Ukraine & Turkey: The European energy coup

The benefits to Ukraine and Turkey are significant:

Benefits to Ukraine

  • Independence from Russia
  • Greater access to the European Union, with Kiev able to be assertive on the terms
  • Political leverage in Washington, which is keen to see a Turkey-Ukraine LNG deal put through, especially one focused in part on Qatari gas as opposed to Iranian gas
  • Control of the European market for LNG
  • Economic prosperity by giving an edge to heavy gas-reliant industries
  • Strategic positioning and leverage that goes beyond Europe and into the Middle East/Gulf and especially between competitors Qatar and Iran

Benefits for Turkey

  • Control of the European LNG market
  • Rise as an energy hub between the Middle East and Europe, not just an energy transit country
  • Political leverage over Europe and access to the EU on Ankara's terms
  • Political leverage with Washington
  • Strategic positioning as an energy hub that renders Turkey the decision-maker from Europe to the Middle East/Gulf
  • Diversification of supplies, with less reliance on Russian and Iranian deliveries, including from emerging African powerhouses such as Angola and Ghana

Timing is important, and the window of opportunity should be taken advantage of before new pipelines come online and while two of the world's biggest gas players—Qatar and Iran—are in a desperate race to grab the European market. If an LNG agreement is solidified within this timeframe, it will dictate rather than serve as an afterthought to Europe's gas future.

In this respect, Ukraine and Turkey together already have a certain amount of leverage at the negotiating table, particularly with respect to Qatari supplies, which are very eager to get to the wider European market. Timing is critical as Iran, suffering under economic sanctions that has caused widespread unemployment and a recession (the under 35 age group is thought to have unemployment of over 40%; a sobering thought in a period of Arab Springs) is attempting to have access to markets from which it currently is cut off from; and there is no better indication of this than the British government's current reconsideration of the embargo on BP's joint venture with the Iranian National Gas Company in the Rhum field. One additional factor in the conflict in Syria was, Qatari-versus-Iranian plans to run a pipeline through the country to Turkey, eyeing the European market.

In terms of critical timing, Ukraine and Turkey would be better positioned strategically were they to strike an LNG deal before the beginning of Phase Two production at Azerbaijan's Shah Deniz field, and before TANAP begins operations. The price of LNG is more volatile due to the Asian market, and it would be more beneficial for LNG to secure this market, while natural gas futures for Shah Deniz supplies, which have already been contracted out for 25 years to nine European companies.

Another Black Sea LNG project—the Azerbaijan-Georgia-Romania Interconnector (AGRI) project—is also being delayed due to the perception that European demand is not ready for this project. This is a false perception that is driven by the Asian-driven LNG price spikes and the diversion of cargoes away from the European market. AGRI at present is languishing as it waits for the market to develop. This is an opportunity for a Ukraine-Turkey LNG agreement. The first to develop will control the market.

The AGRI project is hoping to transport natural gas from the Caspian region (primarily Turkmenistan) to Europe designed as a part of the Southern Corridor and as the shortest direct route for Caspian gas to European markets. If realized, AGRI would transport Azerbaijani LNG from Georgia, across the Black Sea, to an LNG terminal planned for construction on the Romanian Black Sea coast, then piped through to Hungary through the interconnector with Romania and then further into Europe.

Azerbaijan, Romania and Georgia signed the Memorandum of Understanding for this project in April 2010, but not much has happened since then. The project requires the construction not only of a regasification terminal in Romania, but also a liquefaction plant in Georgia.

Competition for this strategic positioning will come from the development of Mediterranean LNG projects, which could also be a game-changer for Europe. Potential projects here (Cyprus and Israel, first and foremost) remain uncertain, but if realized they would offer gas to high-demand Southeastern European markets with attractive pricing. In the absence of an LNG agreement between Ukraine and Turkey, Cyprus and Israel have the potential to capture the European market from the Mediterranean side. Timing is critical and the advantage will go to the players who recognize the opportunity to fill the long-term LNG supply gap that has been created by the diversion of cargo to Asia. Ukraine, has the potential to fill this gap and control the market.

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