2016: An Age of Extraordinary Complexity
The global energy scene is in an “age of extraordinary complexity,” according to the director of the Eurasian Energy Futures Initiative at the Atlantic Council David Koranyi.
“It's not just the energy sector, but all across the board,” he explains. “It's really difficult to stay on top of things. There are more players, more diffuse information – a barrage of information. So it's not really the lack of information, but the overwhelming amount of it and how you select what you read, who you talk to, and how you make sure that you're on top of things.
“You don't get lost in the details, but at the same time you have to know enough to actually be able to put together the big picture in an accurate way. It's a daily struggle,” he says.
Having just turned the page on the year 2015, Natural Gas Europe had the chance to catch up with Koranyi to hear his views on how incidents like Turkey's shooting down of a Russian jet fighter will affect those countries' energy relations and regional pipeline projects, and how countries like his native Hungary may influence the European debate over Nord Stream II.
Now that some time has passed, how significant do you believe Turkey's shooting down of the Russian fighter jet actually is, and what does it mean for these countries' energy diplomacy?
This was bound to happen at some point. Russia has been gambling around on the international scene in the past couple of years in a not very helpful way. I consider Russia's role as pretty much a spoiler in any given theatre globally today. Instead of playing a constructive role in global affairs, Moscow is desperately trying to prove that Russia still matters. Of course it does. But the way Russia’s president, Vladimir Putin, is acting on the international stage serves only his own political purposes, not Russia’s national interests. Ukraine is a blatant violation of international law and borders, and risks undermining the whole – admittedly imperfect – international edifice constructed after the Second World War.
Despite the rhetoric against Isis, what Moscow is doing in Syria is really about propping up its crumbling client, the Bashar al-Assad regime. Putin probably calculated over last summer that unless he did something the Assad regime might fall soon. Look at all the strike patterns by Russian forces in Syria, mostly against other rebel groups, not against Isis.
In addition, Russia is playing a global game of “chicken” – not just in the Middle East but also in the Baltics and Scandinavia, with transponders of planes being switched off flying close to civilian aircraft, flying into the airspace of the Scandinavian countries, just asking for trouble.
I'm quite sure that it was not an “accident” that they flew into Turkish airspace. It's sad to say, but Putin may have met his match in [Turkey’s president, Recep Tayyip] Erdogan, who reacted to provocation by escalation.
In terms of impact on the energy sector, there are many speculations, most of which I consider overblown. Yes, it will have an impact on Russian-Turkish energy relations, primarily in the form of the further postponement of Turkish Stream, which had already been struggling earlier. Turkish-Russian energy relations were tense even before the downing with major disputes about the gas price. At the same time, both sides are in a bind. Russia can’t afford to shut down gas to Turkey, for it needs every penny in a low oil price environment that squeezes its economy and budget. Turkey won’t even consider extreme measures such as shutting down the Bosporus to Russian oil tankers, as that would likely send oil prices soaring, causing major damage to the Turkish economy. The Akkuyu nuclear power plant development by Rosatom will probably proceed too. All in all, over the medium term I expect that the plane incident will have a somewhat muted impact on the energy sector.
The two sides' interdependence in terms of energy is actually quite astounding, isn't it?
Yes, and if you look at the sanctions that the Russians are imposing on the Turks, none of them are energy-related. I'm not sure Putin thought this through, but, strangely enough, the two places where the Russian middle class spends their holidays – Turkey and Sharm el Sheikh, Egypt – are now places that tourists are forbidden from going to. So that's going to hurt him from a domestic political perspective.
The press has reported that Turkey is reaching out to other gas producers as of late in the hopes of diversifying their sources of gas. How do you see the longer term perspective of the country being able to diversify?
This has been happening irrespective of the plane incident – the Turks have been doing this for the past 10 years, and in a clever way. Nevertheless, the Russo-Turkish hostility might give another boost to ongoing and quite promising talks between Israel and Turkey about normalizing their ties and potential gas exports from Israel and Cyprus, if the island is reunified. It might also accelerate as much as that is possible Iraqi Kurdish gas exports to Turkey. Iraqi Kurdistan could also be a major supplier of European markets, on the scale of at least Azerbaijan, though the challenges are numerous from the security situation in Iraq to domestic needs that will need to be satisfied first. Still, I could imagine 10, even 20 bn m³/yr coming out of Iraqi Kurdistan in the next decade. Moreover, that's onshore gas, cheaper to develop than offshore gas from the Caspian.
There's an interesting potential development of onshore resources in Georgia that's not being talked about much. An American company that's been there for the last 10 years is claiming that they have quite significant gas resources that they can bring online in the next couple of years. I would add that as a potential additional source of supply for Turkey and perhaps for Europe beyond, despite the numerous uncertainties.
Overall, while the plane being shot down may be a minor incident in some ways, do you think it may bring Turkey back into the Western sphere of influence?
Turkey is an indispensable country in dealing with the refugee crisis, a vital issue for Europe these days. The plane incident may also have helped to reinforce the notion in Turkey that “we belong to the Western security architecture after all.” These factors lead to the agreement on strengthened cooperation and the rejuvenation of the accession talks. Yet the divergence between Turkey and the EU cannot be reversed overnight. Transactional deals will not resolve neither the EU’s domestic political crisis, nor the challenges within Turkey that are very alarming ranging from the deteriorating conditions of democracy, rule of law and media freedom to the increasingly civil war like situation in the Kurdish areas.
Moreover, shooting down the plane was a risky move on the side of the Turks. There are other ways to signal to a jet that it has entered foreign airspace. Within Nato countries many view Turkey as a maverick type of actor that introduces additional risk to the entire equation in an already volatile and hot atmosphere.
On the Russian side of the equation, we've been seeing a checklist of projects seemingly initiated and then cancelled or put on hold. How do you see the viability of Nord Stream II given its precursors?
Despite all the talk of South Stream and Turkish Stream previously, the real deal for the Russians is an extension of Nord Stream – that's what matters, both from the point of view of circumventing Ukraine, but also being able to directly supply Gazprom's core markets in Western Europe. Now the project is back on the table with a vengeance.
The Atlantic Council recently released an excellent analysis of Nord Stream II by Professor Alan Riley that sums up all the arguments.
I fully agree with the report’s conclusions that this is now gearing up to be a huge fight within the EU. Apparently, the Germans want this to happen, but I don't think they expected quite the pushback from countries in central and eastern Europe (CEE). I also don't think they estimated the pushback from the European Commission either, which is quite strong, at least for the time being.
You have many legal and commercial challenges involved in Nord Stream II but the decision will ultimately be political. Do you want to proceed with a project of strategic importance to the Kremlin in the current political atmosphere? Do you want to send a signal to Ukraine that they will be cut out, even if the loss of transit fees might well contribute to the cleaning up of the rampant corruption there in the medium term? Will Gazprom be able to provide the necessary funding while it is struggling under tremendous financial pressures? How will EU law and third party access in particular apply to the extension?
I expect it to be a protracted political and legal fight and would be surprised to see it proceed any time soon.
Given your Hungarian background as well as Putin's visit to Hungary at the beginning of 2015, are you at all surprised that Hungary is one of the CEE countries that has voiced its opposition to Nord Stream II?
No, not really. That's common sense. I would have been surprised to see Hungary in the pro Nord Stream group. It's not about the political relationships, or Hungary’s prime minister, Viktor Orban, suddenly becoming more antagonistic towards Putin. It's about transit revenues and supply security, and also a backlash for torpedoing South Stream earlier.
Quite legitimately part of the thinking in Budapest is “well, wasn't South Stream the exact same thing as the expansion of Nord Stream? Aren't the legal issues involved the same issues that eventually caused the cancellation of South Stream? Are we employing double standards? Germany can get away with what CEE countries can’t?”
How much sway then do you actually believe they'll have on the debate?
Quite a lot I believe. They can certainly reinforce the principled stance of the Commission: Commissioner for Climate Action and Energy Miguel Angel Arias Cañete and Vice-President for the Energy Union Maroš Šefčovič on Nord Stream II.
The divisions on Nord Stream II contribute to a larger rupture within the European Union exposed by the refugee crisis: the dichotomy between the new and old member states. You have Nord Stream that CEE countries perceive as lack of solidarity, but you also have multiple member states – including the Poles, Hungarians, Czechs and Slovaks – unified around bluntly refusing European solidarity in the refugee crisis, that the western Europeans perceive as undermining solidarity so critical to the cohesion of the EU.
You also have Hungary and now Poland backsliding on democratic values and institutions, different views on countering the Russian threat, etc. These issues reinforce the views of those in western Europe, who increasingly think that the enlargement of the EU was a mistake. It also influences the debate of how the EU should restructure going forward.
There are alternative infrastructure projects being floated like Eastring, Tesla, etc. Which of these might be the most viable?
I think Tesla is pretty much dead, if Turkish Stream doesn't happen. Even if Turkish Stream proceeds, Tesla will likely make no sense, as only the first string of Turkish Stream would probably be built, with limited capacities destined to the Turkish market.
Eastring also presupposes the completion of a larger Turkish Stream in the short term. Perhaps, over time, as more quantities become available from the eastern Mediterranean, the Caspian and the Middle East, these pipeline ideas may be revisited. But in the meantime, we may very well have to manage the status quo: rather significant Ukrainian transit as the most likely scenario. If you can politically stabilize that route, from a financial perspective it makes the most sense.
-Drew Leifheit