Serbia starts, Hungary stops TurkStream Two Project?

Serbia starts, Hungary stops TurkStream Two Project?
Photo: FRE\RL

Without waiting for Russia’s decision on whether to build the second, so-called European leg of the TurkStream, on Wednesday, May 22, Serbia began building its 403 kilometers long section of the pipeline, in the province of Vojvodina, some 80 kilometers north from Belgrade, taking the risk of the costs that could amount close to two billion euro.

Roughly 7,000 tons of pipes arrived on May 20 with and some 50 000 tons more are expected to be delivered, the country’s energy minister Alexander Antic said in a televised interview. Serbia plans to complete the construction of the pipeline from the border with Bulgaria to the border with Hungary by December 18, Antic said.

The largest investment in Serbia opens without an official ceremony

“Nobody saw how works on TurkStream started – without an official ceremony, without TV cameras or government representatives”, independent Belgrade daily Danas headlined. “In silence”, reported Radio Free Europe, the only media that has had the opportunity to record the works so far in the village of Shajkash. This is bizarre in a country where there is hardly an investment of a few dozen millions, not to mention of two billion Euros, that can take place without the presence of the Serbian President Aleksandar Vucic and dozens of journalists.

By the way, let us be reminded that a little over a year ago Vucic was present in Turkey at the opening ceremony of the Trans-Anatolian Natural Gas Pipeline (TANAP) for the transportation of non-Russian, Azerbaijani gas to Turkey and from here via Greece and Albania to Europe.

The TurkStream project consists of two pipelines across the Black Sea, the first of which will serve Turkey with a capacity of 15.75 billion cubic meters, while the second line is planned to serve Europe.

The less probable route for the second leg of TurkStream is through Greece crossing the Ionian Sea and coming ashore in Italy. In the absence of any comment from Gazprom, Executive Director of the Skolkovo Energy Center Vyacheslav Mischenko told reporters in May at an energy conference in Greece that Athens has not implemented the initiative on the TurkStream pipeline extension through Greek territory from Turkey.

“We know that the TurkStream 2 will run through the territory of Bulgaria, and the Bulgarian side has done much to ensure that. Bulgaria will become a hub to transit Russian gas,” he said.

The beginning of the construction has neither been noted so far on the website on the joint venture of Gazprom and Serbian state-owned SrbijagasGastrans d.o.o., a fully-owned subsidiary of Swiss-based South Stream Serbia AG, licensed to administer the construction of the pipeline running from the Bulgarian border to Hungary.

As Gazprom owns a 51% stake in South Stream Serbia, while Srbijagas holds the remaining 49%, it is to assume that the construction of the gas pipeline could not start without the consent of the Russian company. However, analysts could not have missed that Gazprom has not made, or announced so far a decision regarding the second line of TurkStream. According to Gazprom officials, it intends to build the European leg, but not until it receives clear guarantees from the European Union.

Two questions

Apart from the facts we currently have, there are some questions regarding TurkStream 2 which cannot be answered at this stage. Two of them stand out when it comes to the final fate of the project, regardless of the work that started in Serbia.

The first question relates to the effectiveness of measures and actions of the Energy Community (EnC) Secretariat which represents the European Commission in non-EU member states of the Energy Community when it comes to the implementation of the European energy legislation.

The head of the EnC Secretariat Janez Kopac told Serbian agency Tanjug in May that the Serbian energy regulator AERS, giving the exemption to Gastrans from the third party access to the future gas pipeline, failed to comply with the conditions for the exemption from the Third Energy Package.

“We gave the green light for that project under certain conditions that would, in our opinion, lead to greater competition on the gas market in Serbia,” Kopac said. “We are now in talks with the Serbian Ministry of Energy about it, in a way, voluntarily adopting additional measures to overcome an AERS formal decision, which was not good in our opinion,” he said.

The fact that Serbia started building the pipeline is a clear answer to the first question.

The second relates to the long-term economic impact of the project. Not as much as to whether these countries are able to use this gas well economically, as to whether Gazprom will have motives to invest in a pipeline if it does not provide a market for exported natural gas.

The statement of the Hungarian Foreign Affairs Minister Peter Szijjarto that his country could decide to replace the Russian gas with Romanian gas, if the US-Austrian Exxon Mobil-OMV alliance adopts a final investment decision on the development of a large gas deposit in Romania in the offshore project Neptun Deep in the Black Sea by September passed quite unnoticed.

Exxon Mobil can be the game changer in the energy supply of Europe. But they should finally make their final investment decision,” Szijjarto told Reuters during an interview in Houston where he was opening a consulate office. “If they don’t make that decision until September, I will have to make another long-term agreement with the Russians.” Hungary’s long-term gas supply contract with Russia expires in 2021.

At the end of last year, OMV and Exxon postponed the adoption of a final investment decision for this project until Romania corrects several controversial gas taxation regulations, in particular the one that 50% of the Neptune gas produced should be sold on the Romanian market.

Romania’s Black Sea reserves pose a potential challenge to Gazprom’s dominant role supplying Central and Eastern Europe, according to consultancy house Deloitte. Neptun Deep has reserves of 42 to 84 billion cubic meters of gas and OMV’s Romanian subsidiary OMV Petrom and Exxon have planned production of six billion cubic meters a year since 2020. With this, the total Romanian gas production would be 18-20 billion m3, with 11 billion in consumption in Romania.

Hungary has previously expressed its willingness to buy virtually all gas produced from Neptune Deep for its own needs.

September brings answers

September is also the announced date when Russia, Ukraine, and the EU at the final trilateral meeting should agree on a possible continuation of the transit of Russian gas through Ukraine. The fact remains that Gazprom is still mostly dependent on Ukraine’s infrastructure for the majority of its gas sales to European customers. On the other hand, it is in Kiev’s interest to maintain its status as a transit country, which provides its significant strategic value and generates $3 billion in annual transit fees for the state’s coffers.

The executive director of the Ukrainian company Naftogaz, Yuriy Vitrenko, announced recently that in the upcoming negotiations Naftogaz plans to offer Gazprom to book 60 billion cubic meters of transit capacity of the Ukraine gas transmission system for a period of ten years. He noted that the company would provide a capacity of 90 billion cubic meters per year. Based on this, 30 billion cubic meters will remain free capacity available for other companies’ bookings.

Despite the possibility of cancellation of deliveries through Naftogaz’ infrastructure, it remains highly unlikely for Russia to choose this option because it would also significantly damage its reputation as a reliable supplier, and certainly will give a key argument to opponents of the construction of the North Stream 2 pipeline.

The conclusion regarding the second question can be reduced to simple mathematics with a few if’s: If Exxon and OMV adopt by September a final investment decision for Neptun Deep project; if Hungary decides in September not to sign a new long-term contract with Gazprom for deliveries starting from 2021; if Gazprom agrees with Naftogaz in September on extending the contract for gas transit through Ukraine to the EU after 2019, and therefore gets a green light for Nord Stream 2 pipeline, Gazprom will provide a route for 170 to 200 billion cubic meters (bcm) of gas to Europe, and lose an immediate economic justification for the investment in the (11,2 bcm) TurkStream Two extension.

Therefore, it was premature for fanfare, Vucic and cameras in the Serbian village of Shajkash.

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