Link to the original in Bulgaria Analytica
Following President Putin's trip to Turkey and a sequence of publicity stunts, some of them jointly with President Erdogan, it has become clear that the Russian leader is engaging in another game of poker politics in a desperate attempt to make headlines, impress the international audience and sell more gas to Europe, bypassing EU directives and concurrently Ukraine. Although most of his plan is a deja vu, the decision to proceed with the intergovernmental agreement on Turkish stream and start maneuvers on the gas front from Istanbul contains a piece of novelty.
Most of the background remains the same - intentions, plans for the future, verbal rather than real streams - but the new moments are worth noting. Russia has changed several key elements in its approach to the 'streams' issue.
Firstly, Gazprom shifts its partnership priority from Greece to Turkey, with the gas hub being relocated from Greek to Turkish territory. Moscow’s new focus is on Turkey as its strategic gas ally trading Russian gas at trade platforms on Turkish territory. Putin seems to have heavily leaned towards Turkey - something he has been reluctant to do until recently - yet most of what he has said or done qualifies as more than lip service and mere intention.
News agencies report that the two presidents have decided on establishing an addition of an Investment Fund in order to pool resources and finance energy projects, which might be needed to complete the whole picture.
In spite of the generous offer President Erdogan extended during his summer visit to St. Petersburg, i.e. that Turkey is ready to co-finance the subsea part of Turkish Stream, things ultimately returned to standard format - Gazprom will be in charge of the offshore segment, while the onshore infrastructure will be funded and built by Turkish companies.
Vladimir Putin seized the opportunity to pull Turkey on his side in the energy turf wars with the EU and the US, including by allowing Turkish companies to sell Russian gas from Turkish territory to EU companies. In other words, the Russian President opted to grant Erdogan carte blanche to use Russian gas in promoting Turkey as a gas hub and a key gas market consolidator to Brussels.
This is hardly breaking news, but nuances matter.
The Kremlin has been using Berlin in a similar pattern for years, as European traders sell Russian gas from German territory to adjacent markets and beyond. Thus a gas poor Germany managed to turn into a net gas exporter, exceeding 30 BCM in exports in 2015, most of them ending in Eastern Europe at prices well below those achieved in direct sales by Gazprom.
At first glance, the logic is gone - Gazprom loses substantial income. Yet, the Kremlin believes its overriding key strategic objective has been accomplished - transit through Ukraine has been significantly reduced and discord has been sown between Germany and Eastern Europe. Sustainable price differentials have been established between gas markets in Western and Eastern Europe, undermining the EC's attempts to integrate and consolidate the already fragmented EU gas market.
A largely identical scheme is currently being tested in Turkey, which could stir trouble and tension between Turkey and its key partners along the Southern Gas Corridor - from the Caspian and the Middle East to the end consumer countries in Europe.
In spite of all the hype, the gas poker moves of Putin and Erdogan remain mostly a virtual threat, largely because of the missing third important link in the Moscow-Ankara-Brussels triangle. The EU’s response remains of unknown value when considered at the level of the European consumers, traders, the TSOs’ reactions, the investors in the interconnecting infrastructure and, above all, the European Commission. What has repeatedly frustrated all the "streams'' projects in the Kremlin's file in the past might happen again.
All along his 16 years in office, Putin has persistently aimed to block alternative gas flows to Europe in Turkey by flooding the Turkish market with Russian gas in large volumes at cheap prices, which could easily crowd out competing gas supplies. Worth mentioning is that Gazprom continues to face a yawning gap between its production potential and its sales - estimated at well above 100 billion cubic meters on an annual basis. Using classic dumping techniques it can afford to ward off competition selling limited volumes for a limited period of time in limited markets well below costs.
Given recent negative experience, for Gazprom Asia and the global LNG markets are no cure, at least not in the short term — hence the focus on Europe as the last and the only market in which it could balance its gas export equation.
Including a potential third phase involving production from new gas fields in the Caspian Sea, such as Absheron, the maximum estimate of gas supplies from Shah Deniz-2 that could pass through Turkey does not exceed 30 billion cubic meters - a challenge Gazprom could easily meet.
The energy flirt between the Turkish and Russian presidents accommodates multiple non-energy factors, including the situation in Syria and the new assertive aggressiveness of Moscow, which hopes to capitalize on the intermezzo in the power transfer at the White House, the discords within the European Union and the cold spell in Erdogan's relations with NATO and the EU.
President Putin considers this unique window of opportunity as possibly one of the last chances he will have to reverse the loss of control at home by militarizing public debate and artificial “success” media stories about outwitting the West – such as the one in Turkey.
The attempt to accede TANAP and mostly TAP is something relatively new at the Kremlin. Gazprom has largely failed to deliver on the MoU signed with Edison and DEPA to guarantee itself independent access to TAP and the EU markets. Until recently, Moscow sought to sell its gas using its own "stream" pipelines.
Russia is making a dream come true for Turkish gas moguls and for neo-Ottoman rulers - becoming a key gas trader and exporter to the EU without being a major gas producer - and is adding one more level of geopolitical gravitas in a sensitive area for the European Union.
This might explain the sudden and growing interest of major Turkish gas traders in recent months in booking capacities in transport infrastructure on EU territory, including the TAP and the interconnector Greece-Bulgaria.
After unsuccessful attempts to bypass EU law in Bulgaria with South Stream and Greece, with the new streams in the TAP version Gazprom now seems to believe it has a winner. As the saying goes - if you can't beat them, join them - and Gazprom seeks to engage using its Turkish partners to utilize free capacities in Turkish transit infrastructure that have been purposefully developed with the support of the EU to mitigate the risk of overdependence on Russian gas. The Kremlin has so far successfully managed to thwart the Nabucco project and all other attempts to deliver alternative gas to Eastern Europe via the Southern Gas Corridor.
2016 has turned the stakes around with reverse flows, virtual trade, interconnectors and capacity release on existing infrastructure making possible substantial gas flows to CEE from the Southern Corridor, which Moscow now perceives is an imminent and mortal threat.
In the Turkish charming offensive Gazprom uses an upgraded version of its Nord Stream strategy.
Worth noting is the fact, that eight CEE countries that are EU members addressed a letter of protest to the president of the EC, Jean Claude Juncker, warning him that the Nord Stream will have a "potentially destabilizing geopolitical consequences", eroding energy security in Central and Eastern Europe, while harming Ukraine. In the very last moment PM Borissov withdrew Bulgaria's signature, which spoke volumes of the special bond between him and the Kremlin.
At the moment, Sofia is the target of a similar bypass strategy and it can only hope to get the support and the sympathies of the same CEE capitals.
As noted above, Putin's game with the Turkish Stream might work, at least in part. But the devil, as always, hides in the details.
Firstly, the import of significant flows of Russian gas into Turkey, allowing for indigenously sourced excess gas to enter TANAP and TAP using free capacities, could in time easily crowd out Caspian, Middle East and East Med gas - in fact any other non-Russian gas that is produced or imported into the country. This will further destroy the economics of projects aimed to diversify gas supplies and bring new sources to the EU market.
The recent gas interplay between Moscow and Ankara will undoubtedly raise eyebrows and concerns in the Euro-Atlantic community, as well as among shareholders in the key projects along the Southern Gas Corridor. They already face mounting problems with securing the necessary commercial financing, which has forced them to turn to the international financial institutions. Fresh uncertainties might further dissuade investments in new gas field developments in Turkey, in the East Med, Iraq, Iran and across the region.
Over the last decade, gas consumption in the EU, instead of growing as predicted, has dropped from 450 BCM in 2005 to 350 BCM in 2015. Judged against the multitude of new discoveries and plans to deliver more gas to the already congested EU market, a gas glut and fiercer competition for clients and markets seems inevitable. If infrastructure that enjoys exemption status from the Third Directive is indirectly or directly used to transit gas of the dominant producer, the whole logic in the EU plans to deal once and for all with Russia's gas monopoly will be put to a test.
Secondly, against the background of falling gas prices and shifts from long term oil indexed to short term and spot traded gas, which undermine the economics of new projects both up and midstream, investors are likely to pull out of new infrastructure projects. Investments in developing and bringing gas from the Shah Deniz-2 to the EU border so far exceed $45 billion, while sale revenues forecast get gloomier by the day. Although SOCAR, BP and other shareholders control the bulk of the transit capacities in TANAP and TAP, in order to guarantee themselves shipments of their own gas, they must tolerate competition from Turkish companies that "own" Russian gas.
The new Turkish minister of energy and natural resources, Berat Albayrak, seems adamant that Turkey will enjoy a twofold increase in gas demand over the next 10 years. This might sound great to a politician's ear, but it is worth little as a substitute to guaranteed long term market shares and income.
The threat to traditional market players from Turkish gas companies that represent a virtually endless pool of Russian gas reserves seems credible as long as they are able to to sell at lower prices in larger volumes, enjoying Turkish government support and using existing and future transit routes to Europe.
Ankara is walking on thin ice accepting the role of mediator of Russian gas trade with Europe. Whereas Germany is not only a member but a key decision maker in the EU - with the Nord Stream-2 far from certain - Turkey is not only out, but is totally incapable of bridging the gap in the energy dialogue between Gazprom and the European Commission.
On the other side, it is just a matter of time, before the US and the EU harden their tone towards Erdogan after the new US President takes office. With an increasingly disillusioned West, a return to tough talk on human rights and freedoms will inevitably be at the top of the EU-Turkey dialogue.
Europe can hardly return to business as usual with Erdogan's Turkey and can ill afford to cast a blind eye on his gas games with Russia. Turning Turkey into the EU's preferred gas hub is not a foregone conclusion; if things turn awry the EC could speed up plans for LNG terminals in Greece and Croatia and deny Turkish gas traders access to the EU market.
Although President Putin does not have too many options in the field of gasplomacy, too much trust in Erdogan might ultimately backfire, leaving him without gas revenues (comfortable price levels and volumes) and without levers.
This will be nothing new for the Kremlin, which often experiences the effects of the law of unintended consequences with results diametrically opposed to intentions.