by Ilian Vassilev, Bulgaria Analytica
The speculative interpretations on the secretive nature of the trip of Gazexport’s top managers to Sofia last Friday, beyond doubt, will build up due to the total absence of facts and details. This is an inevitable consequence as one compares the media frenzy around the visits of the top brass at Gazprom to the country on previous occasions.
To begin with, the decision to keep the meetings with Bulgartransgaz secretive reflects the content and the range of topics covered. The classic is: both sides need to agree to keep the exchange out of the public record. Gazprom and BTG, as hosts, have no interest in disclosing details, as the negotiations cover a very sensitive topic – the extension of Turkish Stream through Bulgaria.
Two events have marred the usual hype where politicians and managers brag about achievements. This time they had to account for risks and the negative legacy of the failed South Stream project.
The first line of consideration for Gazexport comes with the decision of international shareholders in Gazprom to take to court Gazprom’s management for the mismanagement of the South Stream project that led to $2.2 billion losses that had to be written off. This potentially provides a good explanation as to why Mrs. Burgmistora and Mr. Medvedev show a new zeal in exploring the range of the possibilities to justify past mistakes in a redivivus of the South Stream in a “Lite” format, as Bulgaria is critical for the new project.
The second line, which gives further proof of the motivational base at the highest level of management at Gazprom, is the decision of Gazprom via its daughter company “Gazprom Transgaz Krasnodar” to extend a $1.9 billion loan to the Dutch-based Gazprom company South Stream Transport B.V., which was originally meant to develop the South Stream project. This is a clear sign that the Kremlin has decided to push through with the final stage of the Turkish Stream extension.
The two events, considered in tandem, as well as the stakes involved, warrant the secretive nature of the visit and meetings with top government officials in Sofia. The list of outstanding issues facing the continuation of the Turkish Stream project via Bulgaria to Serbia, could hardly be more impressive. The Bulgarian side, on its part, equally needs secrecy, as the obligations it should undertake need to be cleared in advance with the EC. Under recent changes in EU legislation, any new major cross-border gas transit infrastructure development in the EU requires advance clearance in Brussels. The original South Stream’s abysmal end nurtures natural pessimism as commitments undertaken at the time by the Bulgarian government were not met.
South Stream Lite needs a green light from Washington, as well, as the threat of U.S. sanctions is still hanging over both Gazprom ‘Streams’ projects.
The Bulgarian government of PM Borissov seems to believe that it stands better chances if it links the purchase of US fighter jets for the Bulgarian Air Force to a lenient approach by the U.S. government toward South Stream lite. Borissov could not manage to talk over these hot issues with President Trump but had the chance for a lengthier exchange with Secretary of State Pompeo. The outcome is not clear, though the secrecy of the visit to Sofia by the top managers of Gazexport could serve as an indicator that Washington has not given a nod.
It is quite possible that Mrs. Burgmistrova and Mr. Medvedev deliberately ignored the visit of Nikolay Pavlov, the CEO of Bulgargaz, to St. Petersburg, where he met lower ranking officials to divert attention away from the more critical visit to Sofia.
The signed annexes to the supply contract between Gazprom and Bulgargaz were initiated by Gazprom, covering word for word a pre-set compliance form agreed within the EC-Gazprom anti-trust settlement, where the Russian company was given a 6-month term to provide evidence of compliance. The annexes referred to in the Bulgargaz press release are strictly that and nothing more. there has not been any substantive change in the other essential parts of the contract.
New negotiations are scheduled for November.
Gazexport is, as usual, in the driver’s seat and has suggested its own plan for substitution of the oil-indexed price formula in the current contract with a blend of three EU gas border oil-indexed prices – France, Italy and Germany – and three hub prices – TTF, NBP and Baumgarten. This is a clumsy attempt to substitute the need for diversification of sources and competition on the Bulgarian gas market, with the diversification of benchmarks within the price with the monopoly supplier.
The change in the delivery points that Bulgargaz has requested is echoing a similar document issued in response to a request by the DG COMP to pass judgement on a draft Gazprom placed for the anti-trust case settlement. That document was issued in late April 2017 by the then-minister of energy in the interim government, Nikolai Pavlov, the prior and present CEO of Bulgargaz.
When it comes to price levels, the picture is even more obscure. Although it is true that Gazprom gas prices for Bulgaria are among the lowest in the EU (slightly above 21.2 Eur/MWh) for the 4 Q of 2018, they do not reflect the entirety of ‘gives and takes’ between Bulgargaz/Bulgartransgaz, on one side, and Gaexpoprt on the other. Various angles and factors need to be accounted for in understanding the end effect and overall value of Gazprom’s gas price.
Here is a sample of the balance sheet, kept away from public scrutiny, where favors are swapped – with the net balance always in the red for the Bulgarian taxpayers and consumers, but not necessarily for the people implicated in negotiations and transactions.
А. Bulgargaz is one of the few state gas companies in the CEE that has refused to lodge claims against Gazprom for overpriced gas since 2012. Prior to 2014, the price difference between German border prices (used as benchmark in arbitration cases) and Bulgarian border prices often exceeded $100/tcm), which means that potential claims could have ranged in the hundreds of millions of dollars. Most CEE and EU companies that have pursued this line of action managed to receive substantial refunds in price discounts for future supplies. So the ‘claims’ avenue in defense of interests has been pretty much a routine business. These overpayments in the past should also be added to the “price” of Russian natural gas.
B. Gazexport has been enjoying an unprecedented low tariff for transit of its gas via Bulgaria – the lowest in the EU. Whereas GZE pays for its cross-Bulgaria transit under the old post stamp tariff system around 6 USD/TCM to the Greek, Macedonian and Turkish borders, all other companies, including Bulgargaz, pay under the new entry-exit tariff system. On a ceteris paribus base – same volumes and yearly term – this comes out to at least USD 12/TCM more. The monetary equivalent of the “privilege” judged as a revenue loss exceeds the total annual incomes of the BG gas system operator – Bulgartransgaz. This invites a potential hidden state aid claim. Again, hundreds of millions of unreceived incomes each year for BTG, which should also be added to the “price” of Russian natural gas.
C. Finally, GZP receives the red-carpet treatment and a full 100 percent market share in the BG gas market – thanks to Bulgargaz’s persistent refusal to buy gas from other sources – even when prices have been competitive. Gazprom’s monopoly and total market domination in Bulgaria, which should be added to the “price” of Russian natural gas.
To sum it up, while it is true that GZE prices are among the lowest in the EU – on a net basis – the gives and takes balance, when factoring in the lost revenue under various schemes, including lack of competition, Gazprom’s prices in Bulgaria are at least 25% higher than the nominal ones and are the highest in the EU.