations and non- discriminatory access, it can For Russia the project is a part of its incentivise further investment in systematic efforts to avoid certain natural gas infrastructure and transit routes. For the same reasons upstream activities. leading to the planned Nord Stream 2 pipeline, Russia aims to increase First the project was suspended due to Gazprom’s non-transit pipeline the jet incident in 2015, and when it capacity and redirect volumes that was resumed in October 2016 at the would otherwise flow through Ukraine. World Energy Congress in Istanbul, This is a result of a series of transit the capacity of the pipeline was halved interruptions and transit fee disputes to 31.5 bcm and now may only supply between Ukraine and Russia that took gas to Turkey. This is due to several place between 2006 and 2014. Russia’s factors, some political, some technical transit contracts with Ukraine will and some due to competing pipelines, expire in 2019, and Russia announced as Russia’s Gazprom is currently in the that these contracts will not be initial phases of constructing the Nord renewed, thus transit of Russian gas Stream 2 pipeline, which will double via Ukraine to Europe will be the existing 55 bcm capacity of Nord discontinued. Stream 1. Commissioned in 2011, Nord In addition to pursuing its transit Stream is a direct pipeline connecting avoidance objectives, Russia also Russia and Germany through the increases its market power in Turkey, Baltic Sea5. its second largest consumer after

Germany. Turkey’s national gas Rationale demand is over 45 bcm per annum, and is expected to grow rapidly towards 2030. The TurkStream pipeline gives Russia leverage against 5 Factual information about Nord Stream is available at the project home page at: an already contracted 6 bcm of gas http://www.nord-stream.com/ from Azerbaijan, future flows of gas

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 39 from Kurdish Regional Government in Republic of Azerbaijan (SOFAZ) and Iraq, and current supplies from Iran BOTAŞ, the Transmission System which Turkey pays the highest price Operator of Turkey, will not be able to for. jointly fund the project from their budget, as SOFAZ’s funds are running The IGA of the project indicates that low due to the 2014 oil price slump. the second gas line will be Therefore, BOTAŞ is to receive a loan commissioned only if there is a of $400 million from the World Bank. demand and commitment from European buyers. In this, TurkStream Initially the Southern Corridor was to will be in competition with the TANAP accommodate large volumes of natural project. The Trans-Adriatic Pipeline resources from the Caucasus, Central (TAP)6 will then connect to TANAP at Asia, the Middle East and North Kipoi in Greece, on the border of Africa, however over time the US has Turkey. From there, TAP will cross lost interest – due to various factors, Greece and Albania towards the but predominantly a lack of availability Adriatic coast. First gas deliveries from and access to oil and gas exports to TANAP to Turkey are expected in Europe — to fill the corridor. The 2019, and approximately a year later to TANAP project is currently contracted Europe. to carry only 16 bcm of gas annually, 10 bcm for Europe and 6 bcm for The TANAP project implements the Turkey. The pipeline’s capacity is Southern Corridor initiative, a US- expected to exceed 31 bcm in 2026. backed plan to enable Europe to diversify away from Russia, which TurkStream, while in principle in dates back to the construction of the competition with TANAP, could be Baku-Tbilisi-Ceyhan7 oil pipeline in connected to TANAP if TurkStream’s the early 2000s that brought Azeri oil second line is constructed. Gas could to international markets without the then flow through the TAP pipeline, need for transit through Russia. The which can be expanded by 10 bcm, and TANAP project however is becoming offered to shippers under an open increasingly expensive, with total costs season procedure as per EU currently estimated around $45 legislation, and accommodate Russian billion. And unlike the initial gas alongside natural gas from expectations, the State Oil Fund of the Azerbaijan. BOTAŞ could then increase its transit fees and alleviate investment costs. 6 Factual information on TAP can be found at the project’s home page available at: There are not many alternative export https://www.tap-ag.com/. routes for these supplies, as Turkey is 7 The BTC pipeline transports oil from the Azeri-Chirag-Gunashli field from Shah Deniz surrounded by resource rich gas across Azerbaijan, Georgia and Turkey. It links exporting countries in Central Asia, the the Sangachal terminal on the shores of the Southern Caucasus, the Middle East Caspian Sea, to the Ceyhan marine terminal on and North Africa. However, European the Turkish Mediterranean coast. In total indigenous gas production is rapidly length, the BTC pipeline is 1,768 km long.

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 40 falling, and 2016 supplies from Russia to Europe are expected to be a record Technical aspects high 175 bcm for 2016. The offshore section of TurkStream As the main reason for South Stream’s will traverse 900 km across the Black failure was the EU’s Third Energy Sea, between the Russkaya CS near Package requirements, particularly Anapa and the Turkish seaboard. The third party access, unbundling and onshore line will run up to Turkey’s competition law concerns, a route to border with Greece. Europe through a non-EU country such as Turkey would allow Russia to Figure 1: Route of the TurkStream access the EU market without these pipeline, source: Gazprom restraints. EU energy law would be applicable from the Greek border onwards, however.

While there are motivations for both sides to complete the pipeline, there are also risks, in particular for Turkey. It may damage its political relationships with Azerbaijan as a rival pipeline supplier, and the EU as the pipelines access to Southern Europe would further complicate these states’ conflict of interests with core member The first line was going to be states. constructed by an Italian company, Saipem, under the same contract The risk for Russia is not being able to supply gas to Europe via TurkStream, concluded for the construction of the and also future competition from South Stream project. However, as they failed to reach an agreement for a potential suppliers such as Israel in the Eastern Mediterranean and Iraqi deal worth €2.4 billion, the Swiss- Kurdistan in the Middle East. Despite based Allseas has been contracted to lay the first line of the TurkStream this, a recent meeting held in December 2016 between the CEOs of offshore gas pipeline with its single-lift Russia’s Gazprom, Italy’s Edison and installation and decommissioning vessel, Pioneering Spirit. It will start Greece’s DEPA to discuss possible routes for Russian gas exports to work from the first half of 2017. Greece and Italy shows that the Construction of the first line of TurkStream should end by December prospect of Russian gas deliveries to Europe from the Southern Corridor is 2019. rather substantial. This line will substitute the volumes transported via the Western Line (through Ukraine, Moldova, Romania and Bulgaria), which is currently

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 41 contracted for private shippers. This contracts. Should the second line be line represents the only liberalised built, the capacity will be reserved to import capacity of Turkey under its Gazprom and it is not clear whether Natural Gas Market Law (NGML)8. private shippers will have access. The NGML presently does not allow After the existing volumes from the private companies to import pipeline Western Line is replaced with gas from suppliers that already have a TurkStream, the spare capacity in the supply contract with BOTAŞ. After pipeline can be used for reverse flow to expiration of these contracts private Bulgaria and Romania, and natural gas importers may sign natural gas may also be transported to Greece by contracts for the same quantities as the Bulgaria-Greece Interconnector BOTAŞ’s imports. Imports from those with limited capacity. This would allow countries where no contracts with Gazprom to meet its supply BOTAŞ exist are subject to evaluation commitments under its capacity and permission of the Energy Market contracts with Bulgaria and Romania Regulatory Authority of Turkey. that expire in 2030. However, this is The NGML initially aimed at limiting only true to the extent that usage of BOTAŞ’s gas imports to 20 per cent of pipeline capacity in ‘reverse’ mode the total consumption of Turkey via does not need changes in existing contract and volume transfers to capacity contracts to be considered a private companies. However, this termination or extension under the ambitious target could not be met to Third Energy Package. This would date. Hence, the draft amendments to automatically require them to be the NGML propose to reduce the share brought into line with the capacity of BOTAŞ’s imports to 50 per cent. allocation network code.9 The existing supply contracts between Around 700 km of the offshore part Gazprom and private shippers will be will lie within Turkish waters and the amended to change their delivery Turkish Exclusive Economic Zone points to Kıyıköy in Turkey, instead of (EEZ) in the Black Sea. It will be their current delivery point the divided into two parts. For the section Malkoçlar gas-measuring station on of the pipeline that runs from the the Bulgarian-Turkish border on the Turkish and Bulgarian EEZ to the Western Line. Today, these contracts Turkish coastline, with a length amount to 14 bcm annual capacity, and the first line of TurkStream will have 15.75 bcm annual capacity. Therefore, 9 Jonathan Stern, Simon Pirani and Katja the contracted volumes will more or Yafimava, Does the cancellation of South less coincide with the original Stream signal a fundamental reorientation of Russian gas export policy? Oxford Institute for Energy Studies, Oxford Energy Comment, January 2015, 8 No. 4646, Published in the Turkish Official https://www.oxfordenergy.org/wpcms/wp- content/uploads/2015/01/Does-cancellation- Gazette No. 24390 on 2 May 2001, available in of-South-Stream-signal-a-fundamental- English at: reorientation-of-Russian-gas-export-policy- www.emra.org.tr/TR/Dokuman/6667. GPC-5.pdf

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 42 of approximately 275 km, the pipeline The offshore section of both the first company South Stream Transport will and second lines of the pipeline will be conduct an Environmental Impact fully owned and financed by Gazprom. Assessment (EIA). This will be BOTAŞ, on the other hand, will create developed according to Turkish a company for the construction of the legislation and will cover local first onshore line that will supply gas environmental conditions, to the Turkish market. This line will be communities and overall pipeline nearly 180 km long. safety. For the rest of the route, an EIA was approved by Turkey in 2014 as For the second onshore line, a 50-50 part of the scrapped South Stream joint venture company undertaken by project. Gazprom and BOTAŞ’s subsidiaries will be established. The participants of The Russian part of the offshore line is the joint venture, proportionate to developed according to an approved their respective shares, will pay the EIA under Russian permitting costs of the second onshore line. If procedures and it uses data available both sides agree, third party funding from the Environmental and Social could be sought for the second onshore Impact Assessment (ESIA) of the line and a third participant could be South Stream, which was developed by added to the joint venture. engaging communities in the Anapa region near the landfall, along with For the second line, Italy and Greece NGOs and other interest groups. are likely destinations for Russian gas via the Southern Corridor, if Russian Financial aspect supplies transit through Ukraine is at least partly ceased after 2019, and The TurkStream project is expected to these volumes will be redirected to cost €11.4 billion and the first line will North Stream II via Germany. If TAP’s cost approximately €4.3 billion. The current capacity of 10 bcm is expanded offshore segment could cost around €7 to 20 bcm by adding two compressors billion. Gazprom will provide €310 in Greece and Albania, Russia can use million to South Stream Transport,,a this capacity via third party access. subsidiary of Gazprom, to develop the Transporting larger volumes of both project. Russian and Azeri gas further to Europe will diminish overall network The Russian state budget is estimated costs for TAP operators. to gain around $750 million from export taxes. For Turkey, the economic advantage is discounted gas prices, Negotiations and the IGA and if the second line is built it will receive any profits from transit fees The IGA between Turkey and Russia should it be able to resell the gas. was approved and ratified by Turkey in December 2016 and by Russia in January 2017. The agreement will stay

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 43 in force for 30 years subject to further technical specifications on both extension. The negotiations of the offshore and onshore parts of the project took two years as Turkey pipeline. Disputes will be resolved in insisted on a price reduction from Switzerland judicial courts. Gazprom for Turkey’s supply, which the Russian giant was unwilling to Implications for International provide. The shooting of a Russian jet and EU Energy Law by Turkey has also prolonged the negotiations period as President Putin The EU’s Third Energy Package suspended the project. Eventually, the includes a Gas Directive concerning financial and political motivations to common rules for the internal natural construct the TurkStream pipeline gas market and a Gas Regulation on outweighed previous discord. conditions for access to natural gas transmission networks. This legislative The TurkStream pipeline will use the package requires capacity of pipelines gas compressor station in Russkaya on located in the EU to be open to third the shores of the Black Sea in Anapa as party access in a non-discriminatory an entry point. For the second line, way, under market-based principles there will be a long-term supply and published tariffs. Transmission agreement with a take or pay contract system operators are obliged to with Gazprom, and the full capacity of unbundle their upstream, midstream the second line will be reserved for and downstream assets so that no gas Gazprom. Third parties can participate company can own the gas, operate and in the joint venture. The construction own the pipeline and market it at the of the second line however, can be same time. These rules caused the cancelled with notification from the cancellation of the South Stream Turkish side. pipeline. The EU Commission came to the conclusion that the IGAs signed by There will be significant tax Russia, with each Bulgaria, Serbia, exemptions, particularly for offshore Hungary, Greece, Slovenia, Croatia operations, construction will be and Austria, are all in breach of EU law corporate and profit tax-free and gas and need to be renegotiated from supply services will also be tax-free. In scratch or be terminated. The project addition, there will be no stamp and was eventually suspended not as a customs duties for the technical result of a legal case but due to equipment coming from both political pressure exerted by the EU countries. Commission.

After the construction of the first line In the case of TurkStream, it seems is commissioned, the gas supply from that the Third Energy Package will the Western Line will be directed to work for the benefit of Gazprom the first line. The gas supply should the second line be build, agreements will be revised to reflect because it will give Gazprom access to the new dispatch point and for the the TAP pipeline, which is operated by

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 44 BP, Statoil, SOCAR, Fluxys, Enagás EEZ that covers some of its waters, and and the Axpo. Currently, the TAP thus given UNCLOS’s EEZ stipulations pipeline has an exemption from the legitimacy as customary law. provisions of the Third Energy Package. An exemption is only Another instrument of international provided if a pipeline project brings law, the ECT, also provides rules and new sources of gas, it does not damage principles for offshore pipelines and competition and the exception is transit passage of natural gas, and indispensable for its development. includes provisions on the resolution Regardless of the fact that the TAP of transit disputes. Turkey ratified it in pipeline complies with the criteria, the the early 1990s, but Russia is no longer Commission awarded an exemption a party to the ECT after it withdrew in but only for 50% of its capacity. The 2009 following a transit dispute total capacity of the pipeline is 20 bcm between Ukraine and Russia. Russia - 10 of which are now dedicated to the blamed the ECT for its failure to gas from Azerbaijan via TANAP – but capture transit interruptions when a the remaining 10 bcm could be major cut of Russian supplies destined awarded to Gazprom. for Europe in the middle of winter occurred. This means there is no Gazprom may still face competition for international law other than the IGAs that capacity from other sources of gas that is applicable to the TurkStream such as through a prospective pipeline project, but it provides at least a route between Israel and Turkey, or if Iraqi for dispute resolutions under gas comes online. Yet, in all international arbitration, and includes likelihoods, the TurkStream’s second substantial undertakings and line will be completed faster as it is commitments from both countries. easier and more efficient to construct the second line, as it will be parallel to Conclusions the first line. The likelihood of Turkey becoming a Some provisions of international law natural gas hub depends on Europe’s may be relevant to the TurkStream appetite for more Russian gas - or re- pipeline project. Russia needs to seek directed Russian gas as the case will permission from other Black Sea be. However, there are other factors countries for the construction of an that need to be considered, for underwater pipeline, which would instance the funds required to build evoke old disputes over whether the the second line and whether that Caspian sea is a lake or a sea and would be feasible without firm accordingly which international commitments from European buyers. convention or treaty should apply. As for the TurkStream pipeline, Turkey is Furthermore, for Turkey to become a not party to UNCLOS, an international gas hub it will need to be able to resell treaty that regulates offshore pipelines. the gas at the Turkey-Greece border Yet Turkey declared at least a partial and prove technical feasibility. For instance, a competitive and liberalised,

EUCERS ‘Reflections’ Working Paper Series, Vol 3, Spring 2017 45 and hence accessible market needs to is also an existing Turkey-Greece be established where multiple pipeline with a 6 bcm capacity: this consumers could meet multiple line could also be utilised to ship customers and enter into transactions Russian gas to South East European in competitive prices. A reference price markets, in addition to possible for the spot gas needs to be reverse flows from the Western Line to determined. Bulgaria.

Perhaps instead of a physical hub, as In conclusion, there are little planned, Turkey could establish a infrastructure and funding related virtual hub at the Turkey-Greece concerns that can in principle be border and restructure the market resolved. The future direction of the from oil-price indexation to spots pipeline project is likely to be impacted market. In addition to Russian gas, by demand projections and political natural gas from Azerbaijan, Iraq and, concerns coming from the EU – such in the future even from Israel, could be as reliance on Russia and Turkey for traded at the virtual hub linked to the supplies. financial markets in Turkey as well. About the author For Russia, the true success of the project will be achieved if gas can be A qualified lawyer, Gökçe Mete is a moved into Europe. While gas could be Research Fellow at the Extractives shipped to Greece and Italy (and Hub at the Centre for Energy, Albania), who are already contracted Petroleum, Mining Law and Policy. to receive 10 bcm of gas from This is a UK funded digital project to Azerbaijan from the TAP, there is no support natural resources-rich infrastructure to carry this gas on to developing nations to make informed Bulgaria at the moment. There is a decisions regarding extractives sector planned Greece-Bulgaria development. She is concurrently interconnector, but even when this is finalising her PhD on EU energy acquis commissioned further infrastructure and its impact on investment in energy will need to be built to transport this infrastructure in University of Dundee. gas to other EU member states. There

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European Centre for Energy and Resource Security (EUCERS) Department of War Studies King’s College London Strand London WC2R 2LS

[email protected] www.eucers.eu Tel 020 7848 1912

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