Putin's Plan B Gets a D: Shipping Gas to Europe Via Turkey May Be Unrealistic

 Vladimir Putin said last week he was ditching a $45 billion pipeline to Europe under the Black Sea, he put forward a Plan B. Russia would build a pipe to Turkey and then ship it overland to Greece and on to the rest of the 

It's an idea seen as having little more chance of succeeding than the original Plan A.

"It's only show business," said Necdet Pamir, an energy specialist at Bilkent University in Ankara. A huge gas network from Russia to Turkey to supply European Union markets is unrealistic, he said in a telephone interview.

All the things that combined to block the South Stream project to take gas under the Black Sea to Bulgaria are likely to undermine the Turkey-Greece plan. Stagnant gas demand in Europe makes the economics unattractive, the EU's in no mood for deals with Russia as the Ukraine crisis drags on, and the region is looking to import gas from other parts of the world.

Russia's new plan will see the country's state gas exporter, OAO Gazprom, build a new pipeline to Turkey big enough to carry more gas than the country will ever need. From there it will carry on to Turkey's border with Greece where gas can flow into the EU.

"This project is entirely realistic," Putin said last week in Ankara.

Turkey, though, is a long way from committing to the project. Energy Minister Taner Yildiz said yesterday the country doesn't want to be stuck between Europe and Russia.

"Time will show if the proposed projects are do-able or not," Yildiz said.

Too Ambitious

The Russian plan is too ambitious, according to analysts including Simon Pirani, a senior research fellow at the Oxford Institute for Energy Studies.

The proposed pipeline between Russian and Turkey, augmenting the existing Blue Stream link, could carry 63 billion cubic meters a year, or more than 10 percent of European consumption. While about 20 percent of that is expected to go to Turkey, according to Gazprom, the rest would need to be sent on to Europe.

"While additional capacities to Turkey would be useful, 63 billion cubic meters is of course not necessary," Pirani said. The outlook for the European gas demand is "rather gloomy."

By pitching such a grandiose project, Russia risks losing the money to be made from a smaller, but more realistic, opportunity, said Mikhail Korchemkin, founder of Malvern, Pennsylvania-based East European Gas Analysis. That's increasing Russia's share of the Turkish market, where it's already the largest supplier.

Export Market

Turkey is Gazprom's second-largest export market after Germany and one of only a few to increase gas imports from Russia this year, Gazprom data shows.

The country got 57 percent of its gas from Russia last year, 49 percent of which was imported through Ukraine and the rest via the Black Sea Blue Stream gas pipeline, according to a Bloomberg Intelligence report.

Turkey is broadening its sources of supply though.

It gets gas from Iran and Azerbaijan, which is preparing to double its deliveries from 2018 after a new pipeline network is built. Turkey also plans to import fuel from Turkmenistan, as well as more liquefied natural gas from countries including Algeria, and will also build a pipeline to northern Iraq.

Even so, Russia has the possibility of increasing deliveries to Turkey by as much as 16 billion cubic meters a year, said John Roberts, an energy security specialist at Scotland-based consultant Methinks Ltd.

Two Pipelines

"I think what we are going to see is two pipelines laid each at 16 billion cubic meters and then it will stop," Methinks's Roberts said. The first could carry gas currently shipped through Ukraine, the second would have room to meet growing Turkish demand, he said.

Turkey's energy consumption is set to grow an annual 4.5 percent from 2015 to 2030, roughly doubling over the next decade, according to the U.S. Energy Information Administration. Gazprom's exports to Europe may decline by about 20 percent by 2020 amid competition with renewables and the U.S. fuel, according to Deutsche Bank AG analysts Pavel Kushnir.

Better Price

Tilting to Turkey comes at a price. Russia has already agreed to a 6 percent discount on prices from January, and Yildiz has said he will seek an even better price.

Russian Energy Minister Alexander Novak said Turkey had asked for a discount of as much as 15 percent and the talks will continue. In the future, the price may approach that for Germany, one of the lowest prices in Europe, according to Gazprom CEO Alexey Miller.

Yildiz said Gazprom officials will come to Turkey in two days and he expects they could reach an agreement on prices.

For Gazprom, the EU needs to be thinking of alternative routes for natural gas because it can't rely on Ukraine's pipeline network for ever.

"Russia's transit contract with Ukraine expires in 2019," Gazprom spokesman Sergei Kupriyanovsaid by phone. "The EU can't consider the Ukrainian system as guaranteed from a long-term perspective."

The proposed gas network through Turkey will cut Ukraine's transit risks to zero, Miller said on state television today.

To contact the reporters on this story: Dina Khrennikova in Moscow atdkhrennikova@bloomberg.net; Elena Mazneva in Moscow at emazneva@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net Torrey Clark