Turkish Stream Redux
August 11, 2016
On December 1, 2014, during a visit to the Turkish capital Ankara, President Vladimir Putin of Russia surprised the energy world by announcing the cancellation of the South Stream project, a pipeline system under the Black Sea, proposing to carry 63 billion cubic meters per annum (bcma) of natural gas from Russia to Bulgaria and replacing it with a similar pipeline system from Russia to Thrace in western Turkey, soon to be dubbed Turkish Stream. No real progress has been made on this project in the last 20 months for reasons that will be explained later. On August 9, 2016, President Recep Erdogan of Turkey went to Putin’s hometown of St. Petersburg in his first overseas trip after the mid-July failed coup d’état in Turkey. Among other understandings reached, the two men announced the revival of the Turkish Stream pipeline.
Is Turkish Stream back on track, as reported by the international press? Or is this merely a continuation of the game of Eurasia pipeline politics, which sometimes leads to real projects, but more often does not? I have observed this complicated game for more than 20 years. It often resembles three-dimensional chess, except even in three-dimensional chess the boards do not all move at the same time. In this case, the boards move constantly.
In late 2014, Russia was faced with toughened Western economic sanctions after its annexation of Crimea and aggressive actions in eastern Ukraine. The price of oil, Russia’s principal export along with gas, had dropped by more than 60 percent from over $100 per barrel in the first half of 2014. Just as when he announced the Power of Siberia gas pipeline to China during a visit to Shanghai in September 2014, Putin was desperate to prove to the world—and just as importantly to the Russian people—that Russia was not isolated internationally and had economic options. The South Stream project was already stalled due to EU interference (according to Russians) and shaky project economics. Announcing Turkish Stream was a tactical maneuver for political, not economic, gain.
Naturally, the Turkish side immediately tried to gain economic advantage by demanding a better price for Russian gas imports, not only from the future Turkish Stream route, but also from the existing trans-Balkan route. Price negotiation remained at an impasse for the next year. In actuality, the project was already moribund before the November 2015 downing of a Russian bomber by Turkish jet fighters near the Syrian border, which the general press mistakenly attributes as the reason for Turkish Stream’s demise. It was evident that Russia’s attention had already turned to the much more strategically important 55-bcma Nord Stream 2 gas pipeline system from Russia to Germany under the Baltic Sea by June 2015, when it announced the formation of a new consortium, which includes Gazprom and five commercial companies from four different European countries. This project now appears to take priority over even the Power of Siberia pipeline, never mind the less important Turkish Stream.
So, what are we to make of the new understanding over Turkish Stream reached recently in St. Petersburg? Today it is Turkey that needs to prove it is not internationally isolated. Erdogan had sent Putin a letter of regret over the downing of the bomber in June, before the July coup attempt. Russian economic sanctions after the bomber incident have severely hurt the already weak Turkish economy. Danger is all around Turkey, with its so-far unsuccessful policies on the Syrian civil war and internal Kurdish problems. Terrorism has become a regular occurrence inside Turkey. Meanwhile it feels increasingly isolated from the West.
The bargaining leverage in gas negotiation has now shifted to Russia’s favor. It is interesting to note that there was no joint communiqué or statement after the Putin-Erdogan summit as might be expected after a meeting of heads of state, suggesting that this was a hastily arranged affair. In a press conference afterward, the two presidents declared the (equally controversial) Akkuyu nuclear power project a strategic investment. No such designation was granted to Turkish Stream.
Reviving the notion of Turkish Stream certainly helps Russia in its discussions with European authorities over approval for Nord Stream 2 and affords it additional leverage over Ukraine, on which it continues to rely as the route for 40 to 50 percent of Russian gas exports to Europe. In theory, completion of Nord Stream 2 and Turkish Stream would eliminate the need for gas to transit Ukraine altogether. In reality, there is little chance that either project will be completed and operating at full capacity by the time the Ukraine transit agreement expires in 2019. However, this game is about political posturing as much as economic realism.
Under the right economic conditions, Russia could certainly build one strand of Turkish Stream (designed as a four-strand pipeline system) at 15.75 bcma of capacity. The pipe for such a line was already purchased for South Stream and sits in Varna, Bulgaria. A pipe-laying contract was signed long ago, and Gazprom would suffer large financial penalties to cancel. In effect, building the first strand would rescue some economic value from sunk capital. Assuming agreement on gas price can be reached with Turkey, it avoids transit risks to supply Russia’s largest gas customer away from existing trans-Balkan flows that rely on transiting Ukraine.
In time, completing a second strand of Turkish Stream, with additional 15.75 bcma of capacity, could supply Russia’s other gas customers in southeastern Europe and replace Ukrainian transit with transit through Turkey. Gazprom will have to weigh this priority against competing capital requirements for Nord Stream 2 and Power of Siberia. Therefore, there is a chance that Turkish Stream will become, eventually, a 15.75- to 31.5-bcma pipeline system carrying Russian gas under the Black Sea to and through Turkey. There is almost no chance under foreseeable conditions that a foolishly ambitious 63-bcma system will be built, fulfilling Turkey’s fond dreams of becoming a gas hub.
The risk for Turkey is to allow such aspirations or “birds in the bush” to divert its attention from the bird at hand—that is, the already-agreed Southern Gas Corridor projects of TANAP and TAP (respectively the trans-Anatolian and trans-Adriatic pipelines), which will carry 16 bcma of additional gas from Azerbaijan’s Shah Deniz field to Turkey and beyond. If it does, there will only be one winner, Turkey’s new old friends in St. Petersburg, who have played chess for a long time and like to scramble the board as conditions warrant.
Edward C. Chow is a senior fellow in the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.
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