Bulgartransgaz has recently been informed by its largest customer, Gazexport, that after 2020 it will terminate the transit of Russian gas through Ukraine, and thereby, through the Trans-Balkan gas pipeline to Turkey, Greece and Macedonia. It is still unclear whether the notification qualifies under contractual terms as legal notice served, requiring a new contract for any further arrangement, or whether it should be interpreted as advance notice for a shift of delivery point, with future gas deliveries coming via the Turkish Stream-2 pipeline. As for the quantities for use in Bulgaria itself, Bulgargas would not have a major problem, provided it can add additional delivery points in Slovakia and elsewhere.
In total, the transited annual volumes over the last 12 years have varied around 16-17 billion cubic meters, with revenues increasing from $85 million to $107 million, or 185 million leva, at the current exchange rate. At present, they account for more than 64 percent of BTG’s total revenues, which if gone, could imperil its current status, as transit service proceeds far outweigh the income from services the operator provides for clients via the national gas transmission grid.
Few should be surprised, as this move by Moscow has been expected for quite some time, despite claims by Chancellor Merkel that she received commitments from President Putin that Gazprom will sustain gas transit via Ukraine at current levels. The Polish PM, on the other hand, has aired a concern that has been widely shared by geopolitical experts in NATO – that the Ukrainian gas transit has been a major constraint to Russia’s aggressive plans to invade Ukraine. Once gone, the Kremlin will have a free hand to engage in more coercive actions westward.
One wonders how trustworthy a partner to Ukraine President Erdogan is, when he says, “Turkish Stream is a project of historic proportions for our bilateral relations and for energy geopolitics.” And the remark comes at a time when Turkish Stream-2 and its kin Nord Stream-2 are a prime target for U.S. sanctions on security, geopolitical and market distortions grounds.
Foreign Minister Sergei Lavrov has already made it clear that both the Greek and Bulgarian extension options are being considered for TS-2.
How bad is the situation for BTG, and what policies could remedy the negative effect?
For now, we see almost nothing, or at least far from what a standard risk mitigation process would entail, in terms of countering the effect by diversifying the geography and expanding the portfolio of services, both in the country (through investment in gas network expansion) and across borders – business in the region – in the Western Balkans, in LNG terminals and in related services. The only known plan, which was tabled recently, is the Balkan Gas Hub, in which investments are based on geopolitics with little business substance, totaling almost 1.5 billion euros – way above what BTG could embark on its own.
Bulgarian governments, politicians and the public in general have believed for far too long in the “sacrosanct” nature of the transit contract between BTG and Gazexport, which ends in 2030 and provides for a “ship or pay” clause. The legacy of decades of secrecy surrounding gas deals at government and corporate level has come back to haunt Bulgartransgaz, the Bulgarian Energy Holding and the Government of Bulgaria. New evidence has emerged that they have failed miserably in defending Bulgarian national interest, having voluntarily refused credible legal recourse in the event of an arbitration option against Gazexport. The arbitration clause negotiated back in 2006 under Minister Rumen Ovcharov, triggered in the event of irreconcilable differences, refers the dispute to … the Arbitration Court of the Russian Chamber of Commerce and Industry in Moscow, then headed by Evgeni Primakov.
It is worth recalling that the renegotiation of the supply and transit contracts between Bulgargaz and Gazexport back then was at the explicit insistence of the Russian side, which was one of the reasons I decided to discontinue my contract with the Bulgarian Ministry of Foreign Affairs as ambassador to the Russian Federation in May 2006. By that time, it was crystal clear that the breakup of the linkage between the gas supply price and the transit tariff would harm national interest, and Bulgarian taxpayers and consumers would lose big. Then we could only speculate on the extent of the damage, but it was certain to loom high.
Now we know that Bulgaria had to overpay at least $1 billion due to the higher market price of oil-linked gas, while the transit tariffs remained the lowest in the EU – between 30 and 70 percent below average market benchmark for the region. In addition to the overpayment for gas, the revenues lost over the last 12 years, due to subsidized low tariffs, ranged $700-900 million.
The Energy Grand Slam hangover continues to impair the vision and the choices of the Bulgarian government and energy consumers. Against this background, to voluntarily forfeit a basic defense in the arbitration clause, as the chance for a fair trial in Moscow is close to zero, falls under various categories of crime, even treason. 12 years later, none of the implicated ministers and managers of the energy companies, including of Bulgargas and BTG, have ever tried to renegotiate this apparent collapse of basic corporate and state common sense, which is a failure of basic standards of political and professional values.
Let’s return to the remedial policy actions that BTG could undertake today in the absence of a valid arbitration option.
First, BTG’s revenues as operator of the national gas transmission system depend less on servicing domestic clients than on international transit, which implies that expansion of the national grid and outreach to a new client base would be a step in the right direction. The natural gas consumption levels in Bulgaria on a per capita basis are well below EU averages, which invites a fresh look into the potential of gas demand increase. The amount of gas used in households for heating and cooking is negligible, as electricity prices are kept artificially low. There is some economic sense to expect higher demand for gas in power generation, notably to reflect the climate change dictum and the need for balancing power, suggesting the increase in gas demand as a substitute for other more polluting energy sources, which could help alleviate energy poverty. It is not enough to extrapolate optimistic projections of gas consumption growth to 5-6 billion by 2030. It takes a concise and dedicated effort to harmonize the energy strategy between all key players – consumers, traders, distributors, the operator of the grid – BTG – and regulators.
Secondly, instead of throwing all efforts behind Russian gas, it is about time BTG casts a broader look when identifying and handling new potential gas transit flows across the country beyond servicing Gazprom only. Given the fact that Gazexport’s highly subsidized tariffs generate only $107 million per annum, that is, an average of 6.7 dollars per 1000 cubic meters, while the new entry-exit tariffs scheme provides for much higher tariffs (between 2 and 3 times higher), BTG should be better positioned to earn the current levels of revenues at much lower levels of transited volumes. New sources could be identified at par levels to Gazexport in revenue potential.
The scare tactic – that the Trans-Balkan gas pipeline will remain empty after Gazexport’s notification letter – rings hollow, not solely because there are no empty gas pipelines in the EU, but because it is still possible to identify different significant transit users for gas flows, originating both north and south – from Romania’s offshore oil production in the Black Sea and, especially, the south-north direction, with gas coming from the Southern Gas Corridor and a new LNG entry via terminals in Turkey and Greece. Estimates for alternatives warrant a more qualified response to doomsday scenarios once the Gazexport contract is over, in spite of concerns of a likely loss in arbitration disputes in Moscow. It is worth recalling that Gazexport is gambling, having invested heavily in Turkish Stream-2 (TS-2), without clearing the case for an extension across Turkish-EU borders. Furthermore, the Greek route can hardly be considered bullet proof, as demand at the end of the TAP – in Italy – is shrinking.
Moreover, by giving up the transit contract through Bulgaria via Ukraine, Gazexport, in all likelihood, would lose its privileged transit tariffs and would have to accommodate the entry-exit tariffs regime.
BTG’s bigger problem is that the company’s management has a natural predisposition to longer-term gas transportation contracts, while the primary capacity and transportation market is moving toward short-term capacity trading and spot-sales of natural gas, which requires a completely different attitude.
Wrapping up, Bulgartransgaz needs a new development strategy that more accurately and consistently reflects market trends, rather than desperately trying to play the Gazexport-only card, resurrecting the unsuccessful South Stream in a lighter form, while spreading panic about the loss of Russian gas transit. In spite of attempts to avoid dubbing the Balkan Hub extension of Turkish Stream – South Stream Lite – the fact is irrefutable – the subsea section of the TS-2 is funded by Gazprom money via the South Stream Transport B.V., and it will coordinate the onshore segment in Turkey.
A good indicator along these lines of thought is the preliminary results of the non-binding offers, generated by the market test as part of the Balkan gas hub project. New market players willing to trade and ship gas on the Bulgarian market are just emerging. The business logic still holds that investments in infrastructure should be preceded by market proofs of demand and revenue, making good economic sense.
Geopolitics are a poor guide in business.