Talking the walk

Ilian Vassilev

Russo-Turkish gas hub: already operating?

As the EU prepares its ninth package of sanctions against Russia, Bulgarian headlines are hailing the dispatch of Azeri gas, via Bulgaria, to gallant little Moldova. Well, fine. But there’s not much attention to the fact that Bulgaria’s Rumen Radev, Turkey’s Recep Tayyip Erdogan and Russia’s Vladimir Putin are putting the final touches to a “Еuropean Gas Hub” that could allow Russia to circumvent sanctions. And still less to the fact that – with December seeing a surge in volumes flowing into the EU via the Turk Stream gas pipeline – that the Gas Hub is, in an important sense, already operational.

Do you remember that seemingly pointless mathematical problem in which a swimming pool is being filled via one pipe, while simultaneously being drained via many other pipes? Not so pointless, maybe, since it’s the same story with sanctions, on the one hand, and with what politicians are actually doing, on the other.

While Brussels and Washington are “tightening” the noose of sanctions around the neck of miscreant Russian leader Vladimir Putin, Turkish president Recep Tayyip Erdogan and a few top politicians in Southeast European countries are quietly adjusting the knot by helping Mr Putin to circumvent those sanctions, thus allowing him to breathe quite comfortably.

You don’t believe me? Well, here are the facts.

Talking Turkey

The Russian and Turkish presidents held a telephone conversation on December 16, whose main topic was the proposed Energy Hub in Turkey. This has become known as the “European Energy Hub” and is also referred to as the “gas hub”, since the energy in question consists entirely of natural gas. And attentive readers will recall that Analyses and Alternatives (A&A) has commented several times in the last few months on the nuts, bolts and strategic purposes of this scheme.

After the call, Mr Putin engaged in some relatively straight talking: “The gas hub in Turkey will be created in the next few years,” he claimed, “and the electronic trading platform can be created faster – in the next few months. And it is there that Russia will largely determine the final gas price for European consumers.”

Taken at face value, it means the following:

Instead of 55 billion cubic metres (bcm) of Russian natural gas flowing into Germany each year via the Nord Stream 2 pipeline, roughly the same amount will be able to enter Europe via the Nord Stream’s Southeast European younger sister, the Turk Stream pipeline (to which two new lines will be added). And, instead of Russian gas being benchmarked against the price of gas on the TTF exchange – the EU’s premier gas exchange, situated in the Netherlands – the price of European gas, according to Messrs Putin and Erdogan, will be set outside the EU, in Turkey, where the largest quantities of natural gas will be concentrated.

For his part, Mr Erdogan reaffirmed his country’s commitment to the scheme, saying: “Turkey will become a global hub for gas pricing… Thrace [the European part of Turkey—I.V.] will become an energy hub. We aim to turn Turkey into a global gas pricing centre as soon as possible.”

Now, as I have said many times, without Bulgaria, the European Gas Hub scheme won’t be very “European” at all, but will remain an ambition whose practical relevance is confined to Turkey’s borders. But it seems we need have no worries on this score! For recent developments make the contours of the new trading platform and Bulgaria’s possible participation in it very clear indeed:

• First, there was Bulgarian President Rumen Radev’s visit to Turkey on December 9, during which the issue of the gas hub enjoyed a high profile, featuring in Mr Radev’s talks with President Erdogan, first in a private and, then, in a plenary session. The very same day Mr Radev visited his Turkish counterpart, Mr Putin dispatched his special envoy Alexei Miller, the CEO of Gazprom, who contributed to the exchange.
• Second, the press release following the visit was informative on future technical consultations. There has already been an exchange of expert and ministerial visits, on the interconnectivity of two countries’ gas systems and on the use of two Turkish regasification terminals to import LNG which will subsequently be transited through Bulgaria. The terminals in question are the existing one in Tekirdağ province and a new floating terminal in Saros Bay which is due to come on stream in April 2023. And an intersystem agreement is due by the end of 2022, which will make it possible to transit gas traded in Turkey via Bulgaria – another prospect agreed at the meeting of the two presidents.
• Third, there was Mr Radev’s preceding visit to Moldova on November 29, after which the news broke that Azeri gas was now entering Moldova via Ukraine.

Holding the line

Now, what has generally been emphasised about that last piece of news is the fact that the Trans-Balkan Pipeline (TBP) is currently operating in reverse mode and transporting non-Russian gas. The TBP is a pipeline that runs through Turkey, Bulgaria, Romania and Ukraine, which was commissioned in 1988. In recent years it has been made bi-directional, but before that – and for most of the time since – it has been used to transport gas from Russian energy giant Gazprom through Ukraine and into Southeastern Europe. So the fact that it’s being used to carry non-Gazprom gas in the opposite direction, to beleaguered little Moldova, is presumably good news.

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Well, yes, it is – as far as it goes. But headlines can be a little misleading. For what the media didn’t add is that only the TBP’s first line (the Negru Voda 1) is working; that it’s mainly carrying Russian gas; and that TBP’s second and third lines are idle.

As far as the latter two lines are concerned, Gazprom’s export arm, Gazexport, is still paying under the “ship or pay” clause for 70% of their capacity, thereby guaranteeing itself a dominant-to-exclusive right of use of the two transit pipelines. So, essentially, Gazexport will most likely be able to use these capacities and offer them to traders willing to ship Russian gas bought in Turkey.

Now, this is a likelihood rather than a certainty, as the European Commission could, in theory, step in with a veto – and might do so immediately as the Gas Hub’s main purpose will be to whitewash Gazprom gas and thus bypass sanctions. But it’s significant that it could hardly react in this way if the shippers were Moldovan, Romanian, Hungarian or Austrian companies which had bought Russian gas in Turkey as part of a “Turkish mix”. And it’s a fair guess that Gazexport will be able to outwit the EC sanctions drive somehow.

New dog, old tricks

Many analysts, including myself, continue to be highly skeptical about the prospects of a Turkish-based EU hub being implemented, especially in the current context of war in Ukraine and sanctions against Russia. However, one lesson I have drawn from many years of dealings with Russia is this: if the Kremlin cannot openly achieve something above board, it will resort to its dirty tricks department, to backroom deals and to getting foreign politicians to buy into the scheme.

And indeed, the old tricks that made the Turk Stream project possible are now back in fashion. Back then, the Kremlin had secured tacit passivity both from US president Donald Trump’s White House and in Europe, where the then German chancellor Angela Merkel untied the hands of Bulgarian prime minister Boyko Borissov, allowing him to fund and build Putin’s strategic Ukraine-bypass pipeline.

In fact, both, the funding and the building of the project were, shall we say, “interesting”.

Bulgaria – or, more precisely, state-owned national gas-transmission company Bulgartransgaz – had to cover less than 40% of the $1.5 billion required to build the Bulgarian section of Balkan Stream (the European continuation of Turk Stream). Gazprom did most of the actual funding, by means of direct payments to the Russian and Belarusian companies that did the actual construction work – nominally as subcontractors to an ostensibly Saudi Arabian main contractor. But even then – after Mr Putin’s little indiscretion of annexing Crimea in 2014 – this could not be said out loud. Hence the distinctly odd choice of main contractor.

This was the so-called “Arkad Consortium”, involving Arkad Engineering and Construction (Arkad E&C) – which acts as main contractor in projects for Saudi Aramco, the Saudi national oil company – and its Milan-based affiliate Arkad ABB. Of the two, Arkad E&C had never shown any interest in building anything of scale in Europe, while Arkad ABB did not seem to have the capacity to construct anything substantial there either in Europe. Moreover, the Arkad special-putpose vehicle (SPV) that was registered for the Balkan Stream project does not even seem to have had any direct ownership link to the Saudi heavyweight – just bearing the name plate under some loose licensing agreement. The essential control and management of the company was effectively delegated to Russians after February 2020, when the Russian Nikolay Ilyushenko, replaced Muhanad Shaker, as the top manager.

Essentially, then, the Saudis offered a screen to Gazprom. And, since the Saudis were so cosy with Mr Trump and his family at the time, it can be presumed that they did so with the knowledge of the Trump White House. Moreover, that the US never threatened to impose sanctions on the Turk Stream, as they did on the Nord Stream 2, despite the fact that Washington was fully on the ball of the dependencies of then PM Borissov on Moscow.

All this occurred after a Memorandum of Understanding for gas cooperation between Gazprom and Saudi Aramco was signed during Saudi King Salman’s visit to Moscow on October 6, 2017, which specified cooperation on infrastructure projects in third countries. Gazprom CEO Alexei Miller visited Saudi Arabia in 2018 – and then again in 2019, as part of a delegation led by President Putin – hammering out the details of the plan, which ultimately provided the framework for Arkad E&C’s involvement in a project in remote Bulgaria.

So it is no coincidence that the same people who implemented the Turk Stream project are back in business on the Bulgarian side for the new EU gas hub in Turkey. The only difference is that this time there are no Saudis involved, President Radev has replaced Mr Borissov as the main protagonist, and that Mr Trump and Ms Merkel are absent from the stage. 

Figuring things out

Time for some figures, now. We really like figures at A&A, and it was in fact a rather striking number that triggered the current text. On December 13, a Russian Telegram channel – one that has some expertise in oil and gas – ran a short item saying that Gazprom had increased the supply of Russian gas through the Turk Stream pipeline by more than 40% since December 1 this year.

I checked the story on the web pages of European transmission system operators’ organisation ENTSOG and of Bulgartransgaz – and it turned out to be true.

Since the beginning of the December, the rate at which Russian natural gas had been entering Bulgaria through the Markochlar-Strandja interconnection point (IP) at the Turkish-Bulgarian border had jumped from 320,000-330,000 Megawatt-hours per day (MWh/d) to over 500,000 MWh/d – or 45 million cubic metres per day (mcm/d). At current spot prices, 45 mcm of gas is worth upwards of €60 million, which means that amount potentially ending up daily in Gazprom’s coffers. Or, in other words, in Mr Putin’s war-chest.

All of which proves two things:

• First, the Kremlin can circumvent any sanctions or coordinated policies that the G-7 and the EU care to put in place in their attempt to limit Russian gas purchases.
• Second, if significantly larger volumes of natural gas are being piped through Turkey, then the “European Gas Hub” is – in an important sense and to an important extent – already functioning. For that’s precisely how the gas hub could work. The only thing missing is the pricing platform – which Mr Putin promises will be available in three months.

Now, where is this gas going?

Bulgartransgaz website suggests that a good deal of it is going to Romania. This is mainly via the Kardam-Negru Voda 1 IP, where volumes rose from 55,000 MWh/d at the start of December to an average of 135,000 MWh/d in the first 10 days of December (the latter figure is around 13 mcm/d, roughly equivalent to Bulgaria’s gas consumption rate in winter). But a further 17,000 MWh/d on average was entering Romania, during the same period, via the Russe-Giurgiu interconnector. The additional gas supply mainly explains the jump in supplies to Moldova – and this was Azeri gas from Baku’s national hydrocarbons company SOCAR – but a larger quantity was Russian gas that had been bought by Romanian and Hungarian traders in Turkey.

And the Bulgartransgaz website also show that, in the first ten days of December, more significant quantities of Russian gas were, on average, being supplied via the Turk Stream pipeline to Serbia, Hungary and Austria (combined total up from 225,000 to 295,000 MWh/d) and to Greece (up from 90,000 to 125,000 MWh/d). We can, incidentally, be certain that all this gas originates from Gazprom, since Turk Stream carries no other sort.

As Alexander Frolov, deputy director of Russia’s National Energy Institute (and a man echoing Kremlin’s views), points out, “this gas first changes ownership [in Turkey—I.V.] to local – Romanian and Hungarian – companies, and then is resold”. Whether or not Mr Frolov intends to do so, by saying this he describes rather neatly the intended operating mechanism of the Gazprom hub in Turkey: EU-based companies will buy and transit this gas at their own expense and themselves bear the risk that it might be Russian gas. (Naturally, Turkey-based companies will try to do the same if this ploy turns out to work.) And, once the Russian gas newly acquired in Turkey by EU-based companies crosses the border with Bulgaria (and thus with the EU), it will cease to be “Russian” and instead be considered “EU gas”.

All of which puts into a different perspective the recent increase in the volumes of natural gas flowing into Bulgaria through IGB – the Gas Interconnector Greece-Bulgaria, which began operation on October 1 this year. This flow almost tripled over the period in question, rising from around 30,000 MWh/d at the beginning of December to 88,000 MWh/d on December 12, which looks impressive. It’s mainly SOCAR-owned Azeri gas coming via TANAP (the Trans-Anatolian Natural Gas Pipeline); and some of it presumably explains that reported inflow of Azeri gas into Moldova.

But the 58,000 MWh/d increase in the volume transmitted via IGB represents just one-sixth of the corresponding increase for Russian gas coming in via Turk Stream.

And yet, in both regional and EU media, it was the story of Azeri gas reaching Moldova that dominated in the news media. In fact, “dominated” is an understatement. There’s just been no mention of the far greater flows of Russian gas transiting Bulgaria via Turk Stream.

The Byzantine gas world

By the way, another example of the same phenomenon might be mentioned. We spoke above of an upcoming interconnection agreement between Bulgartransgaz and Turkey’s Botas. Now, this is being sold to the Bulgarian public as an “achievement” because it gives “us” access to Turkey’s LNG import terminals.

Which, of course, it does. And this is indeed a good thing, because it will mean that the operators of the Greek terminal at Revithoussa are finally subjected to some competition – having abused their monopoly position until now. And, given the local historical rivalries that are such a popular hobby in our corner of Europe, some competition tends to play pretty well containing extremes in energy nationalism. On top, it’s all good PR and nice headline material.

But what gets lost in all this is a sense of proportion. The quantities of gas Bulgaria is interested in are, in the larger scheme of things, insignificant. There’s talk of a bit more than 1 bcm of natural gas reaching the Bulgarian market in this way. But, at the same time, the scheme of which the interconnection agreement is part will mean tens of billions of cubic metres of “derussified” gas being transited from Turkey to European customers. In other words, Bulgaria has agreed to cooperate in Turkey’s Russian gas hub project, and got precious little for the betrayal that represents.

And, come to think of it, today’s Byzantines aren’t solely in Greece. The former Byzantium is now Mr Erdogan’s commercial capital, Istanbul. And there are few places more Byzantine than Mr Putin’s Kremlin, in which he still dreams of making Moscow the “Third Rome”.

Yet the Bulgarian press ignores all this.

What a performance!

However, I digress somewhat. The point here is this: if the script about Azeri gas reminds you of something, that’s no accident. It is strikingly reminiscent of the PR and propaganda that followed the construction of the Turk Stream pipeline in Bulgaria.

Every time the then prime minister, Boyko Borissov, felt he had overdone the pro-Putin thrust of his policies, he generated double-bottom waves of anti-Russian rhetoric. Most often, he would send a few Russian diplomats back home. Moscow seemed to understand, and reacted either late or in a pro forma manner. Which left the entirely accurate impression of a match made in heaven.

And now here we are again, with a glimpse of what a similar use of “white noise” to suppress news about the gas hub in Turkey could look like. The overblown story of modest quantities of Azeri gas flowing north to Moldova, in line with EU policies, supersedes the much greater real-life fact that large volumes of Russian gas, rerouted from Nord Stream, are entering the EU.

Now, Bulgarians, like any other EU citizens, naturally trust that the government is following the mainstream of EU policies towards Russia. But the opposite is happening: the government and the President seem to be helping the Kremlin bypass EU sanctions – to the accompaniment of comforting little headlines that suggest they aren’t. And rest assured that, as the Russo-Turkish (sorry, European!) Gas Hub project progresses and the volumes of gas transited increase, yet more anti-Russian dramaturgy and high tones will emanate from the main actors in the play that is being staged so theatrically – while the real action is taking place backstage.

Now, Washington and Brussels aren’t completely fooled. After that Putin-Erdogan phone chat of December 16, the US State Department warned Turkey that it would impose sanctions on Turkish companies and individuals who help Russia circumvent sanctions. For its part, the EC expressed its displeasure with Turkey’s European Gas Hub project, because it was a clear case of sanctions being circumvented. Of course, European Union leaders had previous spoken out strongly against Turkey bypassing the sanctions against Gazprom, and nothing much had happened.

So we have still to see whether “strategic considerations” will yet again weigh in and spare President Erdogan the consequences of his actions. But meanwhile, we should bear in mind one fact about Mr Erdogan. He is an autocrat and play his own games. That became even clearer than before when, last week, a potential rival for the presidency – popular Istanbul mayor Ekrem Imamoglu – was brutally eliminated from the running by means of a three-year jail sentence.

The fact that Mr Erdogan is an autocrat makes any deal with Turkey, while it is under his leadership, a considerably higher political risk. And there is a similar risk in dealing with any autocratic regime that enables another authoritarian regime to diversify the channels at its disposal for selling its gas. Temporary expediency cannot supersede fundamental differences in values and principles.

And there’s another point to consider. Suppose Turkey doesn’t content itself with transiting Russia’s gas? Suppose it imitates Mr Putin and denies transit services to foreign gas – that of Azerbaijan, Iraq, Turkmenistan and Iran – and instead forces those countries to sell their gas on its European Gas Hub?  In that case, the hub will become a bottleneck and, instead of facilitating gas competition, will simply be servicing Gazprom’s needs.

Now, the hub project is not without its critics and skeptics in Turkey and Mr Erdogan will play along Mr Putin’s project as long as he is able to profit. A very prominent one is none other than Gokhan Yardim, former general manager of Turkey’s state-owned oil and gas company Botas. “Putin’s proposal isn’t concrete, it seems like an idea,” he told local news media last month. “Is this a hub for players from different countries to come and negotiate and buy gas – or is it just another pipeline project like the TurkStream which only passes through Turkey?”

Which was brave of Mr Yardim. But there’s no evidence that he has had much impact on policy. And certainly none that Mr Erdogan has taken any notice.

A couple of questions

The point stands, therefore: any excessive reliance on gas transit through Mr Erdogan’s Turkey might prove, in the long term, to be a political risk that cannot be mitigated.

So my questions are these. Does Bulgaria have the resources to play subcontractor to Putin’s projects in Turkey? And is it in Bulgaria’s interests to do so?

The questions are addressed to:

• President Rumen Radev (who has done so much to further these projects);
• The “energy experts” in Mr Borissov’s party GERB (who, being “experts”, presumably should know); and
• Above all, the main driver of such schemes, Bulgartransgaz chief Vladimir Malinov (who, in the name of self-serving geopolitical games, has once again postponed an expansion of the Chiren underground gas storage facility, which is critically important for the LNG-based diversification of the entire region).

Now, it’s just possible that these busy individuals are not regular readers of A&A. If they are, however, I really look forward to hearing their answers: they are bound to be ingenious and entertaining.

But I think I already know the real answers myself…