Russian pipeline exit offers Middle East gas suppliers hope in Europe

Turkish president Recep Tayyip Erdogan, right, and Russian president Vladimir Putin hold a joint press conference at Turkey's presidential palace in Ankara. Adel Altan / AFP

The decision by the Russian premier, Vladimir Putin, to scrap plans to build the South Stream gas pipeline to Europe may help long-term aims to bring gas from Middle East suppliers to European markets.

Mr Putin made the surprise announcement on a state visit on Monday night to Turkey’s capital, Ankara, during which he said Russia would instead build a gas pipeline link to Turkey in a bid to strengthen ties with a country which has not joined sanctions to protest against Russia’s Ukraine policy. But the move is also clearly a response to relentless pressure from the European Union. OMV, the Austrian oil and gas company which is 25 per cent owned by Abu Dhabi’s Ipic, had been a strong supporter of the South Stream pipeline and signed a deal earlier this year to help fund construction of a spur to its Austrian terminus. OMV’s management has been under severe pressure from shareholders, which includes the Austrian government, which has the largest stake at 31.5 per cent.

The chief executive Gerhard Roiss, who had earlier pinned hopes on bringing gas to Austria from the giant Shah Deniz field in Azerbaijan via the planned Nabucco pipeline, saw those hopes dashed early last year when the field’s operators, led by BP, chose an alternative trans-Adriatic route. Mr Roiss and other senior OMV executives already have agreed an early departure and he will step down next summer.

Mr Roiss downplayed the significance of the project’s cancellation. “We have not yet had any contact with Gazprom regarding the statement from yesterday,” he said.

Blocking the South Stream pipeline has been a long-term aim of both the European Union and the United States, which have sought to curb Russia’s power over Europe through its dominance as a natural gas supplier.

If it had been built, the South Stream pipeline, with a capacity of 63 billion cubic metres per year, would have reduced Russia’s gas transit dependency on Ukraine to nil by 2020. It would also have deprived Ukraine of a critical source of influence in its relationship with both Russia and Europe, according to John Lough, a fellow at the think tank Chatham House in London.

Russia exported a record amount of gas to Europe in 2013 and accounts for nearly a third of its 500 billion cubic metre annual consumption. It exports around half of its gas supplies to Europe through Ukraine.

The European Commission had put relentless pressure on member states involved in the project to abandon their commitments, including Bulgaria, Hungary and Slovenia, as well as aspiring member Serbia. All of these countries suspended South Stream operations by last summer.

Part of Europe’s diversification plans has been to open up a “southern corridor” that would connect the vast gas supplies of central Asian countries, such as Azerbaijan and the Middle East, especially Iraq and Iran. The centrepiece of this dream had long been the Nabucco pipeline. Since the decision early in 2013 not to transport Shah Deniz gas, that project has looked in jeopardy unless alternative gas supplies can be found.

Bringing gas via pipeline to Europe from Iran and Iraq seems some distance away, according to Tim Boersma of the Brookings Institution in Washington DC. “Due to the political instability in Iran and Iraq, the Southern Corridor will be significantly expanded only after 2030,” he predicts.

But the Middle East's share of Europe's gas market should increase significantly at the expense of Russia's, mainly through the large network of liquefied natural gas intake terminals built – and planned for construction – around the continent, Mr Boersma reckons. According to Brookings Institution forecasts, LNG imports from all sources will grow from 31 per cent next year to 48 per cent in 2040. Meanwhile, the share of Caspian and Middle Eastern countries (Azer­baijan, Iran, and Iraq) will nearly triple, from 3 per cent in 2015 to 10 per cent by 2040, with the share of pipeline gas supplies from Russia falling from 31 per cent in 2015 to 23 per cent by 2040.

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