The Death of the South Stream Project: Russia’s Desperation and Turkey’s Challenge

Russian President Vladimir Putin and Alexei Miller, the CEO of Russia’s Gazprom, rocked the world of European energy on Monday evening by announcing that the South Stream pipeline would not be built. This pipeline was conceived to bring 63 billion cubic meters of natural gas per year (bcm) from Russia via the Black Sea to Europe.

 In lieu of the South Stream pipeline, Russia now envisages an alternative project that will bring a similar amount of gas not to Europe but to Turkey. Putin directly stated, “Europe will not receive those volumes.” But then who will? Assuming for a moment that the projected amount is indeed going to be realized, where will it find a market? Even though Turkey has one of the largest natural gas markets in Europe, domestic demand is just slightly above 45 bcm. The new supplies from Russia would thus exceed the actual size of the Turkish market. Pipelines are long-term projects, and the Turkish market is expected to be growing rapidly. Nevertheless, even in the future, 63 bcm seem to be beyond the needs of Turkey. Although projections of future demand are inherently uncertain, one might assert that the Turkish market might grow to 70 or even 80 bcm until 2030.

While Turkey’s gas demand might thus be enough to accommodate for the 63 bcm in the future, this scenario is complicated by other supply arrangements. Turkey already receives substantial amounts of gas from Russia; 8 bcm via the Western line and 16 bcm via the Blue Stream pipeline. As also announced on Monday, the latter volume will be expanded to 19 bcm in the future. This would mean a total of 90 bcm in Russian gas supplies. This volume most likely will exceed Turkish demands. Moreover, Turkey has other long-term contracts with Iran and receives Liquefied Natural Gas (LNG) from Algeria and Nigeria. However, the most significant contract is with Azerbaijan. Azerbaijan and Turkey cooperate with one another in the Shah Deniz II project in the Caspian Sea as well as in the Trans Anatolian Pipeline (TANAP).

If all supplies are taken into account, the pipeline plan announced on Monday still appears too grand for the Turkish market. So, the question remains where the gas will go. There are indeed not many alternatives. Central Asia, the Southern Caucasus, the Middle East, and North Africa all are gas exporters rather than importers. Global LNG markets, furthermore, have become substantially more liquid in recent years with US LNG imports decreasing and the chance for US exports increasing. Major markets for LNG are primarily found in Asia. Russia and Turkey would have a hard time competing on these markets, since transport costs play a significant role in LNG trade. The major potential competitors – US producers, Qatar, and Australia – have advantages in this regard.

Putin’s statements are revealing: The new pipeline is envisaged to “meet Turkey's needs and to create a hub for natural gas supplies for Southern European consumers.” In Putin’s own words, therefore, the Russian gas is not going to Europe but to Europe. The Russian decision to kill the South Stream project, in other words, is not as drastic as it might seem at first. In contrast, it reeks of desperation. Instead of bringing gas to Europe directly, this gas will now be sold via a middleman: Turkey. For Russia, this means less income and an additional political player to deal with in energy trade.

For Turkey, the deal has positive implications. It increases energy supply security and lowers costs. However, Turkey should be aware of the risks inherent in the deal. The South Stream project was originally designed to compete against the EU-backed Nabucco project, and it contributed to the latter’s failure. The new pipeline stands in competition with Nabucco’s successor TANAP. Not only will both pipelines supply the Turkish market but they also both aim to supply Southern Europe. In this sense, the Russian move is a continuation of the agenda to counteract non-Russian infrastructure in the Southern Corridor. Turkey must be aware of this aspect. It acquires particular importance given Turkey’s close link to Azerbaijan and the strained Russia-Azerbaijani relationship that is illustrated, for example, by their respective relations to Armenia. Although, the immediate consequences of the new pipeline agreement appear favorable for Turkey, the situation might thus bring future strategic challenges in the arena of energy and beyond.

Jörn Richert is a 2013/14 Mercator - IPC Fellow.  Istanbul Poilcy Center (IPC) is a Natural Gas Europe Knowledge Partner.