gasprom-bulgargaz

 

Since mid-August, the ritual of communicating the bad news of the imminent natural gas price hike has been in motion. It is now a matter of time before politicians and parties join the chorus and contribute to the drum beat. Energy being everyone’s domain, the chorus draws across government-opposition and party fault lines. Quite often the battle for domination and redistribution of power within the energy sector rages within the GERB and BSP parties – survival of the fittest rules in which the weakest link short-circuits and leaves the scene.

 

The scenario in a nutshell is the hot potato – the responsibility for the gas price increase, which is expected to be in the range of 15%, will ultimately be attributed not to the main culprits – Gazprom and Bulgargaz – but to the regulator and the ‘political level’. The buzzwords are ‘anonymous market, corporate and political responsibility’, which comfortably shields the system error – the total mismanagement of Bulgargaz – the web of dependencies at corporate and government levels that decry impotence or corruption.

 

Neither the regulators, nor the energy ministers have been able to singlehandedly cut the Gordian knot of decades-long dependencies on Russian gas. It is not clear whether these days PM Borisov is in charge – capable of steering the ship to a safe port. The power of elected officials is waning versus behind-the-scenes puppeteers. It is suffice to recall that the Bulgarian PM was unable to dismiss one of his own GERB past favorites – former energy minister Delyan Dobrev, who formally tabled a resignation, yet it was voted down in parliament.  A clear sign of Borissov’s waning power is the immunity of the main suspect on the gas price issue – the CEO of Bulgargaz – to public scrutiny, while the heat is likely to be taken by one of Borissov’s favorite – Energy Minister Petkova.

 

These undercurrents do not surface often. Yet once again the behind-the-scenes drivers will mobilize consumers’ and employers’ organizations to protest and challenge the government. Under the guise of concern for the price of electricity or natural gas, businessmen with vested interests in the energy field, benefitting from higher electricity, fuel and gas prices, are directing public wrath away from the main culprits – Gazprom, Lukoil and Bulgargaz.

 

The above story foretells the immediate future, as public debate and anger escalate with the approach of October 1.

 

It is rather strange to watch the proactive engagement of the least culpable party in the process – the Energy and Water Regulatory Commission. Its chairman ‘leaks’ the corporate news of pending price review negotiations between Bulgargaz and Gazprom at the behest of the Russian gas monopoly. This is hardly the job of a regulator. In the meantime, the CEO of Bulgargaz, who has been at odds with the current energy minister ever since the time he served as interim energy minister in the caretaker government of President Radev, is lurking.

 

Nikolay Pavlov is the prime point of call when it comes to responsibility for the price of natural gas – both for what has been done and mostly for the mitigating actions that have been missing. Yet he seems beyond reproach, carefully shielded by his allies that include President Radev.

 

Having dealt for years myself with natural gas and contractual relations with Gazprom, let me share a deep conviction – despite the rigid market and contractual frameworks and the oil-indexed formulae – which are only partially market based – gas price levels leave ample grounds for good mitigation policies and management counteraction.

 

Bulgargaz has effectively given up on its responsibilities as ultimate public supplier. Instead of securing a balanced and diversified mix of sources and terms, the management of the company has intentionally limited its actions to representing and brokering Gazprom’s interests, ignoring alternative sources and routes. The company acts as a representative office for Gazprom, confining its activities to brokering services and sales revenue collections, while ignoring blatant monopoly abuse and overpayments for gas.

 

Bulgargaz activities should be benchmarked against policies and actions taken by other national gas companies in Eastern Europe in defense of consumers’ interests. Let’s start with a review of the most common ways to mitigate price volatility and ma rket fluctuations.

 

Regrettably few in any are used in Bulgaria. Before blaming geopolitics, let’s look at the management track record.  What Bulgargaz’s clients see in their contracts is a mirror image of the terms in the main contract with Gazprom. The price formula, the basic terms regarding volumes, delivery terms, mandatory take-up and prepayment are non-negotiable and reflected in the domestic clients’ contracts. The regulatory commission simply rubber-stamps the inevitable and the lack of competition. With Gazprom having a 100% monopoly and a single contract, the notion of negotiations and agreement becomes fictitious.  It is a one-way street, a diktat all the way down to the end user.

 

The only exception throughout the years has been when indigenous gas production contributed to over 10% of the total supply, which allowed Bulgargaz to offer local consumers gas at a rate lower than Gazprom import prices.

 

Where does Bulgargaz fail in mitigating price risks?

• Bulgargaz has no range of maneuver with a single source. There are neither alternative deliveries nor alternative pricing, benchmarked on “gas-to-gas”. Worth noting is that Bulgargaz is probably the only gas company in the region that has not shown interest in buying gas from the Neptune gas deposit in the Romanian offshore area. Therefore, Bulgarian consumers, while not being spared oil market shocks, are deprived of the modest benefits of the spot and gas benchmarked trade. Bulgargaz management has done nothing to change the situation in the past years.  There is no record of the management proposing to change the situation and the minister refuting their attempts.

 

• Despite price review clauses in the contracts, Bulgargaz has refrained from using this option to accommodate changes in the EU gas market and alleviate terms for Bulgarian gas consumers. The conscious indolence in the past starkly contrasts with the new ranges of freedom of action for Bulgargaz, given the settlement between the EC and Gazprom of the anti-trust case and the commitments undertaken by the Russian state gas company. Making things look ever more tragic, Gazprom itself initiated a price review in the contract with Bulgargaz in order to avoid default on commitments to Brussels. Again the responsibility lies totally in the court of the Bulgargaz’s management.

 

• Bulgargaz has no alternative routes to help balance peak consumption or supply interruptions, which could inter alia reflect positively on price risk mitigation. A lack of alternative supply routes denies Bulgarian gas consumers the chance to switch to flows from less expensive and more competitive gas sources. Bulgarian government officials regularly visit gas producing countries, yet in none of the instances has Bulgargaz managed to translate the opportunities into contracts.

 

• Bulgargaz has no currency risk hedging policy. The problem looms high at times of appreciation of the currency of gas contract denomination – the USD. The justification from Bulgargaz is that the CEWR does not recognize hedge costs in the price justification. However, switching to contracts in EUR/MWh, which are standard for EU gas exchanges, could remove or at least alleviate the currency risk.

 

• Bulgargaz seems stuck with the short-term liquidity problems and growing receivables, which compromises its ability to pre-pay Gazprom for future supplies. Chronic debt issues with large clients, like the Central District Heating Company in Sofia, seem to be beyond the grasp and control of the current management, drastically limiting the range of response options to unfavorable market developments. Yet the management could have initiated remedial action – sell debt, convert it into equity and force the government to privatize. Nothing has been undertaken so far.

 

• Bulgargaz has always been in a position to mitigate price risks, given the time lag in the price formula. It buys in the low season, ostensibly summer, larger quantities at lower prices, storing them in the UGS Chiren (that should have had a capacity expansion to 1 billion cubic meters) or in Ukraine – with practically unlimited storage capacity. The Bulgargaz management has never explored in depth or in substance this line of action, always opting for the easy excuse – the contract with Gazprom. In the last year alone Low–High season price differentials have exceeded 20 percent – which at least in theory could have made possible almost complete price risk mitigation.

 

• Bulgargaz could have substantially strengthened its financial position by replicating established successful precedents in Europe in which national gas companies took Gazprom to arbitration court over overpayments for above market benchmarks gas prices after 2012. Such a move, with almost guaranteed success, could have added hundreds of millions of dollars to the coffers of Bulgargaz, allowing it to offset substantial parts of the expected price increase after October 1st and even neutralize it. It is hard to think of a company in the EU that has not made use of this option to achieve price reductions or compensations in kind – either after a court decision or via an out-of–court settlement.  The evidence for overpayment for gas is overwhelming – there have been times when the difference between prices paid by Bulgargaz and the price at the German border exceeded 100 dollars per 1000 cubic meters. Why the management of the Bulgarian gas monopoly consistently chose not to pursue this track and secure better trading terms in future contracts is still a mystery.

There seems to be no other legal recourse for consumers to protect their interest in the absence of willingness from Bulgargaz’s management than to take legal action against the gas company for inaction, which could ultimately leave the management with no choice but to sue Gazprom for past overpayments. This line of reasoning would make more sense for consumers’ groups than playing politics.

 

• Bulgargaz is not registered on foreign gas exchanges, does not trade outside the country and henceforth is unable to operate buffers of natural gas to allow it a greater range of flexibility and optimal gas mix, accommodating radical price increases. The choice the gas company offers its clients is limited to none.  Oil-indexed prices for gas supplies over extended periods of time, which Gazprom claims are non-discriminatory and competitive for Bulgaria, become substantially more expensive when used as a source for short-term trading, covering peak or impromptu demand increase.

The public debate in Bulgaria fails to address this angle of concern of industrial consumers. No calls for the resignation of the CEO of Bulgargaz are heard, just attempts to redirect consumer anger in safe alternative directions.

 

• Bulgargaz has no record of upstream business, nor has it invested a dime in acquiring shares or production quotas in gas discoveries in the region, which is a must for traders seeking cheaper sources of gas and hedging against price volatility. It is suffice to compare what Bulgargaz’s analogues are doing in Greece, Turkey and Romania – both on and offshore. The news are pouring in with oil and gas drilling in progress in all of our neighbors.

 

Instead of diversifying its business portfolio, Bulgargaz’s management is preoccupied with securing Gazprom’s market share in Bulgaria both via direct brokerage for Russian gas to end consumers as well as via designated proxies or acting as a wholesaler for the quantities that Gazprom would pass on to designated retailers and secondary traders.

 

Bulgargaz will gradually transform into Gazprom’s preferred but not exclusive partner with a shrinking share in the domestic market, while Russian gas imports remain essentially the same. This is the best protection the Russian gas company could receive against LNG or pipeline gas competition from foreign players.

 

At the end, the game plan is for Bulgargaz to end up supplying gas to customers that nobody else wants – such as Toplofikacia Sofia, while the lucrative clients pass on to designated Bulgarian traders.

 

The above-mentioned scenario leads to a simple conclusion – the imminent price increase was preventable and predictable. Applying any of the above-mentioned price risk mitigation steps (the list is not exhaustive) by the company’s management would have produced a substantially lower, if any, price increase.

 

The long-term and lasting solutions require radical reform in the gas sector, abolishing dependencies and avoiding the traps Russian energy grands applied to control the fuel sector – where Lukoil is operating a web of complex carrot and stick systems within a loose ‘cartel’ that stifles competition.

 

Customers are not hostages or liege men of a preordained Russian energy fiefdom. If Bulgargaz is unfit to engage in a level playing field and open competition, then the CEWR and CPC and the Bulgarian government should step in and overhaul Bulgargaz.

 

By Ilian Vassilev

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