Alternatives & Analyses: The demise of Kremlin’s Turk Stream strategy – 2020 feeling like 1990

Throughout the history of the Turk Stream project, I have been tracking and analyzing ongoing developments, trying to ascertain the impact of the project on the gas market in the region. The business case has never been strong, but the latest events have turned skeptics into doomsayers. As soon as the inauguration ceremony ended on January 8th, with no supply contracts signed and no real gas loads committed, it became clear that the Kremlin  visionary’  will need to resort to propaganda and virtual reality.

The 900 km pipeline under the sea has since remained mostly dry.

Behind the headlines of strategic rapprochement between Erdogan and Putin, there was an unswerving, uncompromising turf war between the Turkish State Gas Company Botas and Russia’s Gazprom on the new terms for gas supply via the two new routes.

Despite arduous and lengthy talks, no agreement was reached.

Gazprom believed it could push the case for harsh penalties under the ‘take-or-pay’ clause. Botas bet on international arbitration, overpriced gas, and abuse of dominant position, arguing that the prices the Russian company seeks for its gas are not market-based. From a 66% share of the Turkish gas market Gazprom’s share went down to slightly above 40 % share in two years between 2017 and 2019 and it’s still in free fall.

President Erdogan outdid Putin on all counts. He chose to play strategically, suffering humiliation while waiting to be received by the Kremlin’s Tzar . The Turkish President systematically consolidated and strengthened his bargaining position and denied Putin the right to play his trump card – to cut off gas supplies and dictate terms, shifting the vulnerability balance from the buyer to the seller. Gazprom overstretched its means concurrently attempting its ultra-capital intensive ‘pincer strategy’ on Ukraine via the Nord and Turk Stream projects. It had spent over 60 billion dollars on bypassing Ukraine at a time of emerging alternative gas supply, both piped gas and sea-borne LNG, which is a case of clear misjudgment.

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Erdogan consistently and meticulously intensified his supply options, reducing imports from Russia in March 2020 to a record monthly low of 220 million cubic meters, which on an annual basis, could total a staggering 3 billion cubic meters.

This moment was the breaking point when President Erdogan could have declared victory – Turkey is ready to forego Russian gas altogether.

The notion of Gazprom losing its once second-largest client, who used to import more than 50 billion cubic meters, came as a shock to the Kremlin.

Russia’s pride suffered further blows back home, with the news that Gasprom’s internal gas prices were higher than European ones. In some closest to Europe regions – St Petersburg and Smolensk – gas was sold for 5,2 Euro/MWh. At the same time, ‘Day-Ahead’ quotes at the exchanges in France, The Netherlands,  Germany dipped below 3 euro/MWh at midday on May 22nd, signaling a potential for negative prices in the next weeks.

Belorussian President Lukashenka complained in bitter irony that on May 9th, Gazprom was selling gas to its WW II enemy – the Germans – twice cheaper than to its ‘brethren’ in arms across the border.

Russia’s Gas Europe Alliance is falling apart with “the unthinkable” happening all the time. The price differences between Western European gas exchanges and  Greece, and Turkey vanished. Traders offered LNG at Revithoussa and Tekirdag at discounts to benchmarks in TTF, Zeebrugge, NBP, Gazpool.

Against this backdrop, the partially or wholly oil indexed gas prices of Gazprom seemed a relic of the past.

Turkish trader Botas profited from the COVID-19 crisis and the recession to call in a state of emergency clauses and seek amendments to the supply contract with Gazprom as a precondition for further gas purchases. Erdogan’s gas troopers took advantage of the  cracks in Gazprom’s armor on Turk Stream. Russia’s gas monopoly had already spent more than $ 25 billion on the project, mostly in Russia, and under the Black Sea, with meager gas sales in its anchor market Turkey and more than 80 % of idling capacity in two ‘redundant’  lines of the Turk Stream.

Gazprom is effectively on the ropes, and gas history has opened a new chapter.

Russia’s gas geopolitics are in total disarray.

What are the immediate consequences?

First and foremost,  Gazprom’s dependence on the continuation of the Turk Stream in and beyond Bulgaria has risen exponentially, as the bulk of the shipped gas under the Black Sea, at least 15 billion cubic meters, reaching Turkey, is seeking a buyer.  So far, Gazprom has refused to sell its gas at Turkish or regional gas exchanges, including the Balkan Gas Hub. Gazprom had also refused to allow Turkish, Greek, or other traders to broker its gas in South-East Europe. This hubris will have to be tamed. Still, old habits die hard, and one should expect Gazprom to seek Kremlin’s vintage moves – bullying and corrupting on an unprecedented scale in Bulgaria, Serbia, and Hungary.

Secondly, Turkish Botas will seek to resell their expensive Russian gas under mandatory purchase agreements with Gazprom elsewhere in the region, via existing interconnectors to Bulgaria. Exits to Greece are less relevant. Cheaper LNG and Azeri gas most likely will end up with customers in Turkey and Greece. Henceforth, at least for a while, Turkey and Greece will try brokering between the lower global and the higher regional gas market, delaying full integration of Bulgaria, Serbia, Romania’s gas market to the global LNG market. Different situation optics could push back the intersystem agreements between Bulgartransgaz and Botas beyond the summer of 2020, despite pressure from the EC.

Third, as containing competing sources of gas in Turkey has turned out to be a total flop, Gazprom’s top priority will shift to blocking its competitors in Bulgaria, retaining the highest possible market shares and maintaining oil-indexation in price formulae. To this end, the Kremlin will mobilize all its political and financial leverage in Bulgaria, Serbia, and Hungary.

Note that Qatar is likely to play Saudi Arabia’s game and flood the market with cheap gas, possibly driving prices to negative territory, given the shortage of storage space and above all profoundly depressed consumption levels.

The spread between gas prces in Turkey and Greece and Gazprom’s Bulgarian prices is likely to widen dramatically and translate in virtual detachment of these markets from global trends. At the end of trade on Friday 22nd, Gazprom’s price to Bulgargaz was three times (!?) higher than the reference price for natural gas on TTF and PEG (the Dutch and French gas exchange).

The latest gas market events are not ‘black swan events’ and track similar trends in the oil market. Against this backdrop, the self-aggrandizing statements about the unprecedented breakthroughs and 43% reduction in gas prices, seem arrogant and self-defeating. Bulgaria remains an isolated island of gas dependency on Gazprom, resuscitating past Soviet and current Russian spheres of influence.

Prices are not the sole issue, nor the most important issue. The Bulgarian government is actively assisting Gazprom to bypass Ukraine, investing Bulgarian taxpayers’ money – a record high BGN 3 billion – in the extension of the Turk Stream. As the facts above attest, there could be no guarantee of high and sustainable revenues from Russian gas transit via Bulgaria, enough to recover the funds spent.

At the same time, Sofia denies equal and fair treatment, including revenues from gas transit to Ukraine. In essence, Bulgaria is subsidizing the flops Gazprom made with Turk Stream.

Aşkolsun, Borisov, Molodetz!

Ilian Vassilev

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