Over the past decade, economic and political developments in Eurasia have affected energy dynamics in both expected and unexpected ways. Following the Russia- Ukraine gas disputes in 2006 and 2009, concerns about Gazprom’s domination in the European gas market have continued with competition between Nabucco and South Stream pipeline projects in the last few years.
But following the selection of the Trans-Adriatic Pipeline (TAP) to transport Shah Deniz 2 gas to Europe in 2013, the Nabucco pipeline project has fallen by the wayside. This failure is due to a combination of prevailing geopolitical and economic factors. Meanwhile, the announcement by President Putin during his recent visit to Turkey regarding the termination of South Stream Pipeline and the new pipeline plan via Turkey marks another key development. This is the consequence of the political antagonism between Russia and the West/Ukraine. In particular, Russia’s recent U-turn and its standing in international public opinion clearly indicates the major strategic importance of energy.
Putin’s official visit to Turkey in December and his statements on the termination of the South Stream project portend changes in re- gional dynamics. The EU must balance its goals concerning energy efficiency policies and renewable energy with increasing Eu- ropean energy demand. According to ener- gy outlook reports, the EU imports 64% of its natural gas demands, and this rate is set to increase to approximately 80% in 2030. Russia’s maneuver towards Turkey and the declaration of the new Russo-Turkish off- shore gas pipeline project by Putin might push other European partners in the South Stream project to reconsider the various pipeline options for the transportation of Russian gas.
Given the selection of the TAP by the Shah Deniz consortium and the termination of the South Stream, the newly planned Rus- so-Turkish gas pipeline might revive the Nabucco West project.
According to Putin’s statements in December, the natural gas, which will be transported from Russia to Turkey, will be stored at the Turkish-Greek border and transported to Europe from there. This indicates that the Kremlin and Brussels will start negotiations again, though precisely when will depend on the prevailing political context. Despite the high-level political tension between Russia and the EU over Ukraine, both sides remain open to negotiations on energy projects that do not include Ukraine.
Another point of disagreement between the EU and Russia is the European Commission’s Third Energy Package (TEP) and its impact on Gazprom’s activities in the EU energy market. According to its obligations, the TEP disregards the “Grandfather clause” of Russia and does not plan to pay compensation for asset value destruction. Additionally, the TEP deprives supplier of a right to man- age pipelines.
On the other hand, following Kremlin’s decision to terminate South Stream (and despite the TEP), the statements of high profile decision-makers in Bulgaria, Serbia, Hungary and especially Austria about the significance of Russian gas are the initial clues for prospective renegotiations. In today’s conditions, Russian gas is indispensable for these countries. The European partners of the South Stream project are dependent on Russian gas at the following levels: Bulgaria 100%, Serbia 100%, Hungary 43.7%, Slovenia 45.2%, Austria 71% and Italy 28.1%. In addition to this, Russian officials have stated that Russia is ready to continue meetings with Bulgaria, Serbia, Hungary and Austria on future energy relations, and even new energy projects.
Although the Kremlin’s decision on the South Stream project was interpreted as a bluff by Europe, and attempts were made by Bulgarian President Boyko Borisov and EC President Jean-Claudes Juncker to reduce tension, Gazprom is establishing a new energy company (Gazprom Russkaya) to lead on building a gas pipeline to Turkey under Putin’s command. This is one of the strongest indicators of the Kremlin’s seri- ousness.
Owing to the higher cost of the South Stream project, the disadvantages of the EU’s TEP and the EU’s current economic sanctions against Russia over the Ukraine crisis, it is unlikely that Russia will go back to the South Stream project. Consequently, the European partners of the South Stream project may need a new pipeline option to transfer the Russian gas that will be stored at the Turkish-Greek border. Current analysis suggests that the Ukrainian crisis will continue for some time yet, and due to the recession in Russia, the Kremlin will need an alternative to TAP. At this point, Russia may towards Nabucco West, which is more advantageous than the options for transporting LNG to the European partners of the now-defunct South Stream project.
At this point, Russia might refrain from pushing harder on the TEP obligation, as ultimately the success of the planned Russo-Turkish pipeline will depend on selling the natural gas to Europe.
In addition, country-based natural gas disruptions like Ukraine are highly unlikely in Turkey. Thus, the gas flow from Russia to Europe through Ukraine’s energy grid is highly vulnerable. Moreover, the new energy transport route bypassing Ukraine is also highly ad- vantageous for the energy security perspectives of the EU, Russia and Turkey.
Consequently, if the newly planned Russo-Turkish offshore gas pipeline is constructed, then Nabucco West seem to be the best op-tion for both Russia and the EU in the context of current political conditions.
From Russia’s perspective, Nabucco West – the amended route of the original Nabucco going to Central Europe – is the most feasible way to transport gas and respond to market demand. In addition to this, it represents a significant opportunity for the normalization of the Russia – EU relationship, which has been seriously damaged by the political crisis in Ukraine. Energy remains one of the most sensitive factors in EU-Russia relations. Although Russia has lost its management advantages on Nabucco West due to TEP, it will make up for this by selling an extra 14-bcm gas to Turkey via newly pro- posed pipeline. This will enable Russia’s expansion in the Turkish gas market.
From the perspective of the EU, Nabucco West can solve the possi- ble gas supply problem faced by the European partners of the for- mer South Stream project. The realization of Nabucco West may be an indirect political victory against Russia by the EU.
The possible ties between the new Russo-Turkish pipeline and Na- bucco West might increase competition between Azeri and Russian gas in Balkan gas markets, and in the long run, generate new obsta- cles to European gas exports by Iran, Iraq and Turkmenistan.
Thus for now, the million dollar question is how the recent an- nouncement by Russia will affect Azerbaijan-Turkey negotiations on gas strategy, the extent to which they will be aligned, and how far Turkey will be aligned with the Western stance on Russia in this new “geo-energy” environment. Russia may be able to revive a proj- ect that it previously killed.
Policy Brief published with thanks to the Caspian Center for Energy and Environment of ADA University, a Natural Gas Europe Knowledge Partner
*Mr. Ugur Ertas is an affiliated researcher at Rethink Turkey Institute in Stockholm. His research interests include Eurasian Studies and Energy Security.