Russia and Turkey have agreed a pipeline deal which would open a new transit route for Russian gas to the EU. An inter-governmental agreement was signed by each country’s energy minister on Monday in Istanbul, where the 23rd World Energy Congress has been underway.
The agreement, which sets out the legal framework for the Turkish Stream offshore pipeline project (“TurkStream”), provides for the construction of two parallel natural gas pipelines some 900km from Russia to Turkey underneath the Black Sea, with the addition of an onshore pipeline for transit to Turkey’s border with Greece. Although Russia’s Gazprom and Turkey’s BOTAS signed a memorandum of understanding in December 2014 to construct the pipeline, recent political tensions between the two countries meant that Monday’s announcement was widely unexpected.
If implemented, TurkStream will open a fourth route to the EU market for Russian gas. Transmission routes currently in place include the Nord Stream and Yamal-Europe pipelines which export gas via the Baltic Sea and Belarus, respectively. Natural gas exports via Ukraine, which currently transports around 40% of Russian gas to Europe, have fallen sharply following Russia’s annexation of the Crimean peninsula in 2014. It is also unclear what commercial terms will be agreed between Gazprom and Ukraine’s state-owned Naftogaz when the current transit contract expires in December 2019.
Russian transit diversification: South Stream to TurkStream
TurkStream was conceived in the immediate aftermath of the cancelled South Stream offshore pipeline project (“South Stream”) which, if followed through to construction, would have transported Russian gas via the Black Sea to Bulgaria and onwards through South-Eastern Europe.
This alternative to shipping gas via Ukraine was ultimately abandoned following objections from the European Commission regarding the bilateral agreements signed between Russia and each of the transit states. In particular, the Commission argued that the proposed arrangements would violate EU ‘unbundling’ rules introduced in the EU’s third energy package, as Gazprom would simultaneously own both production capacity and the transmission network. Concerns were also raised regarding the tariff structure and non-discriminatory access to the pipeline infrastructure by third parties.
The inter-governmental agreement signed on Monday serves to partially revive the South Stream project. TurkStream will follow a similar pipeline route to that planned for South Stream, but will stop short of the EU’s external border. An existing Russia-Turkey gas pipeline (Blue Stream) already carries gas to the East of the country.
The TurkStream project in outline
Details of the TurkStream project have so far been released in outline only. What is clear is that Gazprom will finance and construct the offshore section of the pipeline, with BOTAS constructing the onshore section through Turkey. Gazprom has rendered the support of its subsidiary South Stream Transport B.V. which, as its name indicates, was established originally for the planning and construction of the South Stream project.
Cited as having a maximum capacity of 31.5 billion cubic metres, the pipeline will start on the Russian south coast and run through the Black Sea, reaching depths of up to 2.2km, before making landfall in the Thrace region of Turkey some 100km west of Istanbul. The Turkish authorities in September 2016 granted Gazprom survey permits in respect of the sections of pipeline that run through Turkey’s territorial waters and exclusive economic zone.
Details of the development timeframe have not yet been disclosed. It is also unclear what level of gas price discount will be granted to BOTAS by Gazprom.
The TurkStream pipeline, if completed, would improve security of supply of gas to the EU, opening a new transmission corridor and removing some of the risk of supply disruptions associated with transit via Ukraine. Nonetheless, the success of the pipeline remains subject to uncertain Russia-Turkey relations and the backdrop of an EU energy policy intent on diversifying sources of supply.
Unlike its predecessor South Stream, TurkStream is unlikely to meet opposition from the EU on competition law grounds, as it would transport gas to the EU external border and no further. However, a new route that strengthens Russia’s position in the European gas market stands at odds with the European Commission’s Southern Gas Corridor (“SGC”) initiative. Turkey has been identified by the European Commission as an important partner country in the SGC initiative, which would see a series of pipelines bring gas from the Caspian and Middle East regions to European markets. In particular, Turkey is a key player in the Trans-Anatolian Natural Gas Pipeline Project (“TANAP”), which will transport natural gas produced in Azerbaijan’s Shah Deniz field through Georgia to Turkey and then on to the EU.
Another hurdle to the success of TurkStream is the political relationship between Russia and Turkey going forward. Monday’s deal comes after a period of strained political relations between the two countries. Negotiations on TurkStream were unilaterally halted by Russia following Turkey’s downing of a Russian military jet on the Turkey-Syria border in November 2015 and Russia’s subsequent imposition of economic sanctions.
Monday’s announcement also comes at a time when another transit diversification project is undergoing regulatory scrutiny. In 2015, Shell, Uniper, Wintershall, Engie, OMV and Gazprom signed a shareholders’ agreement to build Nord Stream 2, which would extend Nord Stream with two additional pipelines. However, earlier this year the Polish Office for Competition and Consumer Protection forced the participants to reconsider the legal structure of the project when it denied merger clearance to the joint venture, finding that the concentration might lead to a restriction of competition.