By Vladimir Socor
Russian Prime Minister Vladimir Putin and Gazprom chief executive officer Aleksei Miller announced on December 30 that Turkey has authorized the construction of Gazprom's South Stream pipeline through Turkey's Black Sea exclusive economic zone, bypassing Ukraine en route to central Europe.
Turkey's Energy Minister Taner Yildiz had handed the South Stream permits to Putin in Moscow two days earlier. Putin thanked Turkish Prime Minister Recep Tayyip Erdogan for "this wonderful Christmas gift to Russia".
South Stream is nominally designed for up to 63 billion cubic meters (bcm) of gas annually, diverting transit from Ukraine and monopolizing markets and pipelines in Europe. The underwater section in the Black Sea is supposed to be built in four consecutive stages, each at some 15 bcm annually. Turkey's Black Sea exclusive economic zone is the only possible route for South Stream from Russia to Europe (landfall point in Bulgaria).
Ankara's "gift" is twofold. Its go-ahead to South Stream strengthens Russia's hand against Ukraine and Europe. Although non-viable as a gas project in its own right, South Stream is a major political tool for expanding Russian influence in Ukraine and Gazprom's positions within the European Union.
Ukraine regards South Stream as a direct threat to Ukraine's own gas transit system, the country's number one national asset. That system carries some 110-120 bcm of Russian gas annually to Europe. The Ukrainian government takes the South Stream bypass threat at face value. It fears that Russia would shift its gas exports into South Stream, reducing the Ukrainian system to semi-idleness, loss of value and ultimate bankruptcy, unless Ukraine yields control of its transit system and even internal distribution networks to Gazprom.
Moscow proposes a deal along those lines to Ukraine. All Ukrainian governments irrespective of political color have resisted such a deal, until now. Turkey's sudden green light, however, has suddenly increased the credibility and urgency of the South Stream bypass threat to Ukraine. It undercuts Ukraine's bargaining position, with potentially devastating effect.
The Putin-Miller announcement on TV and follow-up actions can precipitate a Ukrainian cave-in at the January session of parliament. There, legislation is being drafted to allow Gazprom (in one form or another) to control Ukrainian pipelines. The government hopes that Russia would in that case renounce South Stream, continue using Ukraine's transit system to Europe full-scale, and reduce the gas price to Ukraine, in return for control of pipelines.
Turkey's move discourages the Ukrainian public from resisting a negotiated handover of pipelines to Russia. With South Stream poised to start in Turkish waters, many Ukrainians will conclude that a deal acceptable to Russia is preferable to no deal, disuse and decay of Ukraine's pipelines.
Earlier, on December 22, Ukrainian President Viktor Yanukovych and the government had held talks with Erdogan and the Turkish government in Ankara, inaugurating the two countries' "High Level Strategic Council", a Turkish initiative. Yanukovych remarked that "diversification of energy supplies, for Ukraine and Turkey, is our strategic goal that we will always be pursuing".
Ukraine and Turkey, he said, will establish a permanent joint working group on energy cooperation ... "And any practical solutions on strategic projects will certainly not be a secret. As soon as they are agreed upon, we will announce them."
On December 23, Ukrainian Minister of Foreign Affairs Kostyantin Hryshchenko was a guest keynote speaker at the Turkish Foreign Affairs Ministry's annual general meeting, by invitation from his Turkish counterpart Ahmet Davutoglu. They emphasized "unprecedented opportunities for Turkey-Ukraine strategic partnership in the Black Sea region.
Did Turkish leaders inform their visiting Ukrainian counterparts about Ankara's imminent decision for Russia on South Stream? When that became public, Hryshchenko Twitted to complain that South Stream "is a political, not an economic project".
Yildiz claimed credit for Turkey opening this gas route to help Europe. On this basis, he urged Brussels to open negotiations on the energy chapter in the dormant association agreement with Turkey. Sarcastically, he claimed that South Stream, too, is a part of the EU's Southern Gas Corridor.
Ukraine had barred South Stream from its own Black Sea exclusive economic zone. There is no corridor available between Ukraine's and Turkey's zones; they are directly adjacent to each other. Thus, Russia could only launch this project in Turkey's zone with Turkish consent.
Ankara took several years to bargain with Moscow over a suitable reward. In August 2009, Erdogan and Putin agreed that Turkey would allow South Stream if Russia guaranteed oil supplies to Turkey's Samsun-Ceyhan pipeline project. That line would cross Anatolia north-south, from the Black Sea to the Mediterranean, anticipating massive oil supplies from Kazakhstan via Russia.
The scheme involved lifting the oil in Russian tankers at Novorossiysk for delivery across the Black Sea into the planned Samsun-Ceyhan pipeline. That plan proved premature at the very least in 2010-2011. Ankara has now accepted a far lesser reward for allowing Russia to proceed with South Stream.
Moscow has apparently agreed to minor concessions on the price of gas supplies to Turkey for 2012, as a one-off gesture. The supplies seem to be governed by four different contracts with specific volumes. Gazprom and Turkey's state company Botas signed the amended contracts on December 28 in Moscow as Yildiz displayed the South Stream permits to Putin. Pricing is not the only issue, however. Take-or-pay obligations pose a further problem for Ankara.
Turkey falls consistently short of taking the full volumes of Russian gas stipulated in take-or-pay contracts. Thus, Turkey imported 18 bcm of gas in 2010, and apparently a similar amount in 2011, instead of the 30 bcm contracted annually with Russia. Such shortfalls are possible and perhaps even unavoidable because Turkey's gas market is oversubscribed. Not all of that 30 bcm is take-or-pay. But Moscow apparently tolerates the shortfalls from the take-or-pay volumes, without requiring Turkish payment for volumes not taken.
This may well be another part of the undeclared tradeoff to allow South Stream in Turkey's exclusive economic zone. Otherwise, Turkey receives no direct advantage or compensation from this project. Turkey is not entitled to transit fees or gas volumes if the pipeline is built, which remains an uncertain proposition in any case.
However, Ankara's go-ahead enables Moscow to increase pressure on Ukraine, and to sabotage the EU's energy policy by enlisting Gazprom's European allies into the South Stream project....
By Pavel Korduban
Kiev's hopes for cheaper Russian gas from January 1 have failed to materialize. Gas talks are continuing, and there are signs that Moscow will agree to cut the price of gas in exchange for a share in a consortium to be set up to operate Ukraine's pipelines carrying Russian gas to the European Union.
The main dispute is about the size of this share, as Russia wants to obtain control of Ukraine's gas transportation system, while Kiev hopes to dilute Gazprom's participation in the pipelines with the EU's help.
Ukrainian President Viktor Yanukovych and Prime Minister Mykola Azarov pinned high hopes on their meetings with the Russian leadership in Moscow on December 20, and the Ukrainian dailies Kommersant-Ukraine and Segodnya even reported on December 21 that Azarov would announce a new gas price later that day.
Ukraine hoped to lower the price from the US$400 per 1,000 cubic meters of gas, which it paid Gazprom in the fourth quarter of 2011, to between $210 and $230. In this case, the budget of the state-subsidized oil and gas company Naftohaz Ukrainy for next year might have been balanced and the International Monetary Fund (IMF) may have unfrozen its $15 billion assistance package to Ukraine. The government's failure to improve the situation at Naftohaz was one of the main reasons behind the IMF's refusal to issue loans to Ukraine last year.
However, Azarov told his ministers after returning from Moscow on December 21 that the talks with Russia had been deadlocked. He said the government could not accept Russian conditions. As a result, the government submitted to parliament a state budget bill for 2012, based on the gas price formula, which has been in force since 2009, and parliament promptly passed it.
The formula suits Russia, but it does not meet the aims of the Ukrainian government, which has been trying to persuade Russia to either change it or give a new discount in addition to the reduction of $100 per 1,000 cubic meters that Ukraine received in 2010 in exchange for extending the Russian Black Sea Fleet lease of the Sevastopol naval base by 25 years until 2042.
According to the current formula, which depends on oil prices, Ukraine will have to pay $416 per 1,000 cubic meters of Russian gas on the average this year.
Kiev believes that $250 would be a "fair price" this year, as Yanukovych told a press conference on December 21. He called the price of $416 "unaffordable". Yanukovych reiterated that Ukraine was aiming to set up a tripartite gas consortium to run its gas pipelines, which he said would be the best solution to the challenge of upgrading Ukraine's ageing pipelines.
Yanukovych said the Russian Nord Stream and South Stream gas pipelines would diminish the importance of Ukraine's pipelines for Russia and the EU, and he complained that Ukraine was not treated as an equal partner by either Russia or the EU in the planned South Stream project. During the Ukraine-EU summit two days earlier, Yanukovych rebuked the EU for not opposing South Stream, which bypasses Ukraine, and said Kiev was waiting for an answer from Brussels on whether the EU was ready to participate in a consortium to manage Ukraine's pipelines.
On December 22, Nezavisimaya Gazeta cited sources from the Ukrainian ruling Party of Regions as saying that Kiev was about to agree to a bilateral consortium with Russia in mid-December but Brussels, with which Kiev hopes to sign an association agreement, rejected the plan. As a result, no agreement was concluded with Russia; an agreement on Moscow's conditions would have not only left Ukraine without control over its own pipelines, but apparently also jeopardized Ukraine's European integration.
At the same time, the ruling party looks set to remove the legal ban on selling any shares in the pipelines, which was passed by parliament on 2007. With the ban in place, any agreement on modernizing the pipelines with Russia or Europe is hardly possible. The Ukrainian Foreign Ministry's spokesman, Oleg Voloshyn, said it would be much better to have full pipelines not owned by the state than empty state-owned pipelines.
Gazprom's CEO, Aleksey Miller, told Russian Prime Minister Vladimir Putin on December 30 that Ukraine evaluated its gas transit network at $20 billion and wanted gas price discounts totaling $9 billion per annum in exchange for a share in it. In addition, several billion dollars would be needed to upgrade Ukraine's pipelines, said Miller. Putin instructed Miller to continue talks with Kiev in order to set up a gas transportation consortium.
During a press conference on December 21, Yanukovych estimated the upgrade costing $5 billion to $7.5 billion. The next round of gas talks with Russia is scheduled for January 15. By that time, the majority in parliament, which is loyal to Yanukovych, will try to scrap the 2007 ban.
The EU has not thus far displayed any official interest in the consortium, leaving Kiev one-on-one with Moscow, as in January 2009, when the then prime minister Yulia Tymoshenko had to accept the price formula imposed by Gazprom.