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RUSSIA, TURKEY: A GRAND ENERGY BARGAIN?
STRATFOR
May 14 2010
Russian President Dmitri Medvedev paid a visit to Turkey on May 11-12,
during which he signed agreements for $25 billion in projects -- mostly
in the energy sector -- including a massive commitment to build a $20
billion, 4.8-gigawatt (GW) nuclear power plant. Medvedev's visit is
the culmination of months of negotiations between Ankara and Moscow
over where the countries could agree to disagree on the future of
Eurasian energy flows.
Turkey, straddling Europe, Asia and the Middle East, is looking to
bolster its geopolitical standing by signing deals that would allow
Turkey to transit energy from the East to the European markets.
Russia, as the dominant natural gas supplier for Europe, wants to
ensure Turkey does not give Europe too many options in circumventing
Russian energy networks.
Since Russia and Turkey are both resurgent powers in the region, the
energy issue can turn quite thorny at times, particularly as the West
is leaning on Turkey to keep its distance from Moscow. But Russia and
Turkey are not looking for an energy brawl at the moment. Tensions
exist between these historic rivals, but the current geopolitical
environment is pushing the two sides to work with -- instead of
against -- each other.
Competing Over Azerbaijan
Azerbaijan has long been a pawn in Turkey's negotiations with Russia.
The country shares deep cultural and linguistic linkages to Turkey,
and already transports roughly 9 billion cubic meters (bcm) of natural
gas per year for the Baku-Tbilisi-Erzerum pipeline, which circumvents
Russia and carries natural gas from Azerbaijan's offshore Shah Deniz
fields through Georgia to Turkey for the European market. Phase II of
Azerbaijan's Shah Deniz project is expected to come online in 2018
and produce 15 bcm per year, 12 bcm of which would be available for
export. Turkey wants to secure as much of that remainder for export as
possible so it can transit substantial amounts of natural gas through
its territory for projects like the much-touted Nabucco pipeline,
designed to provide Europe with a non-Russian-influenced natural gas
alternative. Russia, which has a strategic interest in maintaining
an energy stranglehold on Europe, naturally wants to ensure pipeline
projects such as Nabucco remain pipe dreams.
Such an opportunity arose for Russia roughly two years ago when Turkey
began pursuing a diplomatic rapprochement with Azerbaijan's biggest
foe, Armenia. Azerbaijan was deeply offended that Turkey would try
to make nice with Armenia without first ensuring Azerbaijani demands
were met on Nagorno-Karabakh, a disputed territory that Armenia seized
from Azerbaijan in a war in the early 1990s. As Turkish-Azerbaijani
relations deteriorated, Russia made sure it was there for Baku in
its time of need, giving Moscow the leverage it was seeking over
issues such as Shah Deniz II pricing agreements. So, whenever Turkey
approached Baku for a pricing deal on Shah Deniz II, Russia would
outbid the Turks and the Azerbaijanis would continue to hold out on a
deal. At the same time, Russia used its clout over Armenia to ensure
that Turkish-Armenian negotiations remained deadlocked.
In the days leading up to Medvedev's visit to Turkey, however, signs
of progress between Turkey and Azerbaijan over Shah Deniz II started
coming to light. Azerbaijani Energy Minister Natik Aliyev announced
May 5 that Turkey and Azerbaijan were coming close to a final pricing
agreement to supply Turkey with a minimum of 7 bcm of natural gas
from Shah Deniz II. According to a STRATFOR source, Turkish Prime
Minister Recep Tayyip Erdogan has thus far made a verbal agreement
with an advisor to Azerbaijani President Ilham Aliyev for Turkey to
pay around $220-270 per thousand cubic meters. This starting price
is considerably lower than the Russians' earlier offer of $300 per
thousand cubic meters. It is unlikely to be a coincidence that these
negotiations picked up just prior to Medvedev's visit. If Baku was
moving forward with Ankara on a Shah Deniz II deal, the Russians
likely facilitated these negotiations.
Nabucco On The Back Burner
However, this assistance came at a price. Russia does not want
Azerbaijan's natural gas to go toward a pipeline project like
Nabucco that directly violates Russian energy imperatives. That
said, there are signs that Russia may be willing to let a bit of
its energy stranglehold over Europe slip if, in return, it can more
firmly entrench itself in Turkey, the crucial link to Europe's energy
diversification efforts. According to a STRATFOR source, Russia has
given its consent for now to the Turkey-Azerbaijan natural gas deal
on the condition that the massive Nabucco project be shelved.
The source claims Russia and Turkey have agreed for the time being
that Turkey will focus its attention on another, smaller pipeline
to carry the extra Azerbaijani natural gas: the Interconnection
Turkey-Greece-Italy (ITGI) and Poseidon pipeline project. This pipeline
would take Azerbaijani natural gas across Georgia and Turkey (through
an existing Baku-Tbilisi-Erzerum pipeline) into Greece, and from
there into Italy through an underwater pipeline across the Ionian Sea.
The ITGI-Poseidon project would have a capacity of 11.8 bcm per
year compared to Nabucco's capacity goal of 31 bcm per year. This
difference in market share makes ITGI-Poseidon a more acceptable
compromise for the Russians. Moreover, there is potential down the road
for Russia to link into this pipeline project through its ambitious
South Stream project led by Russian natural gas giant Gazprom, which
aims to deliver Russian energy supplies to Europe across the Black Sea.
The ITGI project -- priced at roughly $507 million -- would be far more
cost effective than Nabucco, the total estimated cost of which is as
high as $11 billion. The ITGI project is also already under way, with
the Greece-Turkey connection having come online in early 2007. Under
the European Economic Recovery Plan (EERP), the European Union has
also pledged a grant of $126.9 million for the final section of the
project, the Poseidon pipeline. It remains to be seen whether Turkey
will be able to convince its European partners, now struggling with
the Greek financial maelstrom, to put down more money to see through
this project, as well as others such as Nabucco in the future.
However, Turkey will be able to make a much more convincing argument
for more funding if it can secure Azerbaijani natural gas to source
these projects.
Azerbaijan's Demands
Azerbaijan's demands in this whole affair are quite simple. Baku
wants a favorable price on its natural gas, but is also looking
for guarantees from Ankara that the Turkish government will
not pursue meaningful peace talks with Armenia without first
addressing Azerbaijani concerns over Nagorno-Karabakh. Given that
the Turkey-Armenia talks have been deadlocked since early spring,
Turkey likely has the diplomatic bandwidth to offer such guarantees
in the interest of securing this natural gas deal and mending its
relationship with Azerbaijan.
Unprecedented Deal-Making?
Russia had to have a strategic purpose for it to start easing its grip
on the Shah Deniz II negotiations between Turkey and Azerbaijan. That
strategic purpose may have manifested itself during Medvedev's May
12 visit to Turkey. During that visit, two significant energy deals
were signed that signaled Russian-Turkish energy integration on an
unprecedented scale.
The first deal was for the construction of Turkey's first nuclear power
plant by a Russian-led consortium led by Atomstroyexport and Inter
RAO. The power plant will have four reactors with a total capacity
4.8 GW and cost roughly $20 billion. The scale of this project cannot
be emphasized enough. If this nuclear power plant is built, Turkey
will be home to one of the largest nuclear energy installations in
the world. Russia has not even built a nuclear power plant on this
scale for itself, and does not have a reputation for providing the
necessary funding to bring such projects into realization.
STRATFOR sources, however, claim many of the details of the deal have
been worked out. Russia will have a controlling stake in the plant
and sell the rest (up to 49 percent) to other investors, most likely
Turkish firms such as AKSA, which has strong political and family ties
to Erdogan and the ruling Justice and Development Party. The plant
will likely be built in two stages; two reactors built, followed by the
second two. The construction for the power plant near Turkey's southern
Mediterranean coastal town of Akkuyu is expected to take seven years,
and can only begin after both parliaments ratify the agreement.
Instead of having Turkey pay a large amount of money up front, Turkish
electricity firm TEDAS has signed an agreement to buy electricity
from the plant for a minimum of 15 years, allowing Turkey to pay for
the construction in installments once the plant becomes operational.
Russia is expected to use this 15-year guarantee to secure loans for
the project. Turkey will also have to rely on Russia for maintenance
and the technological components for the plant, giving Moscow the
long-term leverage it has been seeking in the Turkish energy sector.
Still, $20 billion is an enormous sum, and STRATFOR remains deeply
skeptical as to whether Russia will indeed follow through with
its financial commitment to get this project off the ground. If it
does, this project would signify a sea change in Russian investment
behavior. It would also raise questions as to where else Russia could
put its money in pursuit of its strategic energy goals.
Another agreement was signed for Russia to supply a pipeline
that would pump Russian oil from the Black Sea port of Samsun in
northern Turkey to the Ceyhan oil terminal in southern Turkey on the
Mediterranean coast. Turkish firm Calik Energy (which has close ties
to the AKP government) and Italian firm ENI (which has close ties to
Russian energy giant Gazprom) are building the pipeline, which will
have a capacity of between 1.2 million and 1.4 million barrels per
day. Russian Deputy Prime Minister Igor Sechin said the Samsun-Ceyhan
deal would cost $3 billion, and STRATFOR sources claim Calik Energy
will be responsible for financing most of the deal. The purpose of
this north-south pipeline is to alleviate the heavy congestion of
oil tankers traveling through the Bosporus and Dardanelles straits
to travel between the Black and Mediterranean seas, an issue Turkey
and international energy firms have been grappling with for some
time. The main purpose of the pipeline will be to decrease traffic of
the larger 350,000-400,000-ton tankers and free up the straits for the
150,000-ton tankers. The economic viability of this pipeline has long
been in question, however, given that transit through the Bosporus and
Dardanelles is free by law. It thus remains to be seen what economic
incentives will be given for tankers to bring oil to Samsun port to be
transported through the Samsun-Ceyhan pipeline. Turkey already imports
more than 60 percent of its energy supplies from Russia, and that
energy dependence will deepen if this pipeline becomes operational.
Nothing Firm Yet
STRATFOR will thus be closely watching the Turkish-Russian nuclear
power and Samsun-Ceyhan agreements, as well as whether Turkey and
Azerbaijan will strike a deal over Shah Deniz II in the coming days,
as officials on both sides have been claiming. Any of these deals
would only be sealed under a broader understanding between Moscow and
Ankara. Yet each of these deals also comes with substantial caveats.
In addition to the economic feasibility issues attached to the nuclear
power plant and Samsun-Ceyhan pipeline deals, a potential Shah Deniz
II deal would likely contain a number of loopholes. For example,
Turkey can assure Russia right now that the extra natural gas it
receives from Azerbaijan will not go toward Nabucco, and then divert
the natural gas toward whatever project it chooses down the line. By
the same token, Russia can facilitate negotiations between Turkey and
Azerbaijan over Shah Deniz II right now to secure the energy deals
it wants with Turkey on nuclear power and natural gas supplies, but
can also use its influence with Azerbaijan to scuttle the Shah Deniz
II deal between Ankara and Baku at a later point in time. Nothing is
set in stone in this flurry of pipeline politics, but for now, Russia
and Turkey appear to be working toward a mutual energy understanding.
From: Emil Lazarian | Ararat NewsPress
STRATFOR
May 14 2010
Russian President Dmitri Medvedev paid a visit to Turkey on May 11-12,
during which he signed agreements for $25 billion in projects -- mostly
in the energy sector -- including a massive commitment to build a $20
billion, 4.8-gigawatt (GW) nuclear power plant. Medvedev's visit is
the culmination of months of negotiations between Ankara and Moscow
over where the countries could agree to disagree on the future of
Eurasian energy flows.
Turkey, straddling Europe, Asia and the Middle East, is looking to
bolster its geopolitical standing by signing deals that would allow
Turkey to transit energy from the East to the European markets.
Russia, as the dominant natural gas supplier for Europe, wants to
ensure Turkey does not give Europe too many options in circumventing
Russian energy networks.
Since Russia and Turkey are both resurgent powers in the region, the
energy issue can turn quite thorny at times, particularly as the West
is leaning on Turkey to keep its distance from Moscow. But Russia and
Turkey are not looking for an energy brawl at the moment. Tensions
exist between these historic rivals, but the current geopolitical
environment is pushing the two sides to work with -- instead of
against -- each other.
Competing Over Azerbaijan
Azerbaijan has long been a pawn in Turkey's negotiations with Russia.
The country shares deep cultural and linguistic linkages to Turkey,
and already transports roughly 9 billion cubic meters (bcm) of natural
gas per year for the Baku-Tbilisi-Erzerum pipeline, which circumvents
Russia and carries natural gas from Azerbaijan's offshore Shah Deniz
fields through Georgia to Turkey for the European market. Phase II of
Azerbaijan's Shah Deniz project is expected to come online in 2018
and produce 15 bcm per year, 12 bcm of which would be available for
export. Turkey wants to secure as much of that remainder for export as
possible so it can transit substantial amounts of natural gas through
its territory for projects like the much-touted Nabucco pipeline,
designed to provide Europe with a non-Russian-influenced natural gas
alternative. Russia, which has a strategic interest in maintaining
an energy stranglehold on Europe, naturally wants to ensure pipeline
projects such as Nabucco remain pipe dreams.
Such an opportunity arose for Russia roughly two years ago when Turkey
began pursuing a diplomatic rapprochement with Azerbaijan's biggest
foe, Armenia. Azerbaijan was deeply offended that Turkey would try
to make nice with Armenia without first ensuring Azerbaijani demands
were met on Nagorno-Karabakh, a disputed territory that Armenia seized
from Azerbaijan in a war in the early 1990s. As Turkish-Azerbaijani
relations deteriorated, Russia made sure it was there for Baku in
its time of need, giving Moscow the leverage it was seeking over
issues such as Shah Deniz II pricing agreements. So, whenever Turkey
approached Baku for a pricing deal on Shah Deniz II, Russia would
outbid the Turks and the Azerbaijanis would continue to hold out on a
deal. At the same time, Russia used its clout over Armenia to ensure
that Turkish-Armenian negotiations remained deadlocked.
In the days leading up to Medvedev's visit to Turkey, however, signs
of progress between Turkey and Azerbaijan over Shah Deniz II started
coming to light. Azerbaijani Energy Minister Natik Aliyev announced
May 5 that Turkey and Azerbaijan were coming close to a final pricing
agreement to supply Turkey with a minimum of 7 bcm of natural gas
from Shah Deniz II. According to a STRATFOR source, Turkish Prime
Minister Recep Tayyip Erdogan has thus far made a verbal agreement
with an advisor to Azerbaijani President Ilham Aliyev for Turkey to
pay around $220-270 per thousand cubic meters. This starting price
is considerably lower than the Russians' earlier offer of $300 per
thousand cubic meters. It is unlikely to be a coincidence that these
negotiations picked up just prior to Medvedev's visit. If Baku was
moving forward with Ankara on a Shah Deniz II deal, the Russians
likely facilitated these negotiations.
Nabucco On The Back Burner
However, this assistance came at a price. Russia does not want
Azerbaijan's natural gas to go toward a pipeline project like
Nabucco that directly violates Russian energy imperatives. That
said, there are signs that Russia may be willing to let a bit of
its energy stranglehold over Europe slip if, in return, it can more
firmly entrench itself in Turkey, the crucial link to Europe's energy
diversification efforts. According to a STRATFOR source, Russia has
given its consent for now to the Turkey-Azerbaijan natural gas deal
on the condition that the massive Nabucco project be shelved.
The source claims Russia and Turkey have agreed for the time being
that Turkey will focus its attention on another, smaller pipeline
to carry the extra Azerbaijani natural gas: the Interconnection
Turkey-Greece-Italy (ITGI) and Poseidon pipeline project. This pipeline
would take Azerbaijani natural gas across Georgia and Turkey (through
an existing Baku-Tbilisi-Erzerum pipeline) into Greece, and from
there into Italy through an underwater pipeline across the Ionian Sea.
The ITGI-Poseidon project would have a capacity of 11.8 bcm per
year compared to Nabucco's capacity goal of 31 bcm per year. This
difference in market share makes ITGI-Poseidon a more acceptable
compromise for the Russians. Moreover, there is potential down the road
for Russia to link into this pipeline project through its ambitious
South Stream project led by Russian natural gas giant Gazprom, which
aims to deliver Russian energy supplies to Europe across the Black Sea.
The ITGI project -- priced at roughly $507 million -- would be far more
cost effective than Nabucco, the total estimated cost of which is as
high as $11 billion. The ITGI project is also already under way, with
the Greece-Turkey connection having come online in early 2007. Under
the European Economic Recovery Plan (EERP), the European Union has
also pledged a grant of $126.9 million for the final section of the
project, the Poseidon pipeline. It remains to be seen whether Turkey
will be able to convince its European partners, now struggling with
the Greek financial maelstrom, to put down more money to see through
this project, as well as others such as Nabucco in the future.
However, Turkey will be able to make a much more convincing argument
for more funding if it can secure Azerbaijani natural gas to source
these projects.
Azerbaijan's Demands
Azerbaijan's demands in this whole affair are quite simple. Baku
wants a favorable price on its natural gas, but is also looking
for guarantees from Ankara that the Turkish government will
not pursue meaningful peace talks with Armenia without first
addressing Azerbaijani concerns over Nagorno-Karabakh. Given that
the Turkey-Armenia talks have been deadlocked since early spring,
Turkey likely has the diplomatic bandwidth to offer such guarantees
in the interest of securing this natural gas deal and mending its
relationship with Azerbaijan.
Unprecedented Deal-Making?
Russia had to have a strategic purpose for it to start easing its grip
on the Shah Deniz II negotiations between Turkey and Azerbaijan. That
strategic purpose may have manifested itself during Medvedev's May
12 visit to Turkey. During that visit, two significant energy deals
were signed that signaled Russian-Turkish energy integration on an
unprecedented scale.
The first deal was for the construction of Turkey's first nuclear power
plant by a Russian-led consortium led by Atomstroyexport and Inter
RAO. The power plant will have four reactors with a total capacity
4.8 GW and cost roughly $20 billion. The scale of this project cannot
be emphasized enough. If this nuclear power plant is built, Turkey
will be home to one of the largest nuclear energy installations in
the world. Russia has not even built a nuclear power plant on this
scale for itself, and does not have a reputation for providing the
necessary funding to bring such projects into realization.
STRATFOR sources, however, claim many of the details of the deal have
been worked out. Russia will have a controlling stake in the plant
and sell the rest (up to 49 percent) to other investors, most likely
Turkish firms such as AKSA, which has strong political and family ties
to Erdogan and the ruling Justice and Development Party. The plant
will likely be built in two stages; two reactors built, followed by the
second two. The construction for the power plant near Turkey's southern
Mediterranean coastal town of Akkuyu is expected to take seven years,
and can only begin after both parliaments ratify the agreement.
Instead of having Turkey pay a large amount of money up front, Turkish
electricity firm TEDAS has signed an agreement to buy electricity
from the plant for a minimum of 15 years, allowing Turkey to pay for
the construction in installments once the plant becomes operational.
Russia is expected to use this 15-year guarantee to secure loans for
the project. Turkey will also have to rely on Russia for maintenance
and the technological components for the plant, giving Moscow the
long-term leverage it has been seeking in the Turkish energy sector.
Still, $20 billion is an enormous sum, and STRATFOR remains deeply
skeptical as to whether Russia will indeed follow through with
its financial commitment to get this project off the ground. If it
does, this project would signify a sea change in Russian investment
behavior. It would also raise questions as to where else Russia could
put its money in pursuit of its strategic energy goals.
Another agreement was signed for Russia to supply a pipeline
that would pump Russian oil from the Black Sea port of Samsun in
northern Turkey to the Ceyhan oil terminal in southern Turkey on the
Mediterranean coast. Turkish firm Calik Energy (which has close ties
to the AKP government) and Italian firm ENI (which has close ties to
Russian energy giant Gazprom) are building the pipeline, which will
have a capacity of between 1.2 million and 1.4 million barrels per
day. Russian Deputy Prime Minister Igor Sechin said the Samsun-Ceyhan
deal would cost $3 billion, and STRATFOR sources claim Calik Energy
will be responsible for financing most of the deal. The purpose of
this north-south pipeline is to alleviate the heavy congestion of
oil tankers traveling through the Bosporus and Dardanelles straits
to travel between the Black and Mediterranean seas, an issue Turkey
and international energy firms have been grappling with for some
time. The main purpose of the pipeline will be to decrease traffic of
the larger 350,000-400,000-ton tankers and free up the straits for the
150,000-ton tankers. The economic viability of this pipeline has long
been in question, however, given that transit through the Bosporus and
Dardanelles is free by law. It thus remains to be seen what economic
incentives will be given for tankers to bring oil to Samsun port to be
transported through the Samsun-Ceyhan pipeline. Turkey already imports
more than 60 percent of its energy supplies from Russia, and that
energy dependence will deepen if this pipeline becomes operational.
Nothing Firm Yet
STRATFOR will thus be closely watching the Turkish-Russian nuclear
power and Samsun-Ceyhan agreements, as well as whether Turkey and
Azerbaijan will strike a deal over Shah Deniz II in the coming days,
as officials on both sides have been claiming. Any of these deals
would only be sealed under a broader understanding between Moscow and
Ankara. Yet each of these deals also comes with substantial caveats.
In addition to the economic feasibility issues attached to the nuclear
power plant and Samsun-Ceyhan pipeline deals, a potential Shah Deniz
II deal would likely contain a number of loopholes. For example,
Turkey can assure Russia right now that the extra natural gas it
receives from Azerbaijan will not go toward Nabucco, and then divert
the natural gas toward whatever project it chooses down the line. By
the same token, Russia can facilitate negotiations between Turkey and
Azerbaijan over Shah Deniz II right now to secure the energy deals
it wants with Turkey on nuclear power and natural gas supplies, but
can also use its influence with Azerbaijan to scuttle the Shah Deniz
II deal between Ankara and Baku at a later point in time. Nothing is
set in stone in this flurry of pipeline politics, but for now, Russia
and Turkey appear to be working toward a mutual energy understanding.
From: Emil Lazarian | Ararat NewsPress