Turkey: corridor diplomacy

Economist Intelligence Unit – Business Middle East

1 septembre 2009

Backing Russia’s South Stream gas pipeline project fits in with Turkey’s dual aim of maximising its energy supply options and becoming a regional oil and gas hub

Although South Stream could harm the prospects of the rival Nabucco gas pipeline, Turkey evidently wishes to hedge its bets, while ensuring that it remains on good terms with Russia, which currently supplies about two-thirds of its gas.

The Turkish prime minister, Recep Tayyip Erdogan, and his Russian counterpart, Vladimir Putin, signed a cluster of energy agreements in Ankara on August 6th. Among them was one giving Turkish consent for the conduct of surveys in its territorial waters in the Black Sea for the South Stream pipeline, which aims to start supplying 31bn cu metres/y of gas from Russia to Europe starting 2016. The project is being sponsored jointly by Russia’s Gazprom and Italy’s Eni (hence the presence of the Italian prime minister, Silvio Berlusconi, as a witness).

Ukraine by-pass

Turkey had earlier opposed a suggestion for surplus capacity in the Blue Stream pipeline, which runs north-south across the Black Sea to Turkey, to be used to feed some of the gas into South Stream. The Memorandum of Understanding (MoU) signed in Ankara clears the way for the South Stream partners to survey various potential routes for the pipeline’s 900-km transit across the Black Sea within Turkey’s Exclusive Economic Zone, thereby enabling it to avoid passing through Ukrainian territory—one of the prime objectives of South Stream and of the Nord Stream project in the Baltic. After reaching the Black Sea coast of Bulgaria, South Stream will split in two, with one branch going south through Greece and across the Adriatic to Italy, and another running up through Serbia and Hungary to Austria.

No details have yet been divulged about what direct benefits Turkey might receive if a final decision is taken to build South Stream in its waters. These are likely to include transit fees and rights to buy some of the gas. Mr Erdogan has also secured a number of potential indirect benefits from the other energy agreements reached with Mr Putin.

Turkey has been seeking Russian support for some time for a proposed oil pipeline from Samsun, on the Black Sea, to the Mediterranean terminal of Ceyhan, as a means to limit the number of tankers passing through an increasingly congested Bosphorus. It is envisaged that much of the oil for Samsun-Ceyhan would come from Kazakhstan’s Kashagan field—Eni, the operator of Kashagan, also holds a 50% stake, along with Turkey’s Calik Enerji, in the Samsun-Ceyhan project venture. However, its viability would be enhanced if this could be supplemented by some Russian oil, particularly given the lengthy delays that have beset Kashagan. Russia has also flattered Turkey’s energy hub ambitions by agreeing to allow onward sales of gas supplied via Blue Stream to potential clients in the east Mediterranean, including Cyprus, Lebanon, Syria and Israel.

At the Ankara meeting Mr Putin and Mr Erdogan n signed an agreement on nuclear energy co-operation, which could signify that Turkey’s long-standing plan to build its first nuclear power station at Akkuyu, on the east Mediteranean coast may finally come to fruition.

Nabucco impact

Both the Turkish and the Russian leaders insisted that South Stream should not be seen as a rival to the Nabucco project, which aims to pump some 30bn cu metres/year of gas from central Asia and the Middle East to southern and eastern Europe. Indeed, Mr Erdogan last month lent his weight to Nabucco by signing an agreement for the pipeline in Ankara with Bulgaria, Romania, Hungary and Austria. From Turkey’s point of view, the more gas transit pipelines the merrier, as this will enable it to further diversify its own supplies and secure more toll revenue. However, the progress with South Stream does cast a cloud over Nabucco. Prospective buyers of Nabucco gas will be inclined to drive a harder bargain, as will the potential suppliers of gas for the pipeline.

At present Nabucco has no firm supply contracts in place. Its most promising lead is in Turkmenistan, which has plenty of gas to spare, and which is becoming increasing dissatisfied with its current sales contracts with Russia. The main snag with the Turkmenistan option is that the best way to get the gas to Turkey is via Iran. European buyers are likely to be nervous about putting themselves in a position of dependence on Iran. Moreover, Iran thus far has poor record of reliability in the operation of its existing gas pipeline to Turkey, and its own gasfield projects are beset by long delays. Egypt could supply some gas via its new pipeline through Jordan and Syria, but not enough to make Nabucco viable on its own. Iraq has offered gas, but will need at least a decade to produce the volumes required.

If Mr Erdogan wished to exert some pressure on Mr Putin through endorsing Nabucco last month, the tactic seems to have succeeded.
Turkey’s gas supplies 2008; bn cu metres

Russia 23.6
Iran   5.8
LNG    4.25
Other  2.96

Source: BP