Putin’s Planned Pipeline With Turkey – Just Smoke & Mirrors

Russia’s Prime Minister Vladimir Putin s

Much speculation has been made since Russian President, Vladimir Putin, announced the cancellation of the planned South Stream project last December. Seen by some as a rebuke by the Kremlin towards the EU’s sanctions against Russia, many analysts speculated various theories.

One theory doing the rounds was that the cancellation of the project sounded the death knell for Europe’s poorer countries who are both reliant on Russian supplied gas to power their business and warm their homes and who would have benefited economically from jobs created in the construction of the pipeline, and of course the transiting of the gas once the pipeline was up and running.

Another theory doing the rounds is that it makes political sense to further destabilise Europe, and NATO. Russia would prefer to bring Turkey under its sphere of influence, a country similarly modelled on a narcissistic dictator who has no real respect for democracy, human rights or a free press, all of which are values that Europe holds dear. Thus cancelling South Stream would do two things. It would create economic uncertainty for the poorer east European countries, thus creating a discord between their governments and Brussels, and it would also put the cat among the pigeons with NATO leaders as the only NATO member state ruled by a dictator has built enormous political capital at home and potentially gains more influence, and thus immunity from criticism, with Brussels.

But I think this is all bullshit, and here’s why.

Recently, Gazprom’s mafioso CEO, Alexei Miller, announced a veiled threat to Europe, in the form of a “Godfather” styled “offer they can’t refuse”. You know the kind I’m talking about, how you have “such a nice family and it would be a shame if something happened to it.”

Miller announced yesterday that it would be in Europe’s best interests to support Gazprom’s initiative to circumvent Ukraine as a transit country, by way of building a connector between Greece and Turkey, enabling them to press on with their plan to use Turkey as a transit country into Europe, now that South Stream was cancelled.

“the Turkish Stream is the only route along which 63 billion cubic metres of Russian gas can be supplied, which at present transit Ukraine. There are no other options,” he said.

“Our European partners have been informed of this and now their task is to create the necessary gas transport infrastructure from the Greek and Turkish border,” said Miller, according to a Gazprom statement.

“They have a couple of years at most to do this. It’s a very, very tight deadline. In order to meet the deadline, the work on building new trunk gas pipelines in European Union countries must start immediately today,” Miller warned.

Or else what, Alexei?:

“Otherwise, these volumes of gas could end up in other markets.”

Please, don’t make me laugh. And I also like the way Russians still overuse the word “partner” when referring to any dealings they have with Europe. Any real “partner” wouldn’t have shut off gas supplies, as they have 2006, 2009 and again in 2015. With “partners” like these, who needs enemies?

And where, pray-tell are these gas supplies likely to be sent, if they are redirected away from Europe? China? Not bloody likely. The Chinese gas infrastructure is worse than a leaking sieve. There is already one major pipeline, from KAZAKHSTAN, supplying their main network. And unlike Europe’s infrastructure, China’s is highly centralised, in the form of hub-and-spoke. In fact they have such a hard time actually getting gas to where it’s needed that they’re too busy fixing their own internal pipelines to cover the immediate demand. So where Alexei? Tell me!

What hardman Miller is basically trying to say is that if gas can’t move to Europe via Turkey, Gazprom won’t ship it via Ukraine. But push come to shove, if Europe is still deemed the most valuable destination for Russian gas, Gazprom will continue to sell it there, and ship it via Ukrainian pipes. It simply cannot afford not to.

It’s a bluff, plain and simple. Even the most doveish Eurocrat can see it for what it is. To top it all, gas supply is expected to increase later this year as the Gladstone and Gorgon LNG sites in Australia and Sabine Pass in the US come online. And this glut in supply will further exacerbate the drop in gas prices, meaning that gas imports in Asia will centre on cheaper (and more politically stable) suppliers from Australia, further excluding pass-through business Gazprom could only hope to gain with their deal with the Chinese.

As for Europe, with another mild Winter almost gone, the consequent bumper reserve stores and a focus during these past two years on retrofitting gas terminals in Grangemouth (Scotland), Ferrol, Valencia & Cartagena (Spain) and Hammerfest (Norway) to enable them to handle LNG from the US, it further diminishes Gazprom’s grip on gas supplies into Europe. This alternate path to supply undercuts Russian leverage, not just in Europe, but in China too. And given the noise regarding unresolved prices coming from Mandarin’s in China about the gas deal with Russia announced last year, you just KNOW that the Chinese will squeeze Putin’s balls like a hungry python.

On top of this, the whole thing with Turkey looks like a set-up to me. Since late 2013, right up until very late 2014, the Bulgarians had been courting the Kremlin and Gazprom. Along with demented Hungarian President, Victor Orban, Russia has few other allies in Brussels. The Bulgarian Parliament had tried to pass a law circumventing EU rules forbidding Gazprom from owning AND controlling the pipelines they operated in the EU. They even went so far as to have Gazprom actually WRITE the law! But with Brussels threatening to cut off much needed cash from the EU development funds, the Bulgarians quickly fell into line and they rejected South Stream.

So…..a connector between Greece and Turkey, eh? Why wouldn’t it work? Ignoring the centuries of hatred, a stale war in Cyprus and a complete mistrust between the two? Well, for starters, ignoring the politics for a moment, the current Turkish infrastructure can’t even handle the current pass-through commitments from other deals the Turks inked.

Turkey has the domestic infrastructure to get the gas from the Black Sea shore to the Aegean. From an Oxford Institute for Energy Studies report:

The BOTS [Turkish national gas company] transport system’s throughput capacity is not sufficiently developed to accept and ship all the contracted gas volume from the eastern suppliers due to the limited installed capacity of the existing compressor stations. BOTAS is able to take some 90% of the gas from the Trans-Balkan Gas Pipeline (the Western Line) and the Blue Stream pipeline from Russia, but has struggled to cope with volumes contracted from Azerbaijan and Iran. Therefore, the company has had to pay billions of dollars for ‘untaken’ gas.

This is the picture today. It will take a significant level of investment in Turkey to upgrade their infrastructure that will allow it to handle large additional gas flows via the new pipeline.

So who is going to pay for all of this? It’s not like Gazprom is flush with cash. On the contrary, like all Russian corporations, Gazprom is in dire straits financially. Although it’s not subject to sanctions right now, it IS affected by it’s inability to tap foreign money markets through it’s banking concern. It owes billions of USD denominated debt, which falls due during the course of 2015. Ordinarily they’d pay this off by simply borrowing more and rolling that debt over. But since the money markets have been shut off, they’ve had to resort to government funds and other unlikely sources, such as China (remember those guys?)

Whilst Gazprom is not directly sanctioned now – just the Gazprombank arm – all that could change with the very fluid situation right now in Ukraine. One wrong move by the Kremlin in eastern Ukraine could vastly change the playing field. In addition, Gazprom’s hard currency revenue picture is dismal. Gazprom’s shipments to Europe were down more than 9% last year, and no gas is yet flowing to China. And the best part of it is that Gazprom prices – at its own insistence! – are tied to lagged oil prices. What’s that mean?Well, since the price of oil has plummeted 60%, so too will the price of gas Gazprom sells. It’s revenues from Europe will decline by the same order of magnitude as oil prices have, to the tune of 60%. A far cry from their predictions of $250(!!) back in 2008. Great work Alexei. I can see why you were picked to be CEO.

Schadenfreude doesn’t even come close to describing my feelings at contemplating Gazprom getting what it insisted on – an oil price link. It insisted on this link almost as a matter of principle, and came up with one ludicrous argument after another to justify it.

And while we’re talking about revenue, let’s talk about prices in general. One of the biggest flies in the ointment about the Turkey deal, and which everyone seems to fail mentioning, is the fact that the Russians still haven’t finalised a deal with Turkey on the gas prices for THIS YEAR! So somehow, whilst they’re still bickering about a price deal for this year, they are somehow going to magically reach an agreement and lock in a long-term price for the pipeline business? Keep dreaming Alexei.

Whilst we’re still on the topic of price, let’s cast our minds back to all the other large pipeline projects Putin and his cronies announced this past decade, and ask yourself how many of them ACTUALLY followed through and went live. There were deals announced with China going as far back as 2006, but they never materialised because neither the Chinese, nor the Russians, come come to an agreement on price. The same thing happened with two other lines with the Kazakhs and Azerbaijan. The two latter parties ultimately choosing to cast off the shackles of Gazprom and opting to go it alone.

This current deal, signed when Putin was under the gun has not fully resolved price issues. This “deal” has every prospect of having the same issues as all the others that have come before it, especially since the Turks realise Russia’s holding a weak hand. Not to mention, the Chinese can smell blood from miles off, and they’ve been circling Gazprom like a famished school of sharks.

So sizing up all of the above, the veiled threat from Putin’s favourite Herald, Alexei Miller, is nothing more than that. It’s a ploy, designed by the Kremlin to further destabilise an already unbalanced European economy. It’s made all the more poignant by the fact that one of the country’s that, on the face of it, stands to gain a great deal economically, i.e. Greece, but will in reality not gain much at all. Already lumbered with a massive bailout program which they are failing to manage, putting extra pressure on the Eurozone as as whole. In fact, the way Miller has positioned it, he’s expecting an already bankrupt economy to foot the bill. And remember, that all this is going on whilst the Mandarins in across the EU member states foreign offices are all deciding what to do vis-a-vis the sanctions with Russia. Do they tighten the screws, loosen the screws or just sit on their hands. I’m just curious who will end up with a horse’s head in their bed.

Russian Pipeline

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