11 Aug 2020

Natural gas dynamics in the Black Sea: Geostrategic implications

Tamás Kozma

The Black Sea region’s relevance is often overlooked while analyzing energy security realities in the Eastern and Southern neighborhoods of Europe. It is also less represented in research and analyses than the turbulent Eastern Mediterranean, which has recently tended to dominate attention. The Black Sea has become subject of fierce competition for its natural gas resources in recent years, with security concerns sharpened by geopolitical rivalry centered on the resource. Unsurprisingly, intensified competition for access to new oil and gas sources in the Eastern Mediterranean has, to some extent, diverted the focus from the region, which is also an essential location of energy reserves and pipeline networks.

This article departs from the notion that the Black Sea itself, along with its littoral states – Russia, Ukraine, Romania, Bulgaria, Turkey, and Georgia – can be referred to as a single unit of analysis. Energy-related interactions among states are intense and significant in the region and increase importance from an energy security point of view. A study of the Black Sea’s energy politics reveals both the divergent interests of the main regional actors and broad security concerns that affect the interests and preferences of stakeholders beyond the region.

Natural gas dynamics in the Black Sea Geostrategic implications-infographics

Concerning the comparison mentioned above, it has to be underlined that the situation of the Black Sea is considerably different from the Eastern Mediterranean. With regard to the latter case, the natural gas reserves discovered so far under the area’s seabed are much less sizeable in the Black Sea, and a production boom has not commenced to date. As a result, energy security discussions about the Black Sea do not center on the competition to gain access to vast assets under the sea, but rather revolve around the entire region’s role in the broader energy security architecture, energy trade relations, ongoing infrastructure projects, and meta-regional strategic calculations. Several questions are raised because the Black Sea region is a crucial junction where the North-South energy transportation routes/interests cross East-West links between the Caspian Sea and Europe.

In the past two years, a series of events and developments have induced significant changes in the Black Sea region from an energy security point of view, which demands attention. These issues will be addressed in the following sections.

The Southern Gas Corridor

The Southern Gas Corridor (SGC) construction – that aims to transport Azerbaijani gas to the European markets through a 3,500 km long pipeline system – is progressing. It is expected to be completed in late 2020, once the construction activities on its last section, the Trans Adriatic Pipeline (TAP), are finished. The SGC consists of the South Caucasus Pipeline (SCPX), which runs from Azerbaijan to the Georgian-Turkish border, the Trans Anatolian Pipeline (TANAP), which crosses Turkey from the Georgian-Turkish border to the Turkish–Greek border, and the TAP pipeline. At a total initial capacity, the SGC will be able to transport an annual volume of 16 bcm of natural gas from the Caspian Sea through Turkey toward the EU markets. As Turkey has contracted for buying 6 bcm of Azerbaijani gas, the remaining 10 bcm will be transported further westward each year.[1]

Although the initial throughput capacity of this pipeline is not too significant compared to some other – especially Gazprom-initiated projects - it is still a key milestone in those supply diversification endeavors that aim to curb Russia’s dominant role in gas exports to Europe. The SGC will be the first pipeline system enabling gas flows from the post-Soviet space to Europe through a transportation route functioning independently of Russian control.

The future geopolitical weight of this pipeline system will largely depend on its planned expansion, which opens a myriad of further questions. The most important of these questions is whether there will be a stable European demand for piped gas in an era of low prices for Liquid Natural Gas (LNG) prices being an attractive alternative option for many states. If the demand for piped gas is maintained, this begs questions over whether Azerbaijani gas would be sufficient to meet the expected demand. Moreover, another uncertain issue is the extent to which the “European Green Deal” decarbonization goals for 2050 will affect the EU’s overall reliance on natural gas in the upcoming decade. From a regional perspective, this pipeline system contributes to the energy security and diversification objectives of Georgia, Turkey, and Bulgaria. According to previously approved plans, in 2020, 92.7 percent of Georgia’s gas demand will be covered by Azerbaijan.[2]

Moreover, Turkey’s import structure has significantly changed in the past two years, and Azerbaijan has become its largest gas supplier. Between May 2018 and May 2020, Azerbaijan’s share in Turkey’s gas imports grew from 20 percent[3] to 33 percent.[4] This means that the SGC is a key lifeline for securing both Georgia’s and Turkey’s gas needs. Although SGC does not run through Bulgaria, the construction of the Interconnector Greece-Bulgaria (IGB) pipeline are underway.[5] The 180 km long IGB pipeline will connect SGC to the Bulgarian gas grid, which is an important move toward diversification for Bulgaria. The country will thereafter, be able to receive Caspian Sea gas through the new infrastructure. Bulgaria has also agreed to acquire a 20 percent share in Greece’s new LNG project in the North of the country, increasing Bulgaria’s options to shift away from Russian gas.[6] The gas that will arrive through the future Alexandroupolis LNG terminal into Greece would also be transported to Bulgaria through the aforementioned IGB pipeline.

Shifting Russia-Turkey gas relations

When it comes to characterizing the Black Sea region’s natural gas dynamics, Russia-Turkey bilateral ties are of critical importance. For many years, Turkey used to be the second-largest market for Russian gas after Germany. In 2018, Turkey accounted for almost 12 percent of Gazprom’s total gas export to countries outside the former Soviet Union.[7] However, in the past two years, the previously very stable and predictable Russia-Turkey gas axis has gone through a profound transformation. As of now, Russia’s share in Turkey’s gas imports has declined sharply. Since the first two sections of the SGC are now operational, Turkey stands to benefit from increasing its share of gas imports from Azerbaijan to the detriment of Russia. The increased availability of cheap LNG is also a favorable development for Turkey in its diversification endeavors. The following datasets indicate the transformation of Turkey’s import portfolio over the past two years:

May 2018 May 2019 May 2020
Volume (mSm³) Share (%) Volume (mSm³) Share (%) Volume (mSm³) Share (%)
Algeria 313.89 10.43 339.29 12.65 281.96 10.57
Azerbaijan 601.30 19.98 769.90 28.72 881.58 33.05
Equatorial Guinea 0 0 0 0 97.19 3.64
Iran 499.82 16.61 543.13 20.26 0 0
Nigeria 107.52 3.57 0 0 85.35 3.20
Norway 0 0 0 0 85.66 3.21
Qatar 133.23 4.43 133.90 4.99 520.20 19.50
Russia 1,353.06 44.97 894.90 33.38 339.95 12.74
Trinidad and Tobago 0 0 0 0 94.22 3.53
United States 0 0 0 0 281.29 10.55
TOTAL 3,008.82 100 2,681.12 100 2,667.41 100

1. Changes in Turkey’s natural gas import structure[8]

May 2018 May 2019 May 2020
Piped gas 81.57% 82.35% 45.79%
LNG 18.43% 17.65% 54.21%

2. Piped gas vs LNG: The changing share of Turkey’s imports[9]

Despite Russia’s shrinking share in Turkey’s gas imports, at the beginning of January 2020, the first section of the TurkStream gas pipeline was inaugurated, which creates a new and direct gas link between Russia and Turkey.[10] The first branch of this pipeline, which has a throughput capacity of 15.75 bcm per year, is designed to take over the so-called Western Route pipeline, a decades-old system that runs from Russia through Ukraine, Moldova, Romania, and Bulgaria to Turkey. With the help of TurkStream, Moscow can further its political goal of downgrading Ukraine’s role as a transit country within Russia’s gas export structure.

The planned second branch of the TurkStream is designed to deliver Russian gas through Turkey and the Balkans to Central Europe. However, the construction and completion deadlines for this infrastructure remains uncertain. In addition to the new TurkStream, there is another direct undersea gas link connecting Russia with Turkey in the form of the Blue Stream pipeline, which has an annual capacity of 16 bcm and has been operational for almost two decades. Concerning the future of Russia-Turkey gas relations, it should be stressed that both present market conditions, and Turkey’s well-advancing infrastructure development – including new pipelines and new LNG facilities – should help Ankara create a more balanced portfolio of gas imports. Previously, Russia was by far the most important supplier to Turkey. In the present circumstances, Russia remains set to lose market share in Turkey. It is unlikely to regain its previous position, given that Ankara has managed to establish a more diversified and flexible framework for its gas imports.

However, a major question for the future is whether Russia would be ready to offer more attractive gas prices when renegotiating the long-term gas sales and purchase contracts with Turkey after the expiration of the existing agreements in the years to come. Aside from price considerations, these contracts’ flexibility is also of crucial importance, especially concerning the so-called “take-or-pay” clauses that usually impose a significant burden on gas importers. Turkey’s significant shift to LNG imports, which has been evident over the past year, will serve as a useful bargaining chip that Ankara can use when negotiating new gas contracts with Russia in the future.

Ukraine-Russia gas transit regime

From the Black Sea region’s perspective, the gas dynamics between Russia and Ukraine are also important. Russia has traditionally exported significant volumes of gas westward through Ukraine. However, several conflicts have affected the gas relations between the two countries. In 2006 and 2009, payment disputes led Moscow to completely cut off gas supplies to Ukraine to pressure the latter. In 2014, Russia’s annexation of Crimea, as well as the outbreak of a protracted military conflict in Eastern Ukraine, resulted in a severe rupture in Russo-Ukrainian relations with a resultant impact on their energy relations. Ukraine stopped importing Russian gas in 2015 but has remained a vital transit route for Russian gas exports to the EU.[11]

Since the existing gas transit agreement between Russia and Ukraine was set to expire on January 1, 2020, there were significant questions over bilateral negotiations to agree on further gas transit through Ukraine. Nevertheless, on December 30, 2019, a new agreement was reached for five years. The document specifies that Ukraine will transit a minimum of 65 bcm of Russian gas in 2020 and a minimum of 40 bcm each year between 2021-2024.[12] This deal was undoubtedly an important step in maintaining Ukraine’s role as a transit country, with the contract entitling the country to receive around USD 7 billion in transit fees.[13]

By concluding the transit deal, the parties managed to secure a temporary status quo about their bilateral gas ties and the Northern Black Sea region’s energy security architecture. However, crucial questions remain over what will happen once the accord expires. Just a week after the Russo-Ukrainian agreement was concluded, the first section of the TurkStream pipeline that bypasses Ukraine was commissioned. Simultaneously , the construction work on the controversial Nord Stream-2 pipeline across the Baltic Sea was also progressing. The projects signify that Russia is still actively working toward diversifying its gas export routes, with ominous implications for Ukraine given the latter might quickly lose its transit revenues and geopolitical status as an energy transit country after 2024. It remains to be seen whether Russia would need any Ukrainian transit pipeline capacity after this date or instead bring the current gas flows to a complete stop.

Gas politics and development in Romania

Development of Romania’s offshore Black Sea gas reserves has long been on the agenda. However, the implementation of this goal has faced lengthy delays. In April 2020, it was reported that the final investment decision on the development of the most promising project called Neptun Deep had been postponed to 2021.[14] Although this project has been under preparation by OMV Petrom and ExxonMobil since establishing a joint venture in 2008, ExxonMobil confirmed in early 2020 that it was considering quitting the project.[15] In the meantime, the state-controlled gas company, Romgaz, announced that it would be interested in taking over ExxonMobil’s share. However, negotiations with ExxonMobil are blocked until 2021, according to Romgaz CEO, Adrian Volintiru.[16]

Based on prior estimates, the Neptun Deep project reserves amount to between 42 and 84 bcm of natural gas. Although this is a relatively small volume compared with most of the gas discoveries in the Eastern Mediterranean, the reserves’ successful exploitation would nevertheless substantially strengthen Romania’s regional position in relation to the Black Sea region’s energy dynamics. However, an offshore law passed by the Romanian parliament in 2018, and currently in force, poses significant obstacles to gas development projects in the Black Sea. New legislation would be essential to break the deadlock. . According to the country’s Minister of Economy, Energy, and the Business Environment, Virgil Daniel Popescu, the amendment of this law can be expected after upcoming parliamentary elections.[17]

Therefore, 2021 might be a turning point for the potential continuation of the Neptun Deep project. Concerning Romania’s participation in major gas transportation projects, previous plans to integrate the country in strategic initiatives, such as piping Caspian Sea gas to Europe, have never materialized.

At the same time, the start of construction works on the Bulgaria-Romania-Hungary-Austria (BRUA) gas pipeline and its possible finalization by the end of 2020 is a significant development. However, it should be stressed that the aforementioned suspension of Black Sea offshore gas production projects makes the purpose of the BRUA pipeline highly uncertain.[18] Despite its modest initial throughput capacity, this infrastructure is designed to provide a geo-strategically import gas export channel for Romania and counterbalance Russia’s role in the region’s gas supplies. Similar to Bulgaria, Romania’s Romgaz also considered the acquisition of a 20 percent stake in the Alexandroupolis LNG project in Greece, but later abandoned the idea in favor of the development of Romania’s LNG terminal project on the Black Sea coast, presumably by 2026.[19]

Conclusion

Besides constituting a geostrategic space where important bilateral energy security transactions – such as Russia-Turkey or prospective Azerbaijan-EU gas flows take place simultaneously – the Black Sea region also hosts a complex system of interactions and interdependences, in which the interests of suppliers and customers, as well as intermediary parties, can either coincide or clash. With the quest of diversification being one of the key factors that keep the region’s energy politics in motion, this strategy also provides an overarching framework for analyzing regional gas dynamics. In the Black Sea, suppliers aim to diversify their export routes, while importers are seeking to lessen their dependence on their suppliers by establishing alternative import structures.

Therefore, recent progress on the establishment of new major gas transportation channels across the region, such as the Southern Gas Corridor, TurkStream, or further LNG projects in the neighborhood, are initiatives that will redraw the region’s energy map to some extent. However, at the same time, such projects also reflect and sustain the rivalry between Russia and Euro-Atlantic states concerning their regional energy interests. Since Russia has lost a substantial market share in Turkey over the past two years, this will inspire Moscow to compensate for this by advancing more ambitious regional energy projects, such as the second stage of TurkStream.

Further Russian pipeline expansion into the Balkans and Central Europe will require the cooperation of these countries. Although the Russia-Turkey gas axis has previously been a key energy network for the region, current developments indicate that an ever-growing number of actors that can also pursue their objectives and shape the regional gas agenda. To this end, Romania and Bulgaria are set to play an increasing role in the region’s energy dynamics along with a non-Black Sea country, Azerbaijan, as an important gas exporter also capable of influencing regional energy developments. At the same time, Ukraine’s future status in the regional energy security architecture is likely to diminish, with geopolitical consequences that remain uncertain.

 
References: [1] ”6 bcm of natural gas delivered to Turkey as TANAP ramps up flow in 2nd operating year,” Daily Sabah, 11 June 2020 (https://www.dailysabah.com/business/energy/6-bcm-of-natural-gas-delivered-to-turkey-as-tanap-ramps-up-flow-in-2nd-operating-year) [2] ”Georgia to receive 92.7% of gas from Azerbaijan, 6.6% from Russia in 2020,” Neftegaz.ru, 30 December 2019 (https://neftegaz.ru/en/news/Transportation-and-storage/516078-georgia-to-receive-92-7-of-gas-from-azerbaijan-6-6-from-russia-in-2020/) [3] T.C. Enerji Piyasası Düzenleme Kurumu, ”Doğal Gaz Piyasası Aylık Sektör Raporu,” May 2018 (https://www.epdk.gov.tr/Detay/DownloadDocument?id=qgniV4rz17E=) [4] T.C. Enerji Piyasası Düzenleme Kurumu, ”Doğal Gaz Piyasası Aylık Sektör Raporu,” May 2020 (https://www.epdk.gov.tr/Detay/DownloadDocument?id=Nj954eJRL3g=) [5] Aimee Knight, ”Over 70 km of line pipes delivered for Greece-Bulgaria gas interconnector,” World Pipelines, 18 May 2020 (https://www.worldpipelines.com/project-news/18052020/over-70-km-of-line-pipes-delivered-for-greece-bulgaria-gas-interconnector/) [6] ”Bulgaria to acquire 20% of Alexandroupolis LNG project in Greece,” New Europe, 9 January 2020 (https://www.neweurope.eu/article/bulgaria-to-acquire-20-of-alexandroupolis-lng-project-in-greece/) [7] Gazprom Export, ”Delivery Statistics,” (http://www.gazpromexport.ru/en/statistics/) [8] T.C. Enerji Piyasası Düzenleme Kurumu, ”Doğal Gaz Piyasası Aylık Sektör Raporu,” May 2018; and T.C. Enerji Piyasası Düzenleme Kurumu, ”Doğal Gaz Piyasası Aylık Sektör Raporu,” May 2020 [9] Ibid. [10] Gazprom, ”TurkStream gas pipeline officially launched in grand ceremony,” 8 January 2020 (https://www.gazprom.com/press/news/2020/january/article497324/) [11] Tim Daiss, ”Ukraine Celebration: One Year Without Russian Gas,” Forbes, 27 November 2016 (https://www.forbes.com/sites/timdaiss/2016/11/27/ukraine-celebration-one-year-without-russian-gas/#7ae00f0862f4) [12] Aura Sabadus, ”Ukraine, Russia sign 5-year gas transit agreement,”ICIS, 31 December 2019 (https://www.icis.com/explore/resources/news/2019/12/31/10456279/ukraine-russia-sign-5-year-gas-transit-agreement) [13] Ibid. [14] ”FID on Romania’s Neptun Deep gas project delayed to 2021,” Kallanish Energy, 30 April 2020 (https://www.kallanishenergy.com/2020/04/30/fid-on-romanias-neptun-deep-gas-project-delayed-to-2021/) [15] ”Exxon Mobil confirms may exit Romanian offshore gas project,” Reuters, 8 January 2020 (https://www.reuters.com/article/us-romania-energy-exxon/exxon-mobil-confirms-may-exit-romanian-offshore-gas-project-idUSKBN1Z70XP) [16] ”Romanian Romgaz is still interested in stake in Neptun Deep gas project,” Serbia Energy, 15 May 2020 (https://serbia-energy.eu/romanian-romgaz-is-still-interested-in-stake-in-neptun-deep-gas-project/) [17] ”Romania will amend the offshore hydrocarbon law after the parliamentary elections,” Serbia Energy, 3 June 2020 (https://serbia-energy.eu/romania-will-amend-the-offshore-hydrocarbon-law-after-the-parliamentary-elections/) [18] ”Delayed Romanian Black Sea Gas Projects Pose Risk to Pipeline,” Pipeline & Gas Journal, 21 July 2020 (https://pgjonline.com/news/2020/07-july/delayed-romanian-black-sea-gas-projects-pose-risk-to-pipeline) [19] ”Romania: LNG terminal on Black Sea coast in next six years,” Serbia Energy, 8 May 2020 (https://serbia-energy.eu/romania-lng-terminal-on-black-sea-coast-in-next-six-years/)  
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