Gazprom Moves into the Fifth Corridor

With its South Stream pipeline looking increasingly cumbersome next to the EU’s TAP and Nabucco West options, Gazprom’s position in the Southern Gas Corridor looks weaker than ever. Along with the shale revolution and a more coherent EU approach on energy, this has dealt another blow to Russia’s canny strategy of dominating the European gas market.

There are signs that Gazprom is now striking further afield in an attempt to keep up. The latest target appears to be the nascent ‘Fifth Energy Corridor’ (the Caspian being the fourth) for European energy supplies – the eastern Mediterranean.

This is frontier territory, complicated by the region’s tangled geopolitics, unclear maritime borders and difficult export options. One of the biggest exponents of the idea has been Sohbet Karbuz of the Observatoire Méditerranéen de l'Energie, who has highlighted the potentially huge gas reserves the region holds, as well as the difficulties involved in getting the gas to market.

Broadly speaking the idea for the ‘Fifth Corridor’ would bring gas from offshore fields in Israel, Lebanon, Cyprus, and/or Turkey to Europe – through subsea pipelines or, possibly, through LNG. Some have suggested that the gas could resuscitate the failed Interconnector Turkey-Greece-Italy, which was knocked out of the Southern Corridor race earlier this year. Other options include LNG plants in Israel and Cyprus.

Whatever the final details of the region’s export infrastructure, Israel is set to play a key role; the Leviathan and Tamar offshore fields alone contain an estimated 745bcm and many prospects are still to be explored.

It is at this critical point in the chain that Gazprom, alongside other Russian energy companies like Rosneft, is now directing its attention. Moscow first made its presence felt there in March, when a group of Gazprom officials travelled to Tel Aviv to discuss cooperating with a consortium of Noble Energy and Delek Group, which is developing Leviathan.

Reportedly the Russian giant was looking at three options: buying a stake in the consortium; buying Leviathan gas for sales in the Middle East, away from Gazprom’s core market; and cooperating in LNG production and export. To this end Gazprom’s trading subsidiary signed an initial agreement on marketing LNG from the nearby Tamar field.

Now it has been revealed that Gazprom is close to getting a stake – on 20 August Israeli media reported that the Russian company and France’s Total were among the potential partners for Leviathan, which could require up to $10 billion for export infrastructure on top of production costs which a new partner would be expected to fund. Gazprom is also reportedly looking at more opportunities in Israeli waters beyond Leviathan.

What explains Gazprom’s sudden interest in the Middle East? This is a company, after all, whose limited international footprint is seriously out of proportion to its vast resources, and whose role in the Middle East has been limited so far. Partly it is attributable simply to the sudden rush of interest in the Eastern Mediterranean – explorers follow the crowd, after all. Partly it can be explained by the close ties between Russia and Israel and the relative ease with which Russian-speakers can do business there.

But Gazprom is no ordinary company, and its determination to stake a claim in the eastern Mediterranean – when it has plenty of assets in Russia to spend time and money on - suggests there are also political motives at work. Firstly and most obviously, Russia would like to ensure a strong position in the European gas market, and making an early entry into new supply routes, which could otherwise threaten its position in Europe, is key. In particular, buying a stake in any pipeline or LNG export infrastructure gives Gazprom significant leverage over future EU imports from the eastern Mediterranean.

Even if this leverage is the proverbial dog that doesn’t bark, and is not acted upon in any disruptive sense, for Moscow’s long-term political interests it makes sense to retain influence over European gas supplies. For matters of long-term pricing contracts alone this would be a wise strategic move.

A second reason, not entirely contradictory to the first, may be a desire to refocus Gazprom away from its core European market. With demand peaking and alternative energy sources increasingly prioritised in the EU, the Middle East and Asia are becoming increasingly important customers for Gazprom. Mediterranean gas could be sent east by Russian-owned companies, either piped to nearby Arab states or sent via LNG through the Suez Canal to markets further east.

A third is more specific: leverage over Turkey. Ankara has become a key player in the eastern Mediterranean gas game, threatening Cyprus not to develop its resources without sharing them with the Turkish-backed northern part of the island, and ordering retaliatory drilling around the Cypriot coast. Ankara has also criticised Israeli drilling near the maritime border with Cyprus.

Russia’s ties with Greece, Israel and Cyprus seem to outweigh its relationship with Turkey in this case. Moscow may be calculating that its early intervention can reduce the extent of Turkish opposition and make it easier to develop a Fifth Corridor in the shape which Russia wants. If gas from the region does end up entering Turkey (pending a resolution of Turkey’s disputes with Israel and Cyprus), it would also allow Russia to maintain a strong role in the Turkish market despite increased imports from Azerbaijan.

All of this would involve long-term calculations, but the rapid rise of the eastern Mediterranean shows how quickly the global gas market can shift. There is a lot of speculation about Gazprom’s decision to move in early, but it certainly seems like a well-planned move. As one Israeli gas executive said, “Do they want to buy from us, or delay our efforts? I don’t know. But they are here.”

Alex Jackson is a political risk analyst at Menas Associates in London, focusing on the Caspian region. He also writes independently on politics, security and energy in the wider Caspian region. This article does not necessarily reflect the views of his employers.