While all eyes are turned to Russia’s natural gas pipeline projects – Nord Stream II, TurkStream and South Stream – which it intends to build in Europe in the upcoming years, comparatively less attention is paid to imminent changes that are set to reconfigure gas markets in eastern Europe and Turkey.
The transformations are being triggered by two landmark developments.
One relates to the enforcement of the EU’s latest gas network codes. The codes include requirements to harmonise the allocation of capacity in pipelines, as well as instil more efficient gas trading, gas transmission and data exchange.
The other refers to the expiry of long-term gas contracts held by Gazprom in Romania, Ukraine, Turkey and Bulgaria between now and 2030.
Greater competition, transparency and accountability in eastern Europe are the expected results, in a region which Russia’s Gazprom has almost exclusively supplied with gas for the last three decades.
They should also pave the way for the establishment of a bi-directional north-south supply corridor where markets from Ukraine down to Greece, Turkey and the western Balkans could minimise the risk of relying on a single supplier.
Two Gazprom contracts on the Western Line, a pipeline which transits gas from Russia to Turkey and Greece via Ukraine, Transnistria, the Republic of Moldova, Romania and Bulgaria will expire this year, freeing up key sections to any companies interested in booking capacity.
Capacity at the interconnection points Orlovka-Isaccea 1 (Ukraine-Romania border) and Negru Voda 1-Kardam (Romania-Bulgaria) border will become available for booking through auctions in September and gas flows are scheduled to start under the new regime on 1 October.
The combined annual capacity of the two contracts is 13.3 billion cubic metres (bcm) of gas, just over 2bcm less than the proposed first string of TurkStream, the pipeline which Russia intends to build across the Black Sea for gas deliveries into Turkey and southern Europe.
Meanwhile, although Greece’s Gazprom supply contract was due to expire in 2016, but was renewed in 2014, the country is now under obligation by the EU to open its Bulgarian interconnection capacity to third parties.
All in all, the implications of these changes are manifold.
For Greece it will be an opportunity to enhance its role in regional gas markets, by expanding its liquefied natural gas (LNG) importing capacity and facilitate the export of natural gas.
Already two Greek companies have started to export natural gas in virtual reverse flow to Bulgaria earlier this summer. The export capacity is almost fully available. The capacity in the forward direction has been booked mostly by Gazprom, although there is still flexibility in the pipeline.
A similar opportunity could open up for Turkey. The country expects to bring in its first floating storage and regasification unit (FSRU) to import LNG on the Aegean coast near Aliaga later this winter. If Turkey built an interconnection pipeline to Bulgaria and increased the capacity on the existing one with Greece, it could start selling excess volumes to eastern European countries at a time when gas demand has been falling domestically.
Bulgaria, one of Europe’s most insecure countries in terms of natural gas supplies, given its near total dependence on Russia, could accept to release a portion of its volumes on its existing Russian supply contract to private companies. This would help to spread out risk and guarantee a diversity of market participants.
Bulgaria’s northern neighbour, Romania, expects to bring online more volumes from its Black Sea operations by 2020, including the 84bcm Domino gas field. Gas reserves from this field alone are more than five times Romania’s annual consumption, giving it enough flexibility to start exporting gas.
Ukraine, which has seen important changes in its natural gas market, aligning its laws with those of the EU, could offer its 14bcm of storage capacity to regional companies at attractive tariffs.
It is important to stress that there are still substantial challenges ahead.
Firstly, given the lack of alternative gas supply for the time being, Russian gas will likely continue to be the most important source of supply. Even so, the changes that come will on the one hand give the region’s private companies the opportunity to source their own gas from Russia and sell it independently of Gazprom. On the other hand, Gazprom itself will be expected to abide by the EU’s anti-trust rules.
A second challenge relates to political obstructions that have previously hindered progress. Regional countries need to recognise that only greater coordination and unity of purpose will allow them to benefit from the opportunities that are now opening up.
Finally, there is a need for more transparency to ensure that parties remain accountable at a time of momentous transformation for eastern Europe.
For more information about the expiry of Gazprom contracts in eastern Europe, capacity auctions and the implications for the region, check out our latest ICIS presentation https://www.slideshare.net/slideshow/embed_code/key/uqsUj1SDxqQ07i