Besides the military confrontations in eastern Ukraine and the sanctions and counter-sanctions, the standoff between Russia and the West has damaged energy relations, as seen in Russia's monthslong natural gas cutoff to Ukraine. Then on Dec. 1, Russian President Vladimir Putin announced that Moscow would cancel South Stream, which was intended to take Russian natural gas across the Black Sea to Bulgaria and then onward to Austria via Serbia and Hungary.
Ukraine has long been the primary transit route for Russian energy supplies to Europe, but political frictions between Moscow and Kiev and their spillover into the energy sphere — natural gas was cut off in 2006 and 2009 — led both Russia and the Europeans to seek alternate supply routes. Thus South Stream was born. Significant progress was made on the project in recent years; Russia and the transit states agreed to terms on the financing and ownership structure of the pipeline, and construction was set to begin in 2015 on the offshore portion of the pipeline in the Black Sea.
Then came the Western-backed uprising against former Ukrainian President Viktor Yanukovich and the ensuing crisis. As with previous crises, Russia's decision to cut natural gas supplies encouraged Europeans to renew efforts to diversify their supplies. Moreover, because South Stream conflicted with the European Union's Third Energy Package — Russia could not be both the supplier and primary owner of the pipeline — Brussels held up the project. This factor, plus Russia's wariness to front the more than $30 billion price tag for South Stream when its economy is under significant strain, led Russia to officially cancel the project.
The first possible replacement for South Stream was unveiled at the same meeting in which South Stream was put to rest. While speaking with Turkish President Recep Tayyip Erdogan, Putin announced that Russia would pursue the construction of a natural gas pipeline with a capacity of up to 63 billion cubic meters across the Black Sea to Turkey, with the possibility of a hub on the Turkey-Greece border that could send natural gas to Southern Europe. The project, which has since been coined "Turkish Stream," would essentially be a rerouting of South Stream through Turkey instead of Bulgaria.
From a political perspective, Turkish Stream makes a lot of sense for Russia. Given the poor state of relations between Moscow and the West, a high-cost pipeline such as South Stream that would be at the mercy of EU regulations is too risky. However, a high-profile energy project with one of Russia's largest natural gas consumers — one that is outside the legal confines of the European Union — comes with substantial benefits. Russia would still have a supply route into Europe that bypasses Ukraine, but it would also have greater influence to persuade Ankara not to participate in energy projects that threaten Moscow's interests. The latter is particularly important because of Turkey's position on the Southern Corridor route, which would bring energy from the Caspian region through Georgia and into Europe via Turkey.
Building a pipeline with a capacity as high as 63 bcm, however, could prove just as costly as South Stream was projected to be, and such high costs are infeasible given Russia's economic problems and its energy commitments in East Asia. (The original South Stream project at least had a consortium of investors, including ENI, EDT and Wintershall, though ENI was wavering as costs continued to rise.) A limited version of the project, such as an expansion of the existing Blue Stream pipeline, which carries Russian natural gas to Turkey via the Black Sea, could be more manageable for Russia and would come with a smaller price tag ($3 billion to $5 billion for an expansion of about 5 bcm to 10 bcm). But it would also have a smaller capacity to redirect supplies from Ukraine for consumption in Europe. Turkish Stream is thus the most likely option to replace South Stream.
It is also possible for Russia to reverse its decision on South Stream. The political relationship between Moscow and the West is at a post-Cold War low, but it is possible that ties — at least with the Europeans — can improve enough for the project to be revived eventually. EU countries such as Bulgaria and Hungary have lobbied Brussels to revise its position on the project, and even Germany is trying to keep the option on the table in the event of an understanding being reached on Ukraine. South Stream's resurrection is unlikely, but it is still possible.
A final option for Russia would be not to pursue any South Stream replacements and to instead rely on its existing pipeline network through Ukraine. What would make this option more likely is a further deterioration of ties with the West, or a further weakening of the Russian economy to the point that any new projects are out of Russia's reach financially. Moscow may also go this route if it decides to direct its focus more on energy projects in China and Japan, including an expansion of the Power of Siberia pipeline.
The Europeans have raised or revived several projects in response to the cancellation of South Stream. These projects fall into two broad categories: liquefied natural gas (LNG) terminals and the Southern Corridor route.
The construction of LNG import terminals has long been an item of discussion among Europeans as a way to dilute their reliance on Russia and diversify energy supplies to more distant and commercially minded suppliers such as Qatar. Germany, France and Italy have made strides in building LNG terminals over the past decade. Yet Central and Eastern European countries, which are typically much more dependent on Russia for their natural gas, have been much slower in developing LNG terminals. These countries are usually less willing or able to finance the projects themselves, unlike the wealthier countries in Western Europe.
There have been two recent exceptions: Lithuania debuted an LNG import terminal in November, and Poland will open its own LNG import terminal early next year. The terminals have given Lithuania and Poland greater leverage and flexibility in the energy sphere because they are no longer solely dependent on Russia for their natural gas supplies. They are also relatively low-cost projects; Lithuania spent $325 million on its floating LNG import terminal, and Poland invested $1 billion in its own. The drawbacks, however, are that the terminals have fairly limited capacities — 4 bcm for Lithuania's and 5 bcm for Poland's — and that they are located on the Baltic Sea coast, which is far from the European countries that were on South Stream's route. Barring a major expansion, the terminals are unlikely to be a viable substitute for South Stream for Southern Europe.
However, South Stream's cancellation has revived discussions of new LNG terminals in Southern Europe as well, particularly in Greece and Croatia. As of May there were plans for two new terminals in Greece: one by DEPA and one by Prometheus Gas. The DEPA project, Aegean LNG, would be placed close to the borders with Bulgaria and Turkey and would have an annual capacity of 3-5 bcm. The Prometheus Gas project would be near the port of Alexandroupolis and would have a capacity of 2.5 bcm. The Croatian terminal, known as Adria LNG, would be located on the Adriatic island of Krk and would have a capacity of 10 bcm.
The estimated costs of these projects are close to those of the Lithuanian and Polish terminals ($300 million to $1 billion), but so far funding has not been secured to move them into the construction phase. Greece and Croatia have been unable or unwilling to put up the funds themselves, but the crisis with Russia could spark outsiders — either in the European Union or others — to step in to help.
Another issue when it comes to potentially linking LNG importing countries to those that were on the South Stream route (such as Bulgaria, Serbia and Hungary) is pipeline connectivity. However, several pipeline interconnectors have been built recently throughout Central and Eastern Europe. Linking LNG terminals with pipeline interconnectors is a relatively inexpensive and quick way for Europe to increase the security and reliability of its energy supplies. For example, projections for the Greece-Bulgaria interconnector's total cost are between 150 million and 200 million euros ($185 million to $250 million), 45 million euros of which will be covered through EU financial support. Construction of interconnectors is likely to increase in the region, but countries will still require a reliable source of natural gas for them to be effective.
Southern Corridor Projects
The other major alternative for Europe to avoid transiting supplies through Ukraine is the Southern Corridor route, which would take energy supplies from Caspian countries (particularly Azerbaijan and Turkmenistan but also potentially Iran and Iraq) to Europe via Turkey or the Black Sea. Projects taking this route are attractive for European countries because they avoid Russia and Ukraine, but political considerations and economic costs have long served as major obstacles.
One such project is Nabucco West, which would involve construction of a 10-30 bcm pipeline from the Turkey-Bulgaria border through Bulgaria, Romania, Hungary and Austria. (It would also involve a connection to the Trans-Anatolian Natural Gas Pipeline, which is being built from Baku to the Turkey-Bulgaria border and is financed by Azerbaijan.) The estimated cost of Nabucco West is in the range of $5 billion to $10 billion, which was a main reason the Trans-Adriatic Pipeline (TAP) was chosen over Nabucco West for rights to 10 bcm of the 16 bcm of natural gas that will come online from Azerbaijan's Shah Deniz II natural gas field in 2018. Construction of TAP, which will have a capacity of 10 bcm, is expected to cost around $1.85 billion.
Another reason the TAP project was chosen over Nabucco West is that the latter probably would have also necessitated another natural gas supplier to be viable given its larger capacity, with Turkmenistan being a point of interest for the Europeans. But there is currently no pipeline connection between Azerbaijan and Turkmenistan across the Caspian Sea; Russia and Iran have objected to the creation of a Trans-Caspian pipeline on legal and environmental grounds, though their opposition is really about keeping Europe from having a larger alternative to Russian natural gas. The governments in Azerbaijan and Turkmenistan could change their minds — and there have been more meetings recently with EU and European officials to discuss the pipeline — but for now they are wary of directly challenging Moscow.
One other project that has recently been discussed is the Azerbaijan-Georgia-Romania Interconnector (AGRI). The AGRI project would involve a pipeline from Baku to Georgia's Black Sea coast as well as two LNG terminals — an export terminal in Kulevi, Georgia, and an import terminal in Constanta, Romania. The capacity of the project is 7 bcm, and the estimated cost would be 4 billion to 6 billion euros. But AGRI faces the same limitations has Nabucco West. It is relatively expensive and would require Turkmenistan to participate because Azerbaijan's natural gas is already slotted for TAP. The need to build two LNG terminals further complicates the AGRI project.
New LNG terminals or projects involving the Southern Corridor route could be floated in the future, or current projects could be expanded, such as an increase to the capacity of the TAP project. But with Russia pressuring Turkmenistan and with neither Iran nor Iraq in a position — in either political or security terms — to be reliable suppliers, the main obstacle remains the sourcing of natural gas. A shift in any of these countries could make the Southern Corridor option more viable as an alternative to South Stream.
Whichever projects move forward, Turkey is certain to play an important role. With its transcontinental location and political and economic heft, Turkey is a country that both the Russians and the Europeans will pursue as a partner in the energy sphere. Turkey benefits not just from the political attention but also by ensuring that it gets a portion of natural gas supplies from these projects and by collecting transit fees. Thus, Turkey's stance will serve as a key indication of which projects will be taken seriously. In the meantime, the evolution of the standoff between Russia and the West will serve as the broader backdrop to energy dynamics on the Continent.