The Geo-Politics Of Natural Gas To Europe – Analysis

In January 2022, as Russian troops were massing on Ukraine’s border, the U.S. government withdrew support for the EastMed natural gas pipeline, claiming the project conflicted with the environmental goals of the administration of U.S. President Joe Biden, and created tensions in the region.

The pipeline, set to be completed by 2025, was a €6 billion project by Israel, Cyprus, and Greece, that would have sent 10 billion cubic meters (BCM) per year of gas from fields offshore Israel and Cyprus to Europe via a 1,900-kilometer pipeline.

EastMed avoided Turkey, which has been an irritant to the U.S., NATO, and the European Union (EU), and which wants to become the regional energy hub as it hosts the TurkStream natural gas line that supplies up to 31.5 BCM of gas to Turkey, and South and Southeast Europe annually. Turkey currently has two crude oil import pipelines: the Baku-Tbilisi-Ceyhan (BTC) pipeline from Azerbaijan and a pipeline from northern Iraq to Ceyhan, Turkey. And significant volumes of crude oil and petroleum products from Russia, Azerbaijan, and Kazakhstan transit the Turkish Straits for Europe.

The withdrawal of U.S. support doomed the project even though it was an EU Project of Common Interest. An EU-funded study reported “the EastMed Project is technically feasible, economically viable and commercially competitive.”

Turkish President Recep Tayyip Erdoğan took a victory lap, and crowed, “This business cannot be done without Turkey. Because if [gas] is to be transferred to Europe from here, it will only happen through Turkey.”

The U.S. cancelled the project in part to reduce tensions but only weakened and aggravated Greece and encouraged chest-thumping on Erdoğan’s part, ensuring it’ll be tough sledding if Turkey doesn’t get its way in the future.

In October, GazProm CEO Alexei Miller said Russian gas could be redirected to Turkey if the infrastructure was in place, referring to the cancelled South Stream Gas Pipeline that was to send Russian natural gas across the Black Sea to Bulgaria and onward to Greece, Italy, Serbia, Hungary, Slovenia, and Austria.

According to Miller, “I’d like to remind you that we have the experience of preparing for the implementation of the South Stream project, which was originally planned to have a capacity of 63 billion cubic meters [per year]. Therefore, if we’re talking even about the technical documentation for the development of the route, for South Stream – all this was already done at one time.” 

Erdoğan then said, “There will be no waiting” to a proposal by Russian President Vladimir Putin to export more gas to Turkey via TurkStream and to create a Russian gas hub for Europe in Turkey. The U.S. government expressed its opposition, a spokesman saying, “…we have continued to urge our allies to take steps to diversify their energy sources to reduce energy reliance on Russia. And in the case of Turkey, we are working with them closely to assist in their own efforts to enhance energy security in the long term.”

Putin and Erdoğan put their experts to work fleshing out the idea which will face challenges aplenty. Though the hub, like NordStream, could offer gas to Europe at lower prices than liquified natural gas imported from the U.S., Washington will work to kill the project to hurt Russia and Turkey, to preserve the profits of U.S. gas sellers, which have increased exports to France by 421% during the first eight months of 2022, and to weaken Europe as an economic and political competitor to the U.S.

Perhaps finally realizing what is happening, French President Emmanuel Macron criticized the U.S. (and Norway) for selling gas to Europe for more than 3-4 times domestic U.S. rates.

Newly-elected Italian Premier Giorgia Meloni approved concessions to drill for gas in the Adriatic Sea to back up her predecessor’s April deal with Algeria to increase gas imports 40%. Will the new government be ready to talk to Turkey and Russia about new gas sources in order to bring prices down? Perhaps Meloni can enlist her predecessor, Silvio Berlusconi, to leverage his friendship with Putin to ensure Italy gets in on the action.

On the oil side, recently Ukraine announced the suspension of oil supply to Hungary via the Druzhba (“Friendship”) pipeline due to a “voltage drop.” The Hungarian oil and gas company, MOL, announced it has sufficient reserves, but Hungarian Prime Minister Viktor Orban may recall his recent meeting with Turkey’s Erdoğan and start exploring energy options for Hungary.

An Orban-Erdoğan lash up, which will link the European Commission’s most detested (read “independent”) political leaders may motivate the EU to make the approval process difficult, though spiteful behavior will ultimately harm Europe.

Other challenges will include resolving what the two sides mean by “hub.” 

Does that mean a straight pass-through of Russian gas to Europe, or a market place to set spot and future natural gas prices, like the Henry Hub in the U.S.?

Turkey will prefer the latter in order to establish itself as an energy hub for Europe and Eurasia.

Enlisting participants to finance, build, and maintain the pipeline will be difficult as the U.S., and possibly the EU, will attack them with sanctions, such as U.S. sanctions on Nord Stream 2 AG, the builder of the pipeline, and on the Russian pipe-laying vessel “Fortuna.”

And someone blew up Nord Stream 2, so a kinetic response by parties unknown shouldn’t be discounted, especially if Russia wins, or at least doesn’t lose the war in Ukraine. (Access to the Black Sea for non-littoral states is limited, so another sabotage operation will be harder than in the Baltic Sea.)

Then, as the gas will be going to EU member states, EU laws and regulations, such as the Third Energy Package will come into play. The Third Energy Package, which mandates “ownership unbundling,” that is, the separation of companies’ generation and sale operations from their transmission networks; interconnection agreements; and third party access to the pipeline, was one reason South Stream collapsed. The EU will be inflexible on the terms and conditions, which may require Turkey to unbundle BOTAŞ, the state-owned crude oil and natural gas pipelines and trading company, a politically sensitive undertaking for Erdoğan.

The foundation of the natural gas business is long-term contracts, usually 15-25 years, and includes provisions such as take-or-pay, to ensure stability and predictability. A long contract term is necessary to secure project finance, but was an issue when the Europeans went gas shopping to Qatar and balked at Doha’s expectation for a 20-year agreement (like Germany signed with the U.S. for liquefied natural gas (LNG)) as it conflicted with its green energy transition plan. Qatar earlier said it would “stand in solidarity” and would satisfy existing agreements with Europe, probably encouraged by the EU decision to drop an antitrust probe into QatarEnergy.

After the sabotage of NordStream 1 and 2, the only pipelines remaining in service are the Baltic Pipe (Norway to Poland), TurkStream, the Southern Gas Corridor (Azerbaijan to Europe), the Yamal-Europe pipeline (from Russia via Ukraine, but the flow is decreasing in 2022), and two pipelines from Algeria, TransMed and MedGaz, both of which can increase their capacity.

Nigeria and Algeria are key suppliers to Europe and have revived plans to build the 2,485 mile Trans-Saharan Gas Pipeline (TSGP) that will send 30 BCM/year of Nigerian gas to Europe via Algeria.

However, Algeria may not have the bandwidth to take on this project when the country is facing other issues, such as inadequate infrastructure, corruption, poor governance, and high unemployment. And Nigeria, Africa’s biggest LNG exporter, has seen oil and gas exports decline since 2020 and is producing at between 60% to 68% utilization, so it is an unlikely source of gas to replace costly American LNG.

So, we’re back to Israel, Cyprus, and Greece.

Netanyahu’s return to leadership in Jerusalem may be an opportunity for he and Erdoğan to avoid the bad chemistry that previously plagued their relationship.

Turkey and Israel have taken steps to normalize ties that were moribund after a 2010 Israeli raid on an aid ship headed to the Gaza Strip that caused the death of ten Turkish citizens. Erdoğan congratulated Netanyahu after his recent victory, “provided that the Palestinians’ rights and Jerusalem’s status are respected,” though that may be problematic as Netanyahu recently claimed Israel-Saudi normalization could end the Israeli-Palestinian conflict.

Will Israel and Turkey see a revival of a gas pipeline to Turkey, now that EastMed is no more? Egypt is the only nearby country with LNG export capacity and Israel relies on it on it to export gas outside the region. Last year, Israel and Egypt weighed plans to reroute the EastMed pipeline to bypass Cyprus and flow through Egypt, an option that was considered “more efficient and viable.”

A pipeline to Turkey will face several obstacles such as the need to transit the Cyprus maritime Exclusive Economic Zone (EEZ). Nicosia has said “no” to any pipeline before the reunification of the island, and reunification talks are currently stalled. Normally Nicosia’s intransigence would require ethe intervention of Washington and Brussels, but the U.S. opposed EastMed so it likely won’t support an alternative. In addition, Washington and Brussels will oppose the project if they think it will connect to the mooted Turkish-Russian hub as the increased volume from Israel’s and Cyprus’s fields will be used by Moscow and Ankara to attempt to secure project funding.

And as relations between Netanyahu and Erdoğan may be improved, so hopefully will relations between Netanyahu and Biden, despite Netanyahu’s close relationship with former President Donald Trump and his opposition to the Obama administration’s Iran nuclear deal. Though candidate Netanyahu vowed to “neutralize” U.S.-mediated Israel-Lebanon maritime border agreement, will Prime Minister Netanyahu instead prioritize improving relations with the Arab states, defending against Iran’s Hezbollah proxies, and dealing with Israel’s slowing economy?

Even if Netanyahu and Biden are on better terms, Netanyahu will inevitably point out that, despite the U.S. killing of EastMed, Israel cooperated with the U.S. effort to settle the maritime border issue with Lebanon to appease Iran in order to get a revived nuclear deal, though that now looks like it won’t happen. Netanyahu will call in that marker, and probably when its least convenient for Biden.

U.S. opposition to the Russia-Turkey hub will likely flow over to an Israeli-Turkey pipeline. A majority of Turks do not support improved ties with Israel, but if Erdoğan can make it a jobs issue before the 2023 election he may secure the public’s (reluctant) approval and be better able to weather opposition from Washington and Brussels. On the other hand, Israel can take the weight from Erdoğan by electing to build a pipeline to Egypt, which will lower the temperature in the Eastern Mediterranean by avoiding a repeat of Turkey’s past interference with exploration vesselsworking for Cyprus.

Will Israel join the Russia Turkey project? Who will pay for it in the face of U.S. opposition? Washington will fight any project that benefits Moscow and Biden will want to keep his Green allies happy by not reneging on the decision to cancel EastMed by supporting an alternative project.

Israel will likely pass on attempting to join the Turkey-Russia hub. It will make the Americans happy, and will conserve the Israeli government’s bandwidth because it has more important issues to deal with, like the economy, than picking a fight with Washington.

In the end, Russia and Turkey will have their hands full sorting out their differing visions for a hub. Israel should deal with Turkey and Cyprus on parallel tracks. Jerusalem and Nicosia enjoy close ties that may see a “fair and swift resolution” of a dispute over an offshore gas field, and Israel has already said warming ties with Turkey won’t harm its “strategic relationship” with Cyprus. Israel and Turkey can best move forward by focusing on trade, though Erdoğan will provide regular reminders of Turks’ concern for the Palestinians’ welfare.

The Biden administration cancelled EastMed due to environmental concerns and weakened Europe over a pipeline few Americans cared about. Then, after complicating Jerusalem’s quest to get its gas to market, Washington forced through the Israel – Lebanon border demarcation that will increase funds to Hezbollah regardless of what “controls” Washington imagines it can arrange. Washington also antagonized Greece, while further inflating Erdoğan’s ego.

Europe has one last natural gas option, and it’s in Africa. There, Algeria, the 10th-largest gas producer globally, sends most of it gas exports to Europe, and Nigeria, a major LNG supplier to Europe may be the solutions. (And so might Libya, provided peace ever breaks out.)

U.S. congressmen have expressed concern about Russian arms deals with Algeria, but that’s a frippery for Europe’s leaders who should consider how they can support upgrades to Algeria’s TransMed and MedGaz pipelines, and build the Nigerian-Algerian TSGP so they can stop paying four times the market price for American LNG. And, with China ending COVID lockdowns it will soon be back in the gas market, biding against Europe for available supplies.

If the U.S. objects, it should then explain to Europe how shipping LNG across the ocean in specialized vessels has less of an environment impact than securing gas closer to home. Mercantilism is what governments sometimes do, but preaching the Green religion while expecting Europe to make itself reliant on expensive, imported American LNG is the kind of thing gives hypocrisy a bad name.

The TGSP will cost $13 billion, and Nigeria’s Secretary of State for Petroleum confidently claims, “We’ll get finance from Europe.” The TSGP will also require technical assistance to help Nigeria cure production outages, and stop the flaring of associated gas, and France’s TotalEnergies and Italy’s Eni are equipped to help.

This is an opportunity for Europe to engage Algeria in a “long-term strategic partnership” for natural gas and electricity, but Algiers may doubt the EU’s sincerity as members of the European Parliament want the EU to review its association agreement with Algeria in light of its arms deals with Russia. Algeria has many domestic challenges, like a slowing economy and high youth unemployment, but the recent establishment of the Supreme Energy Council may mean Algeria’s leaders are ready to stretch. And France is seeking to repair relations via economic cooperation, though China is now Algeria’s biggest trade partner.

EastMed was good for Europe, but luckily the Continent has a nearby potential partners in Algeria and Nigeria (and someday Libya) that can help it secure its energy future, and maybe then help address other challenges facing Europe and Africa.

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