TURKISH STREAM FOR TURKEY
Turkey is blessed by its geographical position with its geographical excellence on the crossroads of Balkans, Middle East and Caucasus, while cursed by its rogue neighbors. Turkish-Russian relations rely on more than 500 years historical background, where both were at the odds to gain leadership, spread their influences in the region. Both tried to set up new wave of relations after World War I, during Bolsheviks' leadership in Russia and that of Mustafa Kemal Ataturk in Turkey, during and after Soviet Union. After the collapse of USSR and end of the Cold War, Turkey launched independent foreign policy towards its neighbors, notably newly independent ex-Soviet republics.
The natural gas agreement of 1984 was the cornerstone of the Turkey-Russia energy relations, which is later consolidated with second natural gas agreement (1996), Blue Stream agreement (1997) and Samsun-Ceyhan oil pipeline. Energy relations mostly developed on the sense of 'Russia is gas pumping country' and 'Turkey is a bridge or consumer for that', meanwhile energy became both cooperation and competition factor between both. After the end of Cold War, Turkey-Russian relations soured because of numerous factors such as the Chechen diaspora in Turkey and its support for Chechens militants, while alleged Russian support to PKK and Cyprus in its conflict with Turkey, divergence on Syrian crisis, and annexation of Crimea etc.
Energy relations got new breath during then Russian PM, Viktor Chernomyrdin's visit to Turkey in 1997, which led to signing of Blue Stream natural gas pipeline agreement. This project mitigated Russia's concerns remaining after the BTC pipeline. Russia's "Blue Stream II" plan, which envisaged delivering Russian gas through Turkey to Israel and Middle East, halted because of 'Mavi-Marmara' case. Turkey's increasing gas import from Russia made both of them distinguish political and economic dimension of relations. When Iran closed gas pipes during winter and during 2006/2009 Russia-Ukraine gas crisis, Russia increased gas supply for Turkey via Blue Stream, which rendered Russia reliable energy partner for Turkey. The 70% of Turkey's gas import from Russia comes through Trans-Balkan pipeline, which passes via Ukraine through Moldova, Romania and Bulgaria.
Transit importance of Turkey raised with the materialization of Baku-Tbilisi-Ceyhan oil pipeline. Later, Nabucco appeared as main project of East-West energy corridor to deliver Azerbaijani and Turkmen gas toward Europe to decrease the EU's gas dependence on Russia. In this context, South Stream was Russian-led project to sideline Nabucco and compete with construction of alternative pipeline to Europe. In 2007, Russia kicked off South Stream pipeline project, which is to start from Russian coasts of Black Sea, go under that to Bulgaria, onto to Serbia, Hungary, Bosnia and Herzegovina, Croatia, Austria and Italy to pump 63 bcm gas. Initially, South Stream is planned to be constructed through water areas of Ukraine in the Black Sea. Later, due to political modifications in Ukraine, Russia agreed with Turkey to re-route South Stream through Turkish waters.
South Stream is down
On 1st December of 2014, two ambitious leaders of the world, Russian president Vladimir Putin and Turkish president Recep Tayyip Erdogan met in Turkey, where Putin announced suspension of the South Stream pipeline. On that day, Turkish BOTAS and Russian Gazprom inked new Memorandum of Understanding to construct new offshore natural gas pipeline across the Black Sea to Turkey with 63 bcm annual capacity. The 14 bcm will be supplied to Turkey and remaining 50 bcm is considered for the new gas hub that will be constructed at the Turkish-Greek border, which might be further transported to South-East European countries.
During his speech, Vladimir Putin talked about "increase of gas supply for Turkey", "expansion of Blue Stream's capacity", "6% gas discount for Turkey", "suspension of South Stream" etc. He stated that, because of European Commission's unconstructive position and absence of permission from Bulgarian government, Russia will be not able to continue the implementation of South Stream. "If Europe does not want to implement it, then it will not be implemented. [...] But that was our European friends' choice", Putin said. Under existing circumstances, we cannot start construction, as it would be ridiculous to start construction, reach Bulgarian shores and stop there. Therefore, we are ready to build another pipeline to Turkey and additional gas hub for the South European consumers in the Turkish-Greek border in Turkey.
"The project is closed. That's all." Gazprom chief Aleksey Miller said. Miller stated that Russia will re-route the South Stream to Turkey through its territories till Turkey-Greece borders. New pipeline will start from Russia's Black Sea port of Anapa (Russkaya Compressor Station), where South Stream is supposed to start. But, how they will call it, if not South Stream anymore? "Blue Stream II" or "Turk Stream", not clear yet.
Implications for Turkey
In her article for Foreign Policy, titled "The Tsar Meets the Sultan", Berivan Orucoglu writes that, "Russia carved the headstone for the South Stream gas pipeline." "The two [Putin and Erdogan] indeed have much in common" from historical pasts and domestic policy to governance, political careers, etc. "Erdogan is not naive, he must realize that his alliance with Russia is not a strategic partnership, but a pragmatic one", she writes.
Recent crisis in Ukraine, reemphasized role of Turkey not only for the EU, but also for Russia to avoid new risk of gas supply disruption to Europe. Although, Turkey will be more dependent from Russian gas with this agreement, former will receive 6% discount of gas and this will enhance Turkey's importance as an energy hub. Therefore, Turkey wants to turn itself a regional energy hub for transportation Azeri, Turkmen, Iraqi, Iranian and Mediterranean natural gas as well. However, Turkey's Energy Minister Tanel Yıldız said that 6% discount for gas prices is not final, we are still negotiating over prices, because we want more of gas discounts from Russia.
Russia will also expand gas flow through Blue Stream pipeline from current 16 bcm to 19 bcm per year. Apart from that, Russia also exports 14 bcm/year of gas to Turkey through the Trans-Balkan pipeline via Ukraine through Moldova, Romania and Bulgaria. The problem is that current gas delivery through Trans-Balkan pipeline to Turkey is fragile to possible disruptions because of ongoing crisis between Russia and Ukraine, as well as between Gazprom and Naftogaz.
Turkey also wants to avoid its dependence from single supplier and to meet its energy demands with lower prices from reliable sources, the best way which is currently considered diversification through Southern Gas Corridor that will bring Azeri and possibly Turkmen gas and in the future Arab Gas Network that supposedly will bring Iraqi or Mediterranean gas. Currently Turkey meets its natural gas demand from Russia (Trans-Balkan and Blue Stream pipeline); Azerbaijan (South Caucasus pipeline); Iran (with long-term contract till 2026); Algeria and Nigeria (LNG import).
Though new pipeline will cement Russia's position in Turkish energy market, unlike Ukraine, Russia will not be able to influence Turkey, consequently there is little room for Moscow to politicize the pipeline going to Turkey. From the other hand, Russia exports natural gas not only through Ukraine, but also Belarus, Germany and now Turkey, which grants Russia new power to shift supply from one to another route through which Russia can target specific EU countries for its political motives.
Implications for Russia
"From a political point of view, Turkey and Russia are poles apart", but recent gas agreement brought them together, regardless of their disagreements on many issues, such as Syria, Crimea etc. Both Russia and Turkey are vindictive towards the EU, because of EU-led sanctions toward Russia by virtue of crisis in Ukraine and annexation of Crimea and delays for Turkey's EU membership respectively. With his visit to Turkey, Putin wanted to demonstrate to the world that that there are still alternatives for Russia and he is not totally isolated, though energy is only thing Russia can currently offer. In the light of strained relations of Russia with West and current situation of Russian economy, Putin's visit was noteworthy.
With crisis popped out in Ukraine, Russia launched to seek new gas markets. Putin's declaration to halt South Stream and re-route new pipeline to Turkey was a retaliation to western sanctions. One of them was Russia-Chinese 30-years natural gas deal to break its market dependence from Europe, which will enable Russia to consolidate its position in Chinese energy market through the Siberian Pipeline and the Altai Pipeline. Russia also plans to build new natural gas pipeline between Sakhalin Island and Japan's Hokkaido Island.
Chief of Gazprom, Aleksey Miller said that Russia will change its strategy toward European gas market. Henceforth, Russia will not deliver gas to consumer, but consumers will come for commodity to "market" (new gas hub in Turkey). The transit role of Ukraine will be nullified taking into consideration the capacity of new pipeline, as export for Europe will be conducted through alternative routes, while Ukraine will be able to import only for its domestic consumption, he said. However, until Russia finalize the construction of new pipeline to Turkey, Ukraine will keep its importance as a transit country. As it was in South Stream, this pipeline is also supposed to nullify Ukraine's transit status, though it will take a long. Possibly, Russia can use reverse flow option for the pipeline running through Romania and Bulgaria to Greece, which might be supplied from the planned hub in Turkey.
Mikhail Krutikhin from RusEnergy says that, "Agreement with Turkey is very long way off because it was not an agreement, but just a memorandum of understanding, [which] means it is nonbinding for the parties and a lot of negotiations are needed to give this project a push to go ahead." Actually, most of gas is considered for European markets from Turkish-Greek borders onwards, the market that already captured by South Gas Corridors, which means Russian gas may compete with Azeri gas, possibly with Turkmen and Iraqi gas in the future.
The disputed issue is 'where to construct the pipeline'. Two options are proposed: 1. To construct pipeline next to Blue Stream in Samsun, which is preferred by Russia, as it will be relatively cheaper; 2. To lay down pipeline under the Black Sea towards Thrace region of Turkey. Turkey prefers second option, since there is already infrastructure (Blue Stream) in Samsun to supply region, while western part of country is supplied mostly through Trans-Balkan pipeline. Moreover, Russia and Turkey also plan to construct LNG terminal near to border with Greece, where construction of new gas hub is expected. This will open the way of transportation of Russian gas with LNG tankers across the region. Whereas, restrictions to long-term credits for Russian banks prevented Russian companies to address enough capital to new pipeline projects.
Interesting comment came from Georgian party leader of "United Democratic Movement", Nino Burdzhanadze to re-route failed South Stream trough Georgian territories toward Turkey. She called it historical chance to enhance strategic importance of Georgia and strengthen stability of country. However, Russia would not like to be dependent on new transit country, notably from Georgia and to include third country in negotiations, where Georgia may use its transit position as a bargaining cheap for its breakaway territories.
South Stream has been halted due to EU's opposition to pipeline that did not comply with "Third Energy Package", which stipulates that single company should not both own pipeline system and transport gas through it. Certainly, official Moscow could not go for that, as it meant end of Gazprom's monopoly. Regardless of re-routing pipeline to Turkey, it will have to stop in Turkey-Greece border and will face same barrier as it did with Bulgaria, in case Russia decides to go further on its own [infrastructure]. Since Greece is an EU member, same rules apply to Greece as well.
However, 50% of Trans-Adriatic Pipeline is left for third party access, while another 50% is granted "Third Party Access" exemption from the European Commission. This can enable Gazprom to request TPA to join TAP as a gas supplier, but not owner. As Aleksey Miller said, European consumers may buy Russian gas in the [Turkey-Greece] border as well, which does not contradict TEP rules at all. According to the Commission's regulation, third party also can request construction of additional entry/exit points in the [Turkish-Greek] border, where Russia can sell its gas.
From the other side, neither Russia, nor Turkey are the EU members, consequently both countries are not bound by TEP, which makes construction much easier from legal point of view as it will be bilateral pipeline. Because, if Turkey was an EU member states, Russia would face same obstacle as it did in South Stream, while Turkey would be bound to implement Third Energy Package rules (unbundling and third party access) for the pipelines passing across its territories. This means, BOTAS and TPAO would lose their control over transmission network and other infrastructures. Implementation of South Stream with "Third Party Access" exemption or without complying the TEP would rather strengthen Russia's hand in the Central European gas market.
Suspension of South Stream was not in surprise at all. Because, in June 2014, Bulgaria had already declared suspension of works on the South Stream in Varna. Moreover, in April 201, Turkey Energy Minister, Taner Yıldız had stated that, "We are open to assessing any request for the line [South Stream] to pass through Turkey's territory". Hence, suspension of South Stream had been already negotiated and decided before Putin's visit to Turkey.
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IEA - For the third consecutive year, global energy investment declined, to USD 1.8 trillion (United States dollars) in 2017 – a fall of 2% in real terms. The power generation sector accounted for most of this decline, due to fewer additions of coal, hydro and nuclear power capacity, which more than offset increased investment in solar photovoltaics.
EIA - Crude oil production from the major US onshore regions is forecast to increase 143,000 b/d month-over-month in July from 7,327 to 7,470 thousand barrels/day , gas production to increase 1,066 million cubic feet/day from 69,466 to 70,532 million cubic feet/day .
U.S. FRB - Industrial production rose 0.6 percent in June after declining 0.5 percent in May. For the second quarter as a whole, industrial production advanced at an annual rate of 6.0 percent, its third consecutive quarterly increase. Manufacturing output moved up 0.8 percent in June.
U.S. DT - The sum total in May of all net foreign acquisitions of long-term securities, short-term U.S. securities, and banking flows was a net TIC inflow of $69.9 billion. Of this, net foreign private inflows were $58.8 billion, and net foreign official inflows were $11.1 billion.