Publications of experts CACDS - Balkans

How to get rid of Gazprom? Plamen Dimitrov about the new gas era in Bulgaria

Until recently, Bulgaria was sitting tight on a Russian gas needle. But thanks to changes in world gas markets, in particular due to the reduction in LNG prices, Bulgaria has been able to reduce its dependence on it. About this, as well as about other important issues of the Bulgarian-Russian gas relations - in an interview with the expert on energy geopolitics, Dr. Plamen Dimitrov.

Mr. Dimitrov, how strong is Russia's influence on Bulgaria's energy sector today?

The impact is of course serious. First, because historically Bulgaria has always received gas only from Russia. Secondly, Russia and Gazprom have strong positions among the top management of Bulgarian energy. Here's an example. In the South Stream-Bulgaria company, which was going to build the South Stream gas pipeline, board members received huge salaries from the Bulgarian side - much more than they did in Bulgarian state-owned companies. And these were official salaries. We can only guess if they were still receiving something in the envelope. Moreover, this company has been out of business for 5 years, but it still exists and in 2018 each of the boards received an average of 50 thousand. Euro salary.

Third, until recently Bulgaria had no alternative sources of gas. I'm not talking about oil anymore. We have only one large refinery today, and the one is owned by Lukoil. There is a Kozloduy NPP, which also uses Russian technologies and Russian nuclear fuel. So the influence is strong enough. However, after 2007, a limitation to this influence appeared: Bulgaria's membership in the European Union.

How strong was this limiter?

At first, it did not manifest itself in any way, but after the EU adopted the Third Energy Package, its influence began to increase as part of the powers that national governments had in the gas sector passed into the hands of the European Commission. That is, all that Bulgaria has recently been able to achieve in the sphere of gas trade with Russia has taken place with the assistance of the EU. In particular, the EU's investigation into Gazprom ended in 2018 over the abuse of its monopoly position, which resulted in an agreement between them. The Russian company has agreed to the free resale of its gas between EU countries, as well as to the introduction of contracts for adjusting gas prices for Central and Eastern European countries, so that they correspond to the level of market prices, taking into account LNG hubs. On the basis of this agreement, Bulgaria and other countries were entitled to require Gazprom to bind prices not only to the oil index but also to prices for gas hubs in Europe, which today are twice as low as Gazprom's gas pipeline. Bulgaria alone would hardly have achieved this.

Does Bulgaria have the opportunity today to ease Gazprom's monopoly position?

There is. And again she has appeared recently. Here I would highlight two main points. The first is that since the beginning of last year, LNG has become cheaper than the pipeline gas supplied by Gazprom. Moreover, now China has begun to refuse LNG supplies because of this Coronavirus, and so the market is getting a large surplus of it and prices are going down. The second factor is that Bulgaria has a contract for the supply of Azerbaijani gas in the amount of 1 billion m³ per year. That is, these two factors actually undermine Gazprom's monopoly on the Bulgarian market. But in order to realize these opportunities it is necessary to have the necessary infrastructure: both for transportation to Bulgaria of LNG and for transportation of Azerbaijani gas. And here the key role is played by the gas interconnector between Greece and Bulgaria.

Is it already built?

Not yet, as it has been constantly hampered since its implementation. As this project is carried out on the territory of the EU, a tender was announced for each procedure: for the supply of pipes, construction, construction supervision, etc. And here appeared some unknown Bulgarian company, which had never worked in gas, and filed documents stating that she was dissatisfied with the results of the tender and wanted to appeal it. And so she was dragging her time and constantly postponing the project.

Also here it is necessary to pay attention to the shareholder structure of this interconnector. It was conceived about 10 years ago. At that time, it was supposed that Azerbaijani gas could go to Europe via ITGI (Turkey-Greece-Italy Interconnector) with a branch to Bulgaria. A Poseidon consortium was created specifically for the ITGI project, which included the Greek company DEPA and the Italian Edison. Therefore, Poseidon has also entered the Greece-Bulgaria interconnector with a 50% stake. The remaining 50% is owned by the Bulgarian Energy Holding. It is important to note that Edison is fully controlled by the French Electricite de France, which has long been a strategic partner of Gazprom. That is, some participants of the Greek-Bulgarian interconnector were not particularly in a hurry to implement it.

But, fortunately, last year all these complaints ended, and contracts were signed for the construction and supply of pipes. The first contract states that the contractor must hand over the facility by April 2021. Almost 1/3 of the cost of this project was covered by the EU through grants. The rest of the money was disbursed by the European Investment Bank as a loan. So today there are serious reasons to say that this project will be implemented.

That is, it turns out that in 2021 non-Russian gas will already go to Bulgaria on this interconnector?

Yes, Azerbaijani gas can go on it. Although, Bulgaria has committed to start its procurement this fall, that is, as soon as the Trans-Adriatic gas pipeline is ready. However, I spoke with the director of the Greece-Bulgaria interconnector, who said that she could not get such terms, and that the contract was written in April 2021, not in the fall of 2020. In addition, US gas can be supplied to Bulgaria through the Greek Revitus LNG terminals (active) and Alexandroupolis (construction is planned).

But there is a problem that with all these options - with Azerbaijani gas, LNG, as well as with the current contract with Gazprom, Bulgaria will have excess gas, which it simply has no capacity to store. There is only one Chiren gas storage facility, the volume of which is approximately 500 million cubic meters. m.

Also, the problem is that the contract with Gazprom ends in November 2022, and it has a "take or pay" item, which accounts for at least 80% of total deliveries. That is, from this 3 billion m³ Bulgaria must buy about 2,4 billion m³ of gas under this item. Therefore, Minister Petkova's words that half of the gas in Bulgaria will be non-Russian by the end of this year do not correspond to reality. In order for this to happen, Azerbaijani gas must start flowing to Bulgaria - and it will be no earlier than April next year, and secondly, Bulgaria must solve the problem with Gazprom: what to do with its excess gas. On the second question, negotiations are underway right now, and I can predict that Gazprom will definitely not remove this "take or pay" item from the contract - it will definitely remain. The main question is whether Gazprom will be ready to lower this item to or below 50%.

What are your forecasts for these negotiations?

If Gazprom does not make any concessions on the take-or-pay point and does not agree to tie prices not only to oil but also to gas hubs, first, it will again face the European Commission, as it has committed to make such concessions and not abuse the monopoly. And secondly, he will not have a favorable position on the new contract (after November 2022).

To date, seven of the eight Eastern European countries that have been the subject of EU proceedings against Gazprom have already switched their contracts with him to more profitable ones. And only Bulgaria has not had time to do so. The reason for this can be the aforementioned Russian influence, and also that the Russian side has made an "irrevocable offer": "we will provide you with a large gas transit through Turkish Stream 2, and you do not insist on changing the contract".

It should also be borne in mind that although there are high hopes for the Terminal in Alexandropoulos, its construction will be completed no earlier than 2022. So for at least another 2 years, US LNG will not be able to enter the Bulgarian market through this terminal.

How do you see the fate of the second branch of the Turkish Stream?

Before talking about the second branch, I would like to start by noting a few important points about the first branch. So, today Gazprom has problems even with the first branch, which exists, works, but it turns out that the demand for Russian gas in the Turkish market is not so great now. First, because of the excess LNG on it: this winter alone, the Turkish company Botas ordered 30 LNG tankers. The second factor is the increase in gas supplies from Azerbaijan. The third is the reduction of gas consumption through the introduction of new renewable energy facilities in Turkey.

Here it turns out that half of the 16 billion m³ that Gazprom intends to sell to Turkey through the first branch of the Turkish Stream is no longer in demand.

Overall, Russian gas supplies to Turkey fell by 15 billion cubic meters, according to data from last year. That is, in order to cover Turkey's current need for Russian gas, it will be enough to use only Blue Stream capacity.

The second problem for Gazprom is related to the second strand, that is, how to pull this gas into Europe. Compared to the South Stream, the Russians changed their tactics a little. When the South Stream was planned, they trumpeted that it would be the largest gas pipeline in Europe - now there is none. At that time Gazprom owned 50% of the shares in the South Stream section of the South Stream - now, 100% of the Bulgarian section of the Turkish Stream is owned by Bulgartransgaz. Thus, the Russians tried to remove one obstacle in the eyes of Brussels. But Gazprom has reserved 90% of the Bulgarian section of the gas pipeline at the entrance and 80% at the exit. Here, too, a major problem arises for him: does Brussels consider that 10% and 20% respectively are sufficient for diversification or not? I think not, because it's too little to diversify. Second, 100% of the gas that will be transported through the Turkish Stream through the Bulgarian territory will be Russian.

Another important point is the construction of the gas pipeline, namely: its timeline. So, by May this year, they have to finish the first stage, which will allow to deliver 3-4 billion m16 of gas per year to Serbia. The second stage is the launch of the gas pipeline at full capacity, which will increase its capacity to 2021 billion m³ of gas per year. This is due in June XNUMX. That is, it turns out that by the middle of next year, Gazprom has virtually no opportunity to supply gas from the Turkish Stream to Central Europe. And that, I would say, is the most optimistic term. If the United States continues to put pressure on Bulgaria for this pipeline, then its full-scale startup could be delayed even more.

Do you mean the US sanctions, which should be published in late February?

I do not think that the sanctions will be extended to the land part of Turkish Stream 2. For the time being, the sanctions that are in place are directed against companies involved in the construction of North Stream 2 and Turkish Stream 2 submarines. While it is difficult to say whether any of them will be toughened with respect to the second branch of the Turkish Stream. The toughest option in this case would be if Americans declare sanctions against companies that will buy gas going through these pipelines. I do not know if this is possible against Turkish Stream 2, but if such sanctions are imposed against North Stream 2, it will be a war with Europe.

There is another option: sanctions can be imposed on those companies that are involved not only in the construction but also in the financing of both gas pipelines. In this case, the Bulgarian authorities hope that because the pipeline is being built and funded by the Saudi consortium Arcad, the Americans will not impose sanctions on the company of its closest ally.

However, the threat of termination by the Americans of Turkish Stream 2 still exists. There is a recent feeling that they are putting a lot of pressure on the Bulgarian authorities in this matter.

It should also be noted that Gazprom's reservation for more than 50% of the capacity of the Bulgarian section of the Turkish Stream is contrary to the Third Energy Package…

There is no clear indication in the Third Energy Package that more than 50% of the pipeline capacity cannot be reserved by one supplier. It has requirements for diversification, demonopolization, and the like. And whether the actions of the supplier meet these requirements or not - is already decided by the European Commission. That is, it can say that Gazprom can use 50% of the gas pipeline, and for other capacities it is necessary to look for other suppliers. So, by the way, it was with the OPAL gas pipeline.

It is unknown what decision the European Commission will make. It will also depend on the overall political climate between the EU and Russia. So it was in the past. For example, if prior to the annexation of Crimea, Russia had some opportunity to drag the South Stream project, then after the spring of 2014, it disappeared due to the escalation in relations between Brussels and Moscow.

Interviewed by Igor Fedyk, CIAAC (Kyiv-Sofia-Kiev)