Russia, Ukraine to need new gas transit deal going beyond 2019, says IHS Energy analyst

Oil&Gas Materials 4 August 2015 18:02 (UTC +04:00)

Baku, Azerbaijan, Aug.4
By Elena Kosolapova - Trend:

There will have to be a new gas supply and transit deal between Russia's Gazprom and Ukraine that goes beyond 2019, Andrew Neff, principal analyst with the IHS Petroleum Sector Risk team told Trend Aug.4.

Earlier, Russia's Energy Minister Alexander Novak and Gazprom's head Alexey Miller said that Russia will suspend gas transit to Europe through Ukraine from 2019. Following this, gas will be delivered through the Turkish Stream to Turkey's border with EU.

Gazprom has already walked back from those claims, with South Stream canceled and Turkish Stream delayed, there's no real option for Gazprom to re-direct all of the gas by 2019 that currently transits Ukraine, according to Neff.

"Both sides need to recognize the reality of interdependence - they can continue to try to reduce dependence on each other, but the reality is that there are no alternatives to fully replace the other until 10 years down the line still -complete independence from each other by 2019 is not realistic," he added.

As for the implementation of the Turkish Stream project, the expert said that right now, it cannot really proceed until there is some clarity on the Turkish political front.

"After the June election [in Turkey] President Erdogan has issued his call for a formation of a new government, and there is a 45-day window (starting from his announcement, which was July 9) in which the parties can reach an agreement," said Neff.

The expert added that the ruling Justice and Development Party lost its majority status, but whether the party can form a coalition government or seeks to proceed as a minority government remains to be seen.

"If there's no government in place after the end of the 45-day window, Erdogan can call for new elections, which will extend the period of uncertainty (and there's no guarantee that a new round of parliamentary election will produce a result that is more favorable to him)," he said.

Meanwhile, the Russians simply have to wait it out, which is why they had to relent and give up the idea of proceeding with construction (and had to cancel the contract with Saipem rather than continuing to pay daily rates for the pipelaying vessel that they couldn't actually use), according to Neff.

Gazprom cancelled the contract with Italian Saipem on pipe-laying of Turkish Stream in early July. The company said this decision was made due to the "impossibility of reaching an agreement on many working and commercial issues in the implementation of the Turkish Stream project".

Moreover, it was reported that the talks with other prospective contractors on laying the first branch of the Turkish Stream will start soon.

The expert reminded that Turkey wants a further reduction in its gas import price, not simply tied to the lower oil prices at the moment (from oil-indexed, time-lagged contracts with Gazprom), but an actual change in the pricing formula that will ensure lower prices for Turkey if it consents to the Turkish Stream pipeline.

"I don't expect to see an agreement here until and unless there's a new government in place in Turkey, but I do think that Gazprom will have to consent to a price reduction to get Turkey/BOTAS to agree to Turkish Stream as a future option," Neff added.

"Not in the short-term, for the reasons mentioned above - without a new government, Turkey can't agree to any deal - the earliest we would see a deal at this point appears to be late 2015/early 2016," he added.

In December 2014, Russia terminated its South Stream project, which was planned run through the Black Sea and Bulgaria and deliver gas to the Balkan states, as well as Hungary, Austria and Italy.

This cancellation made way for a new project, dubbed the Turkish Stream pipeline. The new pipeline will pass through Turkey, with a gas hub on the Turkish-Greek border for further distribution to consumers in southern Europe.

The offshore pipeline of the Turkish Stream will consist of four parallel pipelines running through the Black Sea. The pipelines will enter the water near Anapa, on the Russian coast, and come ashore on the Turkish coast some 100 kilometers west of Istanbul, near the village of Kiyikoy.

From Kiyikoy, an underground pipeline will be developed connecting the offshore section to the existing gas transportation system of Turkey at Luleburgaz. The route will reach Turkish town of Ipsala as a final point.


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