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    [NGW Magazine] Bulgaria keeps close to Russia

Summary

This article is featured in Volume 3, issue 14 of NGW Magazine - The Bulgarian prime minister's visit to Russia has not yet led to the South Stream project revival – landfall in Turkey is still the official route – but all roads lead to Rome, where Bulgaria's gas trading project is concerned.

by: Martin Vladimirov

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Natural Gas & LNG News, Europe, Premium, NGW Magazine Articles, Volume 3, Issue 14, Corporate, Import/Export, Investments, Political, Balkans/SEE Focus, Infrastructure, Pipelines, Trans Balkan Pipeline, Turk/Turkish Stream, News By Country, Bulgaria, Turkey

[NGW Magazine] Bulgaria keeps close to Russia

The Bulgarian prime minister's visit to Russia has not yet led to the South Stream project revival – landfall in Turkey is still the official route – but all roads lead to Rome, where Bulgaria's gas trading project is concerned.

During his official visits to Bulgaria, Soviet leader Leonid Brezhnev and his Bulgarian counterpart, Todor Zhivkov, used to sign bilateral deals promising a brighter Communist future fuelled by new projects in energy, petrochemicals and agriculture.

Fast-forward 30 years, and one can see a similar pattern in the Bulgarian relationship with Russia. The Bulgarian leadership still looks up to Moscow to back its ideas for building power plants and pipelines. At the end of May, the prime minister Boyko Borissov flew to Russia to meet Vladimir Putin and ask for forgiveness from the “big brother” (his exact expression) for the failure of South Stream, the Russia-Bulgaria gas pipeline. That was technically the scalp of the European Commission, which found problems with the Bulgarian procurement procedure. Putin retorted to Borissov that forgiveness often costs dear. 

Behind the diplomatic awkwardness lay a simple strategy – lure back the Russians in a large-scale pipeline project on Bulgarian territory. South Stream’s failure at the end of 2014 was a big blow to the-then Bulgarian government, again led by Borissov. On the one hand, the project was portrayed as an instrument to spur economic growth and to create "thousands of jobs"; and on the other, more cynically, it was to become a source for allocating at least €1.9bn to local pro-Russian oligarchic networks that had previously become 50% shareholders in the pipeline’s contractor. The other half was first in the hands of Stroytransgaz, controlled by Genadii Timchenko, the US and EU-sanctioned Russian businessman with close ties to the Kremlin, and then Gazprom’s almost wholly-owned construction and assembly subsidiary, Centrgaz.

Not surprisingly, in 2015, the Bulgarian government decided to revive the dream for a major, Russian-led energy project in the form of the so-called Balkan Gas Hub, which according to the current government plans, will serve as a trading point for Russian (via a 'South Stream light' pipeline through the Black Sea), Azeri and LNG (via TAP and the Greece-Bulgaria interconnector), as well as potential domestic production from Black Sea offshore reserves. This was always to be a physical trading point, as opposed to a virtual hub.

Most of the so-called hub concept involves a string of expansion and modernization projects related entirely to the domestic natural gas transmission network allegedly in preparation for major gas exports from Bulgaria to central Europe via Serbia. Cost estimates vary between €1.8bn and €2.1bn, coincidentally equalling the Bulgarian stake in the former South Stream project on Bulgarian territory.

The deputy energy minister, Zhecho Stankov, said that the concept for the hub would be ready by the end of 2018 when the ongoing feasibility study would come out. Judging by the actions of the natural gas TSO, Bulgartransgaz, which has recently announced a €25mn ($29mn) tender – the deadline for submitting applications is July 26 – for the engineering and construction of a 48-inch, 10.7-km gas transmission pipeline from the Bulgaria-Turkey border to the Strandja compressor station serving the Transbalkan transit pipeline, Bulgaria is gearing up to win the competition for the exit route on the planned 15.75bn m³/yr TurkStream 2 pipeline.

Physical trading hub dream

Bulgartransgaz has said the new pipeline took it a step nearer the Bulgarian objective of becoming a hub in the EU and the region. It also explicitly mentions Gazprom’s decision on TurkStream as a precondition for building the pipeline link. Gazprom’s CEO, Alexei Miller, said June 29 that Russian gas from TurkStream could be flowing through the gas pipeline networks of Bulgaria, Serbia and Hungary by 2020.

If this plan materialises, the new Russia-led Balkan project would mirror the route of the now-defunct South Stream. Borissov has allegedly asked Putin for TurkStream to pass through Bulgaria rather than Greece. No final decision is expected, however, before the end of the year.

Gazprom’s statement comes as Bulgartransgaz has pursued a sustained strategy to relaunch the project on Bulgarian territory. The TSO first acquired the assets of the South Stream Bulgarian project company, and then launched a preliminary market test for a new pipeline along the same 450-km route from the Provadia compressor station in northeastern Bulgaria to the border of Serbia near the town of Zajecar.  

Bulgartransgaz said that five companies had expressed interest in booking up to 54.6mn m³/day at the Bulgaria-Turkey border, while only 34.4mn m³/d would reach the Serbian border. The TSO puts the price tag of the new "Bulgarian Stream" at €1.5bn but it is hard to imagine that such a pipeline could be built in less than 24 months. 

The names of the five shippers were not publicised, but Gazprom is one of the few companies able to supply so much gas to the new pipeline system. It is even less clear who would buy the enormous new gas supply – at least 13bn m³/yr after subtracting the quantities for Bulgaria, Greece and Macedonia. 

Bulgarian transmission tariffs are indeed lower than in most of Europe but there still seems to be little market logic for traders to purchase Russian gas from the south when they have more direct and cheap options in the north. Gas demand in the region has also been stagnant and is unlikely to increase much in the future considering energy efficiency gains and the transition to renewable energy sources in the electricity sector. 

TurkStream: strategic, not commercial

TurkStream however, has not been and will never be a commercial project. It has an obvious strategic dimension: to reroute the Balkan gas supply from Ukraine-Romania-Bulgaria to Turkey-Bulgaria-Romania-Serbia. This would not only circumvent Ukraine and provide a direct outlet for half of Turkey’s purchases of Russian gas, but would also potentially avoid a difficult renegotiation of the transit contract Bulgaria has with Gazprom, which might become obsolete if Gazprom stops the Ukrainian transit after 2019, ten years before the contract expires.

The transit agreement with Gazprom gives Bulgaria a lever. Bulgartransgaz receives around €100mn/yr from transit fees paid by Gazprom on a ship-or-pay basis for 15bn m³/yr. But as Bulgaria has been paying between 20% and 30% more for its own gas imports than Gazprom’s average European price, the costs of Bulgaria’s dependence on Russian gas have outweighed the benefits from the transit agreement. Gazprom has been paying some of the lowest gas transit fees to Bulgaria at $1.85/’000 m³/’00 km (540 km for Bulgaria).

Having a long-term transit contract with Gazprom provides Bulgaria with an ace in its sleeve when it comes to the future gas supply negotiations with the Russian company. The long-term take-or-pay supply contract between Bulgargaz, the wholesale market quasi monopolist, and Gazprom ends in 2022 but can be opened for renegotiation as early as this year. 

Strangely, though, policy-makers have been unwilling to use their newly-acquired improved bargaining position. Instead they have rushed to welcome TurkStream and to use it as a justification for the hub project. In principle the EU backs the idea and has even allocated €900,000 for a feasibility study. However, in private, the European Commission has implied that the political support for the Balkan Gas Hub is a carrot to push Bulgartransgaz and the government to do their homework and commit to unlocking regional gas trading and so to liberalise the domestic market.

The natural gas transmission system operator (TSO), Bulgartransgaz, has worked hard to keep things the way they are despite EU pressure for a comprehensive reform of the market. The company has dragged its feet for a decade to reach an agreement with its counterparts in Greece and Romania on liberalising cross-border trade along EU rules. All along, Gazprom has refused to allow a change to the long-term supply and transit agreements of the three southeast European countries that would have allowed the redirection of natural gas supplies outside the fixed destination point in the contracts.

After strong EU pressure, which has included also direct talks with Gazprom, in 2016 a trilateral agreement was reached allowing virtual gas swap agreements to be struck by trading companies in Greece, Bulgaria and Romania. This was also part of the ongoing process of EU-Gazprom settlement of the EC’s anti-trust investigation against the Russian company.

Despite the breakthrough in regional gas market liberalisation, cross-border gas trade has not picked up much and Bulgargaz remains the dominant supplier in Bulgaria with only minimum gas volumes of around 500,000 – 1mn m³ imported on a gas swap basis. This is due to the continued administrative and governance bottlenecks from Bulgartransgaz and the Greek TSO, Desfa, as well as the fact that competitive alternative gas supply does not yet exist in the region.

As the EC struggled to successfully pressure Bulgartransgaz into liberalising third party access despite multiple infringement procedures, it finally demanded its privatisation in 2016. But the government firmly rejected the proposal, and even publicly stated that it would be better to pay the EU fine estimated at €330mn (a tenth of the annual revenues). The parliament even mandated that the Bulgarian Energy Holding, which is the mother company of Bulgartransgaz, did not plead guilty, which would have reduced the potential fine.

The EC is yet to come out with a verdict but it seems less likely that the Bulgarian TSO will be penalised as the EU and Gazprom have struck an agreement on the anti-trust case that theoretically frees up Bulgartransgaz to act and finally implement the Third Energy Package.

By backing the hub dream of the government, the EC seems to be giving Bulgartransgaz the benefit of the doubt. Yet, the fact that the Bulgarian government has not given any indication that it is going to follow up on the EU-Gazprom settlement to achieve better terms on its supply contract, gives little hope that the Russian grip on Bulgaria’s gas policy will be relaxed soon. 

Martin Vladimirov