The End of the Russian Natural Gas Monopoly in Balkans
Givi Baramidze, Analyst
There were three developments on the natural gas market in south-eastern Europe at the beginning of 2021 that will have long-lasting effects on Gazprom’s business in the region, and the European Union market as a whole. The Russian media only covered one of those events widely: on January 1, the President of Serbia, Aleksandar Vučić, issued a permit on the supply of Russian natural gas to Serbia in a celebratory environment, using a new route through Bulgaria with the Balkan Stream, which became an extension of the second line of the Turkish Stream.
In addition, several hours earlier, on the last day of 2020, Bulgaria started receiving natural gas from Azerbaijan through the Trans-Adriatic Pipeline (TAP), the construction of which was concluded several weeks prior. In order to underline the importance of this event, on January 1, the Prime Minister of Bulgaria, Boyko Borisov, visited the compressor station in the village of Kulata at the border with Greece, where he stated: “From today – full diversification!” by which he basically announced the end of Gazprom’s monopoly on the Bulgarian market.
The third new year event was the launch, in commercial exploitation, of a new maritime liquified natural gas (LNG) terminal on Krk Island in Croatia. The re-gasification vessel received a tanker loaded with US natural gas, and started loading the fuel into the national gas transportation system, which is also connected to the European system. Hence, Croatia, which until now was practically exclusively receiving gas from Gazprom, will be able not only to diversify its suppliers, but also to serve as a natural gas exporter for Hungary and Ukraine, for example.
According to Gazprom’s website, the biggest buyers of Russian natural gas on the Balkan peninsula in 2019 were Croatia (2.82 billion cubic meters), Greece (2.41 billion cubic meters) and Bulgaria (2.39 billion cubic meters). Serbia (2.13 billion cubic meters) holds the fourth place within the region.
The projected output of the Croatian liquified natural gas terminal, which is already in operation, is 2.6 billion cubic meters a year. Hence, Croatia has practically overnight received a theoretical opportunity to almost fully abandon Gazprom’s services. Their doing so fully is unlikely, however, and yet the volume of gas purchased from Russia could decline significantly.
In any case, the Russian company will now have to deal with increased competition in Croatia, which will necessarily influence prices. And competitiveness will be required not only on the Croatian market: A significant, one could even say a very large part of the output of the LNG terminal near Krk Island goes to exports. It is expected that Hungary will become the main buyer, yet Ukraine is also named among the potential customers.
Hungary is a very important market for Gazprom. In 2019, the company sold over 11.26 billion cubic meters of natural gas to Hungary. Russia plans to export its gas from Hungary to Austria, where a decisive pipeline for Russian exports, Gas Hub Baumgarten, is located. This is where most of the natural gas that Russia plans to transport through the second line of the Turkish stream is supposed to go, ultimately directed to European countries. Its volume stands at 15.75 billion cubic meters per year.
The volume of the LNG terminal at Krk Island is fully booked for the next three years, with 80% of it leased until 2027 and 50% until 2035, which indicates the efficiency of the project. This competitor to Gazprom has appeared with a long-term plan and is clearly in demand; however, it must also be pointed out that re-gasified LNG is in general more expensive than pipeline natural gas. The overall capital cost of a thousand cubic meters of LNG is about 30-35% higher than that of pipeline gas.
The Southern Gas Corridor is Fully Operational
If the launch of the commercial operations of an LNG terminal in Croatia means Gazprom losing its monopoly position and the strengthening of competition in Hungary, with the launch of the Southern Gas Corridor, the Russian gas supplier has also lost its monopoly in Bulgaria, and from now on it will be forced to operate under greater competition in Greece and Italy. Furthermore, in this case, the Russian company will have to rival not the LNG from Qatar, Algeria or the USA, but rather a more competitive Azerbaijani pipeline gas.
The Southern Gas Corridor is a two-pipeline system. The first is the Trans-Anatolian Pipeline (TANAP), which launched in 2019. Through this pipeline, Azeri blue fuel is delivered through Georgia to the entire territory of Turkey up until the Greek border. At the border between Turkey and Greece, the Trans-Anatolian Pipeline (TANAP) connects to the Trans-Adriatic Pipeline (TAP), which has already been launched. This pipeline runs through the territories of Greece and Albania, continuing along the bottom of the Adriatic Sea to Italy, its final destination.
The capacity of the Trans-Adriatic Pipeline is ten billion cubic meters per year, of which eight is designated to the main buyer of Azeri gas in the European Union – Italy. It must be noted that Italy is the second most important market for Gazprom in the EU, right after Germany. In 2019, the Russian company supplied 22.1 billion cubic meters of natural gas to Italy. Theoretically, after the launch of the Trans-Adriatic Pipeline, the demand for Russian natural gas could reduce by about a third.
Already in 2021, about one billion cubic meters of natural gas from the Trans-Adriatic Pipeline will go to Greece, and the same amount to Bulgaria. Given the fact that in 2019, each of these states purchased about 2.4 billion cubic meters of natural gas from Gazprom, the supply of Russian gas to these two markets could reduce by about 40-45%. Further, in the case of low consumption of gas due to a warm winter and following the pandemic lockdowns, the supply rate of Russian natural gas could drop by about 50%.
The Trans-Anatolian and Trans-Adriatic Pipelines have vital importance for the energy diversification of Europe and consequent end of the monopoly of Russian natural gas. By 2026, the projected load of the Trans-Anatolian Pipeline will be 31 billion cubic meters per year, while that of the Trans-Adriatic Pipeline will be an annual 20 billion cubic meters. In the case of such transit capacity, the demand for Russian gas in Italy, Bulgaria and Greece will reduce on average by 60-80%. In this regard, it is important to analyze one other factor: On January 21, 2021, Azerbaijan and Turkmenistan reached an agreement on the joint study of hydrocarbon ore in the Caspian Sea. The two Caspian states will jointly study and develop the underwater ore, which, according to expert estimations, contains natural gas and at least 50 million tons of oil. The resolution of this issue will facilitate the development of the Trans-Caspian Pipeline, as a multi-billion project which envisages connecting the gigantic natural gas reserves of Turkmenistan to Europe. Making this strategic line functional may put Europe’s need for Russian natural gas entirely under question.
At the same time, Serbia is clearly benefiting from the changes in routes and transit tariff rates, as the cost of 1,000 cubic meters of Russian natural gas for Serbia has reduced from USD 240 to USD 155. This increases the competitiveness of Russian gas. In addition, Gazprom has not yet tackled the task put to it by the Kremlin – to fully stop natural gas transit through Ukraine.
Disagreement surrounding Nord Stream 2
Parallel to the weakening of the monopoly on the Balkan Peninsula, the provision of Russian natural gas to Europe is set to take place through the Nord Stream 2 project, which envisages supplying natural gas to Germany through the Baltic Sea, although US sanctions are causing problems for this, Russia’s most important project in Europe.
President of the United States Joe Biden, during his vice-presidency under Barack Obama, opposed the project, and, as yet, it is unknown what the scale of his opposition to this project will be now that he is President. One thing to expect, however, is that Biden will maintain his oppositionary stance. It must also be pointed out that according to the EU’s third energy package, Gazprom will only be able to use the pipeline at 50% capacity. About 90% of Nord Stream 2 is already completed; however, its construction was halted last year due to the imposition of sanctions by the US. The Russian company continued working independently, and the Russian vessel Fortuna started installing pipes in Danish waters, despite said sanctions.
Given the current situation, Russian natural gas will face a competitive environment in the Balkans, which means the weakening of Russian influence in this part of the continent. If the US sanctions work, Russian leverage in Europe will face the risk of significant weakening. That said, the aforementioned Russian project has many supporters in Europe itself, which, at this stage, leaves little room for making definitive conclusions.
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