Balkans Gas Developments Still Face Structural Woes

By Nicholas Newman, Contributing Editor

The gas market in Southeast Europe, better known as the Balkans, is weighed down by several longstanding difficulties.

The region bounded by Bulgaria to the north, Croatia to the northwest and Turkey to the southeast currently suffers from disconnected markets, owing to the lack of an integrated cross-border gas pipeline network, a heavy dependence on Russian gas and insufficient storage capacity.

And in the future, the region will have to meet challenging European greenhouse gas emission targets.

Nevertheless, these structural gas-sector problems have begun to be addressed. To reduce reliance on Russian gas and access new supply, several liquefied natural gas (LNG) import terminals have been built, and regional ports have been developed.

Under development are also several new gas transmission corridors linking the region to new sources of gas and to markets in western and southern Europe. In addition, expansion of cross-border, interconnection capacity is being driven by the need for an integrated regional gas market to facilitate greater use of gas for power and heating.

Net Zero

Given the absence of a sizable developed market for gas, coal and lignite account for 30% to 40% of the feedstock used for electric power generation across the Balkans.

The creation of a single natural gas market in the Balkans is seen by policy makers and utility operators as a means of both cutting strategic dependence on Russia as well as reducing carbon emissions to satisfy European Union greenhouse gas targets. The cost will be considerable.

Estimates suggest that the Balkan countries plus Greece and Romania would have to invest in 6.5 GW of new gas-fueled power generation plants to replace existing coal-fueled plants and provide backup for unreliable hydroelectric plants. Moreover, significant construction of local and regional gas pipeline grids would be needed to connect the new gas power plants to an enlarged market of residential and industrial customers.

Storage Developments

One of the key questions in the Baltic is how to transport piped Caspian Sea gas reaching Greece and Turkey to markets in the north and northwest, including Bulgaria, Romania and Ukraine.

Another equally important question is where to establish gas storage facilities in the region to balance supplies. Currently, both Romania and Turkey are developing new pipeline and storage capacity, whereas Bulgaria, Greece, Moldavia and Macedonia have little or no storage capacity.

Ukraine has about 1,059  Bcf (30 Bcm) of gas storage capacity and can offer some surplus capacity to its southern neighbors. Indeed, as of last year, the Ukraine has become eastern and central Europe’s gas storage hub.

Thanks to recent investments in the gas sector of the Balkans, there is a growing diversity in gas flows. For example, market operators in the Ukraine, Moldavia and Romania are increasingly importing alternative sources of natural gas from Bulgaria, Greece and Turkey. Likewise, traders in Bulgaria, Greece and Turkey are reaching out to sell gas to their northern neighbors and to store gas in the Ukraine.

Nonetheless, inadequate bidirectional, cross-border gas transmission pipeline capacity in the Balkans remains a problem. Flexibility of gas supply within the region and its neighbors is essential for energy security and sharing of valuable transit revenues.

For example, when Russia’s Gazprom cut natural gas exports from the traditional trans-Balkan pipeline, it not only caused a collapse in transit revenues to Ukraine but also caused gas shortages beyond.

Since then, geopolitical considerations have underpinned Gazprom’s development of the 1.12-Tcf (31.5-Bcm) TurkStream gas pipeline as an alternative to the customary 946.4-Bcf (26.8-Bcm) trans-Balkan pipeline route.

Regional Cooperation

Due in part to past historical political difficulties, cooperation for developing mutually beneficial energy projects in the region has proved difficult and slow, to say the least.

However, under encouragement from the European Union (EU), progress is finally underway. The EU has established the Secretariat Facilitates Southeast and East European Gas (SEEGAS) project, which aims to bring together multiple exchanges and transmission system operators (TSOs) to define common interests and actions.

This has already yielded significant steps toward the balancing and spot trading of natural gas within the region. Moreover, adoption of the EU’s third energy package by all parties in the region should significantly boost investment, competition and transparency, as well as market integration.

Currently, the Baltic region benefits from the recent development of two important transmission corridors: the Turkish Stream (TurkStream) pipeline and the Southern Gas Corridor, which encompasses the recently opened Trans-Adriatic pipeline. Unfortunately, neither can fully meet regional needs.

TurkStream Diversion

In the case of TurkStream, the pipeline project has two legs. The first 580-mile (930-km) section, opened in January 2020, diverted gas from the Trans-Balkan pipeline, which is consequently running at only 4% capacity. This hit Ukraine’s transit revenues badly. And, due to the largely subsea nature of the first section, the Turkish government collects relatively little in transit rates.

The second leg of the TurkStream pipeline from the Lüleburgaz hub crosses into Bulgaria, then north to Macedonia and finally Serbia. To increase regional coverage and gain market share, Russia’s Gazprom proposes extending TurkStream north to connect with the gas networks of Hungary, Austria and Slovakia.

Southern Corridor

The 2,200-mile (3,500-km) Southern Gas Corridor includes three pipelines: the South Caucasus Pipeline, the Trans-Anatolian Pipeline and the Trans-Adriatic Pipeline, the last of which connects with the Trans-Balkan pipeline.

In reality, the only existing regional gas infrastructure that could help satisfy regional gas balancing and trading needs is the 953-Bcf/year Trans-Balkan pipeline.

Notwithstanding Gazprom’s development of the TurkStream pipeline, the Trans-Balkan pipeline has advantages both old and new, including its route, which shares gas and transit revenues among Ukraine, Moldavia, Romania and Bulgaria. In addition, it provides access to gas from recently developed import LNG facilities in Turkey and Greece.

The Trans-Balkan pipeline currently has the advantage of easy access to several western Turkish LNG import terminals. It will also benefit from the planned opening of the interconnector at its southern end with the trans-Adriatic pipeline, giving it access to the newly completed LNG import terminal at Alexandropoulos, in northeast Greece.

Additionally, to the northwest, the start of operations of the Croatian LNG import terminal at the Adriatic port of Krk will enable Croatia, Slovenia, Northern Italy and Hungary to access gas from the U.S., Egypt and Qatar. This will improve gas supplies to the whole region, as well as reduce dependence on Russian gas, and could potentially affect the viability of the TurkStream pipeline.

There is also an economic benefit. Because the construction costs of the older Trans-Balkan pipeline have already been paid, its transit fees could be reduced while still providing meaningful revenue for the countries it crosses, including Ukraine, Moldavia, Romania and Bulgaria, thus aiding natural gas trading.

A lot of change in the Balkans is on the way, which will create new gas markets, increase market penetration of gas in power generation and reduce reliance on Russian gas, provided vested interests can cooperate and the necessary investment is forthcoming.

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