EurasiaNet Business & Economics - Blue Stream Pipeline's Future in Doubt Amid Russian-Turkish Pricing Dispute

BUSINESS & ECONOMICS

BLUE STREAM PIPELINE’S FUTURE IN DOUBT AMID RUSSIAN-TURKISH PRICING DISPUTE
Mevlut Katik 6/02/03

Only months after it began to pump natural gas, the Blue Stream pipeline’s viability is threatened by a pricing dispute between Russia and Turkey. The two countries have agreed to a meeting, scheduled for June 16, to resolve their differences. Barring a settlement, Turkey has raised the possibility that it will seek international arbitration.

Over the past week, the Blue Stream dispute has taken on an increasingly acrimonious tone. On May 27, Viktor Kalyuzhny, Russia’s special envoy on Caspian affairs, used a speech at an international energy conference in Istanbul to accuse Turkey of "not fulfilling its contractual responsibilities." In front of Turkish Energy Minister Hilmi Guler, Kalyuzhny pilloried Ankara "for constantly demanding price reductions." [See related EurasiaNet story]. Kalyuzhny also criticized Turkey for causing delays in tanker traffic in the Bosphorous straits. "Such ships that are kept waiting create the proper ground for terrorist attacks," he warned.

The Russian official went on to imply that Turkey was double-crossing Moscow, backing out of the Blue Stream agreement in order to obtain natural gas at a cheaper price from Azerbaijan’s Shah Deniz field. "If Turkey does not need Blue Stream, why is it building an additional [pipeline] extension to Azerbaijan," the Russian daily Kommersant quoted Kalyuzhny as saying. [For additional information see the Eurasia Insight archives].

The 400-kilometer Blue Stream pipeline connects Russia’s southern gas fields to Turkey’s Black Sea port of Samsun via the world’s deepest undersea pipeline. The $3.4 billion project began deliveries of natural gas to Turkey in January this year. According to initial projections, Blue Stream would have the capacity to deliver 16 billion cubic meters of gas annually to Turkey.

However, since its completion, Blue Stream has been clouded by questions concerning Turkish demand for natural gas. [For background see the Eurasia Insight archive]. Turkish officials suspended Blue Stream imports in March, citing a clause in the contract that allows either party to suspend deliveries for six months.

In his speech, Kalyuzhny suggested the main reason for the lack of demand had more to do with the Turkish government’s response to the country’s financial crisis, rather than with a flaw of Blue Stream’s operational framework. [For background see the Eurasia Insight archive].

Turkish officials reacted angrily to Kalyuzhny’s comments. "I was sitting next to him and told him his remarks demanded clarification, that some of them are not true," Turkish Energy Minister Hilmi Guler told reporters May 27. He also accused Kalyuzhny of not getting necessary info from "Gazprom officials" about the issue. Guler held out the possibility that Turkey may take the Blue Stream dispute to an international arbiter. "We would prefer a solution through talks," Guler added.

Mehmet Bilgic, general director of Turkey’s state-owned pipeline company Botas, also harshly criticized Kalyuzhny’s statement. "It is not right to speak of Turkey and Botas not fulfilling its obligations under the [Blue Stream] contract," he said, insisting that Botas considered only economic issues when deciding on its import mix. Such statements gloss over the fact that some former top officials of Botas are being tried for corruption in connection with the original Blue Stream contract and similar deals.

Many in Turkey argue that politics, specifically patronage to large businesses that sought contracts associated with Blue Stream, inflated the original contract between Moscow and Ankara. The project has long faced criticism in Turkey as an extravagant investment, and many denounce the 1997 Blue Stream contract as a relic from an era during which patronage influenced Turkey’s governance.

Turkish Prime Minister Recep Tayyip Erdogan has spoken out against corruption in Turkey and has visited Russia to promote stronger trade between the two countries. He met with Gazprom officials on May 29, according to Turkey’s Anatolia news agency, and endorsed a mutually beneficial settlement.

Turkish leaders say the central issue concerning Blue Stream is the price structure for natural gas. "There is no problem with the project, but there is with the price formula," Guler told reporters. Gazprom lowered prices in March by 9 percent, to $115 per thousand cubic meters, according to Moscow’s Kommersant newspaper. Turkey, with its economy still shaky, has sought a price closer to $75 per thousand cubic meters, which Gazprom has said cannot be profitable in the short term. As it stands, Blue Stream, which has maintenance costs of $8 million annually, is �currently bringing net losses," Kommersant said.

The standoff leaves all parties with a narrow range of choices. According to some observers, officials in Moscow believe an arbitration process could drag on without ever producing a satisfactory solution. It could also discourage other buyers from entering into deals with Gazprom. Turkey, meanwhile, must increase domestic gas consumption to make contractual payments and re-export unused gas to become an "energy bridge" from Russia and Asia to Western Europe. BP, the Anglo-American conglomerate, is watching from the sidelines as the lead investor in the Shah Deniz project.

Editor�s Note: Mevlut Katik is a London-based journalist and analyst specializing in Turkish affairs.

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