For those who follow the saga of Gazprom’s pipeline projects the recent months certainly offered a decent spectacle. Ever since the cancellation of South Stream and the announcement of Turkish Stream in December 2014, the information puzzle around Gazprom’s actual intentions and capabilities has been growing in complexity. The lack of clarity and transparency allows for speculations by observers over occasional media reports or press communiques on behalf of Gazprom officials.

Intentionally or not, the Russian gas giant together with the Kremlin managed to create a quicksand of pipeline politics. A couple of gas transit options are currently “on the table”, however, it is still rather unclear which one of them would take priority and might eventually materialize. Turkish Stream seemed to be leading the ledger, but recent developments around it have hinted that the the project might not take its initial form.

It would be useful to take a look at what has reached the public over the past months in order to make more sense of this entangled situation.

Firstly, the macro conditions in which Gazpom operates have changed into a very unfavorable direction.

Gazprom’s financial situation seems to be weakening. The company’s net profits went down by 86% to just around 3$ bln. in 2014. The weak rubble, falling oil prices, supply cuts to Ukraine, and decreasing demand in Europe have all contributed to this performance. The company’s shares are trading today at 4.46$ (28/07 quote) as compared to around 7$ a year ago. Surprisingly, bad news also came from Turkmenistan in early July indicating that Gazprom has not paid for gas purchases since January 2015. This poses a precedent for Gazprom as the Central Asian country has threatened an arbitration.

Price disputes are on the rise. Amidst this difficult situation, Gazprom has also given price concessions to some clients. Lithuania which is developing its LNG capacities obtained a 20% gas price cut in April. Romania cut Russian gas imports by 61% in 2014 and ultimately ceased them fully in April 2015 Turkey has been promised a 10.25 % overall gas price discount as a precursor to the ongoing Turkish Stream negotiations. Even Ukraine was almost able to get a 40$ price cut at the end of June but the negotiations failed as Kiev was insisting for a 100$ discount (per 1000 cm) strengthened by reverse gas flows from Slovakia and Hungary. These moves have not been motivated by Gazprom’s benevolence but by the rather pragmatic realities of increasing competition and need to maintain market positions.

In April the European Commission charged Gazprom with market position abuse mainly in Central and South East Europe. This move coincided with the stiffening conditions for the company. The 12 week deadline is expiring soon and Gazprom has still not responded with any reasonable arguments to the EC’s allegations. The risk is legal action and possible hefty financial fines unlikely to help Gazprom’s financial health.

Secondly, Gazprom seems to be still largely undecided about the future outlooks of its gas transit to the European markets (both EU and non-EU). Turkish Stream, Nord Stream II, and transit through Ukraine are the current options at Gazprom’s disposal. These cards are played simultaneously creating unclarity and speculation.

Ukraine

The primary source of concern for the Russian company is, of course, Ukraine. Here, it is rather impossible to decouple doing business from doing politics. The Russian position on transit through Ukraine changed a couple of times since 2014. Initially, Gazprom had intended to cease transit through Ukraine by the end of 2019 when the current contracts expire in view of the collapsing relationship between Moscow and Kiev. Then, by the end of June we saw a turn of events as the Russian side decided to negotiate on the resumption of gas transit even after 2019. Ultimately, the talks collapsed and as from July 1st Ukraine stopped buying Russian gas once again, however transit to the rest of Europe remained intact. The two sides could not agree on the price discount margin for Ukraine’s domestic needs as well as the transit fees charged by the Ukrainian Naftogaz for each 1000 cm of blue fuel. Although, the Ukrainians are not buying Russian gas at the moment, it still unclear whether there may be a continuation of gas transit talks in the future.

South Stream.

The South Stream pipeline was conceived after the 2009 gas dispute with Ukraine as a way to create an alternative export route to Central and Southern Europe. It’s capacity of 63 bcm (billion cubic meters) was to match almost the entire amount that goes through Ukraine, approximately 70 bcm. The firm position of the European Commission, in my opinion partially due to the decline of the relationship between Brussels and Moscow over the Ukrainian crisis, forced Bulgaria to block the project as it did not fulfill the legal requirements of the Third Energy Package. In December 2014 while visiting Ankara Putin was quick to throw the gauntlet at Sofia blaming the end of South Stream on external forces and announced the rebirth of the project as Turkish Stream.

Turkish Stream.

The new pipeline is supposed to have the same 63 bcm capacity but rather than entering Bulgaria it would make entry into the European part of Turkey. Today, this seems to be the only more or less certain fact about this pipeline. For the rest, there has been a lot of speculation over the possible route, cost, capacity, legal framework, ownership, etc. Things went even so far as to completely speculate that the political instability in Macedonia was due to some conspirative opposition to the project, which is of course nonsense.

The realities around the project show that the Turkish side proves to be a tough partner. The negotiations are still ongoing although it was initially announced that by mid-July there would be an agreement. Turkey has still not formed a government after its June election and the constitutional deadline for this expires on 23 August. This is one argument explaining why there still may be no inter-governmental agreement at this point.

However, there are other indications of a deeper problem with the project. As from 1 July it was announced that Gazprom is freezing the expansion of the their South Corridor infrastructure on Russian territory. Out of two branches – western and eastern – Gazprom will continue building only the shorter western one 547 mi long compared to the eastern branch stretching 1010 mi. This infrastructure was supposed to feed gas to the Turkish stream pipes if they are to deliver the promised 63 bcm/year.

Another development that raises speculation over the future of the project has been the cancellation of the contract with the Italian company Saipem which was to lay the pipelines under the Black Sea for the initial South Stream project. The ships and their crews were idle since December first in Bulgarian ports and then in the Russian port of Anapa. The official position of Gazprom on the cancellation explained that this was purely a price/business conditions dispute and has nothing to do with the Turkish Stream. Gazprom will have to pay $300 million in compensation.

This explanation could be valid of course but there have been reports from some Turkish sources that describe the negotiations as tense. A meeting between Putin and Erdogan in Baku on 13 June did not create much fanfare as it was reported that there were some disputes over prices and the final agreement. Most recently the Turkish Minister of Energy and Natural Resources Taner Yildiz said that Russia had gotten back on its words and that “Moscow sees us only as a transit country. For us, this makes no sense. We are interested in establishing a joint supply chain.”

The Turkish Stream pipeline is actually designed in four separate lanes each with a capacity of roughly 15.7 bcm. Altogether they would add up to the announced 63 bcm. Permission has been obtained only for the first stretch, while stretches two, three, and four are still under negotiations. Most recently on 25 July prime minister Medvedev commented that “we are coordinating an intergovernmental Russian-Turkish agreement. Soon we’ll start talks with the companies that will build the first section” and later it was announced that an intergovernmental agreement had been sent only for the first lane of the project at this time.

Nord Stream II.

While Gazprom is pushing its pipeline project on the Southern “front”, news came on 18 June of an expansion of the existing Nord Stream pipeline. The current two-stretch infrastructure will be doubled by adding two new pipelines bringing the total capacity of this corridor to more than 100 bcm/year. This said, there has been no final deal signed, just a memorandum of understanding between Gazprom and three European partners – Royal Dutch Shell PLC, Germany’s E.ON and Austria’s OMV AG. Although the issue has since seen no further development, it is an indication of increasing uneasiness about the future of gas transit from Gazprom’s perspective.

The EU’s role.

The European Commission has held firm in defense of the Third Energy Package. So far, Brussels and Commissioner Sefcovic have been observing the developments and have acted according to their prerogatives. The EC works with actual legal documents and the truth is that apart from some memorandums of understanding and expressions of intent, there has been little tentative paperwork to take action upon. As far as the Nord Stream announcement is concerned, the Commission issued a reprimand calling for respect to the EU’s regulation and there was indeed little else to do at this level of agreement. In connection with Turkish Stream, Brussels has made it clear that any development of the project on EU territory must comply with its legal framework. Bulgaria was quite disturbed about the possibility that Turkish Stream could be allowed into Greece while Sofia was the front-line for the legal clash over South Stream. It came as no surprise, when Athens announced its 2.3$ bn pipeline deal with Moscow earlier in July after SYRIZA’s flirting with the Russians. This deal, however, is also a preliminary one and in view of the very difficult situation in Greece nowadays it would be a long-shot to make any predictions. Furthermore, the hard-line SYRIZA member and (now ex) energy minister Lafazanis who was leading the charge on the gas deal was dismissed by Tsipras roughly two weeks ago.

Brussels seems much more interested in the development of its Southern Gas Corridor strategy rather than another Russian gas source. A summit in Dubrovnik on 10 July gathered fifteen counties from Central and South East Europe which signed deals on improving gas interconnections and energy security in their regions. The Commission has been actively involved into convincing the Balkan countries to build up their gas infrastructure and trans-border links rather than part taking in monster pipeline projects. The ideal scenario from Brussel’s perspective would be a an efficient and interconnected energy infrastructure in South East Europe and Azerbaijani gas flowing through the TANAP and TAP pipelines before 2019 as well as LNG terminals operating along the coast of Northern Greece. Of course, there is still a long way to go and many underwater stones on the way of these projects and so far they do seem as “virtual” as Turkish Stream, by the words of Jarosław Wiśniewski. The example given just serves as an illustration of the differing visions on energy policy in the South East as seen by Brussels and Moscow.

Gazprom’s pipelines – dead end or stratagem?

There are two predominant versions that could explain this complex network of events.

The first view puts Gazprom in the position of a tool of Russian foreign policy. There have been many occasions that have proven this connection and, of course, the Russian model of governance can leave really little independent sway in the hands of Gazprom’s CEO Alexei Miller. The charges that the EC raised against Gazprom’s monopolistic policies in Eastern Europe are just a culmination of a long era of aggressive expansion, unfavorable treatment, direct meddling in sovereign energy policies, supporting clientelism, and outright graft. Hereby, we can look at Gazprom’s pipeline designs as just an extension of these policies aiming to divide the EU states, create a smoke screen of misinformation, throw a bluff at the unsuspecting audience. South Stream, Turkish Stream, Ukrainian transit, Eastring, Nord Stream II are all projects with currently little concrete foundation. To illustrate, Turkish Stream is, as described above, approaching its initial launch but at the same time the Bulgarian Energy Ministry has not received an official note of the cancellation of South Stream yet and on top of that negotiations have opened on a new Nord Stream. All options are kept open on the table and some of them are tapped in when necessary. This policy has been well summarized in Jarosław Wiśniewski’s article “Virtual Pipelines” written for New Eastern Europe magazine. What is important in this approach is to keep all parties hanging in a limbo, tied to mega projects which promise billions of income to state budgets and thousands and millions in bribes to proxies and officials in a clientelist network on the local member-state level.

The above model has been very effective so far, at least until the start of the Ukrainian crisis and the West – Russia stand-off. An old Bulgarian saying goes something along the lines of “the dogs bark, but the caravan goes on”. In other words, there seemed to be a status-quo which exploded with the annexation of the Crimea and the war in Eastern Ukraine. The energy security policies that have been prepared for years found the need to be accelerated with the worsening of the geopolitical environment. The point here being that Gazprom quickly fell victim to this situation. Its politically motivated monster projects overreached. Finding itself in this weakening financial situation, the company may be looking for a way to save itself from collapse. Therefore, this can be another explanation for the nervous rush into negotiations or new projects. Meeting stiff resistance from Brussels and finding a very tough and uncompromising “partner” in Ankara, Gazprom may have fallen hostage to its own designs. Some would say that this is the price to pay for following political logic instead of economic reason. For example, this analysis shows how costly would be giving up transit through Ukraine. Also consider the billions that need to be spent on pipeline construction under the Black Sea, the Baltic or thousands of kilometers to the Chinese border (for the Power of Siberia pipeline). The cash-strapped company cannot afford them any longer, neither can it rely on financial guarantees from Moscow where financial reserves halved within the last year.

What to expect?

Considering all the recent events, it seems highly unlikely that the Turkish Stream project will be completed in its entirety as planned. The Nord Stream II will probably remain a fantasy. Gas transit through Ukraine will stay but possibly at renegotiated conditions with EU mediation. It should be clear that all the projects currently on offer cannot be completed simultaneously primarily due to the lack of financial resources and enough gas to fill in pipes with combined capacity of hundreds of bcm/year.

Turkish Stream has curiously met with the same conditions that killed South Stream but from the Turkish side. Ankara does not agree to be just a transit country or a simple buyer, it seeks access to those pipes on its territory. Turkey wants to position itself as a middle man that has a stake in price formation and profits. It wants to buy and resell on its own terms. This may be a condition too heavy for the Russians to meet. Turkish Stream may thus be scaled down in ambition to just the first or maximum second stretch – combined 32 bcm out of which half will be for the Turkish market and the rest sold to European companies at a hub in Bulgaria or Greece. This move can prove to be a reasonable end to this mega-project and a way to save face for Gazprom.

To know more, one must wait and see who will govern in Ankara after 23 August and to what extend the Minsk ceasefire will be holding in Ukraine this autumn.