Bulgaria Analytica: The South, Turkish and Nord Stream demise. Case closed. Politicians defeated by Markets.

Following its decision, the Polish regulator bluntly informed the European companies involved in the company Nord Stream 2: Shell, OMV, Engie, Uniper and Wintershall, that if their subsidiaries are involved in the construction of the pipeline, they can bid farewell to their business in Poland.

 The problem is not so much the importance of the Polish market to these companies’ portfolios, but that what has occurred, including the precedent of activating a regulator over such a sensitive topic, could put them in the sights of similar investigations in many other countries. Moreover, the issue could hypothetically be coming to the attention of the European Commission.

The Polish regulator UOKiK has an iron-cast argument: if Nord Stream 2 is built, the dominant role of Gazprom on the European market will grow beyond any reasonable limit. Over 80% of Russia’s gas exports would be concentrated in just one route which is a complete antithesis of all EU efforts to distribute and manage risks to energy security and this without even considering the political factor.

Nord Stream 2 will take away the chance of fair competition from almost all European projects for gas transmission aimed at diversifying routes and suppliers.

To summarize, the over-concentration in this segment of the transit market would block the integration of the remaining non-integrated segments of the East European market. At the same time, it would strengthen the price spread of natural gas between Gazprom-privileged West European countries and consumers of Russian gas in Eastern, Central and Southern Europe. Under existing trends, this could have profound negative consequences for the future of the European Union.

In the scheme under which Germany becomes a hub of Russian gas for Europe, German energy companies and consumers would benefit at the expense of other European companies and consumers. Firstly, they would get the cheapest Russian gas in the EU. Secondly, the German Gazprom partners in Nord Stream 2 would receive substantial commercial premiums on further sales of the same gas in CEE and Southern Europe, outside of the established contracts and relationships. Therefore, through the added price for transit, those consumers would also be paying the cost for building Nord Stream 2. This on itself is an extra cost, imposed neither by market logic, nor by established practices and price schedules. Conversely, lower prices for natural gas in Germany would provide local companies with non-market advantages in the fuel component of manufactured goods and services to all its competitors who consume Russian gas after the German border.

Significantly, in the past three years Germany has turned from an importer into a net exporter of natural gas and last year the export volumes of natural gas exceeded 30 billion cubic meters. All of the above-mentioned energy corporations, participating in the project, cover various fragments of the European market for natural gas, using Russian natural gas to enhance their market position and frequently doing so at the expense of alternative suppliers and competitors of Gazprom.

One of the assumptions – of the Russian gas monopoly financing Nord Stream on its own – borders on extreme optimism, especially in the current state of the investment commitments, income and credit rating of the company.

Another hypothesis remains that will surely be noticed by promoters of Gazprom projects in Southeast Europe – that as a compensation for the failure of Nord Stream 2, the Kremlin could refocus its efforts on the construction of its kin in the South in two versions – South and Turkish stream.

This means new sharp escalation of pressures and Russia’s geopolitical maneuvers in Turkey, Bulgaria and throughout Southeast Europe, putting into use its entire arsenal of power tools. Since neither Bulgaria, nor Turkey alone can ensure the realization of the Streams in the Black Sea, we are likely to witness a new round of tensions between Ukraine and Russia, caused by the dead end of the Kremlin’s policy of circumvention.

Without resolution of the current pressing issues – compatibility with the Third Energy Package (for third party access and mandatory release of unused capacity), guaranteed consumer demand and the availability of investors in connecting infrastructure within the European Union, the new pipelines across the Black Sea make no economic sense. This is a problem of every new major infrastructure project, not just those that duplicate existing routes through Ukraine as South Stream and Turkish Stream, but also those connecting new gas fields to the European market, such as TANAP and TAP.

Moreover, the new Streams cannot have the same priority for Southeast European states as gas market liberalization, system connectivity, interconnectors and gas storage capacities, not least because they do not enhance competition but prolong the existing unsatisfactory market domination by one participant only.

The idea that the Poseidon project could be resurrected beyond the Turkish border, as agreed some time ago in Rome between Gazprom, Italy’s Edison and Greece’s DEPA, is also hanging in the air without any actual timescales or even estimates. Against the backdrop of the difficulties in securing funding for TAP and the oversupply of natural gas in southern Italy, it is impossible to find any business logic for the additional costs for providing billions of cubic meters to an already supersaturated market. 

Even in the part of Turkish stream envisioned for the European region of Turkey and thus theoretically more feasible in view of the significantly larger capacity of this gas market, economic logic is also stretched as the Turkish party would have to undertake a significant chunk of the financing – up to 50% of the construction of the subsea and onshore parts of the project, for one line only. Still, without full volumes and without the benefits of transit to European markets, there is no obvious reason for Ankara to duplicate an arrangement for obtaining Russian natural gas. A Stream via the Black Sea would of itself meet Russia’s strategic ambition of bypassing Ukraine. However, this is not an essential issue for Turkey, especially at the cost of over $3 billion.

Erdogan’s generosity of words about Turkey’s financial participation in Turkish stream will surely alarm TANAP shareholders, namely SOCAR with its disproportionately high share in the financing of the pipeline in Turkey without a matching commitment from Ankara.

As a reminder, the current cost of work on the complex South Corridor project amounts to over $40 billion, including work on Shah Deniz 2 for $23 billion, the transmission infrastructure in Turkey included (TANAP: $ 9.3 billion), plus $ 6 billion for TAP and the expansion of the South Caucasus line. The discouraging reactions by capital markets and banks have already forced the Azeri company, struggling with its revenues, to turn to institutional investors – the World Bank, European Investment Bank and the European Bank for Reconstruction and Development. Thus the financing of TANAP and TAP has not yet been finalized. Against this background, Erdogan’s generosity towards Putin raises more questions than answers.

This does not automatically imply that these Streams will be dropped from the agenda of politicians and the media, but from a market perspective, this subject is closed.

Yet once again markets have defeated politicians.