Rovshan Ibrahimov Editor of USAK Energy Review printable version send your friend message to author add comment (1)

Friday, 4 September 2009

The summer of 2009 witnessed a notable increase in Turkey’s activity in the energy field. On July 13 an agreement on the construction of the Nabucco gas pipeline was signed in Ankara. Then, on August 6, during Russian Prime Minister Vladimir Putin’s visit to Ankara, an agreement to build a second Blue Stream pipeline between the two countries was signed, which will also be built under the Black Sea.

In contrast to the first pipeline, which was built with the aim to increase the supply of natural gas to the Turkish market, the second pipeline is planned for re-export to the south, mainly to supply the Israeli market. In addition, the parties agreed on the feasibility work for the South Stream pipeline, which must also be laid under the Black Sea, and through which Russia plans to export gas to Western markets. The South Stream project is considered a competitor of Nabucco, as gas for both pipelines must come from the same sources, mainly Central Asian states and Azerbaijan, and will be exported in the same direction. Despite this, Turkey has declared that it does not view these pipelines as competing with each other.

It is worth noting that despite the fact that both sides reached an agreement, their motives differ. Thus, Turkey's energy plan is to become the main transit country for oil and gas in the Eurasian area. In this case, it can be said that all of Turkey’s activities in the energy sector are developing in this direction. The same can be explained by the fact that Turkey does not consider South Stream and Nabucco to be competing projects. It is important that both projects will take place on Turkish territory, for this will allow Turkey to guarantee gas supplies should one of the projects fall through. Turkey also obtained certain assurances from Russia that in the case of support for the South Stream project, Russia would supply oil for the planned Samsun-Ceyhan pipeline, which was intended to export Russia's oil but lost much of its standing after Russia's intentions to implement the Burgas-Aleksandropolus pipeline project.

As for Russia, it is currently more interested in the South Stream pipeline. This flow would allow Russia to create an alternative to Ukraine to access the southern EU countries. It is no accident that Italian Prime Minister Silvio Berlusconi attended the signing of treaties between Turkey and Russia. Another reason for Berlusconi attendance is that the Italian company ENI specializes directly in such projects.

To date, 80% of exports of natural gas to European markets are transported through Ukraine. At the beginning of each year, Russia and Ukraine disagree over the price of natural gas and its transportation. In this case, Russia, by building South Stream, will be able to export natural gas, bypassing Ukraine. Russia will try to build a pipeline under the Black Sea, since it does not want a repeat of the Ukraine situation with Turkey.

However, for this project, Russia needs to resolve several issues. One such issue is the need to address the problem of financing the project. During the financial crisis, Russia's economy has declined by about 15%. The same kind of reduction was only observed during the collapse of the Soviet Union, when the Russia was transitioning from a centrally planned economy to a market economy. Foreign exchange reserves of the country have dropped considerably, and the market price of the gas monopoly Gazprom has fallen by 84%. Russia is currently unable to finance such a costly project, so the beginning of the project has been postponed to 2013. The funding problem is yet to be solved.

As the South Stream project has been postponed, there is a real danger that it will not be realized due to the possible construction of Nabucco. This is because Russia intends to fill the pipeline, with gas not only from its territory, but also from Central Asia and Azerbaijan. Nabucco intends to import gas from the same sources.

Russia has taken several steps to prevent the possibility of the realization of Nabucco. First of all, since the beginning of 2009 Russia has agreed to increase the price of imported Central Asian gas. Thereby it is hoped that the countries of the region will lose interest in Nabucco. However, it is no secret that Nabucco will rely on gas imported from Azerbaijan during the first stage. For the project to be profitable in the first stage, Azerbaijan must export 8 billion cubic meters of gas. Azerbaijan will be able to supply this gas after the entry into force of the second phase of the Shah Deniz gas field. Russia immediately offered to buy this gas from Azerbaijan and proposed a price even higher than the global market price. Azerbaijan is skeptical of its Western partners, who passively viewed the Russian invasion of Georgia, and it has followed through on this proposal: on 27 March 2009, Azerbaijan signed a memorandum of understanding with Russia regarding gas exports. The second reason which led Azerbaijan to take this step was commercial: Turkey wanted to acquire 15% of Azerbaijani gas at a reduced price, with the option to resell, which Azerbaijan rejected. It should be noted that Turkey renounced its claims in this matter in the signing of the agreement on the construction of Nabucco in Ankara on July 13.

These were not Russia’s last attempts to prevent the realization of Nabucco. Russia’s Surgutneft Company acquired a 24% share package of the Hungarian company MOL, which is a member of the Nabucco construction consortium. Because no one holds the majority of shares of the company, Surgutneft become the largest shareholder. According to some sources, the owner of this company is the highest official in the echelons of power in Russia.

Following Russian policy in this direction, we can also conclude that its agreement with Turkey also has the character to prevent the possible realization of Nabucco. In this case, Russia naively believes that the Blue Stream-2 project will be realized in the near future. As both countries faced serious consequences from the global financial crisis, it will be difficult to determine the source for funding this project. It is also unclear how natural gas would be transported to Israel and other markets: expensive infrastructure would have to be built, constituting an additional expense. Possible projects include the construction of an LNG-producing plant in one of Turkey’s Mediterranean ports to allow gas transportation by tanker, or the construction of pipeline on the bottom of the Mediterranean Sea.

In addition, Russia has the opportunity to participate in the implementation of the construction of the first nuclear power plant in Turkey, which is also an important aspect of the relations between the two countries. Turkey sees the agreement with Russia as strengthening its position as a transit state. In this case, the pipeline projects could bring it additional dividends by solidifying its position as regional leader.

Turkey also hopes that Russia will reduce the price of its gas; to date, Turkey imports 70% of its gas from Russia. In addition, Turkey hopes to change the take or pay principle in the intergovernmental protocol on cooperation in the gas sphere: in 2009 Turkey will have to pay Russia for an unused 2 billion cubic meters of gas. In addition, Turkey hopes to re-export Russian gas to international markets.