In pursuit of the missing business logic in the Russian-Turkish-Balkan stream through Bulgaria

In pursuit of the missing business logic in the Russian-Turkish-Balkan stream through Bulgaria


Let us state the publicly known facts and try to assess the business merits of the deal. Bit by bit, slowly and systematically, so that even non-experts can understand.


We have a standing valid gas transit contract between Gazexport and Bulgartransgaz, using the current Trans-Balkan Pipeline, until 2030 with “secure” revenues of $ 1.2 billion. This is not the total contract amount, just the ‘ship or pay’ segment, accrued until the end of the contract. This is regardless of whether Gazprom decides to end transit through Ukraine, to take up alternative routes through Turkey, Germany or the North Pole. Cash in hand. Or almost.


Giving up on these receivables is a condition sine qua non, set by Gazprom, if we want to enter into the new venture with the Russian-Turkish-Balkan (RTB) stream. Russia’s gas wars with Ukraine are of Kremlin’s making and interest, not ours. Yet we are asked to take sides and forego on a $1, 2 billion income. The ten-year old adage is no more relevant. Back then, when the contract was signed, we were stuck with Gazprom, did not have any alternative, and essentially did not have any choice but to bend to Kremlin’s whims. The situation has radically changed since and we are no longer susceptible to blackmails – the moment Gazprom threatens to cut off supplies – an instant and cheaper alternative will be available – at least six companies are able to fill in Gazprom’s market share, at a lesser cost.


Once again – the precondition for Bulgartransgaz’s entering into the new transit deal is to give up its contractual pretense on a billion and two hundred million dollars! The current net present value of this sum, at 4 percent annual discount, is approximately $ 850 million.


In the new project, unlike its twins in Serbia and Turkey, the Bulgarian TSO – BTG – will have to underwrite the entire investment and project risk in the $ 1.4 billion Russian-Turkish-Balkan project. If the gas pipeline is not complete by the set date, BTG will be fully liable to Gazexport and anyone further along the contract chain.


For example, if the US impose sanctions on Nord Stream-2, which will affect the Turk Stream -2 as well, and as a consequence the RTB project is cancelled or delayed, BTG pays as sanctions do not fall under the standard force majeure clause.


Bulgaria sinks again into the scape goat trap – the one President Putin used to divert away the blame for the demise of the South Stream project. The truth is – its suspension had nothing to do with Bulgaria or even the European Commission, but with Kremlin’s own deficient acts – mainly the annexation of Crimea, that led to sanctions and preempted financial closure, with Italy’s Eni effectively dropping out of the project.


Let’s look at the situation from the point of view of the risk exposure of Bulgartransgaz. The company’s annual revenues are in the range of $ 300 million a year. Hence, the size of the investment in the Russian-Turkish-Balkan stream is almost 5 fold the EBITDA base, which threatens, should things turn awry, to bankrupt the company and force it to fire sell assets. Note this is far from being the worst case, as this scenario provides for BTG remaining in the driver’s seat when selling its jewels, whilst in all likelihood this is will be done by creditors’ proxies – a long line starting with the Russian TMK, the Italian Bonatti and the Austrian Max Streicher, with Gazexport and the banks standing next in line.


Given the project hyper-risk, Bulgartransgaz has to diagnose and mitigate all risks associated with the projected revenue streams. Early on, the BTG’s consultants came up with an initial estimate of the required minimum tariff level, which could warrant an FID by the TSO and state support from the Government of Bulgaria. However, Gazexport had a differenent priority set and countered with a much lower tariff rate on a take-it-or-leave basis. That deep into the procedure it was already crystal clear that the BTG are not calling the shots. With reduced tariff and lower revenues, the feasibility of the project was compromised – the business logic left the room, while geopolitics entered.


To further add insult to injury, Gazprom hastily and publicly humiliated BTG by blocking the humble attempt for an independent play, when the Bulgarian TSO picked a Saudi contractor – the Arkad group, in defiance of Gazprom’s pre-selected Russian and EU contractors.


With the tender stuck by claimants’ pleas and the ball in the Anti-Trust body’s court, followed by a possible appeal with the Supreme Administrative Court, the date for completion at the end of 2019 becomes a chimera.


The undercurrents do not end here. The Project’s financing model is totally obscure, hidden behind a set of arrangements between Gazprom and a group of background intermediaries, who secure the funding channels outside BTG’s purview. The debts accrued in the course of the EPC execution will be repaid out of future tariff revenue streams.


The Bulgartransgaz seems to have fully complied with the arrangements between Gazprom and TMK, that cover not only Bulgaria, but also the kin projects in neighboring countries. Payments to the Italian Bonatti and Max Streicher are backed also by proceeds from transit tariffs, but note not through what would be a typical project financing scheme and bank credit, but by agreeing to Gazprom acting as a clearing house for BTG’s debt.


BTG’s prime role is to come up with the initial EUR 250 million for the project’s kick off. As there are too many creditors queuing up for compensation out of the transit tariff proceeds, it is highly likely that the BTG will have to pledge assets, including the grid – as collateral.


During the 10 years of the debt repayments, principal and interest will accrue on the initial EPC contract sum, while will further add to the financial burden of the project. The end result – judging from the initial and actual cost and revenue estimate – a delicate balance, with the net potential total positive result forecast in the range of $ 400 million – i.e. less than $40 million a year on a $1,7 billion investment!


To make things further depressing – we need to add to the final project tally the price of two gas compressor stations – a new EUR 180 million, that need too to be recovered out of the future revenues from tariffs.


The BTG team does not consider the Gas Compressor Stations costs in the overall feasibility study for fear that will further topple the whole business logic of the project, leading to a possible negative cash flow.


Gazprom is in charge, borrowing heavily from the South Stream’s rulebook, cherry-picking the companies to construct, to supply, the finance, to oversee, and ultimate distributing the benefit from the Russian-Turkish-Balkan flow.

One thing is certain – Bulgartransgaz and Bulgaria are not the clear winners.


Since BTG’s forecasted profits over the next 10 years are vague, the company will need a plan B to compensate insufficient revenues in its gambit with Gazprom, and the only source is – other clients and services. Since the state regulator – CEWR – has voluntarily given up on its right to determine individial entry and exit tariffs, Bulgartransgaz, could opt to make up for lower proceeds from the Russian-Turkish-Balkan stream’s entry-exit tariffs, by inflating other entry exit tariffs for Gazprom’s competitors. The Russian gas monopoly will thus hit two birds with one stone – lower tariffs for itself, higher for its rivals, This is nothing short of a hidden subsidy. The regulator – the CEWR could intervene, again nominally, to challenge individual tariff rates, however a substantial share of them is not attributed to destination specific factors, but to overheads and general costs.


Further to final cost estimate of the Russian-Turkish-Balkan stream, should be added the one hundred million euros, Gazprom demanded in a recent ultimatum, which will be paid by the Bulgarian Energy Holding, as an old South Stream debt. Once these new costs are added, the overall project viability would definitely sink.


The grand balance of the RTB Stream also covers hidden debts of other oligarchs, associated with VTB credit lines; funds spent on the failed South Stream, which President Putin himself topped at 800 million euros. The above referred 100-million-euro payment from BEH to Gazprom is just the tip of the iceberg. The oligarch took the cream; the state companies took the bill.


Any project, regardless of how advanced or conceptually  mature it is, starts with seed money, which lead to more spending and finally to the grand cash streams. Sooner or later the bets are called. It would takes years, before any trace of profit emerges on the balance sheet of Bulgartransgaz, while in the interim the company commits to ensure deadlines for transmission capacity of Russian gas to the Serbian border, that are beyond its control and reach.  Once again, the Damocles’ sword will hang over and threaten the existence of BTG, as penalties and losses amass.

The question is why then embark on that slippery road?


Remember where we started at the beginning of this analysis – the Russo-Turkish-Balkan Stream will not start unless we give up on “safe” $ 1.2 billion in proceeds from the existing transit contract that expires in ten years. The spending so far – without a single meter of duct laid – exceeds 20 million leva and the bill continues to rise, as with every other single Russian energy project in Bulgaria.


The reason this scandal is being shelved is that once it flies in the open, the institutions will have to account for criminal negligence by a sequence of energy ministers and heads of the TSO, who have overlooked the gaffe in the contract with the court of arbitration in Moscow. As it is impossible to justify such a decision many years ago, it is even harder to continue to accept this clause in the current contract in 2019 with a time horizon until 2030. Worth noting is that such arbitration clauses seem odd even for Gazprom contracts with companies from the former Soviet Union space.


The conceptual managed dependence matrix enshrined in the idea of the Energy Grand Slam launched by former President Parvanov, former PM Stanishev, former energy minister Ovcharov and later PM Borisov provides for a perpetuity in cash flows, servicing politicians ideas. If a project reaches a level of absurdity and financial proceeds are halted, a new projecy or an existing one is resurfaced, to secure sustainably high level of payments, that come back to fund Russia’s political and business proxies and Kremlin’s channels of influence in Bulgaria.


Even when projects are supposed to be totally wound up – as the Bourgas – Alexandroupolis pipeline – a thin thread remains, that allows addicts on both sides, should the opportunity arise, to keep them afloat, ready for restart, should the overall cash flows dry.


While pursuing grand and geopolitical projects with dubious reputation and benefits, BTG fails to invest in market-attested projects – such as the long overdue (12-year-old) expansion of the national and transit gas system and the Chiren under-ground storage, which would allow imports of PNG and LNG by Gazprom’s competitors to the Bulgarian gas market.


The only thing ‘grand’ in this Russian-Turkish-Balkan stream is the grand corruption, which is strong enough to provide for the initial impetus and motivation for project’s cash payment start, but always proving short of substance and sense to see the projects through to completion.


By Ilian Vassilev

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