The price “ceiling” put the implementation of the Russian-Turkish gas project on the verge of failure

Moscow and Ankara thought about the reality of construction plans

The introduction by the European Union of limit exchange quotations for gas from February 15, 2023 is forcing energy market participants to make adjustments to their plans. One of the projects that risk losing relevance in the presence of a price ceiling is the creation of a gas hub in Turkey, through which Russia intends to establish an alternative channel for exporting energy resources to Europe in the coming years.

Recall that in mid-October, Vladimir Putin proposed creating a “largest gas hub” in Turkey for deliveries to Europe. Ankara readily responded to the initiative of the Russian president. His Turkish counterpart Recep Erdogan immediately named a suitable location for the future energy cluster – an area in Eastern Thrace near Istanbul.

In the near future, Gazprom and the Turkish Botas should prepare a plan for creating a new gas cluster. To all appearances, there will not be any big difficulties with working out the details of creating an energy hub. Work on the project is being actively carried out, which was recently confirmed by Deputy Prime Minister of the Russian Federation Alexander Novak. According to him, this gas hub may have several suppliers of raw materials in addition to Gazprom, in particular, Algeria, Qatar and Azerbaijan.

According to Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund, the parameters of the unrealized South Stream gas line, which Bulgaria abandoned in 2016, can be used to implement the project. The infrastructure of this pipeline has already been successfully used to expand export supplies from our country via the Turkish Stream launched two years ago. However, in order to create a full-fledged hub, additional transport lines will also have to be built: first, stretch the land section from the fields in Yamal to Anapa, and then lay the sea part from the Russian resort town to the Turkish coast. “As a result, the launch of the gas hub will take place no earlier than in three or four years, and investments in its creation may amount to about $10 billion,” the analyst believes.

As Vladimir Putin stated earlier, a large-scale connection to the gas hub in Turkey will allow our country to transfer the supply of hydrocarbons from the northern routes lost due to Western sanctions to the southern direction. “The capacity of the Black Sea pipelines will be lower than that of the Baltic branches of the Nord Streams – so far, up to 31.5 billion cubic meters per year can be pumped through the Turkish Stream. Theoretically, it can be increased to 60 billion cubic meters, but even in this case it will be inferior to Nord Stream, whose total capacity was 110 billion cubic meters. However, due to deliveries via the southern highways, Russia will be able to partially eliminate the problems with the delivery of raw materials to their destination, since interaction with the Turkish cluster will allow selling hydrocarbons directly at the border, shifting transport risks onto the shoulders of the buyer,” believes the Executive Director of the Capital Market Department of IC IVA Partners » Artem Tuzov.

But the gas hub project in Turkey also has a downside. Firstly, Turkish negotiators have already beaten out a significant discount from Russian partners on gas supplied through their distribution point – and initially they wanted to receive “blue fuel” in 2023 for free in general in the form of a kind of advance payment for future energy cooperation. Secondly, the transit of Russian energy resources with the help of Ankara will be profitable and competitive only if there are end buyers in Europe who could guarantee the completion of transactions and make an advance payment for supplies. As Erdogan promised earlier, his country’s gas hub will independently form the cost of raw materials, at least in its region. However, in order to pump hydrocarbons towards the West, producers and transit countries one way or another will have to correlate their cost with the imposed European restrictions, which Russia opposes.

“At the first stages of the gas hub’s operation, prices will apparently be set below the “ceiling” agreed upon by the Europeans, but when the cost of a thousand cubic meters exceeds $2,000, prices on the Turkish site may be significantly higher than on European exchanges. Moreover, the EU countries will still have to pay,” predicts TeleTrade analyst Alexei Fedorov. — For now, we can continue to hope that in the future the new gas cluster will become a relevant tool for circumventing European restrictions. Turkey is not part of the EU, so the “ceiling” of prices should not apply to the volumes sold through this hub.”

Now it is difficult to predict how the experiments of European countries to intervene in market regulation through the price “ceiling” will end. Nevertheless, Fedorov believes, “if a high level of diversification of supplies can be created on the Turkish site, which, in addition to Russia, Azerbaijan, Iran and Turkmenistan can join, then we will get quite competitive, and therefore effective pricing.”