My favorite Russian diplomat is Ambassador Chizhov. He tops my rankings as the most outspoken Russian diplomat on a range of hot topics in EU-Russia relations. He is entrusted by the Kremlin to challenge the EU on its home turf each and every time the European Council, the European Commission or the European Parliament passes a motion that affects Moscow’s interests. One clear mark of President Putin’s personal trust in him is the fact that Vladimir Chizhov is spending his record 14th year in office as Russia’s Permanent Representative to the European Union.

 

He did not waste time in reassuring Russians and Russia’s friends and partners that the amendments to the EU Gas Directive passed by the European Parliament on April 4th, amending key regulations for gas pipelines entering the EU internal market, will not affect the Nord and Turk streams. In short, Moscow has nothing to worry about.

 

Yet, a glance at the text of the amendment certainly leads one in a totally different direction.

 

There is little doubt that once the amendments become law, and this should happen by the end of 2019, the powers of the European Commission to oversee and control infrastructure entering and influencing the EU’s internal gas market will be boosted.

 

During Ambassdor Chizhov’s tenure in Brussels, Gazprom has learned the hard way that Moscow’s wishful thinking seldom turns into reality. The costs of ignoring Brussels have skyrocketed, yet Moscow seems to learn slowly.

 

There are some key aspects of the amendment that, regardless of Chizov’s upbeat comments, Gazprom and its partners would have to account for in earnest.

 

First, the EC will formally become the ultimate decision-making level pertaining to all gas infrastructure entering EU territory. National regulators in EU member states where third country infrastructure will be interconnected will play a subordinate role. Henceforth, both the offshore Nord Stream segment and, more importantly, the onshore segment of Turk Stream entering the EU will need to undergo an advance compliance and exemption procedure. This is regardless of IGAs or corporate level agreements, as each EU member country will have to notify the Commission and seek advice at the design and construction stages and particularly the operational stage.

 

The keyword in the changes to the new Gas Directive document is competition – the impact of new and existing gas transmission infrastructure on competition. Although national regulators in the first countries of entry will retain a key role, the veto power rests with Brussels.

 

The upgraded version of the EU Gas Directive hit a raw nerve with the Bulgarian government, reflected in the voting of Bulgarian euro-parliamentarians from both the ruling coalition and the socialist opposition – either ‘no’ or ‘abstain’ votes.

 

For all the work done so far on the extension of Turk Stream in Bulgaria, regardless of the wording or the title – the different branding from Balkan Gas Hub to Bulgarian Stream to a more abstract and vaguely worded ‘extension of the Bulgarian gas transmission system’ – the project should undergo a review and compliance procedure before being green-lighted for operation.

 

The new EU Gas Directive is not the only reference point that the promoters of the Turk Stream extension should reckon with – the public procurement rules and the basic standards for transparency and good corporate governance practices should apply.

 

The EC would certainly need to understand how the nature of the project funding, the suppliers and the subcontractors, which for now are kept in the dark, would impact competition.

 

The change in the EU Gas Directive expands the definition of interconnector to “transmission line which crosses or spans a border between Member States or between Member States and third countries up to the border of Union jurisdiction.” Therefore, the part of the new proposed gas pipeline that crosses the Bulgarian-Serbian or Bulgarian-Turkish border will have the status of an interconnector, which will incur EC judgements on capacity allocation and tariffs.

 

For all practical purposes, allocating 80 or 90 percent of the interconnector capacity to Gazprom-related companies would certainly not comply with the changes in the EU Gas Directive and, in all likelihood, would be deemed as non-compliance. The negative impact on competition does not relate only to non-Russian competition, but also to Russian gas exporters – Rosneft, Lukoil, Novatek – which do not have access to Gazprom’s export gas pipelines.

 

Bulgaria will undoubtedly need a derogation, yet the mechanism for EC notification, review and granting derogation is neither quick nor self-understood. Furthermore, a formal procedure on derogation can be initiated only after the changes come into force, which could take at least another 9 months. At any rate, there are circumstances beyond Bulgaria’s reach and control.

 

With the European Commission displaying the utmost goodwill in the precedent-setting case that is most related – the Opal pipeline – it took almost two years to clear all the stages of compliance review, and ultimately, the German regulator and the EC agreed on a 50 percent long-term capacity exemption from the TPA. Another 20% of OPAL capacity (in the event of demand) had to be auctioned to third parties at the German Gaspool hub, with the tariffs set at a minimum base level. The remaining 30% of the capacity of Opal had to be sold at additional auctions, which allowed Gazprom to increase its share to more than 80%, but only on a short-term basis with a mandatory capacity release option.

 

In the case of the Turk Stream extension via Bulgaria, both the border interconnectors with Turkey and Serbia need individual exemption procedures, which in itself is too much of an ask of the EC, as effectively Gazprom’s competitors are denied a level playing field in accessing Serbia and Hungary via this purpose-built pipeline. Therefore, a more flexible capacity allocation scheme above the 50% allocated to a long-term booking for Gazprom is a foregone must.

 

There is little chance that the EC would take lightly Gazprom’s 80-90% control of the exit-entry capacity given its long track record in opposing Nord Stream and Bulgaria’s history of 100% dependence on Russian gas for supplies and transit, which perversely is currently used to justify a monopoly extension in the region.

 

The tariffs as set out in the third phase of the market test of the Balkan Gas Hub also invite a fresh look from EC anti-trust and regulatory authorities – whether they are truly market based and reflect real developments cost, disallowing cross-transfers of price privileges between different entry and exit points in Bulgaria’s gas transmission system, just to accommodate Gazprom’s reluctance to pay the market tariffs.

 

This will be nothing new, as at present post-mark transit tariffs paid by Gazexport are between 2-3 times less than the entry-exit market tariffs everyone else pays. The tariff agreement between Bulgartransgaz and Gazprom-affiliated companies, in spite of attempts to use the current contractual legal frame, needs a new contract.

 

The upgraded gas directive would still allow national regulators to grant a time-limited and market-compatible derogation, but only to existing pipeline infrastructure with third countries. In the event of new and ‘essential’ infrastructure, as in the case of the Turk Stream extension, the Bulgarian national regulator would only be allowed to grant an exemption under a series of strict terms approved by the EC. The national regulation option for granting an exemption to the EU single market rules requires proof that the infrastructure under question is essential for national and regional energy security and that without the exemption it would not be built. Derogation would not be needed for island nations, like Malta and Cyprus. Neither Bulgaria, nor Serbia or Hungary fall into this category.

 

There is one more ground for seeking exemption for new gas transmission infrastructure under the EU Gas Directive terms – for recovery of investment or security of supply consideration. Again, this is only provided the desired derogation does not impair competition and the functionality of the EU internal natural gas market. One could hardly imagine how nearly complete market control by Gazprom’s flows would not be detrimental to competition in this part of the EU’s natural gas market. It is worth noting that, prior to granting derogation, the EU Gas Directive provides for an extensive process of EC consultations with ‘all’ member states on its impact on the regional market – Romania, Greece and Croatia included.

 

The haste with which Bulgartransgaz has pushed through the EPC tender for the extension of Turk Stream is explained by the faits accomplis drive – to complete the gas pipeline before the changes to the EU Gas Directive take effect. Even the Nord Stream II project, which is far more advanced than the Turk Stream extension, is not expected to become operational before the beginning of 2020, thereby requiring an EC exemption.

 

Given the facts on the ground, with real work on the Turk Stream extension via Bulgaria beginning at the earliest in the 3rd quarter of 2019, it is impossible for the new gas pipeline to come online before the directive comes into force.

 

An exemption, as referred to above, is not guaranteed.

 

After all, the Turk Stream extension does not primarily serve Bulgaria’s own supply needs, but it would have a profound effect on the whole SEE gas market, which justifies the EC calling the shots on gas transmission infrastructure.

 

The Bulgarian government and the state gas operator, Bulgartransgaz, which are developing the new 440-km extension, could proceed at their own risk with awarding the contract to the consortium led by the Saudi firm Arkad. But that decision would certainly be followed by a calculation of sunk cost and anti-Brussels rhetoric.

 

By Ilian Vassilev

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