Russia is gambling big with its Turkish Stream problem. Gazprom is preparing to begin work on the Turkish Stream pipeline without there being an Russian-Turkish intergovernmental agreement in place. The Japanese firm Saipem, which Russia has been paying for months to sit idle in the Black Sea after cancellation of the South Stream project, will begin laying the pipeline in the Russian sector in early June.

The Risks in Russia’s Turkish Stream problem

This is an enormous risk, because the European Union is unsympathetic to any Turkish Stream problem, as the pipeline is Russia’s last-minute replacement for the cancelled South Stream project that would have made landfall in Bulgaria. It is an enormous risk, also because any gas from Russia putatively targeted at the European Union will compete with gas from Azerbaijan that will transit the Trans-Anatolian Gas Pipeline (TANAP) making landfall in Greece with onward transmission through the Trans-Adriatic Pipeline to Italian and Central European markets.

TANAP, on which construction began two months ago, will carry 16 billion cubic meters per year (bcm/y) in the first instance, of which 6.6 bcm/y will be for domestic Turkish consumption. The remaining 10 bcm/y will go into TAP, on which construction will commence next year. Azerbaijan has already signed contracts for these 10 bcm/y respectively with Italy, Greece, and Bulgaria.

It is noteworthy that the work of laying the pipe for Turkish Stream is scheduled to begin in the Russian sector of the bed of the Black Sea next month, without the requisite environmental permits from the Turkish side being in place for construction in the Turkish sector. If the Turkish Stream problem is resolved, Russia declares that gas will flow by the end of the 2016; but the Turkish Ambassador to Russia publicly asserted that the project could not be considered to have even reached the starting point, and that it was incorrect to fix a date for transmission of first gas.

Russia’s bet to resolve the Turkish Stream problem

That first Turkish Stream gas could conceivably be for Turkish consumption if Russia cuts the supply to western Turkey through Ukraine, Romania and Bulgaria. But as the director of the Russian National Energy Institute Sergei Pravosudov has observed, there are long-term gas-supply contracts between Russia and European countries that are in force through 2019, when the Russian-Ukrainian transit contract expires. Those gas-supply contracts specify exactly where the gas will be delivered, and these gas delivery points “are not on the border between the EU and Turkey.”

There are yet further complications. The sources of funds for the laying of the pipe, estimated at nearly $20 billion, are far from clear. In the cancelled South Stream project, half this cost was to have been borne by Gazprom’s Western partners. And that is not the only financing hurdle. According to Russian deputy finance minister Sergei Storchak, it is unlikely that Greece can attract funding to help solve the Turkish Stream problem by building a follow-on pipeline through its own territory, because of restrictions upon sovereign borrowing by Athens imposed by the IMF program that it has been implementing. In addition, EU banks would severely restrict Greece’s borrowing ability in international credit markets.

In addition, the Turkish government knows that the Russian company is in a bind, so it is negotiating very hard on the price. At the beginning of the year, it obtained a 6 per cent discount, then delayed and postponed further negotiations until it received an 11 per cent discount, and still has not signed on the dotted line. Reliable sources suggest that they are looking for at least 16 per cent, and also to reopen discussions over the contract price currently paid for gas through the other Russian-Turkish pipeline, the Blue Stream.

Yet the prospect of increased Russian gas exports to Turkey is in question, because there are multiple sources for gas other than Russia for Turkish consumption in case of increased demand. To name three, in decreasing order of likelihood: Azerbaijan, from which it now already imports gas; Iraq, where Turkish firms are seriously exploring possibilities in the northern Kurdish region; and Turkmenistan, which continues to inch closer and closer to approving a Trans-Caspian Gas Pipeline (TCGP), but has still not gotten close enough “for all practical purposes”.

Azerbaijan and Russia’s Turkish Stream problem

Azerbaijan already supplies 6.6 bcm/y to the Turkish market for domestic consumption. It would in principle be able to increase that amount as TANAP gets built and finished, because it would be able to access more of the Turkish market, the further the pipeline is extended. It will eventually run all the way across Turkey to the border with Greece.

Azerbaijan has no fewer than five undeveloped offshore deposits in addition to Shah Deniz now in production. To name just two, Absheron and Umid are reasonably estimated to contain 350 bcm of natural gas each. However, they will not be seriously developed until there is serious commercial interest, including identified prospective consumers in other countries. More gas from Azerbaijan could follow from as early as 2019. At the same time, Turkey is exploring the possibility of transiting gas from Iraqi Kurdistan as well as from Turkmenistan. TANAP is designed to be scalable, so that the volume can easily be doubled to 32 bcm/y if additional sources are found.

Of the supposed 63 bcm/y that the four strings of Turkish Stream would carry, Turkey would take a maximum of 14 bcm/y, or one string, which is equivalent to the quantity now flowing by the “Western route” through Ukraine, Romania, and Bulgaria into western Turkey. Russia has threatened, indeed promised, to this flow cut off because it transits Ukraine. That would leave 49 bcm/y of Russian gas, out of the 63 bcm/y, having to have to find a market somewhere, in competition with gas from Azerbaijan, Iraq, and Turkmenistan, and possibly even Cyprus and/or Israel.