TurkStream will reduce its reliance on Ukraine for sending natural gas to EuropeForecast- Turkey will maintain the upper hand in negotiations with Russia over the TurkStream pipeline. Ankara will use its position to secure major discounts on natural gas from Gazprom.
- Russia will use TurkStream to reduce its reliance on Ukraine's pipelines for sending natural gas to Europe, though it will never completely abandon Ukrainian infrastructure.
- Gazprom will continue to test the boundaries of European energy legislation, but it will ultimately comply with the Continent's regulations.
- Though new geopolitical realities are limiting Russia's energy leverage over Europe, pipeline politics will remain an important component of Russo-European relations in the coming years.
AnalysisEditor's note: Stratfor closely monitors the ebbs and flows of world energy. Aside from production, the transportation of crude oil, natural gas and petroleum products is of paramount concern for oil-producing nations. For energy consumers, transit routes are indispensible lifelines. A huge amount of the world's energy is transited through pipelines, across the Eurasian landmass in particular. In this periodic series we will examine some of the most geopolitically significant pipelines running through Europe and Asia. In this installment, Stratfor examines TurkStream, the successor to South Stream, from the Russian perspective.
Since Vladimir Putin came to power in the late 1990s, Russia's natural resources have formed the foundation of Moscow's attempts to assert its power abroad. To leverage those resources, the Kremlin has woven an intricate network of pipelines across Europe that has accorded Russia powerful political influence for a decade.
Despite Moscow's best efforts to maintain its sway over the Continent, Europe has succeeded in eroding Russia's energy leverage over the past few years. The latest battle has played out over Russia's TurkStream project, a natural gas pipeline formerly known as Turkish Stream that would circumvent Ukraine, sending Russian energy exports to Southern and Central Europe through Turkey instead. But finalizing the plans for the project has not been easy for Russia; though it has signed a deal with Greece, an agreement with Turkey remains elusive. Russia is hoping to push forward with building the first phase of TurkStream, which would bring natural gas to Greece and Turkey, while buying itself time to sort through the politics of the second construction phase — increasing the pipeline's capacity and connecting it to the rest of Europe.
TurkStream: Two projects in one
Gazprom, Russia's state-owned natural gas monopoly, envisions TurkStream as a network comprising four parallel pipelines running under the Black Sea to western Turkey. Together, the pipelines would have a total capacity of 63 billion cubic meters (roughly 15.75 bcm per pipeline) and would cost between $10 billion and $15 billion. Like its canceled South Stream predecessor, TurkStream is designed to send approximately half its capacity to Greece and Turkey while diverting the other half north into Central Europe.
To achieve both phases of the project, Russia would first need to secure the Turkish and Greek markets to support the project's first half. Only then could Gazprom proceed with its second phase, building the final three pipelines that would stretch onward to other European consumers. Combined with the Greek deal already in place, a final agreement with Turkey would do just that, guaranteeing a customer base for the project's initial infrastructure. As with South Stream, Gazprom and the Kremlin are looking to jump-start TurkStream's construction as quickly as possible.
By comparison, Russia is proceeding much more cautiously in its attempts to move forward with TurkStream's second phase. Gazprom's previous strategy of trying to control the entities involved in the construction and operation of the Bulgarian segment of the South Stream pipeline ultimately shuttered the project because it flouted the legislation of Europe's Third Energy Package. This time, Gazprom has changed its model, choosing instead to leave Russia's natural gas at Europe's doorstep, hoping to entice European companies and countries into approaching it with offers of partnerships. Russia recognizes that any expansion of the TurkStream pipeline into the Continent will likely need to be led, financed and constructed by Europe itself.
Given this calculation, Russia's hurried efforts to begin construction on TurkStream are meant to convince Europe that its intention to stop using Ukraine as a natural gas transit state when Gazprom's contract with Ukraine's Naftogaz expires at the end of 2018 is not a bluff. Constructing even part of the TurkStream project would be a concrete step in that direction, which Russia hopes would give potential European investors more confidence in future pipeline expansions into Central and Southern Europe.
Pipeline politics
Many factors besides economics will determine the viability of the TurkStream project. Much of the last decade has seen a number of competing pipeline proposals — Nabucco West, Blue Stream II, Nabucco and South Stream, to name a few — falter and fail, in large part because of political factors that ultimately shaped final investment decisions. The environment TurkStream must navigate is no less complex, and each player involved in the project has a different and often competing set of objectives to meet.
Russia, for its part, has a clear rationale for pushing forward with TurkStream. The stated purpose of the project is to diversify away from using Ukraine as a transit state for natural gas being sent to Europe for economic and security reasons. Gazprom's concerns about Ukraine's unreliability are legitimate and, for the company, a sufficient reason to look for alternative routes. Disputes between Gazprom and Ukraine have forced Russia to take into account not only Kiev's actions but also any disputes that may hurt downstream customers. Such disputes have twice resulted in natural gas cutoffs, and Ukraine's subsequent decision to simply keep the natural gas intended for Europe. From the Kremlin's point of view, it should have the ability to cut off supplies to Ukraine if Kiev fails to make its payments without risking Russia's relationships with downstream customers, including Turkey. Beneath this more public line of reasoning is the related motive of maintaining leverage over Ukraine. Natural gas has traditionally provided Moscow with a powerful political tool in its relations with Kiev; having a way to bypass Ukraine as a transit state to Europe would increase the strength and utility of that tool.
Moscow is also looking to maintain Turkey's energy interdependence with Russia. Turkey is already the second-largest European consumer of Russian natural gas, behind only Germany. It is also perhaps the only Gazprom market outside of East Asia that is projected to experience significant growth as it continues to develop.
Turkey, in its own attempts to diversify its energy sources, has taken steps to become a key transit state in Europe's Southern Gas Corridor proposal, which would supply the Continent with natural gas from the Caspian and Middle Eastern regions in the not-too-distant future. Looking for ways to bypass Russia for supplies, Europe has continued to seek out options that limit Russia's involvement in its energy imports, if not exclude it entirely. Because TurkStream would neither increase natural gas flows to Europe nor alleviate bottlenecks in transportation, Brussels has openly questioned the project's viability. Europe's active attempts to facilitate trans-Caspian natural gas routes, as well as thawing relations between the West and Iran, which borders Turkey and holds the world's third-largest reserves of natural gas, have added to Russia's sense of urgency in making progress on the TurkStream pipeline.
Ironically, the Southern Gas Corridor could provide Russia with an alternative route for exporting natural gas to Europe. Russia currently cannot transport natural gas through the Trans-Adriatic Pipeline, a Southern Gas Corridor project designed to send natural gas from Azerbaijan and possibly Central Asia to Italy, because of an exemption in EU laws requiring the pipeline be accessible to all potential suppliers. However, the exemption is in place only for the first phase of the project; if the pipeline were to expand, non-Azerbaijani suppliers (including Russia) could use it to send natural gas downstream to Greece and Italy. Since Gazprom's internal production costs will likely always undercut other, more expensive production in the Caspian region, the company would likely retain an edge in negotiations with Central Asian producers over their involvement in future projects transiting the Caspian Sea. Russia has already entered into close talks with Azerbaijan, intending to insert itself into future Southern Corridor projects.
As Russia continues its talks with Turkey to reach a final deal on TurkStream, it will keep looking for ways to move forward on the first phase of the pipeline's construction, despite political resistance from the West. Though Gazprom's South Stream failure will make the company cautious in the future as the project expands into Europe, Russia will at least be able to pursue initial construction unhindered by the Continent's regulations.
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