Russia entices Turkey, Hungary with dreams of becoming gas hubs

By bne IntelliNews April 3, 2007

Nicholas Watson in Prague -

The Kremlin considers Turkey and Hungary as key "hubs" for the storage and transit of Russian gas to Western Europe, though as events in March illustrate it still has some way to go to convince Hungary to back its extension of the Blue Stream gas pipeline over the EU's Nabucco pipeline and to persuade Turkey to enter into a strategic partnership.

That was certainly not the impression EU policymakers got, however, on March 12 when Hungarian Prime Minister Ferenc Gyurcsany was quoted in an interview with the International Herald Tribune as saying that because the Nabucco pipeline project had experienced significant delays, a Russian pipeline plan was more realistic.

Nabucco is an ambitious – overly so, many would argue – EU-backed plan to help break Russia's stranglehold over gas supplies to Europe by transporting gas from the Caspian region and Iran across Turkey, Bulgaria, Romania and Hungary to OMV's gas hub at Baumgarten.

Nord Stream

Russia has a rival pipeline project that would build an extension to the up-and-running Blue Stream pipeline that links Russia and Turkey under the Black Sea, which would transport Gazprom's gas through the Balkans and into Hungary. This project is part of Gazprom's plan for a South European Gas Pipeline, counterpart to the controversial North European Gas Pipeline, now called Nord Stream, under construction from Russia to Germany via the Baltic seabed. Both projects aim to capture European gas markets by locking out competitors and maximizing long-term European dependence on Russia and circumventing Ukraine.

"Which of these two pipelines exists?" Gyurcsany asked rhetorically in the interview with the newspaper. "The Nabucco has been a long dream and an old plan. But we don't need dreams, we need projects."

Furious back-pedalling

Given the EU is placing huge importance on the 30bn cubic metres per year (cm/y) of non-Russian gas that the Nabucco pipeline would bring to Europe, Gyurcsany and other government officials were immediately forced into a public clarification of the remarks, insisting that no decision to back the Russian project over Nabucco had been made

In a series of statements before and during a visit to Moscow later that month, Gyurcsany said his words had been misinterpreted and tried to move toward a more pro-Nabucco stance.

"Gyurcsany didn't put his weight behind either Blue Stream or Nabucco, he simply tried to take a pragmatic approach by saying that whichever comes earlier should be preferred," says Gergey Varkonyi, a Budapest-based analyst for Deutsche Bank. "The only thing he later qualified his statement with was that it would be better if Nabucco with non-Russian gas arrived earlier."

Some analysts said the story was blown up out of proportion and urged people not to read too much into it. But blown up or not, the brouhaha touches on two inalienable facts that are causing some disquiet among the more hawkish, Russophobic – and some would argue paranoid – sections of the US and Europe.

Gazprom pipelines

The first is that Nabucco is simply not as feasible a project as Blue Stream – it is expensive at €5bn and climbing; involves five different companies in five different countries (Austria's OMV, Bulgaria’s Bulgargaz, Hungary’s MOL, Romania’s Transgaz, and Turkey’s BOTAS) and is now looking for a sixth to share the pain; and many people doubt whether there's even enough gas to fill it. Although gas exports of some 9bn cm/y have started from the Azeri Shah Deniz field, the idea of taking Iranian and Egyptian gas is unrealistic.

"Growing tensions between Iran and the West have heightened concerns over finding a reliable supplier," says Mathew Hall, an analyst with the consultancy Global Insight.

The second is that Russia is proving very adept at preventing the EU from speaking with a single voice on energy matters by prising away various members with the promise of juicy oil and gas deals and "guaranteed energy security."

"Russia is pursuing an integrated strategy of trying to segment the European market through sweetheart deals with key countries," says Paul Domjan, a former energy security advisor to the US Military European Command and current senior consultant at John Howell and Company Ltd.

Hungary's weakness is its stated ambition of becoming a major gas hub for central and southern Europe, something which Blue Stream, with access to lots of Russian natural gas – Gazprom sent 8.8bn cm of the stuff via Ukraine in 2006, amounting to some 80% of Hungary's consumption – would go a long way to helping it achieve. By opting for the Russian pipeline, Hungary would also seriously harm the prospects of OMV's competing hub at Baumgarten in next-door Austria, which would be the destination of the Nabucco pipeline.

As an added incentive to Hungary, Gazprom is mulling building a large gas storage site of 10bn cm there. "One advantage of Hungary over other routes is that it's got large partly or fully depleted gas fields, which are considered as the cheapest way of building storage assets," says Deutsche Bank's Varkonyi.

During Gyurcsany's meetings with President Vladimir Putin in Moscow in March, the two sides “conducted joint drafting of a promising project for underground storage of gas,” a representative of the Russian president’s office was quoted as saying.

Currently, E.ON owns all Hungary's 3.5bn cm working storage capacity after acquiring MOL's gas assets last year. On March 2, the chairman of E.ON Foldgaz Trade, Klaus Hammer, told Platts that E.ON might boost its Hungarian storage capacity by 50% if geological conditions allow.

E.ON's presence in Hungary's gas market is a fortunate coincidence for Russia, since the German utility is also a key partner in the Nord Stream pipeline project. Nord Stream will terminate at Greifswald on the German coast and directly connect the Unified Gas Supply System of Russia and the European Gas Network. With Nord Stream, analysts say E.ON and Germany have bought fully into the Gazprom narrative about "guaranteed energy security"; however, experts like Vladimir Stepan, a partner of the Prague-based energy consultancy ENA, point out that Nord Stream "is not diversification of supply but diversification of transport."

In return for offering to make countries like Hungary a "regional hub" for storage and transit of Russian-delivered gas, Vladimir Socor of the rightwing think-tank The Jamestown Foundation says Gazprom demands portions of the would-be "hub" country’s infrastructure in return for that favour. "The offer is dubious because the cession of infrastructure in conjunction with long-term supply contracts would lead to dependency on Gazprom," says Socor.

For all that, many analysts believe it is unlikely Hungary will unilaterally abandon Nabucco and its European partners, and the Russians will probably have to hope the project collapses under its own internal contradictions. Though Hungary on the whole has relatively good relations with Russia, unlike the frothing antipathy of other former Soviet satellites like Poland, Gyurcsany's comments angered many in the country and have been seized upon by opposition politicians.

The opposition Fidesz party, which has been trying to oust the government since last September when a leaked recording of Gyurcsany admitting he lied to the nation sparked riots, raised the spectre of communism.

"We did not show the door... to the Russians, to the Soviet Union, to communism, only for them to climb back in the window," Viktor Orban, the leader of Fidesz, said in a speech. "Oil may come from the east, but freedom always comes from the west."

Turkish dreams

The irony is that another of Russia's key gas markets and targeted hubs, Turkey, is receiving tepid, rather than strong, support from the EU – much to the annoyance of the US, which has been encouraging Turkey to utilize its unique geographical position to become a major transit centre for gas from the Caspian and Central Asia to Europe.

The EU's ambivalence is, of course, tied to its fraught negotiations over Turkey's membership of the club. According to Katinka Barysch, an analyst with the think-tank Centre for European Reform, President Putin initially wooed Turkey's Prime Minister Recep Tayyip Erdogan with the line, "we are both unwanted by the EU," to convince him to back the Blue Stream extension over Nabucco.

"Turkey, as well as the Balkan countries and Hungary and Slovakia, are pivotal transit countries," says Barysch. "So Putin has put a lot of effort into convincing them that alternative plans for Nabucco and the Trans-Caspian pipelines would not materialise and they would be much better off with the immediate transit fees from a Russian controlled pipeline."

Turkey is already very dependent on Russian natural gas, importing 67% of its needs via Blue Stream pipeline. Gazprom was contracted to provide Turkey with 8bn cm of gas in 2006. But it's not just pipelines: Gazprom has indicated it's keen to participate in a range of gas-infrastructure projects in Turkey to support both the local market and its south European gas ring. Privatisation of Turkey's gas market could provide Gazprom with an opportunity to join the Turkish gas-distribution business. On February 28, the liberalization of Turkey's gas sector began with the transfer to Shell of part of one of the gas import contracts held by Turkey's state-owned Botas with Russia's Gazprom.

Gazprom is also interested in building underground gas storage units in the country. One of the biggest projects planned is to store gas in the natural salt dome under Tuz Golu, the huge salt lake in central Anatolia. Also under discussion is the possibility of installing gas liquefaction plants on the Mediterranean, at Ceyhan or Izmir, to enable Russian exports to be shipped beyond Europe.

Even so, Turkey is proving to be less slavish towards Russia's energy offers than the Kremlin would like. Zeyno Baran, a senior fellow at the hawkish Hudson Institute in Washington, says that Turkish decision makers are certainly not immune to Russia's blandishments about guaranteed energy security and elevating the country into a regional energy hub, but historically the Ottomans and the Russians have always been competitors, especially in the Black Sea region.

"The alliance can only go so far – Russian support for the Armenian diaspora groups or the Greek Cypriot government are some of the issues that will always be an issue," says Baran.

Turkey is also fully aware that Russian offers of friendship and closer ties are rarely unstinting – in contrast to the strong support it receives from the US.

"Putin has promised everyone – the Germans, Hungarians, Greeks, even the Belgians – that they should become an energy hub, so by now Turkey should have realised that what Russia is interested in is controlling as much of the European oil and gas transport system as possible," says Barysch. "I don’t see any kind of strategic partnership emerging there."

For example, Turkey had hoped to interest Russia in a "Blue Stream 2" pipeline that would have bypassed Ukraine. But with about only half of the original Blue Stream's 16bn (cm/y) capacity being used, the second pipeline seems dead in the water.

Meanwhile, Russia's eventual backing for the Burgas-Alexandropolis oil pipeline, signed into force in March, is a mixed blessing for Turkey. While it will help reduce the number of tankers travelling through the crowded Bosporus, there are fears it could harm Turkey's efforts to diversify from Russian gas using the Turkey-Greece-Italy (TGI) gas pipeline, which is expected to start transporting small volumes of much-needed Azeri gas to Greece by the end of this year.

According to the Hudson Institute's Baran, in order to secure oil for the Burgas-Alexandropolis pipeline Greece may have to agree to accept the participation of the Gazprom in the TGI pipeline, which she says would entirely negate the whole purpose of a non-Russian gas transit route to Europe.

"TGI is a win-win project between Turkey and Greece that will deliver Azeri gas to EU markets," she says. "Access to an alternative source of gas is extremely important [and] in nine years, Azerbaijan could export one-third of what Russia currently sends to Europe. This significant volume would free the EU to a considerable extent from Moscow’s grip."

Such fractures in the Russia-Turkey partnership should be exploited to the maximum, say the hawks, who despair at the EU's inability to grasp the importance of this.

"The EU member states currently considering Turkey’s application to join the 25-state grouping, should come to see Turkey’s stability as a reliable energy transit corridor an asset in an increasingly fractious part of the globe," says John Daly of The Jamestown Foundation.

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