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16 November 2016

The Turkish Stream Agreement and What It Means

The Turkish Stream is really just another "agreement to agree"

On October 10, in the margins of the 23rd World Energy Congress being held in Istanbul, Russia's president Vladimir Putin and Turkey's prime minister Recep Tayyip Erdogan signed an agreement confirming common intentions to proceed with construction of the Turkish Stream pipeline, after bilateral relations improved following a Turkish apology for the November 24 2015 shootdown of a Russian Sukhoi-24 bomber. The new intergovernmental agreement clarifies some geophysical aspects of Turkish Stream's planning but still represents an "agreement to agree", fulfillment of which is still conditional upon circumstances, some out of the control of both parties.

Putin first proposed the Turkish Stream project in December 2014 during a meeting in Ankara with Erdogan after the abrupt Russian decision to shelve the South Stream project, which had been planned to carry Russian gas to Europe under the Black Sea to Bulgaria and other members of the European Union. The latter project fell afoul of the EU's Third Energy Package, specifically its anti-monopoly provisions, because Gazprom had insisted on owning the South Stream on EU territory, transiting its own gas through it, and exercising exclusive authority over third-party access.

Turkish Stream may be considered the replacement for the abandoned project of a second line of Blue Stream which was the first Russian-Turkish pipeline under the Black Sea, agreed upon in 1999 which opened for business in 2003. This second line was  abandoned for the ill-fated South Stream project which Turkish Stream is in turn meant to replace. The Blue Stream natural gas pipeline runs a total length of over 1,200 kilometers and achieves landfall near Samsun, in north-central Turkey. After years of partial volumes entailing financial losses for Russia, it achieved consistent volumes of just over 14 bcm/y as from 2011.

Turkish Stream is being developed by South Stream Transport BV, a subsidiary of Gazprom registered in The Netherlands, and is planned as two parallel lines or "strings", each carrying a maximum of 15.75 billion cubic meters per year (bcm/y) over 900 kilometers from Anapa, Russia, to Kiyikoy in Turkish Thrace. According to reports, these would connect up, first, at Luleburgaz, with the Turkish pipeline that already receives gas through the so-called "western route" (i.e., via Ukraine, Moldova, Romania, and Bulgaria: also called the Balkan Corridor and the Trans-Balkan Pipeline) that Russia is threatening to let lapse after transit contracts with Ukraine expire at the end of 2019. The line would also provide a junction, farther to the southwest, at Ipsala on the Greek border, to the Trans-Adriatic Pipeline (TAP) to Italy. It is thought that Russia might bid for space in a projected second string of the TAP (the first carries 10 bcm/y from Azerbaijan) sometime in the next decade.

Like the many almost annual "agreements" signed between Russia and China over the last decade, concerning the different natural gas pipeline projects now put together under the "Power of Siberia" umbrella, the one just signed by Putin and Erdogan is really another "agreement to agree". This is not to say that no pipeline will ever eventuate, but rather to caution against overestimating the new agreement's significance. However, the sticking-points between Russia and China were always the price for the gas and the funding for the pipeline construction; and indeed, these seem still to be less than fully settled and blocking implementation, despite official celebrations of the East Siberian gas deal's final sealing. (Industry sources suggest that economists at Gazprom are less enthusiastic about it than the geopoliticians in the Kremlin.) Significantly, those two issues are also outstanding questions in the current state of the Turkish Stream project.

Thus, concerning price, although Putin publicly remarked that he had agreed to give Turkey a price discount on the gas, this was not specified. By contrast the two sides had reportedly agreed on a 10.25 per cent price discount for Russian gas to Turkey (also applicable to Blue Stream) in a meeting in Antalya in November 2015 before relations were frozen. Bearing in mind that there were also many "price agreements" with the Chinese side over the Siberian gas projects that were really only agreements to agree, the failure to provide details on the gas price to Turkey makes it impossible to exclude, that Russia is in fact renegotiating that discount.

That is all the more plausible in view of Turkey's apparent renunciation of all demands made to Russia during the previous period, before the freezing of bilateral relations consequent to the shootdown of the Russian bomber in late November 2015. In particular, the second string of the pipeline, if built, will be laid underground across Turkish Thrace.

This is a climbdown from the earlier Turkish position, as stated by Energy and Natural Resources Minister Ali Rza Alaboyun, who said the matter required further discussion. Turkey had at that time still sought capital investment and training from Russia in petrochemical industrial enterprises on Turkish territory, such as Azerbaijan volunteered to Turkey as part of its investment in TANAP.

Likewise, concerning the second question, the one over funding, the bilateral agreement empowers the Russian side the seek third-party participation, suggesting that this is in fact necessary. Yet traditional international financial institutions appear unlikely to back it, and neither the Chinese-backed Asian Infrastructure Investment Bank nor the Islamic Development Bank, nor even the Asian Development Bank, is likely to show interest.

In addition, the undersea pumping stations (planned years ago for the South Stream project, the route of which Turkish Stream will follow until turning south to Turkish Thrace) are based on old technology, no longer produced, and also very likely subject to Ukraine-related trading sanctions on Russia if they can be found. To lay a single string of Turkish Stream may cost up to $5 billion at a time when Gazprom has no funds to construct the Power of Siberia One line to China and some estimates suggest that the state budget Reserve Fund itself (which stood at $87 billion in 2014) will run out sometime next year.

Russia suggests that if the pipeline's second string does not eventually export to world markets, then it could still feed any increase in Turkey's needs for domestic consumption. This would only increase Turkish energy dependence on Russia, which has risen from 40 to 55 per cent over the last 10 years, in respect of natural gas imports.

Even if only one string of the project is ultimately built (or even none), the constellation of diplomatic and geo-economic forces around the project confirms Turkey’s political weakness after the attempted coup, not just domestically but also in foreign policy power-projection, to the point where one observer sees the emergence of a Russian-Iranian condominium in the broader region, already manifest in Syria and Iraq.

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