Russia continues to play hardball with natural gas for the European Union, trying to get Brussels to sacrifice Ukraine in return for the promise of better relations with Moscow. The European Commission’s vice-president for energy union, Maros Sefcovic, visited Russia on January 14 to ask exactly what Moscow’s intentions were about the now-cancelled South Stream pipeline. Russian President Vladimir Putin had announced late last year a Russian plan to substitute for it a huge 63 billion cubic meter per year (bcm/y) pipeline project under the Black Sea to Turkey and then up to the Turkish-Greek border.

Moscow Tries to Turn the Natural Gas Pipeline Screw

Sefcovic was told that Russian shipments of natural gas through Ukraine would end and that if the EU wanted the gas, then it would have to get it through the new planned pipeline, which Russia has suggested could be called “Turkish Stream”.

But it is far from clear that Russia and Turkey can arrive at terms for implementing the project, even if Europe bends to the Russian pressure. For example, the day after Putin’s announcement of the new pipeline project in December, the Turkish energy minister said his country would really prefer LNG terminals for export to the world at large, instead of merely a passing gas through to Europe. And the Turkish vice-premier remarked earlier this month that the Azerbaijani-sponsored Trans-Anatolian Gas Pipeline (TANAP) would take precedence over any new Russian project.

That may be because TANAP is already agreed between Turkey and Azerbaijan and soon to be under construction. Even before Sefcovic’s visit to Moscow, the EU had asked for TANAP’s initial volume to be scaled up from the initial 16 to 20 bcm/y. The additional volume could come from sources in Azerbaijan or the Kurdish Regional Government (KRG) in Iraq.

Understanding the Multi-dimensional Natural Gas Chessboard

Russia, Iran and Iraq in the Broader Setting

Russia wants to prevent Kurdish and also Iranian gas from reaching European markets. However, Iranian leaders have recently stated that their own domestic supply needs would supersede any European wishes, in the event of any further investment in production facilities. So it is a pipedream for Europe to get gas from Iran, although on the political level this question remains in the rhetorical mix over the Iranian nuclear question, despite its being a non-starter by Teheran’s own declaration.

This does not prevent European companies, following the partial lifting of sanctions by the U.S. President Barack Obama, from undertaking preliminary negotiations with the Iranian regime for future investment. However, it is perhaps telling that of the about 50 energy companies that have done so, none has considered it useful to pursue the matter further. For this, the lack of transparency and extreme centralization of Iranian energy industry decision making are among the more responsible factors.

People in Southeastern Europe are still paying attention to the prospect, however dim, of Russian-Turkish energy cooperation, in part because these are two large countries that are close by, and they naturally dominate the local international news. Sefcovic met Bulgaria’s president Boyko Borisov earlier this week. Borisov wishes to turn Bulgaria into a gas hub for Southeastern Europe.

The Place of Ukraine, Azerbaijan and Iraq

Russian gas exports to Europe through Ukraine have fallen by over half from a decade ago, when they averaged 130-140 bcm/y, to 62 bcm in 2014: a figure almost exactly equal to the volume bruited for the new undersea Russian-Turkish gas pipeline. The KRG in northern Iraq would be able to supply about 7 bcm/y to Europe without much difficulty.

Azerbaijan, with its vast offshore natural gas deposits, could take up a good deal of the slack merely by accelerating their development, if justified by European demand. This would make it possible for Azerbaijan to scale up to 30 bcm/y with its own supply by itself.

The question here is to what degree Baku, which has somewhat de-Westernized its geo-economic orientation over the last two years due to pressure from Moscow that the West ignored or did not care enough to balance, would cede to Russian wishes for decreased Azerbaijani gas exports to Europe, in order to increase the pressure from the new threatened Russian cutoff.

The deputy head of Russia’s Natural Energy Security Fund, Aleksei Grivach, has already placed a marker here, saying that Azerbaijan would be unable to supply more that 15 bcm/y of TANAP’s possible scaled-up volume of 30 bcm/y and that “Gazprom has the right[!] to count on the remaining capacity in the pipe”: even though Gazprom has no stake in the pipeline construction consortium or the bilateral Azerbaijani-Turkish supply and purchase agreements.

Does the New Russian Project Threaten a New Cutoff to Europe?

The new Russian ploy does amount to the threat of a new cutoff, albeit one with a kindler, gentler face. The threat came from Gazprom chief Alexei Miller while the EU minister Sefcovic was in Moscow. Miller bluntly told the press, “We have informed our European partners, and now it is up to them to put in place the necessary infrastructure starting from the Turkish-Greek border.”

Sefcovic told the press that he was “very surprised” by Miller’s statement, and that a route through Turkey simply would not fit with the EU’s gas system. He correctly observed that Southeast Europe does not need 63 bcm/y even if the pipeline is built. However, at lower volume it would probably have little chance of turning an economic profit.

Given the experiences of 2006 and 2009, for which Russia unsuccessfully tried to blame Ukraine, any new Russian pipeline does nothing for Europe’s diversification strategy, aimed an insuring security of supply.

“We don’t work like this,” Sefcovic replied, referring to Miller’s comment. “The trading system and trading habits, how we do it today, are different.” Russia’s energy minister Aleksandr Novak told that press that the decision to eliminate Ukraine as a transit country for Russian natural gas to Europe has been taken, implying its irreversibility.

It remains a very open question who could fund construction of the new proposed Russian-Turkish pipeline. Neither the Turks nor the Russians can; the Arab and Asian banks have no interest in doing so; and European banks cannot do so under the current sanctions. So in this light, the Russian move appears not just as new pressure against Ukraine but also as a strong-arm gambit to get the EU to drop sanctions.

Meet the New Problems, Same as the Old Problems

However, any new pipeline project would face the same problems as the old South Stream project. In particular, it would still have to comply with the pertinent Third Energy Package and other European rules.

Not only is it unsettled is who would pay for a new Russian-Turkish pipeline. Even unasked is the question: Why not just expand the existing Blue Stream pipeline? This was built a decade and a half ago and already takes Russian gas under the Black Sea to Turkey, although not overland to the Greek border. Certainly any expansion of the Blue Stream pipeline would be more cost-effective that a totally new pipeline laid entirely underwater. However, neither Turkey nor Russia seems to want this, perhaps for that reason: there would be a smaller pie of profits to divide among the parties concerned.

Yet even to persuade Ankara to subscribe to the announcement of the idea of a new underwater pipeline, Moscow was obliged to concede a 6 per cent discount in the sale price of gas to Turkey along with the promise of an increase of 3 bcm/y in Blue Stream throughput. This in turn merely reconfirms that the Blue Stream has never operated at full capacity and is in fact uneconomical.

That is because Blue Stream was not built to make an economic profit (except for the pipeline manufacturers) but rather as a state-supported geo-economic blocking-move against the late-1990s project for a Turkmenistan-Azerbaijan natural gas pipeline under the Caspian Sea, through which Central Asian gas could reach Europe.

The Still Bigger Stakes in EU-Russia Relations

The day before Sefcovic arrived in Moscow, Russian foreign minister Sergei Lavrov told his Latvian counterpart that Russia would not pursue any dialogue with Europe over the EU’s sanctions. Perhaps not coincidentally, two days later the EU foreign relations chief Federica Mogherini circulated a four-page paper to member-states that suggests in its details essentially a return to business as usual although denying this in the boilerplate political rhetoric at the head of the paper. However, for a variety of reasons, there is nearly certain to be no consensus in favor of this when EU foreign ministers meet early next week. For one thing, German chancellor Angela Merkel is on record as ruling out a reversal of sanctions until and unless the Minsk accords are fully implemented.

All this geo-economic and power-political jousting is conditioned by the fact that EU sanctions against Russia will begin to expire in three phases between March and July unless there is an EU consensus to keep them in place. Various national political leaders in various EU member-states have already suggested that they should be allowed to expire. However, the European Parliament is on record in favor of maintaining them unless a comprehensive settlement is implemented, including Russia’s respect for the commitments that it has already undertaken, starting with but not limited to the withdrawal of all its forces from occupied eastern Ukraine.