Russia’s New Pipeline Deals Keep Getting Shot Down

Gazprom has yet to comment on Poland’s decision. Their Moscow offices are currently closed.

Just over 50% of the company’s shares are owned by the government. The rest is free-float, with around 27% foreign owned. Investors are unlikely to support Gazprom financing Nord Stream 2 alone.  That currently leaves just two pipelines left: Power of Siberia and the Turkish Stream.

 The Power of Siberia is a China deal. It was signed almost immediately after the West imposed sanctions on Russian banks and oil and gas companies in a government effort to show it still had friendly neighbors wanting to do business. Margins are tight on this one. China is financing most of it.

The Turkish Stream may be back on again. After Vladimir Putin and Recep Erdogan let bygones be bygones over a downed Sukhoi fighter plane in Syria, there is movement on the ground again. Despite the lukewarm relations between Turkey and Russia, that pipeline may be the best deal around. Gazprom may do its shareholders a service if it gives up on Nord Stream 2 and sticks to these two lines instead.

“My immediate reaction is clearly negative,” says Michael Reynal about Gazprom going it alone. Reynal is a long-time Russia investor and emerging market fund manager for Sophus Capital, formerly known as RS Investments. Reynal does not hold Gazprom.

China and Turkey lines are important, but the market — for now — sees Europe as of paramount concern for Gazprom.

“Russia’s negotiating position on the Siberia line was very weak. China neatly exploited that. Add the fact that Russia is dependent on China for credit, and the Power of Siberia doesn’t look as good,” says Sijbren de Jong, a strategic analyst specializing in EU energy security at the Hague Center for Strategic Studies.

Gazprom cannot catch a break. It’s true that the $1.2 billion Power of Siberia pipeline is delayed. It omitted the start date from its second quarter 2016 report.

Turkish Stream, meanwhile, looks the most promising. Outside of that, Russia has nothing new to offer Europe in terms of delivery routes.

Gazprom watchers know that the Turkish Stream pipeline was born out of the failed South Stream line. That one kicked the bucket after the West deemed it as a means for Russia to deliver gas around Ukraine, Gazprom’s main route into southeastern Europe. Russia and Ukraine are going through a bitter divorce. And some people believe that Russia, ever the political animal, is not thinking economically about the pipeline, but is building them in the south in order to squeeze out Ukraine.

Turkey, on the other hand, is not worried about hurting Kiev or Brussels feelings.

Turkey is a growth market for Russian energy. The demise of South Stream means Gazprom still has unused pipes lying around that it can use for the Turkish Stream line one, says de Jong. If line one replaces the Trans-Balkan pipeline, Gazprom will have to build a second line if it wants to tap into Turkish growth in gas demand. But getting any surplus gas from the 2nd 15.75 billion cubic meter capacity line to southeastern Europe is not clear cut, de Jong says.

“You cannot build a new pipeline to Greece and beyond and be the sole user. You need to ensure third party access. Gazprom only likes parties where it is the sole guest of honor,” he says. That leaves them with using part of the Italy-Turkey-Greece (ITGI) Interconnector line that currently has a 25 year exemption on third party access, and only has around 8 bcm capacity if hooked up to the planned offshore section of ITGI, known as Poseidon.

Plus there is the Trans-Adriatic pipeline, which is not in Russia’s wheelhouse, and that has an initial capacity of 10 bcm and can be expanded to 20. The gas fields are primarily in the Caspian Sea region of Azerbaijan. Lukoil of Russia owns a 10% stake in the main gas field that will be the source of deliveries.

Turkish Stream allows Gazprom to compete in southern Europen, if they can get it done.

“Turkey wants to be an energy hub and not just Russia’s appendix in the south,” says de Jong. “This is why you see them in talks with Azerbaijan, Iran and Israel. I don’t expect the bromance between Erdogan and Putin to be super solid.”

Germany has been one of the strongest supporters of the Nord Stream II project. The proposed pipeline would replace the transit agreement between Kiev and Gazprom, which expires in 2019, moving natural gas from Russia to Europe while skirting the aging infrastructure and politically delicate situation in Ukraine.

What’s left for Gazprom? Siberia route to China is ongoing and late. But into Europe, the only project that stands a chance is the Turkish Stream.

Beyond its economic benefits, the proposed pipeline has political implications. Now that Ukraine is busy and proudly sourcing nearly all of its natural gas from European countries, Russia no longer enjoys the power that it once had over Kiev, say analysts at Stratfor. Russia does not want to do any favors for a Ukrainian government that is not under its influence.

Unless Gazprom builds an alternative pipeline to Europe, Ukraine can use the existing route as leverage in negotiating with Russia. This is a political and financial vulnerability that neither Moscow nor Gazprom can afford, Stratfor analysts wrote on Aug. 13.

“There’s no chance Russia finances Nord Stream 2 and goes it alone,” says de Jong. “It would be way too much to handle.”

Barring some sort of alternative legal construct that can pass muster with Poland’s anti-monopoly agency, Shell Oil and Gazprom’s four other Western partners are out. Nord Stream 2 remains a pipe dream.

“It’s important for Gazprom to secure its supply routes to Europe as the current Russia-Ukraine transit contract expires in 2019. Turkish Stream might be the best bet nowadays,” says Daniel do Vale, an energy analyst at Sophus Capital in Des Moines.

Last week, Erdogan mentioned during his visit to Russia that the pipeline construction plan is back on with his country incurring part of the costs.

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