Improved Russia-Turkey Energy Relations Could Reorder Energy Supply Map

An Emerging Competition

Although Russian-Turkish political relations have not exactly been warm in recent years, neither have they been frigid. Yet, in the energy sector at least, the two countries have been somewhat at loggerheads, pursuing policies that at times have been in direct conflict with one another, with Turkey seeking to become an "energy bridge" between East and West, connecting Middle Eastern and Caspian-region gas to Europe while Russia's Gazprom has sought to retain its dominant position as a supplier to Europe. Whereas Turkey has sought to open the door for non-Russian gas suppliers to Europe by fostering the establishment of a new supply corridor, Gazprom has tried, essentially, to keep that door closed—or at least ensure its control over the door's opening.

Thus, one year ago, the burgeoning competition between Russia and Turkey for control over the supply route for new gas exports from the Caspian and Central Asian regions, in particular, burst out into the open, souring relations between the two countries. In May 2007, Russia announced a plan with Turkmenistan and Kazakhstan to build a new "Caspian shore" gas pipeline and renovate the existing Central Asia-Centre (CAC) gas pipeline system, thwarting (at least for now) Western efforts to connect Turkmen gas to Azerbaijan via a proposed "trans-Caspian" gas pipeline. Gazprom subsequently announced its "Turkey bypass" plan for delivering this Central Asian gas to south-eastern Europe with its South Stream gas pipeline plan via the Black Sea (see "Related Articles" below).

Turkey, which has been promoting itself as key to the emergence of a new supply corridor for gas to Europe, then responded by announcing its own deal with Iran and Turkmenistan, geared to attract gas supplies from these countries and ensure additional supplies for the Nabucco gas pipeline project linking Turkey to central Europe. These gas volumes from Turkmenistan and Iran would be on top of existing and planned deliveries from Azerbaijan, which began exporting gas to Turkey last year following the launch of the Baku-Tbilisi-Erzurum (BTE) pipeline. These competing visions for a new gas supply route to south-eastern Europe for Caspian and Central Asian gas have pitted Turkey squarely against Russia—even though a handful of states in south-eastern Europe have hedged their bets by voicing support for both Nabucco and South Stream. Indeed, the European Union (EU) itself has sought to downplay talk that the projects are rivals, but for Turkey and Russia at least, it is a zero-sum game, with one's victory meaning the other's loss.

A Changing Landscape?

Or so it seems. At the same time that Turkey and Russia have been pushing their different visions for gas pipelines, the two countries have offered competing solutions for the rising volume of oil exports from Russia and Kazakhstan to bypass the increasingly congested Bosphorus Straits, with Russia promoting its Burgas-Alexandroupolis pipeline while Turkey is moving ahead with construction of its Samsun-Ceyhan pipeline. Yet, even with their differences, relations between Turkey and Russia have avoided the deep freeze, perhaps due to the fact that their energy-sector ties have, ironically, increased in the past few years. Turkey counts Russia as its largest gas supplier, with Gazprom frequently boosting supplies to offset disruptions in Iranian gas exports to Turkey, and last year Russia overtook Iran as Turkey's largest source of oil imports as well.

Furthermore, in recent weeks, Russian-Turkish energy relations have improved considerably, with the two countries discussing co-operation on a potential north-south energy bridge that would carry Russian gas to Israel via Turkey, and Gazprom eyeing potential investments in Turkey's gas storage and distribution network. Turkey has said it wants to renew a gas import contract with Gazprom, and the Russian gas giant has also proposed expanding the Blue Stream gas pipeline. Earlier this week, in another sign of the warming trend in relations between the two countries, Russian oil major LUKoil acquired Turkish fuel distributor Akpet, a US$500-million-plus acquisition that would not likely have been possible in the bilateral environment at this time last year.

Outlook and Implications

Although it is far too early to draw any definitive conclusions from the warming trend in Russia-Turkey energy relations, it is not too soon to speculate on what this could mean, and how it could change the pipeline outlook for Caspian and Central Asian gas to Europe. Indeed, with Gazprom beginning to make headway with Turkmenistan regarding the Caspian shore pipeline, offering the lure of the Russian gas giant paying "European" prices, Gazprom is looking more secure in its control over Central Asian gas exports. At the same time, the continued stalemate between Turkey and Azerbaijan over gas prices and transit arrangements has given Gazprom an opening to try to attract Azerbaijan's future gas export volumes as well, offering the same carrot of "market" prices.

The slow progress in pushing forward the Nabucco project, together with the same lingering questions over sufficient gas supplies, financing, and Turkey's intransigence on the transit issue that have dogged the pipeline in the past few years, has given Gazprom the upper hand in promoting its South Stream pipeline. As such, the Russian gas giant has now "turned" several European companies and governments to its side, at least insofar as prompting them to sign up for South Stream, if not abandon Nabucco entirely. Turkey is indeed the key to Nabucco, as without Turkey's co-operation Nabucco is dead on land, with South Stream if anything alive in the water. However, the rising costs of South Stream—which Russia's Energy Ministry said this week could cost US$20 billion to build now, yet another increase in the project's expected cost—make the pipeline an extremely expensive endeavour, even for Gazprom, which is not exactly known for its cost control.

Thus, the possibility exists that Russian-Turkish co-operation in the gas sector could herald a solution that may allow both countries to achieve their aims. While South Stream would allow Gazprom to ship Russian, Central Asian, and potentially Azerbaijani gas to south-eastern Europe without paying Turkey for transit services, a Turkey-Russian partnership to expand the Blue Stream pipeline and then pump this gas to Europe via Turkish territory would be cheaper in terms of construction. What Gazprom pays in transit tariffs it could effectively make up in retaining (and increasing) its market share in Europe, given that a deal between Turkey and Russia would effectively kill Nabucco entirely—or rather, kill South Stream as it is currently envisioned, but ensure Gazprom's participation in Nabucco.

In this scenario, then Gazprom would abandon South Stream, but join Nabucco and become the pipeline's major supplier, potentially controlling Russian and Central Asian gas shipments via the pipeline, and perhaps even Azerbaijani gas volumes as well. Interestingly, this outcome would mean the death of South Stream but the victory of Gazprom's vision. At the same time, this would entail the death of the political idea of Nabucco—meaning, the establishment of a new gas supply corridor to Europe pumping non-Russian supplies and not controlled by Gazprom—even if the pipeline itself is actually built.

Related Articles

Turkey: 30 July 2008: Russia Surpasses Iran as Turkey's Top Oil Supplier 

Turkey: 29 July 2008: LUKoil Expands Downstream in Turkey with Akpet Acquisition

Turkey: 18 July 2008: Turkey, Israel Agree to Move Ahead with Med Pipeline; Gazprom Nears Supply Deal with Israel

Azerbaijan: 3 June 2008: In Tactical Move, Gazprom Offers to Buy Azeri Gas at Market Prices

Turkey: 17 July 2007: Iranian Gas Deal Marks Turkish Response to Russian Bypass Challenge

Iran: 16 July 2007: Iran in Energy Deal with Turkey, Turkmenistan, in U.S.-Defying Grand Plan

Turkey: 26 June 2007: South Stream Pipeline Threatens Turkey's Role in Gas Transit to Europe

Europe: 26 June 2007: Eni, Gazprom Sign MoU to Build 30-Bcm South Stream Pipeline to Europe

Turkey: 24 April 2007: Samsun-Ceyhan Pipeline Represents Turkish Gamble on Bosphorus Bypass Business

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