Russia’s Gas Expansion in the Mediterranean

Everyone has heard about the rows surrounding the construction and certification of Russia’s Nord Stream 2 gas pipeline. This project embodies the Kremlin’s economic and political expansion in the north. However, it is not the only one. In the south, in the Mediterranean, Russia has been expanding its network of deposits and actively exploring energy over the past decade. So, we decided to find out why Moscow needs Mediterranean gas, where the Russians have already shored up their positions, and what the prospects are for further promotion of Russia’s energy interests in the region.

Blue Stream as the beginning of journey to the Mediterranean

After the Soviet Union collapsed, Russia faced the task of diversifying the directions and infrastructure for its major exports: oil and gas. In the south, Turkey was the first country to attract Russia’s attention. In 1997, preparations began for the construction of the Blue Stream gas pipeline that was to run under the Black Sea, linking Russia and Turkey. The official opening ceremony of the pipeline took place in 2005. At the same time, the Blue Stream 2 project was announced to become a string of the pipeline towards the Balkans.

However, it was not implemented because the Kremlin preferred the more ambitious South Stream that was to run through most of the southern EU countries. However, Blue Stream 2 was mentioned for the second time in 2009 when Vladimir Putin suggested laying the pipeline in a southerly direction through Turkey to Israel, Syria, and Cyprus. However, these hopes were not fulfilled due to the discovery of gas deposits in the Eastern Mediterranean.

Gas boom of the 2010s in Eastern Mediterranean and reaction of Moscow

In 2009-2011, some of the world’s largest natural gas deposits were found in the territorial waters of Israel, Greece, and Cyprus. At first glance, this circumstance should put an end to Russia‘s hopes to take a leading position in the Mediterranean market. But the global economic crisis of 2008 and the debt crisis of Greece and Cyprus in the early 2010s created new opportunities for gas expansion that Moscow took advantage of.

Western recipes for aid to Cyprus, proposed by the IMF, the EBRD, or the European Commission, were to cut budget spending, strengthen fiscal discipline, and reduce the public sector in the economy. Under such conditions, the Kremlin tried to offer less painful and more attractive solutions to the affected states – large loans on favourable terms, which other countries and organisations could not provide. Cyprus needed almost $4 billion in 2011 to save its banking system. Moscow supported Nicosia with a $2.5 billion five-year loan at 4.5% per annum.

But Russian investment in Cyprus did not stop there. Subsequently, citizens and companies from the Russian Federation invested up to $40 billion in Cypriot banks, accounting for one-third to one-half of all deposits. Cyprus, in turn, nominally became one of the largest investors in the Russian economy in 2011-2013. The primary reason for such Russian activity in Cyprus was, of course, money laundering, but the Kremlin hoped to use such serious financial infusions into the island nation to increase its influence on it and guarantee its participation in gas exploration and production in the exclusive economic zone of Cyprus.

Furthermore, Moscow did not miss the opportunity to take advantage of the difficult situation in Greece. To overcome the crisis, Athens began the process of privatisation of national gas transmission operator DEPA and its subsidiary DESFA in 2012-2013. Both had a monopoly on the sale of hydrocarbons in Greece and the appropriate infrastructure in the country, including a liquefied gas terminal. In particular, 65% of the shares of these companies belonged to the Greek government and 35% to Hellenic Petroleum.

Among the five companies participating in the auction, the two largest bids came from Russia’s Gazprom and Sintez. At the same time, under the EU’s Third Energy Package, Gazprom, as the main supplier of gas to Greece, could not acquire DEPA/DESFA. That is why Sintez was in the lead during the auctions. At the same time, the Russian gas monopoly began negotiations to buy Hellenic Petroleum, which owned 35% of DEPA/DESF shares. The Kremlin’s plans to buy both companies under any circumstances were thwarted by the Greek government’s decision not to sell them.

At the same time, in 2011-2012, Gazprom negotiated the gas production at the Leviathan field, discovered in 2010, with Israeli companies. The creation of a local company run by Gazprom was discussed, which would deal not only with gas exploration but also with its transportation. This became the leading topic in Putin’s meetings with Israeli high-ranking officials in 2012. In 2013, Gazprom offered to buy 30% of the Leviathan field. Tel Aviv, however, sold the share to an Australian company.

So, as we can see, in the early 2010s, after the discovery of significant gas deposits in the Eastern Mediterranean, Moscow was actively trying to gain control over them. In Greece, Israel, and Cyprus, Russian state-owned companies were involved in talks on gas exploration, acquisition of national gas transmission companies, and more.

South Stream as the most ambitious gas project

Although South Stream was first mentioned in 2007, its construction began only in 2012. The pipeline was to run from Russia’s Black Sea coast through Bulgaria in two directions: Central Europe to Austria and Southern Europe via Greece and Italy. South Stream was to become one of the largest Russian gas transportation projects due to its capacity. As of 2014, the Kremlin had managed to build about 400 km of pipeline in the Black Sea, but the EU changed its attitude to the project and abandoned it because of the occupation of Crimea and the outbreak of war in eastern Ukraine.

During the South Stream talks, Russia, as in the case of the acquisition of DEPA/DESFA, reiterated its tendency to disregard European legislation. And although the South Stream could only be greenlighted at the EU level, Moscow tried to hold a dialogue on its launch exclusively in a bilateral format with individual countries – Bulgaria, Austria, Greece, etc. This principle was used to avoid the application of the Third Energy Package that required the separation between companies owning gas pipelines and companies producing and transporting energy. It is clear that in this case, Gazprom’s state monopoly would be violated.

Despite the overall failure of the project, Russian investment in the South Stream got its traction. As early as 2014, the Kremlin announced the start of construction of the Turkish Stream, which used pipes made for the unachieved South Stream. Thanks to this pipeline, Russia did not only increase its share of the Turkish market but also maintained the ability to supply gas to European countries through Turkey. The Turkish Stream was launched in January 2020.

As evidenced by the talks with the Balkan countries on the construction of the Tesla Stream, the Serbian Stream, and other similar projects, Moscow did not finally abandon the idea of ​​the South Stream. All of these projects are aimed at covering the Northern Mediterranean (Greece, Croatia, Italy) and gaining access to Central Europe (Austria, Hungary).

Southern Mediterranean countries and Russia’s gas interests

In relations with the Arab countries, Russia showed a completely different tactic of gas expansion. While in negotiations with the EU Member States, it sought to circumvent certain legal norms that prevented Gazprom from establishing a monopoly on gas supplies and infrastructure; such problems did not arise in the Southern Mediterranean due to a lack of relevant legal requirements. In addition, Moscow often dealt with kleptocratic authoritarian regimes, some of which were in a state of civil war, making it easier for Russia to enter new markets.

In Syria, Russia’s access to gas exploration has been one of the benefits of the latter’s support for the Assad regime. For the past seven years, the Kremlin‘s position in Syria has grown stronger every year. Currently, gas from Syria accounts for up to 30% of Russia’s liquefied gas exports. In April 2021, Soyuzneftegaz signed a 30-year agreement on energy exploration on the Syrian Mediterranean shelf. It is worth noting that the cost of the works will be fully covered by the proceeds from the sea shelf gas sales. This exploration zone is partly located in the region that is the subject of a territorial dispute between Damascus and Beirut. It is also believed that one of the goals of Russia’s intervention in Syria was to prevent the launch of Iran’s Arab Stream project, which was to pass through the territory of this state.

In 2018, Russian company Novatek acquired a 20% stake in the Lebanon offshore exploration and production project. Interestingly, some experts suggest that Moscow is not engaged in geological research and gas exploration in this country but uses this process as a cover for military surveillance, especially over Israel. Such opinions are prompted by the fact that a military search and rescue vessel is engaged in hydrocarbon exploration in sectors where hypothetical gas deposits are the smallest.

In 2016, Rosneft acquired a 30% stake in the Italian company ENI for gas production in the potentially largest field in the world, Zohr in Egypt, for $1.5 billion. At the same time, the parties stated that Rosneft could additionally count on another 5% of shares. According to ENI, the decision to sell the shares was made due to the crisis in the company, which could not cope with such a large-scale project.

Libya has become another country where Russia launched its gas projects despite the civil war. In 2019, Tatneft began geological gas and oil exploration in the western part of the country, near the border with Algeria. It seems paradoxical that the fields explored by Tatneft are located in a territory controlled by the Government of National Unity, which Moscow did not support in the country’s civil war.

Oleksiy Otkydach, ADASTRA think tank