Natural Gas Europe - Turkey’s Bold Move Shakes up the Southern Corridor

My latest article for Natural Gas Europe is below. The original article can be found here:

The news that Turkey has given Gazprom’s South Stream pipeline permission to cross its territorial waters was, Vladimir Putin announced, a “New Year’s gift for Russia”. Just days before, Turkey had also given Azerbaijan’s SOCAR a valuable Christmas present with a deal approving the construction of the new Trans-Anatolian pipeline. These agreements close out a remarkable year for Eurasian gas politics which has seen old pipelines fall and new ones rise.

So what explains Ankara’s generous festive spirit and what does this mean for European energy security? For Turkey, these agreements are not acts of charity: they are bold new moves in its strategy of playing hardball with Moscow, Baku, and Brussels.

Turkey has been holding off from granting permission for South Stream to cross its Exclusive Economic Zone for some time. Ostensibly this has been for environmental and technical reasons, but mainly as a way to keep some leverage in energy deals with Russia. It has found an opportunity to use that leverage: in exchange for South Stream permission, Turkey gets what Energy Minister Taner Yıldız calls a “serious discount” (unspecified) on Russian gas imports for two contracts ending in 2021 and 2025. As a further sweetener, Turkey is also increasing its gas imports from Russia to 27.5bcm, up 8% on 2011.

The 28th December agreement (some minor issues are still outstanding but are unlikely to affect progress) seems a much-needed fillip for South Stream. The 63bcm project, which will bypass Ukraine and bring gas west to Europe, has been on the back burner for some time over concerns about cost and demand.

But with Russia, particularly Vladimir Putin, in a bullish mood again, and Europe’s competing Caspian energy projects apparently on the ropes, South Stream would appear to be making a rather triumphant comeback. The day after the deal with MOU with Turkey was signed, Putin followed up byordering Gazprom boss Alexei Miller to bring South Stream’s construction forward a year, to the end of 2012, with first gas due to flow in 2015.

On first reading the agreement is a major volte-face for Ankara, which has previously aligned itself with EU-backed gas projects competing with South Stream. Turkey’s change of allegiance has prompted strong criticism from Kemal Kılıçdaroğlu, leader of the opposition CHP.

Kılıçdaroğlu said that “[w]e have presented Turkey to Russia as a New Year’s turkey” and would receive nothing from the deal, which would cripple Turkey’s ambitions to become a regional energy hub. Turkey will accrue no transit fees or re-export rights from South Stream, as it would from overland routes. The government seems to feel that the gas discount is worth it.

However the South Stream agreement is part of a bigger picture. By signing the SOCAR deal, Ankara has shown its continued commitment to an overland route - even if not in the way that its European partners originally intended. The Trans-Anatolian pipeline, which was proposed as recently as October, has essentially short-circuited the negotiations in Baku over what route gas from Azerbaijan’s Shah Deniz Phase Two – slated to begin producing an additional 10bcm a year from 2017 - will take to Europe.

That discussion had previously included infrastructure from the Georgian border to Europe itself; now, with the Trans-Anatolian pipeline able to carry at least 16bcm (of which 6bcm will be for Turkey’s domestic market and 10bcm for Europe), the Shah Deniz consortium will mainly be discussing what pipeline to choose for the European section.

This essentially replaces Nabucco: there is no need for a 37bcm behemoth and the 16bcm Trans-Anatolian line. The Shah Deniz consortium will probably choose one of the smaller, cheaper and easier routes, like BP’s South East Europe Pipeline, instead. A decision is due to be made in the next couple of months.

For those who backed Nabucco over South Stream, concerned about the latter’s reliance on Russian gas, the Trans-Anatolian pipeline is an unexpected blessing which saves the Southern Corridor. Official circles in both Ankara and Baku have made it clear that they would built the pipeline “whether or not buyers first came forward with commitments to buy the gas”. This is in pointed contrast to Nabucco, where drawn-out disputes about price and suppliers led to mounting frustration in Azerbaijan and Turkey alike.

In this light Turkey’s signing of the South Stream deal and the Trans-Anatolian MOU was not ‘disloyalty’ to Nabucco so much as a masterful political stroke. South Stream may never get built, particularly if the Trans-Anatolian pipeline undercuts its demand base in Europe; pushing ahead with the latter means that Turkey gets transit rights for European gas whilst still getting a binding contractual discount on its gas imports from Russia.

Ankara is essentially playing both pipelines off against each other. This may explain Putin’s decision to bring South Stream’s construction forward a year – to compete not with Nabucco but the Trans-Anatolian pipeline. Turkey’s strategy may yet misfire, but in promoting both South Stream and the Trans-Anatolian line it is kick-starting Europe’s hunt for new gas supplies.