Who will make the next move?
Moscow, Ankara and Athens are involved in an important game for the future of gas flows to the Old Continent. The hope should be for partial diversification—rather than total replacement—of the Russian supply

The very strong tensions between Turkey and the Russian Federation regarding the Syrian conflict and the future of the Middle East have led to the freezing of the construction of Turkish Stream, the Gazprom-designed gas pipeline under the Black Sea, with a landing place in Turkey, on the border with Greece, to transport natural gas to Central-Southern Europe and the Balkans. On December 2, 2015, as a result of the shooting down of a Russian military jet by Turkey, Russia, in the words of Energy Minister Alexander Novak, "suspended negotiations with regard to Turkish Stream," and stopped the construction of the $22-billion nuclear power plant of Akkuyu in Mersin (Turkey) contracted to Rosatom. After this, Russia accelerated the Nord Stream II project, its effort to double the transport capacity of the Nord Stream I pipeline. Previously, on December 1, 2014, Vladimir Putin had officially terminated the construction of the South Stream gas pipeline due, firstly, to the effects of U.S. pressure on Bulgaria—resulting in the withdrawal of the construction permit—and obstacles imposed by the European Commission - a "non-constructive approach," in the words of the Russian President - regarding the use of the pipeline. In this political context, how can the scenario evolve with regard to energy infrastructure (pipelines) aimed at supplying Russian natural gas to the northeastern Mediterranean? What effects can a changed geopolitical energy context have on Turkey and Greece?

A country in search of new supplies

Turkey is the fourth largest European natural gas market, and the only one that has been growing steadily, even during the 5-year period 2010/14, the years of the economic crisis, resulting in stagnation of the European demand for "blue gold." In 2014, Ankara consumed 48.6 Gmc3 of natural gas - up 6.5% from 2013. The construction of the Black Sea pipeline - thanks to the laying of underwater pipes on the seabed by Italy’s Saipem - would make the country a kind of energy hub for South East Europe, despite the heirs of the Ottoman Empire being completely deprived of domestic natural gas production. In the face of an EU demand growing by 7%, from 412 Gmc3 in 2014 to 441 Gmc3 in 2015, has Turkey correctly assessed all energy and political consequences related to the loss of such opportunity? Moreover, can Ankara actually rely more on other suppliers such as Azerbaijan, post-sanctions Iran or LNG from Qatar? In 2014, Turkey consumed 125.3 million tons of oil equivalent (Mtoe).

Ankara's position between Moscow and Tehran

The Oxford Institute for Energy Studies has emphasized that Turkey will increase its gas demand by approximately 22 Gmc3 between 2014 and 2023, reaching a total consumption of between 67-70 Gmc3. Botas, the Turkish state gas company, provides an even more dramatic scenario, according to which, between 2012 and 2030, Turkey’s consumption of blue gold will increase by 45 Gmc3 (it was 15 Gmc3 in 2000) to 81 Gmc3. Iran cannot replace Russian gas supplies to the European Union and Turkey for the following reasons:

1 | It has a growing domestic demand to be met. 13% of Iranian families live in rural areas that are still disconnected from the national gas supply system.

2 | It must modernize its energy infrastructure. To do so, Iran must import new technologies to improve the extraction and distribution of natural gas.

3 | It is estimated that Tehran needs approximately $100 billion of investments in the gas industry to reach its goals.

4 | Iran’s legitimate export ambitions will most likely soon target the markets of Pakistan and India, more lucrative prospects than Europe. This could lead to a confrontation with Qatar regarding the exploitation of the huge neighboring gas field of South Pars and the subsequent export of LNG.

5 | Geopolitical instability in the Middle East continues. The supply infrastructure in Eastern Turkey—entering from Iran (Eastern Anatolia) and Azerbaijan (BTE)—is very vulnerable, as demonstrated by the attacks of recent months. Shortly after the start of the war in Syria, both gas pipelines had already been blown up. Azerbaijan’s recent problems with regard to natural gas production and the simultaneous need to comply with existing export agreements have led the country to be supplied by the Russian Federation. This situation raises a number of questions in relation to the actual production capacity of the Shah Deniz II gas field. In fact, the Azerbaijani gas field should supply the Southern Corridor, hence the Trans-Adriatic (TAP) gas pipeline, which will arrive in Puglia, in southern Italy. As regards the possibility of covering the additional demand through LNG, currently only an additional 6.9 Gmc3 would be importable, and at higher prices than Russian gas. In light of the data provided, the intimidations of Recep Tayyip Erdogan appear to lack credibility. "I have already said that, apart from Russia, we buy gas from many countries. With the help of the Most High, we will overcome the problem" exclaimed the Turkish President on December 2, 2015, immediately after learning of the freezing of the Turkish Stream pipeline by Russia. In fact, Turkey, in addition to its need to meet the growing demand for blue gold at favorable prices, could lose the chance to become the energy hub of southern Europe.

An unexpected key role for Athens

In 2014, Greece consumed 23.4 Mtoe, down 0.6% from the previous year due to the continuing economic recession. Greece, which is not a natural gas producer, could, in the event that the Turkish Stream project is reinstated, assume a role approaching energy hub by virtue of the conjunction of 3 favorable geopolitical factors:

1 | The Russian Federation’s desire to bypass Ukrainian territory, and its intention not to renew the transit agreement with Kiev in 2019.

2 | The construction of the Southern Corridor strongly desired by the EU.

3 | Turkey’s interest to become a strategic energy hub from East to West for Russian and Azerbaijani resources.

The potential Russian-Greek cooperation in the field of energy could theoretically follow the footsteps of that of Russia and Germany—Nord Stream. In this case, the most delicate phase of the project would concern the development of the pipeline in Greek territory, which is governed by E.U. law (Third Energy Package). It is likely for this reason that the Russian government, following the agreements reached between Moscow and Athens in the spring of 2015 and confirmed following the reappointment of the Syriza-ANEL government in September 2015, was explicit in clarifying that Gazprom will have no involvement in the Greek stretch of Turkish Stream, 50 percent of which will be owned by Vneshekonombank (Veb), the state bank dedicated to development. As a result of the bilateral agreement of October 21, 2015 between Victoria Nurland, Assistant Secretary of State for European and Eurasian Affairs at the U.S. Department of State, and Alexis Tsipras, Prime Minister of Greece, the government of Athens is considering the possibility of constructing an LNG terminal near Alexandroupolis (Thrace). This would supply liquefied shale gas imported from the U.S. company Cheniere, despite the higher cost of the raw material compared with Russia’s price. If this were to happen, it would reflect a change of strategy by Athens, moving away from a privileged energy axis with Moscow in the direction of Washington in the wake of what was attempted–but substantially failed–by Poland and Lithuania. Moreover, Depa, the Greek gas supply company, would purchase LNG from a U.S. operator that has declared $297.8 million in debt in just the third quarter of 2015, an increase compared with the $89.6 million in the same period of 2014. One cannot exclude that this forms part of the price that Greece will have to pay for the help received from the U.S. during the warm phase of acceptance on the night of July 12/13, 2015 of the third bailout as shown by certain diplomatic documents, when German Minister of Finance Wolfgang Schaeuble wanted the country out of the Euro for 5 years.

Europe's destiny passes through the new gas pipelines

According to estimates provided by the consensus forecast, in 2025 and 2035, Europe will consume 15% (587 Gmc3) and 21% (621 Gmc3), respectively, more natural gas than the 513 Gmc3 of 2015, which was up 5.6% compared with the 486 Gmc3 in 2014 (+27.4 Gmc3). Due to the simultaneous decrease in internal production and increase in consumption, Europe will need, in 2025 and 2035, an additional 110 Gmc3 and 160 Gmc3 of gas, respectively. In the background is the announcement of the doubling of the gas pipeline’s transport capacity under the Baltic- North Stream I - made during the Forum in St.Petersburg on June 18, 2015. This would make Germany Europe’s main energy hub, a situation that would never have occurred if the South Stream project had been completed, which would certainly have been more responsive to the interests of Italy. In this case, the Russian Federation - whose exports to Europe increased by 8% in 2015 (11.8 Gmc3) and an additional 7.5 Gmc3 in just the first 2 months of 2016-  would bring to fruition its strategy of almost full abandonment of Ukrainian transit without depriving themselves of the possibility of a future reinstatement of the Turkish Stream project, given what was stated by Russian Energy Minister Alexander Novak on January 16, 2016, then reiterated by the Russian ambassador to Ankara, Andrei Karlov, on February 9, 2016. In fact, it would be an infrastructure no longer composed of 4, but of 2 lines, for a transport capacity of 36 Gmc3, although not complementary and not necessarily alternative to Nord Stream II, whose extension to the Balkans—the Tesla project—entered the UE’s list of energy infrastructure priorities (as did its competitor Eastring) despite attempts of destabilization of the government of Skopje, which had shown itself favorable to the extension of the pipeline through its territory. The months to come will reveal whether a new Trojan horse will be constructed on the Greek-Turkish border, in the form of a hub. Whether it involves the difficulties with North African and Middle Eastern supplies due to political instability or winter peaks, the impression is that Russia remains the hub of European supply, as well as that of the northeastern Mediterranean, particularly if the “next move‘ involves the resurrection of ITGI Poseidon, following the February 2016 signing of the Memorandum of Understanding between Gazprom (Russia), DEPA (Greece) and Edison (France). In fact, this pipeline, besides already possessing the permits required by the Third Energy Package and intergovernmental agreements (Turkey-Greece-Italy), is expected to ensure the Russian Federation’s ability to bypass Ukraine with Nord Stream I and II, and would allow Greece to become the southern hub for the entry of Russian gas into the E.U., in addition to becoming a partner in the project together with France. At the same time, Italy would become the landing point for the gas pipeline (Otranto, in Puglia) and would have the opportunity to diversify the Russian gas supply route, which currently moves entirely through Kiev and covers the needs of almost 50 percent of Italian consumers. Moreover, Italy would avoid purchasing raw material at a higher price than that calculated for the possible Nord Stream II-Germany route, and we would at least partially make up for the disappointment of South Stream. In this case, the Sultan will be forced to take account of its national energy needs, the interests of Sofia in offering an onshore alternation to Ankara, and also the pressures of constructing the Russia-Italy gas pipeline that will inevitably come from Athens, Rome and Paris, while Moscow can easily afford to wait. Regardless of which project triumphs, the hope is that the resources of the southeastern Mediterranean will be able to contribute to a partial diversification—rather than an actual replacement—of the Russian supplier. This is thanks to the final confirmation of the estimates relating to the Egyptian Zohr gas field discovered by Eni, the increase in reserves in Israel’s Leviathan gas field, as well as those of Damar and Talit, and the future energy role that can definitely be played by the Republic of Cyprus.