The expansion of the European Union in 2004 and 2007 indirectly led to several crises at a level not seen since the oil embargo of 1973. The accession of several former Warschau pact countries introduced an extra dimension to European politics: Russia. Due to historical reasons some of these countries have a high dependency concerning hydrocarbons on their large eastern neighbour. Several serious disputes concerning supply, pricing, and debt between Moscow and Kiev from 2005 until 2009 led to disruptions in supply to EU member states. These conflicts highlighted the need for reduced dependency on Russia.
During this period the search for alternative sources was already on its way, but the shutdown of gas supplies as a consequence of these disputes accelerated the process. The completion of two LNG liquefication plants in Poland and Lithuania has decreased the dependency of this region on Russia. The south-eastern flank of the EU, however, is in a direr state. In order to alleviate dependency, the European Commission obstructed construction of the South Stream pipeline from Russia through the Black Sea to Bulgaria.
This region is on the brink of a breakthrough as it stands to benefit from the diversification of routes to the east and south. Moscow, however, has not been sitting idle in improving its chances to maintain market share. In July 2018 the second phase of the Southern Gas Corridor, the Trans-Anatolian Pipeline or TANAP, will be finalized to export 6 bcm of gas for the domestic Turkish market from the Shah Deniz field in Azerbaijan. Another 10 bcm will be sent to Europe when the third phase Trans-Adriatic Pipeline or TAP, is finished in 2020.
Furthermore, the discovery of significant energy resources in the Eastern Mediterranean provides for an additional source. The most obvious beneficiary, due to its geographic location, would be the EU. There are several options on the table to transport natural gas to customers in Europe: LNG facilities in Egypt, pipeline through Turkish territory, and pipeline directly through EU member states Cyprus and Greece.
Israel will be exporting natural gas worth $15 billion or 64 bcm under a ten year deal with Egypt. These imports will add to Egypt's domestic production in order to supply its idle liquefication facilities. Other alternatives to export significant volumes are pipelines through Turkey and Cyprus/Greece. Although infrastructure on land is significantly cheaper than subsea pipelines, the bellicose rhetoric of Turkish president Erdogan and the deteriorating relations between Turkey, Israel, and Cyprus deem such an option something of the past (for now).
A more expensive but politically safer alternative would be a subsea pipeline which Israel, Cyprus, and Greece have been exploring, the EastMed pipeline. This would transport 10 bcm of gas from the Eastern Mediterranean to Greece at a cost of $7.3 billion. The follow-up project that is supposed to take the gas from Greece further into Europe is called Poseidon and will run from the Greek coast to Italy. This pipeline has recently been upgraded to transport 20 bcm, 10 more than the EastMed pipeline. According to the project team, the upgrade has been designed to "allow multiple sources of gas, from Turkey/Greek border and from Eastern Mediterranean region".
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Despite opposition from Brussels, the countries in the region show continued interest for Russian gas due to lower prices compared to LNG or other sources. In order to meet this demand, Moscow struck a deal with Ankara on 26th of May 2018 for a second string of the Turk Stream subsea pipeline to supply 15.75 bcm of natural gas to Europe. Gas giant Gazprom already opened a potential export route in 2017 when it struck an agreement with Italy's Edison and Greece's Depa to use the southern route for Russian gas through Poseidon, where the expanded 10 bcm capacity could be used.
However, Moscow's plans also extend to other infrastructure in south-eastern Europe such as the TANAP and TAP pipelines constructed for Caspian gas. Moscow intends to participate in the auction system for the pipeline giving access to any would-be supplier. This would be contrary to the intention of the EU, which proposed diversification away from Russia. The 'unbundling legislation' of the EU provides equal access to transport infrastructure, meaning that legally Brussels does not possess alternatives to block Moscow's intentions.
In recent years serious challenges have arisen for Russian gas export to Europe: the foiled South Stream pipeline, the EU supported rival Southern Gas Corridor, and the rise of the Eastern Mediterranean as a gas hub. However, Moscow has proven to be resourceful and relatively successful in maintaining its market share. The participation in multiple projects, including the Southern Gas Corridor meant to loosen Russia's energy hold on Europe, has shown the interest for Siberian gas from European partners. Furthermore, the multitude of plans and intentions to participate in several projects has increased uncertainty for other would-be suppliers who potentially could invest in alternative sources. Ultimately this plays in the hands of the Kremlin whose export capacity remains essential until the near future.
By Vanand Meliksetian for Oilprice.com
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Comments
Neither the Southern Gas Corridor (SGC) nor the discovery of significant gas reserves in the Eastern Mediterranean or a potential EastMed subsea gas pipeline to Europe which Israel, Cyprus, and Greece have been exploring or US LNG exports to the EU could pose any threat to Russian gas supplies to the EU for the foreseeable future.
And while the SGC could at best raise its projected supplies to the EU from the initial 10 billion cubic metres annually (BCM/y) to 20 bcm/y in coming years, it is a fraction of Russian supplies amounting currently to 224 bcm annually or 37.4% of total EU demand and on the rise. And to add salt to the wound, the SGC will end up transmitting Russian gas to the EU through the Turkish Stream. For Russia, it is a win-win situation.
And while the recently-discovered gas reserves in the Eastern Mediterranean are vital to the economies of Egypt, Lebanon, Cyprus and Israel, they are not big enough to challenge Russian gas supplies to the EU. Moreover, building an expensive subsea pipeline, the EastMed, to transport just 10 nbcm of gas from the Eastern Mediterranean to Greece and further into Italy and Europe at a cost of $7.3 bn is too expensive and ill-advised in the current tense situation between Cyprus, Greece and Israel on the one hand and Turkey.
Despite opposition from Brussels, the EU countries show continued interest for Russian gas due to lower prices compared to LNG or other sources. In order to meet this demand, Moscow struck a deal with Turkey on 26th of May 2018 for a second string of the Turk Stream subsea pipeline to supply 15.75 bcm of natural gas to Europe. Gas giant Gazprom already opened a potential export route in 2017 when it struck an agreement with Italy’s Edison and Greece’s Depa to use the southern route for Russian gas through Poseidon, where the expanded 10 bcm capacity could be used.
Then there is the Nord Stream 2. According to the Wall Street Journal (WSJ), President Trump reportedly told German Chancellor Angela Merkel that the US would restart talks with the EU on a trade deal in exchange for Germany cancelling the Nord Stream 2 pipeline. Chancellor Merkel’s answer was to defy Trump and start building its portion of Nord Stream 2 —in its Baltic Sea port of Lubmin.
Nord Stream II construction will start in 2018 and will be finished by the end of 2019. The two “Nord Stream II” threads will transfer 27.5 bcm/y of gas, doubling the capacity of the Nord Stream I.
The United States has always been opposed to Nord Stream 2 partly because it will tighten Russia’s grip on Europe’s energy supplies but mostly because of self-interest.
Some in the EU are claiming that the US wants to displace Russia as a gas supplier to Europe. While there is some truth in this, US LNG can’t compete with Russian gas supplies to Europe.
Moscow’s plans are not only to build gas pipelines of its own such as the Turk Stream and Nord Stream 2 but also to make use of the SGC and the Poseidon pipeline to transport more Russian gas to Europe. While this would be would be contrary to the EU’s policy of reducing dependence on Russian gas supplies, it does not possess alternatives to block Moscow’s intentions.
Russia as a master chess player has anticipated every possible move by the EU and its rivals and countered them very successfully. Russian gas supplies will continue to dominate the EU gas market for the foreseeable future.
US Senator John McCain once called Russia a gas station masquerading as a country. While you can insult your gas station as you like, you still have to pay the bill.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
These two piplines are not necessarily to increase supply to Europe but to provide a more reliable and lower cost way to transport the existing natural gas volumes than the current method of going through Ukriane and Naftogaz (For an excellent review on this read the OilPrice article by Victor Katona: https://oilprice.com/Geopolitics/International/Will-Gazprom-Leave-The-Ukraine-Forever.html ).
Further, the supply disruptions in 2005 and 2009 were due to the corruption within Ukraine, which is still a factor, not because Russia is trying to play games. Ukraine has still not been able to make the needed reforms which would increase transparency and reduce corruption that resulted in Naftogaz losing crucial lending from the European Bank for Reconstruction and Development (EBRD) this year.
What is always missing in these type articles are the projections of future natural gas/energy use in Europe. From the most recent (2018) BP Energy Outlook for the EU through 2040. "We project that the EU’s energy demand will decline by 11% through the outlook; this contrasts with the last 20 years through which demand has been broadly flat." So if demand is projected to decline, why would anyone built expensive pipelines to increase supply? Its simple business math, not some nefarious plan from the Kremlin.
Time to stop the russophobia stories and move on to more important issues.