Turkish Stream halt could save face all round

The ill-starred Turkish Stream project may well fall foul of the simmering tensions between Moscow and Ankara, after Turkey’s shooting down of a Russian bomber jet near the Syrian border on 24 November. Economic development minister Alexei Ulyukayev said today that the project could be included in the package of economic measures Russia is drawing up in retaliation, a day after prime minister Dmitry Medvedev said that joint projects between the countries could be renounced.

But for all the posturing, including Turkish Stream in a list of suspended projects would save face on both sides.

Cutting off gas deliveries to Turkey in retaliation would have caused even more damage to Russia’s reputation as a reliable gas supplier. That reputation withstood the Cold War but was tarnished by the Ukrainian transit crises of 2006 and 2009. And now, against the backdrop of Russia’s annexation of Crimea and the downing of a civilian airliner carrying mostly Dutch nationals in Ukrainian airspace, Brussels is forcefully asking whether Russia uses gas as a geopolitical tool.

Of course, cutting off supply to Turkey would starve Russia of much-needed cash just as Moscow’s budget is squeezed by the fall in oil and gas prices.

But calling off or indefinitely postponing Turkish Stream would permit Moscow to look tough without actually damaging its interests — because it had never seen eye to eye with Ankara over the Black Sea pipeline, which Russian president Vladimir Putin had announced in Ankara nearly a year ago as a replacement for the stymied South Stream pipeline to Bulgaria.

Russia’s state-controlled Gazprom had already scaled back Turkish Stream from an initially planned 63bn m³/yr capacity to a 16bn m³/yr pipeline supplying the Turkish market only, with perhaps a second 16bn m³/yr line to supply gas to southeast Europe — if Moscow and Ankara could only have agreed on the terms.

Ankara had wanted separate agreements to govern each line, while Moscow wished for only one. The talks had become inextricably entwined with a 10.25pc price cut for the gas that Gazprom supplies to Turkey’s state-controlled Botas. And it was far from clear how Gazprom would move gas delivered through the conduit from the Turkish border into southeast Europe.

Little progress was made under Ankara’s caretaker government between elections on 7 June that delivered a hung parliament and those on 1 November that returned the AK party to power. A new energy minister had only been named the day that the Russian plane was shot down.

And in late October, Gazprom’s board approved a 26.1bn rouble ($398mn) cut to the company’s 2015 capital expenditure on transportation to Rbs416.4bn, mostly because the firm has halted work on feeder lines for Turkish Stream.

Suspending the project may be no great loss to Turkey. Competing supply could have limited the country’s appetite for the full 16bn m³/yr of Russian gas to fill the first string of the conduit. Turkey’s gas demand is not growing as fast as was once expected. But even so, the country will have 6bn m³/yr more gas from Azerbaijan once the second-phase development of Shakh Deniz comes on stream around the end of this decade. The Kurdistan Regional Government has agreed to supply 10bn m³/yr of gas to Turkey, which could start as soon as 2019. And gas price arbitration under way could potentially make Iranian gas deliveries to Turkey more competitive with Russian gas.

Gazprom could still boost its export capacity to Turkey without Turkish Stream. The firm had already ploughed around Rbs234bn into infrastructure to enable west Siberian gas to be transported to the proposed South Stream, and then Turkish Stream, pipelines. But this infrastructure could still be repurposed to fill an expansion of the 16bn m³/yr Blue Stream pipeline to Turkey. Before Turkish Stream was announced, Gazprom had considered building new compression capacity that would expand Blue Stream to 19bn m³/yr.

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