Russia's Turkish Stream pipeline more credible than critics say

Russia’s plan to build Turkish Stream, a strategic gas pipeline, is more credible than its critics say, the head of the International Energy Agency (IEA), has told EUobserver.

The project is designed to harm Ukraine by bypassing its pipelines and to reward Moscow’s EU friends, Turkish Stream would-be hosts Greece and Hungary.

It has prompted ridicule by EU officials and by diplomats.

The EU energy commissioner, Maros Sefcovic i, says it doesn’t make economic sense. “A first assessment is that this wouldn’t work”, he told the Wall Street Journal in January.

A Polish diplomat told EUobserver the EU will source supplies from liquid gas (LNG) markets or from Tap, a new pipeline being built to Azerbaijan, instead.

A Turkish source said Russia doesn’t have the money to build it.

“Nobody in Turkey is taking it very seriously”, he noted.

“The Russians feel isolated. They have the same reflex as the Iranians used to have: to announce some kind of new project with Turkey, and the whole idea is to show they still have international partners.”

But for Fatih Birol, the head of the Paris-based IEA, the project merits closer analysis.

Money

He told EUobserver at Globsec, a security congress in Bratislava, on Saturday (20 June), it depends on three factors: Can Russia afford it? Does the EU need it? And does Russia have the gas?

“It’s too early to make a judgement … but governments and analysts are waiting to see how these questions will be answered”, he said.

On affordability, Russia, which gets most of its income from oil and gas exports, has been hit by a double whammy.

Global oversupply has seen oil prices slump from more than $100/barrel to $60 over the past year and Russian gas prices are indexed to oil prices on a slight lag.

But the slump won't last forever, Birol said.

He noted that global investment in oil production, mainly in the US, has fallen to a level “never before seen in the history of the industry”.

“We’re seeing production growth slow down and at the same time we’re seeing demand becoming stronger in the US, in Europe, and in China… So, I think, in the medium-term, we may see upward pressure on prices.”

Demand

He said EU gas imports are on the up because its internal gas production is “in decline”.

He added that many of the EU’s nuclear reactors, which produce 30 percent of electricity, are reaching “retirement age”, with few plans to build replacements.

LNG is an alternative to Russia and Australian and US liquid gas exports are set to grow. But LNG, which requires liquification, shipment, and regasification, is more expensive.

For its part, the Tap pipeline has a capacity of just 10 billion cubic metres a year compared to Turkish Stream’s 63.

The EU hopes that, in future, Tap could add gas from Iran, Iraq, and Turkmenistan. It has also shown interest in East Med, an Israeli-Cypriot pipeline project.

But Birel said political problems, such as Iran sanctions or the Cypriot-Turkish conflict, are likely to hold things back.

“In the long-term, Iran can play an important role in global gas markets. But I doubt that, in the short-term, its gas exports will be of substantial quantity”, he said.

“There are options which look very attractive from a theoretical point of view, but when it comes to the realities of life, they face many challenges”.

Supply

The IEA chief did warn that EU and US sanctions will restrict Russian supplies.

They ban its energy companies from buying debt on international markets and from buying high-end technology from Western firms.

“Russia’s energy sector is going through very difficult times”, Birol said.

“It will face more and more difficulties in accessing capital and in accessing sophisticated technology, which will impact … oil and gas production trends”.

He also noted that China is likely to buy more Russian gas in future in order to reduce dependence on coal.

“I wouldn’t be surprised if Russia-China energy trade increases significantly in the years to come”, he said.

But he added: “The gas which is going to go from Russia to China isn’t necessarily an alternative to the gas which is going to Europe, as they come from different fields, different basins”.