Alternatives & Analyses: The missed opportunity for Bulgaria's energy independence in December

A series of events last December, proved unequivocally that Bulgaria's national gas companies are not led by the national interest, but by an amalgamation of past and current dependencies and corrupt interests, qualifying their captured status as a national emergency.

To begin with, once every two years, Bulgargaz has the right to review its contract with Gazprom and seek adjustments to delivery points, mandatory purchase volumes, prices, formulas, including the introduction of spot elements into the oil-indexed formula.

The review deadline expired on December 3. At Gazprom's behest, the delivery point was changed from Isaccea to Strandja-2, which resulted in an extension of the deadline until the year-end. But, again, Bulgargas chose to remain silent.

Bulgaria's national gas trader acts as a local Gazprom accounting office tasked to guard its market shares on a single gas supply contract via a single route.

Why was the readjustment of the formula a must?

The spot market price on January 2nd at the NCG platform to which Naftogaz also refers was € 12.4/MWh. Note, this is the middle of the high season!? Last year winter prices jumped well over the  € 25/MWh. Despite peak levels in consumption in some key EU markets like Spain this winter - prices remained very low. The long-predicted gas glut has arrived and is here to stay. The unthinkable happened - gas prices end of December have plunged from November levels of  € 18 to  € 12,4 per Megawatt hour.

Against this favorable background, recent events in Bulgaria's gas market confirm - it is entirely detached from the EU gas market, firmly spinning in the orbit of Gazprom.

Moscow's decision to finally sign the 5-year transit agreement through Ukraine contributed to the low prices as it eliminated a vast unknown, allowing stored gas in the EU to shape the market and dampen expectations for future demand peaks.

LNG has indeed wiped out the exclusivity of Gazprom's gas and, at present, is the indisputable trendsetter in the global gas markets. Europe is no more left at the mercy of Russian gas. Gazprom has finally acknowledged it has to struggle to retain its shares on the EU market.

Very much at odds with this background, Bulgargaz's management failed to catch the wind into its sails and missed a golden opportunity - no spot price reference in the contract price, no reduction in "take or pay" volumes, no more flexible delivery schedule, no trade beyond Bulgaria's borders.

All top officials in the energy state sector - from Minister to CEO's - brag about the 5 percent hard-fought price discount in talks with Gazexport? Is this true?

The new gas price should be in the range of  € 21.5 per MWh, which seems excessively high when compared to the average gas price at the NCG for 2019 of 13 euros / MWh. It turns out that Bulgargas overpaid last year more than € 250 million, almost 70 percent more than German buyers pay.
It is all the more important to base judgment on what the Bulgarian energy companies have failed to do in order to favorize Gazprom.
The Greek DEPA and the Romanian Romgas bought stakes in the FSRU project in Alexnadropoulis, while the Bulgarian Bulgartransgaz has been long dragging its feet, dedicating instead its full attention to the transit Balkan stream project securing Gazprom's monopoly. The message the Bulgarian government sends is more than clear; our priority is Russia's pipeline gas, not its competitors.

Minister Petkova and the three top managers of the BEH, BTG, and Bulgargaz,  interpreted before the media this the 5 percent reduction as a major win.  A closer look. however, should reveal this is gross manipulation and an elementary PR for Turk Stream's importance for Bulgaria. There is no reduction in the actual price of Gazprom but an actual increase, as the lower price at which gas enters Bulgaria from Turk Stream is due to savings on Romanian transit worth more than € 40 million, which equals exactly 5 % of the annual cost of gas at Bulgarian-Romanian border in 2019.  The only way to explain why these 5% end in 1,8 % price reduction, in the regulated prices for 1Q of 2020, is that Gazprom's contract price for gas from Turk Stream is higher.

One should not forget that Gazprom's price for the Turkish national gas trader Botas has increased from $ 245 to $ 255 per TCM, which is a 4% increase. It is unlikely that Bulgargaz would get better terms as both contracts are oil-indexed.

Gazprom prices for Eastern Europe are commonly higher than prices for their West European clients mostly because of the difference between oil-indexed and spot market mix in their respective price formula. The effect of global LNG and pipeline gas from Azerbaijan or other gas in the SGC is minimal to modest given their low market shares and difficulties in accessing the South-East and East-European gas market.

Even adjusting for all the additional regas, storage and transit cost through Greece, the average price for LNG via Revithoussa to the Bulgarian border, is € 4-5 for MWh below-regulated prices in Bulgaria. On an annual basis, these differences amount to "only" € 150 million in price premium for Gazprom.

Another striking mark of the total captivity of the Bulgarian state gas companies in the last tenders for gas supply by Bulgargaz, which later should form the basis for gas release programs and for liquidity at the gas exchange of the Balkan Hub. All three December tenders were a failure due to a lack of interest and liquidity on the gas exchange to justify trade and its existence. So far, the traded volumes are marginal, most contracts are priced above the regulated benchmark of the EWRC.

The persistence in misleading the Bulgarian public is exemplary for the dual nature of the executed policies. The deviation from reality sometimes is so stark that one wonders where is the border between truth and falsehood. The government keeps repeating that Gazprom gas will form the backbone of the liquidity offered at the Balkan Gas Exchange. The truth is that this is not Gazprom gas, but gas bought by Bulgargaz, in irrelevantly small amounts for any gas exchange in the EU.

Worth reminding that the key objective of Bulgaria's energy policy is not for state energy companies to generate profits and feed the unduly large network of affiliated companies, but to secure competitive prices for natural gas for individual and industrial customers. Low and competitive prices are essential for Bulgarian citizens, whose wealth should not be drained and exported via price premiums to Gazprom. Low prices are vital for Bulgarian companies to be able to compete in the domestic and international markets. In this respect, all the talk about the country benefitting from being on the gas map of Europe might be good to serve the vanity of politicians, but what matters for consumers are low prices and favorable trading terms, not the politicians' egos.

By agreeing to a change in the delivery point, Bulgargaz, under orders from the PM's office, has vouched to guarantee Gazprom's shares in the Bulgarian gas market. Gazprom is making use of the state company's client base and the pre-order contract system, which substantially limits the ability of gas consumers in Bulgaria to diversify and seek alternatives.

Bulgargaztransgaz's unwillingness to claim damages for the unilaterally terminated transit agreement through Bulgaria to Turkey by Gazexport has a $2 billion value tag - a saving for the Russian company, a missed earning for the Bulgarian company.

While the CAPEX and OPEX of the new transit line are a certainty, the projected revenues from the extension of the Turk Stream into Bulgaria bear a high risk of not happening.

Under EU legislation, Gazprom's 90 percent control over the capacities of the Bulgarian segment of the Turk Stream is inadmissible as it blocks access of competitors to the regional market at a critical stage of its opening up.  In effect, the Turk Stream is a project meant to perpetuate Gazprom's dominance at an early stage of the diversification and liberalization of the gas market. The managers of the state energy companies have dedicated most, if not all, of their time to help the Russian company navigate the troubled waters of EU regulatory and legal compliance, turning procedures such as the open seasons for capacity allocation into a staged formality.

Gazprom's lawyers have played an instrumental role in pushing the argument, used by the Bulgarian government, that the Turk Stream is presented as an expansion of the national transmission system, therefore does not need an exemption, nor should it be regulated at EC level, but by the national regulator - the EWRC.

The text on US sanctions against Nord and Turk Stream in the 2020 US military budget law explicitly states that the sanctions apply to  "any project" that succeeds in their offshore segment, that is, the onshore or land-based part in Turkey, Bulgaria, Serbia, and Hungary. Here again, the name change trick will fool no one - it has limited credence, confined to few offices around the Council of Ministers in downtown Sofia. The transit character of the project is indisputable.

The second precondition in the NDDA text has also been covered as the new gas supply contract with Gazprom, deviates to the Turk Stream more than 25% of the volumes transited through Ukraine in 2018.

Big companies, enjoying strong backing from the governments of Italy, Germany, Switzerland, and Austria, chose to immediately stop work on the Nord Stream - 2 to avoid sanctions. At the same time, Bulgartransgaz and the main contractor Arkad chose to ignore warnings from Washington.

In all likelihood, they obey direct orders from PM Borisov, whose grip on the Bulgarian Turk Stream seems stronger than that of Merkel and Conte. The CEOs of the state companies feel invincible, confident of avoiding persecution for fund misappropriation, and bad governance.

In fact, as preliminary results of an investigation point, Bulgartransgaz and Borisov are implementing an elaborate backstage plan of funding the Turk Stream with Gazprom and the Bulgarian government agreeing to hide the identity of the real owner and financier.

To wrap up - the net effect of the government policy on the Bulgarian gas market at the end of December 2019 is to pay between BGN 300 and 500 million more for Russian gas. By the end of the gas supply contract in three years, almost a billion and a half leva will end up in price premiums to "Bulgargazprom".

The national trader has refused to renegotiate the supply contracts and change the price formula, a reduction in the mandatory take-or-pay rate, and a more flexible supply schedule. The aggregate damage inflicted from this act adds to the above.

Bulgartransgaz has waived nearly BGN 2 billion in compensation for termination of the transit contract.

Despite Gazprom's backstage financing for the Turk Stream project, the risks of lower earnings, following EC regulatory intervention or US sanctions are born by Bulgartransgaz, which might cause its potential bankruptcy. Worth reminding that the total asset base of BTG is BGN 1.8 billion, while the new project's cost is above BGN 2.6 billion.

Despite the opportunities that EU and NATO membership unfold, underwriting independent energy policy pursuit, diversification of supply sources, a boost for competition, and liberalization of the national gas market, Bulgaria's state-owned energy companies remain firmly fixed in the Soviet-Russian court.

Bulgargaz continues to pay the highest prices in the region and is bound to do the same next year,  the year after next year, and so on. Price premiums reveal the nature of the imperial tax Bulgaria pays to the metropolis Moscow, very much the way in Bulgaria gangs in the 1990s forced people and small businesses to pay a ransom and ensure against their raids.