January 09, 2020

Why Russia offers natural gas by dumping price to its neighbours

topic:	Energy
located:	Russia, Turkey
editor:	Igor Serebryany

The "Turkish Stream" pipeline opened by Russian and Turkish leaders on Wednesday is on its way to becoming another commercial failure.

The pipeline may repeat the fate of the "Power of Siberia" pipeline - the project designed to tie Beijing to Moscow geopolitically, but never expected to generate any profit. Russian natural gas monopoly Gazprom pumps gas to China via the "Power of Siberia" at a price below its production cost. 

This has also been true for the "Turkish Stream" from the start. Moscow spent a year persuading Ankara to buy one branch only instead of three initially planned. In July 2016, Ankara reluctantly agreed to sign up for the project on the condition that Gazprom offers a 10 per cent discount on gas.

As of today, the 2,500-kilometer pipeline cost Russia $7 billion and another $13 billion will be invested before the "Turkish Stream" could gain full capacity, an analyst in the Sberbank CIB Alex Fek calculates.

"The 'Turkish Stream' isn't expected to pay off in the next 50 years. In total, Gazprom will lose $13 billion", he says.

The money already invested in the project has been spent on the underwater pipe construction only. That money has been sunk in the Black Sea, a partner in the RusEnergy consulting firm Mikhail Krutikhin says.

"There is no commercial sense in gas transit to Europe via Turkey. Turkey doesn't need Russian natural gas. Last year, Turkey cut Russian gas consumption two-fold while increasing import from Azerbaijan and Iran. Ankara has been able to dictate its conditions to Russia because there's no alternative route for the Gazprom to transit fuel to Europe", he explains.

Gazprom had to abandon the "Southern Stream" project earlier due to political tension with Ukraine, another transit country for the Russian natural gas. Russian gas giant envisaged exporting 90 billion cubic meters of fuel via the Ukrainian route compared to 50 billion cubic meters. the "Turkish Stream" has been able to transport. 

Besides, the market price for the natural gas went down in 2019 from $400 per cubic meter at the start of the year to $120 by the year's end. This has been the lowest price since 2004.

Director of the National Energy Security Foundation Konstantin Simonov has been more optimistic over the "Turkish Stream" future. According to his calculations, the project might pay off in about ten years.

"My calculations are based on the presumption that transit fees remain fixed once and forever. If so, the pipeline will go to black by 2030. However, no one can assess political risks in advance. If we agree to include those risks into the calculation, then, well, the project could be called failure from the start", he says.

In 2016, Italian Eni company withdrew from the "Turkish Stream" project citing its commercial meaninglessness.

Image: Free-Photos / Pixabay