Russia, Turkey: A Grand Energy Bargain?
STRATFOR – 14/5/2010
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
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
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.
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
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.