Let the energy games start

Russian President Vladimir Putin created a sensation when he announced during a visit to Turkey on Dec. 1 that Russia would stop developing the South Stream Gas Project and would instead explore a new pipeline project to transport natural gas to Europe through Turkey.

While it is still too early to predict the future of the new project, which was later dubbed “Turkish Stream” by Turkish Energy Minister Taner Yıldız, the termination of South Stream has already created a stir for the nascent EU Energy Policy and will surely encourage Turkey’s decade-old dream of becoming an energy hub.

Putin’s decision was a reaction to the European Commission’s insistence that state-owned Gazprom’s control of South Stream was contrary to the EU competition law, which requires separation of extraction, transportation and sale of energy resources. Russia, on the other hand, believes the commission is blocking the project for political purposes.

The 24 billion-euro South Stream project was conceived in 2007 when Italian energy company ENI signed a partnership deal with Russia’s Gazprom to create a new route to Europe bypassing Ukraine.

When fully operational, it would have transported up to 63 billion cubic meters of natural gas per year from Russia to Central and South-Eastern Europe. The United States and some EU members opposed the project, as it would have increased Europe’s energy dependency on Russia and further isolated Ukraine, thus leaving it at Russia’s mercy.

While the EU, in response to a disruption of the gas flow in winter 2009 because of a Russia-Ukraine price dispute, has tried to change its energy policy to guarantee continuous flow, it still is the largest global energy importer and its dependence on Russia will continue in the foreseeable future. Currently, Russia supplies 34 percent of oil, 32 percent of natural gas and 26 percent of solid fuel imports to the EU. Thus the recent crisis over Ukraine has once again highlighted the need to reform EU energy policy.

The cost of the Turkish Stream, even including the price of new storage facilities near the Turkish-Greek border, would be cheaper as the pipeline distance under the water would be considerably shorter than the South Stream. The new project might still be in breach of the EU energy regulation, though Russia might try to go around it by selling the gas to Turkey and allowing it to re-export it to Europe. However, the question of whether the EU members wish to purchase more gas from Russia remains, bringing other projects through Turkey into the picture.

Turkey and Azerbaijan have already planned for the Trans-Anatolian Natural Gas Pipeline project to connect with the Trans-Adriatic Pipeline to carry natural gas from the Caspian Sea to Europe. Other options such as transporting Iraqi and Iranian gas to world markets via Turkey are being explored. The shortest way to Europe from the eastern Mediterranean is also through Turkey if the Cyprus problem can ever be dealt with.

Shelving the South Stream project will undoubtedly hurt Bulgaria and Hungary, as they will lose valuable investment and transit fees, and replacing Russian gas might not be easy or cheap for the EU. On the other hand, Putin has launched a gambit to pressure European leaders on their sanctions by showing that Russia still has alternatives. However, Russia will still suffer from Western sanctions, declining energy prices, and a depreciating ruble. In the longer run, it needs Europe as much as Europe needs Russia, as the Russian economy is highly dependent on energy revenues.

Turkey, on the other hand, stands to benefit if it plays its cards right and on time. One question it needs to ask itself though, before getting too excited, is why Russia did not prefer the much cheaper Turkish Stream to South Stream in the first place.