Gazprom rolls back timetable, size of Turkish Stream gas pipeline

By bne IntelliNews October 7, 2015

bne IntelliNews -

Russian natural gas giant Gazprom has pushed back the deadline for launching the first stage of the Turkish Stream pipeline by one year to the end of 2017, the company's deputy chairman Alexander Medvedev said on October 7, a day after the company announced that the project's pumping capacity will now be halved.

"Nothing terrible" would result from the postponement, which was only due to the delay in signing the relevant contracts with the Turkish government, Reuters quoted Medvedev as telling journalists in Moscow in the latest blow to the faltering project.

A day earlier, Gazprom CEO Alexey Miller said the company would cut the planned capacity of the pipeline from Russia to Turkey from 63bn cubic metres (bcm) to 32bcm annually. Speaking at an industry conference, the Gazprom chief stressed that "political factors" were not influencing the work on the pipeline and that the reduction in its scope was due to the recently agreed expansion of the existing Baltic Sea Nord Stream pipeline route to Germany.

However, relations with Turkey have grown markedly tenser since Russian military jets on September 30 started bombing rebel and Islamic State (IS) forces in Syria in support of President Bashar al-Assad. Syria is a pro-Russian stronghold in the Middle East and Damascus a major buyer of Russian military hardware.

Since the bombardments started, the Russian ambassador in Ankara was reportedly summoned twice over Turkish airspace violations by Russian military jets. On October 6, Turkish President Recep Tayyip Erdogan said in Brussels that Russia could "lose a friend" in Turkey, revealing frustration over Russia's actions in recent days.

But even before Russia's Syrian campaign began following President Vladimir Putin's UN General Assembly address on September 29, Turkish Stream was facing delays and uncertainties.

The pipeline was originally seen as a way of piping Russian gas to the EU fontier, where it would be purchased and relayed by the buyers to its destination via a large hub on the Greece-Turkey border. With an estimated price tag of €11.4bn, the originally four-strand pipeline was due to carry a total of 63bcm of gas per year to southern Europe via those two countries by 2020, replacing the planned South Stream pipeline that was scrapped last December amid the plummet in relations with the EU over Ukraine.

However, with still no agreement on the terms with Turkey in place, Russian officials say that even one strand of the pipeline would satisfy Turkey's domestic demand for gas.

Russian Energy Minister Alexander Novak said in September that he did not expect an intergovernmental deal on the pipeline to be signed before the formation of a new Turkish government. However, recent surveys have suggested that Turkey's snap elections in November would produce a yet another hung parliament.

Alfa Bank analysts described the Russian decision as "sensible and timely": "As Nord Stream-2 would make the entire 63bcm capacity of Turkish Stream redundant, and given Turkey’s political turmoil (with Parliament unable to form a coalition government and new elections set to be held soon), it is unlikely that talks would have been able to progress," Alfa wrote in an October 7 note to clients.

Nord Stream-2 tender in the pipeline

Gazprom's deputy chaiman Medvedev said the company will in 2016 choose a contractor for the Nord Stream-2 pipeline, which is is due to start operations by the end of 2019. 

"We are within the schedule," Medvedev said in remark reported by TASS news agency. "Next year we will hold a tender among pipe-layers," he said. Pipes for Nord Stream-2 project are estimated to cost Gazprom at least €2.6bn, according to earlier reports.

With a capacity of 55bcm, Nord Stream 2 will run from Russia to Germany under the Baltic Sea, reaching land also at the German hub of Greifswald like the first Nord Stream pipeline launched in 2011.

The project will be implemented by the joint project company New European Pipeline, in which Gazprom will hold 51%, E.ON, Shell, OMV and BASF/Wintershall 10% each, and Engie - 9%.

Gazprom currently supplies around a third of the EU's gas, and approximately half of this is piped through Ukraine’s territory. Because of the second northern pipeline, "Ukraine will lose the opportunity to pump around 140bn cubic metres a year of Russian gas to Europe, which would mean losing $2bn in revenue per year", Ukrainian Prime Minister Arseny Yatsenyuk said in September after the Nord Stream 2 deal was clinched. 

Other gas transit countries Poland and Slovakia also condemned the deal, with Slovakian Prime Minister Robert Fico branding it a "betrayal" that would cost his country and Ukraine billions of euros, and which ran against Europe’s official position on Ukraine.

Meanwhile, Nord Stream project's technical director Sergey Serdyukov has said the second pipeline is not subject to European regulation. "European customers will receive gas from European companies, which will solve the problem with the restrictions of the Third Energy Package," he said, referring to the EU legislative package for the internal gas and energy market that entered force in 2009. 

A core element of the package is ownership unbundling, which stipulates the separation of companies' generation and sale operations from their transmission networks. 

Gazprom has been careful to avoid violating EU energy regulations since it ran foul of anti-trust laws in April, when the EC deemed it was leveraging its market dominance in Central and Eastern Europe to overcharge consumers. The company has sought an "amicable" settlement in a case that could see it fined as much as €11bn.

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