Friday, March 18, 2011

Russia and Turkey Holding South Stream Hostage

Turkey and Russia are engaged in a game of chicken over the South Stream Pipeline. Both sides are threatening the construction of the Russian-inspired natural gas pipeline, in an effort to see who blinks first.
Turkey has signed a number of natural gas agreements over the years, and it is committed to purchase more gas than it can use. Unfortunately for the Republic, Turkey's contract with Russia is a "take or pay" contract which means it has to pay for the gas whether it is shipped or not. In addition, the long-term contract price for the gas is much higher than current spot prices. At the same time, Gazprom has been waiting for Turkey to issue the permit allowing construction of South Stream in Turkish waters of the Black Sea. "So far, we don't understand the reasons why we didn't receive the permit," said Deputy Prime Minister Igor Sechin, as reported in the Moscow Times.
According to the online newspaper, the reason is obvious: Ankara is looking to use the pipeline issue to lower the gas prices. The strategy may work, as the Moscow Times quotes President Demitri Medvedev that discounts were possible in exchange for unspecified Turkish concessions.
Russia also has hard-ball tactics at its disposal; namely, a proposal to replace South Stream with LNG shipments. According to the Sofia News Agency, Russian Prime Minister Vladimir Putin asked Russian Energy Minister Sergey Shmatko to examine building a liquified natural gas terminal in place of constructing a Black Sea pipeline. Under this scheme, Bulgaria would also have to build an LNG terminal to receive the gas shipments. According to ITAR-TASS, Shmatko said that according to preliminary assessments the most attractive option was the delivery of natural gas from the Yamal Peninsula, because much of the transportation costs would be within Russia.
Shmatko claimed that the European Commission has proposed the LNG terminal as one of many alternatives to the South Stream project. According to the Moscow Times, however, EC spokeswoman Marlene Holzner denied that the Europeans had anything to do with the idea. "This was not discussed during the meeting between the Russian government and the European Commission in Brussels at the end of February," she said.
It would appear that the threatened LNG plan is a ploy designed to pressure the Turks into granting the construction permits without reducing the price of gas deliveries. The key to this assessment is Shmatko's assertion the best option was gas from the Yamal Peninsula. Delivery costs from this area, which is snowed in for much of the year, would be excessive. AFP quotes RusEnergy expert Mikhail Krutikhin: "Has he seen the globe?...Producing on Yamal for the South Stream is nonsense...Once transported it would have the price of diamonds." Krutikhin concurred that it is a bluff: "an attempt to scare the Turks."
There is other evidence that the talk of an LNG option is bogus. According to Steve Levine in his Foreign Policy blog, South Stream pipeline director Marcel Kramer has received no new instructions, and is proceeding with his existing orders to make the $21 billion pipeline work. Further, in their March 17 summit meeting, Medvedev and Turkish Prime Minister Recep Tayyip Erdogan did not discuss the project. (Bloomberg reported that Russian Deputy Prime Minister Igor Sechin tried to dismiss the lack of discussion by claiming it was unnecessary. "Why discuss something we can do on our own?...This was resolved a hundred years ago," he said.) Finally, Shmatko himself denied Russia having any plans to abandon the pipeline. According to the RIA/Novosti, Shmatko said, "We are not wording the issue in such a fundamental way...We'll have several ready alternative routes of supplying gas directly to European countries."
Whether South Stream is ever built is a question yet to be resolved, but it is clear the LNG proposal--for the moment--is a red herring.