The TurkStream Opportunity
November 28, 2018
As the battle for the Nord Stream 2 pipeline project continues, the offshore section of the TurkStream gas pipeline, from Russia to Turkey, was inaugurated on Monday, November 19. Two broadly similar projects have triggered sharply different responses—no one is threatening sanctions over TurkStream, there are no grand legal or diplomatic chess moves to stop the project, and the op-eds and conferences denouncing the project are few and far between. That is good news—no one needs more Nord Stream 2-like controversy. But it is also good news because TurkStream can enhance energy security; but only if Europe acts. For a continent bitterly—and, often, needlessly— divided by pipelines, TurkStream offers an opportunity to depoliticize gas and show that new infrastructure can be a win-win for Russia and Europe.
TurkStream will have two parallel lines: the first to deliver gas to Turkey, the second for onward sale to Europe (although markets will determine the actual volume split). Like other Russian pipelines, the short-term impact will be to change how Russian gas is sent to Europe: rather than flowing through Ukraine, Russian gas will be shipped straight to Turkey and, later, Europe through the Black Sea. Over time, as Russian exports grow, the pipeline will be delivering new gas rather than acting purely as a substitute route. This evolution takes time: gas transit through Ukraine fell by approximately 40 percent between 2011 and 2014, after the Nord Stream 1 pipeline came online, but it had largely recovered by 2017 (2017 volumes were about 10 percent lower than 2011).
Rerouting presents challenges as well as opportunities. For Ukraine, TurkStream is another step in a long process of the country’s declining role as a transit for Russian hydrocarbons. Oil transit in 2017 was approximately 75 percent below 2000, its high point. Gas transit has proven more resilient, but volumes in 2017 were about a third below their 1998 peak. Revenue from gas transit is often seen as a lifeline for the Ukrainian economy, but a more accurate description would be to say that this revenue has delayed a long overdue restructuring of Ukraine’s gas sector, especially on pricing. Low prices have led to wasteful use, which is one reason that gas demand had fallen by 73 percent between 1991 and 2017—far above what would be justified by economics alone. Even today, Naftogaz estimates that “subsidy recipients use twice as much gas as consumers who pay their bills themselves.” Less transit revenue increases the need for market reforms.
Rerouting has also brought opportunities to Ukraine. Since late 2015, Ukraine has not imported Russian gas directly. Instead, Ukraine’s imports come from Europe via Slovakia, and less so, Hungary and Poland. This change is primarily due to Nord Stream 1. As the Nord Stream 1 pipeline delivered more gas to Germany, some of this gas found its way into the Czech Republic and then Slovakia. At first, there was a physical flow—from Germany to the Czech Republic to Slovakia to Ukraine. Over time, the market adjusted. Ukraine transits gas to Slovakia and Hungary, and this gas is being sent back into Ukraine. It is Russian gas in origin but not in name—Russian gas without geopolitical baggage, made possible mainly due to Nord Stream 1 and its impact on markets in Central Europe.
A similar scenario is possible with TurkStream. Today, Russia delivers gas to Turkey through two routes: the Blue Stream pipeline, which connects Russia and Turkey directly under the Black Sea; and the Trans-Balkan pipeline, which ships gas via Ukraine to Romania, Bulgaria, and onward to Turkey, Greece, and the Former Yugoslav Republic of Macedonia. When TurkStream comes online, we can expect flows to shift as they did with the Nord Stream 1 pipeline The Trans-Balkan pipeline might no longer send gas to Turkey. With time, Bulgaria and Greece could receive their Russian gas through Turkey rather than via Ukraine—and eventually, other countries might as well. What happened in Central Europe after Nord Stream 1 could happen in the Balkans with TurkStream.
Once again, this change will present challenges and opportunities. One challenge will be supply security. Transit always entails risk, and countries will need to be comfortable with Turkey’s growing role as a transit country. Greece has imported gas from Turkey (really, Azerbaijan) since 2007, so there is some comfort level with Turkey as a transit country. There have been some disruptions, physical rather than political, but the commercial relationship has been fraught, leading to multiple arbitrations. With the start-up of another tranche of gas from Azerbaijan, from Shah Deniz 2, Greece, Bulgaria, and Italy will depend on Turkish transit anyway. The only question is whether that transit role will be enhanced or not.
And therein lies the opportunity. The simplest option will be to leverage the existing infrastructure to create new flows. If the Trans-Balkan pipeline is no longer flowing gas south, it could be repurposed to flow gas north. Turkey has a connection point with both Greece and Bulgaria, and with some modifications, technical and regulatory, gas could find its way up to Romania and Ukraine (physically or virtually). Such change would even obviate the need for the interconnector between Greece and Bulgaria, a project that has struggled for years to gain traction, despite heavy state and European support.
The second opportunity lies with synergies between TurkStream and the Trans Adriatic Pipeline (TAP), which will connect the Turkish border with Italy via Greece and Albania. TAP can be doubled in capacity, thus absorbing much of the gas flowing through TurkStream. It could supply additional gas to Greece, Bulgaria, Albania, Italy, and the Western Balkans, where a proposed pipeline awaits. But for this to happen, Europe and, less so, the United States must be open to Russian gas flowing through TAP, which is far from certain. Such openness will require a recognition that once several supply sources comingle, the ability of any one player to dominate a market diminishes, especially given growing liquidity in Italy and Greece’s access to liquefied natural gas.
More fundamentally, this is the kind of adaptive strategy that could deliver benefits in dealing with the Nord Stream 2 pipeline project as well. So far, much of the effort is in either supporting the project or trying to block it. In practice, as the Nord Stream 1 pipeline showed, the market will adapt once the Nord Stream 2 pipeline is built, often in ways that are hard to anticipate. A stronger connection between Germany and Poland could lessen the overwhelming majority of the (gas) anxieties that the Nord Stream 2 project creates in Warsaw, even though it is still a Russian project with all the geopolitical connotations that this entails. Rather than looking to construct an expensive pipeline to send gas from Norway to Poland via Denmark, Poland and Germany could find a solution that links the two countries to shrink the sizeable price disparity that exists between them.
In simple terms, TurkStream can enhance liquidity and competition in Southeast Europe, just like Nord Stream 1 did in Central Europe. It can improve supply security, allowing countries like Romania and Ukraine access to additional supply sources. It can lessen the need for new infrastructure, as long as the existing infrastructure is used better—which will only happen with strong regulatory oversight, allowing access to infrastructure and enabling virtual trades that shrink price gaps between countries. It does not lessen the challenges of dealing with Russia’s geopolitical assertiveness, which transcends energy, but it offers a possible blueprint for dealing with the Nord Stream 2 pipeline: finding a way to repurpose infrastructure and let market forces deliver gas where it is needed. This is, above all, what Europe needs.
Nikos Tsafos is a senior fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.
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