Russia-Turkey gas hub plans create uncertainty over import figures

Aura Sabadus

02-Dec-2014

Russia’s plans to shelve South Stream and create a 63 billion cubic metre (bcm)/year gas hub on the Turkish-Greek border, has created uncertainty over just how much annual imports Turkey will receive in the future. It is not clear whether the 14bcm/year earmarked for Turkey would be in addition to its current 30bcm/year imports or volumes merely shifted around in the system.

The U-turn on South Stream was announced during a visit by the Russian President Vladimir Putin in Ankara on Monday.

Under the latest plans, Russia intends to build a new pipeline across the Black Sea, possibly Blue Stream 2, to carry 14 billion cubic metres (bcm)/year to Turkey and another roughly 50bcm/year to the Turkish-Greek border.

The Russian section of the pipeline will be owned by Gazprom and will start from the Russkaya compressor station which is being built in the southern Krasnodar region.

Although a Memorandum of Understanding (MoU) was signed between Gazprom and Turkish incumbent BOTAS on the building of the pipeline, a source close to discussions said Turkish private companies may also be invited to take part in the construction.

“It is possible that in a first stage the pipeline will have a capacity of 28bcm/year. BOTAS would be only a shipper,” he said.

Turkey already imports 14bcm/year via the Western Line which crosses Ukraine via the Republic of Moldova, Romania and Bulgaria and less than 16bcm/year via Blue Stream 1, where capacity will expand to 19bcm/year from 2016, according to Gazprom.

It is not clear whether the 14bcm/year transported through the new pipeline would be in addition to the existing Russian volumes or merely shifted from the Western Line to Blue Stream 2.

The source added that the 50bcm/year earmarked for southern Europe would be shipped either via the BOTAS system, a new loop, or even the Trans-Anatolian Pipeline (TANAP) which is designed to bring 16bcm/year of rival Caspian gas to Turkey and southern Europe.

He explained that the new pipeline would be cheaper than South Stream which cost $45bn and would have involved raising considerable capital on international financial markets at a time when Russia is hit by sanctions in response to its annexation of Crimea.


Implications for Turkey

In scrapping South Stream and replacing it with a new pipeline crossing Turkey and landing the gas on the Turkish-Greek border, Russia will potentially block, at least for the short-term, Turkey’s own ambitions to transport alternative sources of gas and create a landmark regional hub.

“Russia has a clear objective in gas: Not to allow any new sources to Turkey and the EU before prolonging existing contracts with critical consumers like Turkey in 2021,” a source said.

Turkey will be the main transit route for Caspian gas and expects to source some 5bcm/year from northern Iraq before the end of the decade. It has also eyed Mediterranean gas and high-profile Turkish private companies had been talking of importing some 8bcm/year from Israel by 2018.

Iran has a 10bcm/year supply contract with Turkey and has been expecting to sell gas to Turkey and Europe once EU and US sanctions in response to its alleged nuclear programme are lifted, but it may also be blocked from doing so, the source said.

The 50bcm/year gas supplies proposed for southern Europe will offset the need to bring in alternative volumes as gas consumption in this part of Europe is minimal.

The source said the only game-changer would be northern Iraq which could sell up to 20bcm/year of gas in the mid- to long-term at competitive prices. ICIS understands that northern Iraqi gas could be sold at $6.50/MMBTu (€16.98/MWh) into Turkey, possibly the cheapest price in the region. Comparatively, Russia is expecting to sell gas to Turkey at $10.50/MMBtu (€28.64/MWh) next year.


Turkish gas price – short and long-term view

Russia’s Putin announced on Monday a 6% discount to BOTAS for 2015, bringing the purchase price to an estimated $380.00/1000m3 (€28.64/MWh).

However, Russian energy minister Aleksandr Novak said subsequently that the discount could reach 15% subject to negotiations. The reduction would in fact reflect the record falls in the price of oil which represents a benchmark in the gas pricing formula.

In the long-term, however, the creation of a Turkish-Greek gas hub, as predicted by Putin would raise question marks regarding Russia’s gas pricing plans.

It is not known what the structure of the new Russian-Turkish southern gas hub would consist of, nor whether it would follow the principles of free trading based on demand and supply as seen at traditional western European hubs.

A hub that would allow a trading element in addition to the purely physical delivery of gas might challenge Russia’s own indexation to oil price as seen in its supply contracts with Turkey or east European countries.

The merit of oil indexation is becoming questionable as far as gas producers are concerned, especially now that the price of oil has dropped to a four-year low. A Russian gas hub on the Turkish-Greek border, complete with a reference price would be able to influence the pricing of gas in the region.


Implications for the region

Announcing the scrapping of South Stream, Putin said the project had hit a number of obstacles raised by the European Commission, deploring Bulgaria’s hesitation in throwing its full support behind the pipeline.

Although Russia aims to sell 50bcm/year to southern Europe, it is possible that Bulgaria and Greece would upgrade their infrastructure to accommodate alternative pipeline or LNG volumes before the first Russian deliveries.

Meanwhile, Romania, which expects to become energy independent by 2020 thanks to new shale gas production, may not be affected by the developments in southern Europe.

The biggest impact will be felt in Ukraine which will see its role as a Russian gas transit country diminished once 50bcm/year of gas is transited to Europe via Turkey. Aura Sabadus


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