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Turkey to Benefit as Russia Scraps South Stream Pipeline

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Russia has dealt a potential blow to its competitors for the European gas market by scrapping plans to build the South Stream pipeline and pledging to build a 63 billion cubic meter per year pipe to Turkey instead. But the new project is only at the level of a nonbinding memorandum of understanding (MOU), giving Ankara plenty of time to weigh up how much it could squeeze out of a weakened Russia in return for a strategic, long-term partnership, and how those rewards would stack up against the risks of incurring the wrath of the US and EU. Industry sources say the new pipe would in effect be a Blue Stream 2, running parallel to the existing Blue Stream pipeline from Russia under the Black Sea to Turkey and using much of the same infrastructure, as well as the Russkaya pumping station in Russia that has already been built for South Stream. It will also use pipe ordered for South Stream from European suppliers. It is too early to put a price on the new scheme, but it will be vastly cheaper than the $29 billion outlay that Russian gas giant Gazprom envisaged for South Stream, which some in Moscow had begun to criticize for being too expensive, especially given EU resistance to the project (NC Nov.27'14). The idea is to set up a new gas hub, a "Turkish Baumgarten," on Turkey's border with Greece, from where Russian gas could be sold into southern Europe, says Mehmet Ogutcu, executive chairman of London-based consultancy Global Resources Partnership. "This Russian chess move has created a situation that will kill so many rooks," he said, noting that it would penalize Bulgaria for dithering over South Stream and undermine plans in the next decade to expand the Southern Gas Corridor across Turkey from Azerbaijan, as well as schemes to send gas along the same route from Turkmenistan, Kurdistan in northern Iraq, and potentially one day Iran and Israel. Sources close to BP, which is heavily involved in the Southern Gas Corridor, designed to reduce Europe's dependence on Russia, say the new Russian proposal does not represent a threat: All the 10 Bcm/yr of gas the corridor will send to Europe from 2020 has already been signed up for in 25-year contracts (NC Nov.6'14). Turkey imports about 46 Bcm-47 Bcm/yr of gas, of which in 2013 some 26.7 Bcm came from Russia -- making it the second-biggest importer of Russian gas after Germany -- with 13.7 Bcm of that via Blue Stream. The rest came from various sources, including Azerbaijan, Iran and LNG. The proposed new pipeline would aim to supply Turkey with up to 14 Bcm/yr of gas that it now gets via the overland Balkan route that transits Ukraine. That would leave up to 50 Bcm/yr to be exported into Europe, potentially without encountering the objections from Brussels that blighted South Stream, where Gazprom's determination to own the onshore sections across Eastern Europe conflicted with EU competition legislation. "It will not be Russian gas but gas coming from Turkey," Ogutcu said. It is unclear how much of the gas would be existing supplies to Europe diverted from their current transit route across Ukraine, which now accounts for more than half of Russian gas exports to the EU. Gazprom expects exports to Europe, including Turkey, to decrease to 157 Bcm this year from 161.5 Bcm last year. Although at an early stage, it is believed that Russia would wholly own the offshore section of the new line to Turkey. Italy's Eni, which owns 50% of the existing Blue Stream line, with Gazprom owning the other half, may not be involved because it is out of favor in Turkey for having invested in Greek Cyprus, despite warnings from Ankara. In Turkey, industry sources in Istanbul say any new system to handle the extra gas from Russia would probably involve the private sector rather than Turkish state pipeline company Botas, even though Botas signed the pipeline MOU with Gazprom. Setting aside differences over Syria and Crimea, President Vladimir Putin and his Turkish counterpart, President Recep Tayyip Erdogan, also agreed at their Dec. 1 meeting in Ankara to expand the existing Blue Stream pipe's annual capacity to 19 Bcm from 16 Bcm, requiring upgrades of the Beregovaya compressor station in Russia and the Durusu terminal in Turkey. Russia is offering Turkey the carrot of lower gas prices, in the form of a 6% discount. "This is peanuts," one Turkish source says, noting that Turkey now pays $375 per thousand cubic meters ($10.42 per million Btu) for Russian gas, compared with the $306/Mcm that Europe pays on average. Russia has left the door open for further discounts -- hinting at up to 16% -- if Turkey shows it is serious about deepening relations. Michael Ritchie, London

Topics:
Gas Supply, Gas Pipelines
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