Russia, Turkey Agree to Build Gas Pipeline Under Black Sea

  • Link could cut Gazprom dependence on Ukraine as transit route
  • Deal forged after Erdogan apologizes for shooting down jet

Russia and Turkey agreed to build a natural-gas pipeline under the Black Sea that could be up and running by the end of 2019, capitalizing on a recent improvement in relations between the two nations. 

Approval for Turkish Stream -- a dual pipeline project consisting of one link serving the Turkish market and another one possibly to southern Europe -- was signed in the presence of presidents Vladimir Putin and Recep Tayyip Erdogan in Istanbul on Monday.

Russia has long sought to cut its reliance on gas shipments through Ukraine, which account for about 40 percent of its exports to Europe. A link to Bulgaria, known as South Stream, was scrapped in 2014 after being opposed by the European Union. An alternative route through Turkey was shelved last year when relations deteriorated following the downing of a Russian military jet by the Turkish air force near the Syrian border. Tensions eased after Erdogan apologized for the incident in June.

Putin said after holding talks with Erdogan that a mechanism for providing a discount on gas prices had been agreed upon. Gazprom PJSC, the world’s biggest gas producer, has been ordered to work out precise numbers for a gas discount for Turkey, Russian Energy Minister Alexander Novak told reporters.

“The deal is a piece of the puzzle in reducing transit dependence on Ukraine, but does not represent a major coup for Gazprom in terms of European market access,” said Emily Stromquist, a London-based analyst at Eurasia Group, in an e-mail. “This pipeline is a reroute option.”

Price Dispute

The Turkey gas link, originally designed to make the nation a new gas hub for the EU and replace Ukraine from 2020, has also been held up by gas-supply pricing disputes. Its annual capacity, initially planned at 63 billion cubic meters with four lines, was later halved.

Gazprom had agreed to provide a 10.25 percent discount to Turkey’s state-run energy company, Botas Boru Hatlari Ile Petrol Tasima AS, as part of the pipeline deal before the project stalled. Botas filed an arbitration claim last October, seeking price revisions dating back to December 2014.

While the link to Turkey could also help Gazprom access southeastern European gas markets, including Greece and Italy, it can only transport a limited amount of gas to the region because only one interconnecting pipeline between those countries -- still under construction -- allows third party access, according to Sijbren de Jong, an analyst at The Hague Centre for Strategic Studies.

Securing Deliveries

Rather than significantly boosting Russian gas supply into Europe, Turkish Stream benefits Gazprom by keeping its gas from being displaced by competitors, he said.

“What Gazprom and Russia are trying to do is pre-empt gas deliveries from Azerbaijan and maybe in the future, Iran,” he said in an e-mail. This “is key, in my view.”

Turkey will own an onshore pipeline connected to the first part of the undersea Turkish Stream, while the second onshore line through its territory - possibly toward the EU - could be owned by a joint venture, Novak said.

Gas demand in Turkey reached 43.6 billion cubic meters in 2015, according to the BP Statistical Review. Its biggest suppliers last year were Russia, Iran and Azerbaijan. It received its first cargo of U.S. shale gas at the end of September.

— With assistance by Anna Shiryaevskaya, and Ilya Arkhipov

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