« Back to Energy Insider
No Shortage of Pipeline Proposals for the
by Christina Nagy-McKenna, Enerdynamics Instructor
Last April as Europe was reeling from the political instability of the Ukraine and annexation of Crimea to Russia, we wrote in a blog post that “gas pipeline projects are already responding to the events in the Ukraine: South Stream is dead. Shah Deniz lives. The EU [European Union] is strategizing to reduce its energy dependence on Russia while protecting all of its members from possible energy blackmail.”
The spring and summer of 2014 were dotted with news reports of alleged troop movements on both sides in the Ukrainian conflict as Europe and the Baltic states sat nervously watching the situation play out in their own backyards.
The Players and the Pipelines
Sixteen months later much has happened:
- The relationship between the EU and Russia is layered with economic sanctions and mistrust.
- Turkey is being courted by the East and West as the critical piece to pipeline projects that each side is championing.
- An agreement between the U.S. and Iran may eventually bring Iran’s resources to the global market.
- Lastly, there’s the matter of the EU’s $96 billion bailout plan to pull Greece’s economy off its tightrope and into safety.
Each of these countries may play a role in the drama surrounding Europe's energy security, Russia's economic security, and the pipeline projects that factor into both.
Last year’s aggressive stance toward Ukraine resulted in the EU withdrawing support from the South Stream pipeline, a project that was going to bring Russian natural gas through the Black Sea and Bulgaria to Western Europe. Instead, the EU is pursuing another project in the southern corridor of Europe called the Trans-Adriatic Pipeline (TAP) to bring in gas from the Middle East and Central Asia, including the Shah Deniz reserve in Azerbaijan.
In December 2014 Russia officially cancelled the South Stream project and announced a new project, Turkish Stream, that pipes natural gas from Russia to Turkey and then on to Western Europe. Regardless of Russia's strained relations with the EU, Europe remains an important market as 70% of Russia’s natural gas comes from Europe. Whether all projects can be built is questionable as market demand is not robust enough. Perhaps for that reason, Russia is purportedly scaling back Turkish Stream and is quietly negotiating to expand its Nord Stream pipeline instead.
Market demand aside, these projects have rapidly become political tools for several countries:
- Europe views the Russian project as a possible strategy to thwart the EU’s Southern Corridor proposal and to protect its economic stake in the European market.
- Greece has used Turkish Stream as a bargaining chip with its creditors, alleging that it would stand to gain $3.5 billion in transit fees, a figure which is not substantiated by the project’s finances.
- Turkey is stuck between the U.S., which is allegedly pressuring it not to go forward with the Turkish Stream project, and Russia, which is offering a 10.25% gas price discount to Turkey as part of the project. Turkey recently became an important ally to the U.S. in the fight against the Islamic State, but it also envisions itself as the corridor for oil and gas from the Middle East and Central Asia to Europe. Trying to remain neutral and do what’s best for itself may not be easy as it is caught between two super powers that each wish to assert its own influence.
- Lastly, there is the issue of resource-rich Iran, which, by virtue of recent negotiations regarding its nuclear program, may eventually be in a position to supply European markets with natural gas and may also participate in the TAP project.
The Numbers Game
Ultimately the pipeline projects that will be built are those that make financial sense. While the South Stream project had multiple investors, Turkish Stream is so far only financed by Gazprom, the natural gas company of Russia. Simultaneously, Gazprom is planning to build a new pipeline to China, and it quietly signed a non-binding memorandum of construction in June with Shell, E.ON, and OMV to add a second pipeline for its Nord Stream system that brings natural gas through the Baltic Sea to Germany. At a time when economic sanctions are taxing the Russian economy, it is difficult to imagine that Gazprom has the money to build all these projects.
Considering the capacity sizes of the pipeline proposals and the existing Nord Stream pipeline (see chart below), it is clear that all projects are not necessary for Europe to diversify the 82 Bcm of gas it imported through the Ukraine in 2013.
In addition, Europe has not been sitting by idly during the past five years. Rather it increased bidirectional flow by almost 100 Bcm and added 42 Bcm of interconnection capacity between central and western Europe and within eastern Europe. Europe also has been adding new LNG terminals to import gas from Africa, the Mideast, and the U.S. and soon will further increase import capacity by 25 Bcm in 2016. Many of the new terminals are located in regions formerly served by Russian gas.
The big question remains: Is there a way for Russia and the EU to both succeed and peacefully conduct business in the European market? The EU cannot simply walk away from its dealings with Gazprom and Russia. The proposed Nord Stream Expansion project is proof that although East and West are not always aligned politically, its business interests are at times in sync.
And what about newer players? Countries such as Turkey, Azerbaijan, and others are also looking to find their places in the larger European market. Ultimately consumers, the pipeline companies, and the governments all benefit from stable, thriving markets. This next year will prove to be an interesting test to see if the players in that market can make it happen and perhaps also take the politics out of natural gas decision making.
Footnotes and references:
 Note that Iran has the world’s largest amount of natural gas reserves.
 “The Energy Security Dilemma of Turkish Stream,” Natural Gas Europe, August 3, 2015.
 McCracken, Ross, “Sussing out the Ceilings over Russian Gas Prices,” The Barrel Blog, July 31, 2015.