In Brussels’ corridors of power, they’ve started referring to it as the “Iron Embrace”. When Vladimir Putin on February 7 ratified Moscow’s Turkish Stream gas pipeline investment, he set in motion a strategy which, if successful, will enable Russian gas giant Gazprom – which already supplies around a third of the continent’s gas, with parts of Central and Eastern Europe nearly wholly reliant on it – to enclose European markets with a pincer movement from both north and south.
Yet the pincer to the north is currently in the balance. Geopolitical and geoeconomic analysts are eagerly awaiting a European Court of Justice ruling on whether to agree to Polish state gas producer PGNiG’s request for an extended interim injunction against Gazprom. The extension could for many years block its plans to use the Nord Stream 1 and (planned) Nord Stream 2 pipelines, along with the Opal and (planned) Eugal feeder pipelines, to turn Germany into a massive gas hub. From there the German and Central European gas markets - with acquiescence from Berlin that has infuriated the Poles - could be dominated.
Now attention is focussed on the pincer to the south, which is currently going ahead following the ratification of Turkish Stream under the new détente between Ankara and Moscow.
The €7bn Turkish Stream is Russia’s response to the EU-backed Southern Gas Corridor (SGC), which by 2020 will stretch nearly 3,500km to deliver gas from the giant Azerbaijani Caspian Sea Shah Deniz 2 field to the European bloc via a set of three linked pipelines - the South Caucasus Pipeline (SCP) traversing Azerbaijan and Georgia, the Trans-Anatolian Natural Gas Pipeline (TANAP) crossing Turkey, and the Trans-Adriatic Pipeline (TAP) laid across Greece and Albania and reaching Southern Italy via an Adriatic undersea section.
Costing some $45bn, the SGC will offer the EU gas supplies from the first non-Russian pipeline since Algeria’s Medgaz link came on stream nearly a decade ago. And not content with only the gas from Azerbaijan, EU officials hope to live to see the day when the SGC will also be filled with Turkmen, Iraqi and Iranian gas, not to mention potential supplies from further down in the Middle East.
Investors who have been pushing ahead with the SGC - due to deliver its first gas to Georgia and Turkey in late 2018, according to Shah Deniz 2 developer BP - have grabbed a substantial headstart on Russia.
Moscow was wounded in December 2014 when it was forced to cancel its South Stream investment, which would have piped Russian gas to Austria via the Black Sea, Bulgaria, Serbia, Hungary and Slovenia.
The project became infeasible after a European Commission intervention. The commission said that under its energy market laws Gazprom would breach competition provisions by both owning and filling South Stream, while not offering access to third party suppliers (the Poles, bidding to ward off their Nord Stream nightmare, are insisting that the German gas hub plan falls foul of the same rules and cannot qualify for an exemption).
But having moved on from its South Stream defeat, Russia has been busy mending and firming ties with Turkey in an effort at accelerating the two-string Turkish Stream, designed to pump 31.5bn cubic metres of gas a year under the Black Sea to a hub in Turkey. First deliveries are envisaged in 2019.
Sijbren de Jong, a strategic analyst at The Hague Center for Strategic Studies (HCSS) independent think tank, says that with Gazprom eyeing the supply of at least 8bcm/year of natural gas to Southeastern Europe via Turkish Stream’s second line “it becomes clear that Russia is trying to pre-empt [SGC] deliveries and as a result poke holes in the Southern Gas Corridor”.
“Whether this strategy will ultimately succeed remains to be seen, but it is clear that Gazprom is trying to raise the pressure on the EU’s diversification plans and pre-empt any future deliveries beyond the 10bcm already contracted from Azerbaijan,” he adds.
The Russians, observes de Jong, could not yet present the Turkish Stream agreement with Ankara as anything like a coup in European gas markets. “After all, the first string of the Turkish Stream pipeline is merely set to divert the existing 14bcm of gas per year that is currently supplied to Turkey via the Trans-Balkan pipeline that traverses Ukraine, Moldova, Romania and Bulgaria,” he says.
“As such, the creation of the first string of Turkish Stream does nothing to satisfy Turkey’s growing demand for natural gas and does not pump additional gas into Europe,” he says. “Rather, it is the same strategy that underpins the Nord Stream extension: getting rid of the Ukrainian gas transit route by making European customers directly reliant on Russian supplies. Any additional flows will have to come from Turkish Stream’s second string.”
Pressure and charm
Agnia Grigas, a non-resident senior fellow at the Washington DC-based Atlantic Council international think tank, stresses that TANAP and Turkish Stream are not driven solely by commercial considerations, but also significantly by strategic and political considerations. “However, if the Southern Gas Corridor becomes operational there will be less commercial rationale for Moscow to pursue Turkish Stream,” she says.
There has been some speculation that an Ankara-Moscow alliance could pose an existential threat to TANAP, but Grigas considers that while the Russians’ “mix of pressure and a charm offensive to co-opt Turkey as an energy partner does raise some concerns for TANAP, especially as relations between Turkey and the West have been volatile, at the same time Ankara’s relations with Moscow are hardly stable either”.
She adds: “While Turkey is Russia’s second largest natural gas market in Europe and Turkey is hungry for more natural gas imports, Ankara is probably wise enough not to want to become excessively dependent on Russian gas. Indeed Turkey will want to support its regional ally Azerbaijan, import more Caspian gas, and thus at the end of the day it is more likely than not to stick to its commitments to TANAP.”
Imagining a scenario in which Turkish Stream did manage to push the SGC out of the market, Grigas says “it would be a blow but not a deadly blow”. The SGC is strategically important for Europe as it would diversify gas imports in the southeast of the continent, where Gazprom has a near monopoly. But adds Grigas, “at the same time, the changes in the global natural gas markets - increasing global gas production in North America and the rising popularity of the LNG [liquefied natural gas] trade - give European importers more choices and opportunities to diversify their natural gas imports”.
Some analysts are also contemplating a change of plan in which Russia cancels the second string of Turkish Stream and instead switches back to laying a pipeline through the Black Sea to Bulgaria. In a February 1 interview with Caucasus news website Vestnik Kavkaza, Igor Yushkov, an analyst at Russia’s National Energy Security Fund, said there is still a “big question” over whether the second string of Turkish Stream, which would transit gas to Europe, would go ahead.
“Despite the fact that the construction of the second pipeline through Turkey to the Bulgarian border was already prescribed in the [30-year Moscow-Ankara] intergovernmental agreement, I'm not sure Gazprom will use this route. Ideally, the company wants to build the second line using the old route of South Stream, directly to Bulgaria and then to Austria's Baumgarten [gas hub] through the Balkans. It will allow it to supply gas without intermediaries,” Yushkov said.
Tapping into TAP
Provided the second leg of Turkish Stream is realised, it is what happens with the forwarding of the Russian and Azerbaijani gas supplies once they reach Turkey en route for Europe that could provide a twist in the tail of the Turkish Stream versus the SCG story.
It is taken as read that the gas from Azerbaijan will be sent into the SCG end-piece TAP system, but what if Gazprom was to attempt to place its supplies in TAP too? Until lately, Brussels had not contemplated such a scenario. Russia, for instance, had suggested its gas would run into a proposed Tesla pipeline, which would connect Turkish Stream to Central Europe via Greece, Macedonia, Serbia, and Hungary, ending at Austria’s Baumgarten. But last month Gazprom's deputy head Alexander Medvedev said his company was considering pumping gas through TAP under an auction system giving equal access to any would-be supplier.
EU officials fearing the “Iron Embrace” were none too jubilant at news of Gazprom's potential bid to tap into a pipeline meant to reduce Europe’s dependence on Russian gas, but if the Russians make a request it may not be possible to block it.
The initial 10bcm capacity of TAP will be filled by the consortium developing Shah Deniz II, but TAP concedes that any gas supplier can bid for the second 10bcm at “open season” auctions.
“There isn’t much that can be done against that,” said HCSS analyst de Jong. “It would be simple competition. It is not very realistic to assume that Turkmenistan will be able to supply gas to the Southern Gas Corridor as the Transcaspian pipeline [option] will likely still be blocked by Iran and Russia. And in the longer term indeed, Russia will want to try to pre-empt Eastern Med supplies coming on stream.”