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Turkey deal boosts Russia's pipeline project

Turkish Energy Minister Taner Yildiz speaks with Russian Prime Minister Vladimir Putin during their meeting in Moscow, Dec. 28, 2011.

Yana Lapikova/AFP/Getty Images/Yana Lapikova/AFP/Getty Images

A plan by Russia to build a new gas route to southern Europe gained momentum on Wednesday after Turkey agreed to host the Black Sea section of the pipeline in its territorial waters.

Taner Yildiz, the Turkish Energy Minister, handed Vladimir Putin, Russian Prime Minister, written permission for the construction of the South Stream pipeline across the Black Sea, removing a big obstacle to a project that is central to Russia's plan to tighten its grip on European gas markets.

Turkish approval for South Stream was hailed by Mr. Putin as "a big event in Europe's energy sphere."

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South Stream will transport up to 63 billion cubic metres a year of Russian gas to south and central Europe from 2015, reducing Russia's overwhelming dependence on gas export routes across Ukraine. In November, the first Russian gas was pumped to Germany under the Baltic Sea through the new Nord Stream pipeline, which will carry 55 billion cubic metres of gas by 2013.

The $20-billion (U.S.) South Stream project is seen as a competitor to the European Union-backed Nabucco pipeline to ship Caspian and central Asian gas to Europe and reduce reliance on Russian energy supplies. But Turkey, which is carving a role as an east-west energy transit hub, said the two pipelines should complement each other.

Nabucco's future has looked uncertain as investors struggle to identify gas supplies to fill the 32 billion cubic metres a year pipeline and justify the €12-billion to €15-billion ($15-billion to $20-billion U.S.) construction costs.

Azerbaijan is being courted by rival pipeline groups for rights to ship gas from the BP-operated Shah Deniz field across Turkey to Europe. It warned this month the Nabucco project might be too ambitious to suit its near-term needs.

In another blow to Nabucco's prospects, Turkey this week signed a preliminary deal with Azerbaijan to build a pipeline to carry up to 16 billion cubic metres of gas a year from Shah Deniz to the Turkish-Bulgarian border.

Russia's Gazprom has teamed up with Germany's Wintershall, Eni of Italy and Électricité de France to build the 900-kilometre offshore section of South Stream to link southern Russia with Bulgaria.

Analysts have predicted the Russian gas monopoly would abandon South Stream if it succeeded in its goal to gain control of Ukraine's gas transit network, which carries about 80 per cent of Russia's gas exports to Europe. But Alexei Miller, Gazprom chief executive officer, pledged on Wednesday to press ahead with South Stream, saying Turkey's approval was "the most serious proof that the project" would be complete by the 2015 schedule.

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Concern about Europe's dependence on Russian gas was underscored this month when the EU blocked a plan by Gazprom to buy a 50-per-cent stake in the Central European Gas Hub in Austria on the grounds the deal contradicted EU liberalization laws. Gazprom reacted by altering the route of South Stream to end in Italy, rather than in Austria.

The European Commission said yesterday the South Stream deal did not affect its commitments to the Nabucco route.

After receiving permission to build South Stream on Wednesday, Gazprom said two long-term gas supply contracts with Turkey would be extended to 2021 and 2025 and pledged to increase deliveries to Turkey in 2012. Turkey told Gazprom in October it would halt imports of Russian gas through a pipeline across Ukraine, Romania and Bulgaria after failing to agree a discount on supplies.

A spokesman for the Turkish energy ministry confirmed to the Financial Times on Thursday that it had granted Gazprom full permission to construct South Stream and that no further permits or licences are required.

In return Gazprom has granted Turkey's state gas importer Botas a discount on the gas it buys, and has agreed to an easing of take-or-pay commitments on the contracts, the spokesman said, confirming that the level of discount is not being made public.

In nearby Cyprus, the country's president announced Wednesday that a natural gas field offshore holds an estimated 5 trillion to 8 trillion cubic feet of gas, a significant find for the Mediterranean island.

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