RUSSIAN GAS STRATEGY
On December 1 2014, during his official visit to Turkey, Russian President Vladimir Putin announced the suspension of South Stream, blaming the EU for its "unconstructive" position. In fact, the realization of pipeline had become untenable as a result of various legal, political and financial issues, such as the EU's Third Energy Package, the Ukraine crisis and the ensuing sanctions over companies involved in South Stream (Stroytransgaz and Gazprombank). That day, Turkish BOTAŞ and Russian Gazprom signed a Memorandum of Understanding for construction of a new offshore gas pipeline with 63 bcm/a capacity, to run under the Black Sea to the Turkey-Greece border. Some 16 bcm of this amount will be supplied to Turkey in the first phase in December 2016. In the second phase, the remaining 47 bcm will be delivered to the planned gas hub near the Turkish-Greek border – on the Turkish side – to transport Russian gas to Europe.
The key question is whether the Turkish Stream will be a competitor for the Trans-Anatolian or Trans-Adriatic Pipelines, which envisage the delivery of 16 bcm of Azerbaijani gas to Turkey and Europe by 2018 and 2020 respectively. There had been similar tensions between the South Stream and Nabucco projects; while previously Nabucco offered an alternative to South Stream, now Turkish Stream presents an alternative to TANAP/TAP.
However, Nabucco failed due to political and financial uncertainties, and was subsequently redesigned as Nabucco-West, after Azerbaijan and Turkey initiated TANAP in 2012. When Azerbaijan opted for TAP over Nabucco-West in June 2013, Baku's choice was interpreted a positive development for Russia's South Stream; Azerbaijan refrained from angering Russia as a pipeline competitor.
One of the main factors in Moscow's shift from South Stream to Turkish Stream was the EU's Third Energy Package (TEP). Under these rules, a single company cannot own the pipeline through which it also supplies gas. Neither Russia nor Turkey is an EU member, and so neither are bound by the TEP, which makes the construction of Turkish Stream much easier. However, the construction of Turkish Stream is not the only issue at stake. The pipeline will have to stop at the Turkey- Greece border because of the TEP rules, given that Greece is an EU member state.
Thus Russia will need its customers to buy its gas right at the border from the planned natural gas hub in Turkish territories. Meanwhile, the new government in Athens has expressed interest in the extension of the Turkish Stream into Greece. In order to transport its gas to Greece and onwards, Gazprom needs to use existing interconnectors – either TAP or Interconnector-Turkey-Greece-Italy, including the DESFA-operated Greek National Gas Transmission System (NGTS).
Turkish Stream is intended to end in the Ipsala district of Turkey (near the Greek border), where TANAP is also planned to end and connect with TAP. This raises another question, namely whether the termination of both pipelines at the same location will create competition in terms of market share, given the possible expansion capacity of both TAP (from 10 to 20 bcm/a) and TANAP (from 16 bcm/a to 23/31 bcm/a).
In fact, Russia has the opportunity to export its gas via TAP from the Turkish Stream toward Europe, without Gazprom's presence in the TAP Consortium and without breaching the TEP rules.
First of all, Russia has no stake in TAP. Second, in the first stage, TAP is supposed to use 50% of its total capacity for 10 bcm/a. It can expand its capacity up to 20 bcm/a (100% of total capacity) in the second stage. Third, the EU Commission's regulation left 50% of TAP's total capacity open for Third Party Access (TPA) for the Expansion Capacity (second stage). Fourth, the EU regulation also states that upon request of a third party, TAP is obligated to construct additional entry/exit points in Greece to receive gas from non-Shah Deniz sources.
In this context, Russia may reserve space in the TAP by requesting TPA to transport its gas (as a supplier, not an owner) at the second stage of gas delivery, or request the construction of additional entry/exit point for additional compressors at the expansion capacity of TAP. If Russia does not own the infrastructure, but simply sells its gas from the Turkey-Greece border, its actions are not in contravention of the TEP rules. However, the Shah Deniz Consortium has already secured 10 bcm of Azerbaijani gas with a 25-year-contract for the first stage of gas delivery via TAP. Under this contract, the Consortium has already secured 100% of its initial capacity (50% of final capacity). Meanwhile, the Consortium has been already granted a TPA exemption by the EU Commission for 100% of initial capacity (for 10 bcm) of the pipeline for 25 years. This means that Russian gas cannot be transported via TAP for at least the next 25 years, unless there are either significant market or geopolitical changes, or sufficient gas demand to drive expansion. The long-term contracts of Shah Deniz Consortium together with the relevant provisions of EU law make this option unlikely, as Gazprom plans to pump its gas as earlier as possible.
Allowing Russian gas to enter TAP could put both Russian and Azerbaijani gas in competition in terms of price and volume. Beyond the 10 bcm, Azerbaijan is expected to increase its gas flow from the Azeri-Chirag-Guneshli, Umid, Absheron fields and possibly Shah Deniz Phase III. It can deliv- er this via the Interconnector-Greece-Bulgaria to Bulgaria, and the Ionian-Adriatic Pipeline (from Albania) to Montenegro, Bosnia-Herzegovina and Croatia in the second stage of gas delivery. More- over, the amount that Turkey is supposed to receive via Turkish Stream is close to the volume currently transported by the Trans-Balkan pipeline (TBP) to Turkey via Ukraine, Moldova, Romania and Bulgaria. However, the expiration of a transit agreement on Russian gas supply through Ukraine in 2019 along with the completion of Turkish Stream mean that TBP will likely be suspended. Thus, Turkish Stream will enable Russia to change the route of its current gas export to Turkey, without affecting the current volumes, and without competing with TANAP in terms of capacity.
Furthermore, Greece also wants to see Russian gas transported via the Interconnector-Turkey-Greece-Italy (ITGI) as an extension of the Turkish Stream from Greece to Europe. This could pave the way for Russian gas through the Interconnector-Greece-Bulgaria (which also considers transportation of Azerbaijani gas) as an additional branch from ITGI. Back in June 2007, President Putin suggested to Athens that Greece join South Stream, because Russia was planning to construct an alternative route for South Stream towards Greece in case the northwestern route to Bulgaria did not come to fruition. However, both the Turkey-Greece (ITG) part of ITGI and the Greek part of IGB will be operated by DESFA as part of the NGTS. Given that SOCAR hopes to purchase 66% of DEFSA, it is possible that SOCAR can control Russian gas delivery if Gazprom decides to transport its gas through ITGI (or ITG).
Surprisingly, on March 4 ,2015, following his meeting with Azerbaijani President Ilham Aliyev, Bulgarian PM Boyko Borisov called for the revival of Nabucco pipeline as a part of the Southern Gas Corridor (SGC). After the failure of both Nabucco and South Stream, Borisov's stance is understandable, as Bulgaria has been sidelined twice. President Ilham Aliyev states that, "Bulgaria has already become a part of the Southern Gas Corridor via IGB pipeline, [but] we can merge TAP and Nabucco by virtue of the huge gas reserves of Shah Deniz, Absheron and Umid fields." The issue is not the revival of Nabucco; the intent is to transport Azeri gas through existing interconnectors to Nabucco-West countries – namely Bulgaria, Romania and Hungary, which Russia is also targeting. Russia plans either to revive South Stream's onshore section as an extension of Turkish Stream from Bulgaria to Serbia, Hungary and Austria, or to set a reverse flow via Trans-Balkan pipeline to Bulgaria, Romania through to Greece. Russia also supports the construction of a new pipeline from Greece through FYROM, Serbia and to Hungary, once gas volumes have entered Greece through the Turkish Stream. However, it is not yet clear from where in Greece this new pipeline will pump Russian gas toward Hungary, nor which pipeline with which it will be merged – TAP or ITGI.
Ultimately, the move from South Stream to Turkish Stream will not change Russia's energy market, as the latter might be extended into Greece or Bulgaria via different pipelines. Thus, Russia is seeking either to target potential markets (Central and Eastern Europe) for Azerbaijani gas, or to use the additional capacity of Azerbaijan's gas export routes. At first glance, it might seem that the timeline and capacity of Turkish Stream will hamper Azerbaijan's gas strategy in Southeast Europe, given that Azerbaijani gas will reach Turkey in 2018 and Europe by 2020. However, the 16 bcm of gas from Shah Deniz's Phase II that TANAP/TAP will carry to Europe has already been sold based on 25-year contract with European companies, and the initial capacity of TAP has been secured via a TPA exemption under EU Regulations. These long-term agreements protect SOCAR from the risk of competition from other gas suppliers. Consequently, Russia is seeking additional routes for gas exports, such as onshore sections of South Stream and reverse flow via Trans-Balkan Pipeline. Meanwhile, the transportation of Russian gas via ITGI is matter of time and financing, while a new pipeline via FYROM, Serbia to Hungary might encounter new problems with TEP rules.
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