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The Geopolitics of Tariffs

Bulgartransgaz’ nеw tariff plan for the 2021-2022 gas year discriminates against Gazprom’s competitors, shedding light on murky backstage doings.

The English have a saying that there’s more than one way to skin a cat. Similarly, there’s more than one way to frustrate a pipeline. For some years, I have been following the geostrategic play around large infrastructure projects. And the Kremlin, in particular, has come up with no end of clever tricks.

Nabucco: go figure…

Once upon a time there was Nabucco, the EU’s grand Southern Corridor scheme to bring Azeri gas produced by the Shah Deniz Consortium to Central Europe and, ultimately, to Austria. That was up against Russia’s South Stream, which was to send Russian gas across the Black Sea, through Bulgaria and the Balkans, to Austria and Italy. In this case, the Kremlin successfully neutralised competition from Nabucco by entangling BP (formerly British Petroleum)—leader of the Shah Deniz Consortium—in a network of existing and new dependencies and overlapping interests. Result: it eventually delivered Azeri gas, not to Austria but only, and much less promisingly, to Italy.

The public remained in the dark about the behind-the-scenes war against Nabucco. The Russian lobby dealt the project some nasty blows below the belt, primarily using administrative and bureaucratic tricks that would deserve a place in any textbook on subversive activities.

After Gazprom had successfully used eco-activists to obstruct work on a legally binding exploration licence issued to US giant Chevron in 2012, the same group of environmentalists employed the same method to block Nabucco. Prominent Green leaders, who were committed to the smooth and timely approval of South Stream environmental impact assessments, concurrently engaged in impeding analogous Nabucco procedures by lodging complaints.

Today, these pages are missing from the Euro-Atlantic narratives of the Greens, newly allied with Bulgaria’s  right-wing parties. But they are worth remembering.

Favouring Turk Stream

Ultimately, South Stream never came off—in that form, anyway—falling victim to EU competition rules, reactions against Russia’s little indiscretions in the Crimea in 2014 and problems with funding. However, thanks to the persistent Mr Putin, the project has been reincarnated by South Stream Transport B.V. and Russian gas is reaching Bulgaria via Turkey—in a pipeline imaginatively named Turk Stream. It proceeds across Bulgaria and into Serbia in what is formally a separate pipeline called Balkan Stream.

Gazprom still has influential local friends: not eco-activists, this time, but the heads of Bulgaria’s big state-owned companies—appointed and controlled by Gazprom’s friend-in-chief, Boyko Borisov, until very recently the country’s prime minister. The tendency to subsidise Gazprom—and give it priority treatment at the expense of all other natural gas traders and shippers—persists as these state companies sink further into debt.

This can be seen quite plainly by comparing the current tariffs at entry and exit points to Bulgaria’s National Gas Transmission Network (NGTN) with those that will be payable in the next gas year, which starts on October 1, 2021. These are determined by Bulgatransgaz (BTG), Bulgaria’s state-owned gas transmission and storage operator. (Nowadays, the sector regulator—the Energy and Water Regulation Commission [EWRC]—has to approve the methodology used in determining the tariffs, but not the tariffs themselves.)

And there’s a very clear pattern to the changes. Tariffs at entry and exit points used by Gazprom (or rather, its subsidiary Gazexport) have gone down. Those at points used by other companies have gone up—in most cases quite sharply.

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Ups and downs

Now, there’s no intersystem agreement between BTG and its Turkish counterpart, Botas, so non-Russian gas imports from Turkey, for now, are not an option.

But take Siderokastron-Kulata on the Bulgarian-Greek border: currently that’s the only possible entry point for gas from the Southern Gas Corridor, and will remain so until the Interconnector Greece-Bulgaria (IGB) comes on stream, which it now seems will not happen until May next year. Since the beginning of this year, Bulgaria has been importing between two and four million cubic meters per day of Azeri gas, in itself cheaper than Russian gas, via Siderokastron-Kulata. The contract between national gas supply company Bulgargaz and its Azeri counterpart AGSC envisages 1 billion cubic meters per year. But from October 1, it will cost 23.3% more for such gas to enter Bulgaria. Which hurts competitiveness—and is a pretty clear signal of whose gas is more welcome.

Or consider the point, near Stara Zagora, where IGB will connects with NGTN, having run 182 km from Komotini in northeastern Greece. This will be the key piece of infrastructure not controlled by Gazexport: IGB can be seen, as it were, as “Nabucco Lite”, the rival to Turk Stream, and would be the route not just for Azeri gas but also for gas from the liquefied natural gas (LNG) terminal at Alexandroupolis on Greece’s northern Aegean. And the tariff at this crucial entry point for IGB is to be raised by 4.5% from current levels?!

Then there’s the Giurgiu-Ruse Interconnector, which crosses the Danube between Bulgaria and Romania: here a 15.6% hike is planned, making it more expensive for competitors of Russian gas seeking to import from Romania.

The overall picture remains equally bleak for the transiting (and resultant exports) of non-Gazexport gas to neighbouring countries. Those via Ruse-Giurgiu are subject to a hike of 7.6%, while there’s a 13.6% rise in the tariffs for exports via another Bulgaria-Romania crossing, Kardam-Negru Voda (the export route to Ukraine’s gas market and its unrivalled system of underground gas storage facilities).

Perhaps most controversial of all is the fact that the plan decrees a 13.7% hike in tariffs at the points where locally produced gas enters the system. This won’t be an encouraging signal to those currently investing millions in oil and gas exploration and development, onshore and offshore, in the hope of treatment equal to that enjoyed by Gazexport.

Fat chance of that, it seems: wherever Gazprom’s interests are affected, tariffs are to go down, though percentages vary. Thus:

  • The entry tariff for Turk Stream into Bulgaria at Malkochlar-Strandzha is reduced by 1%;
  • The exit tariff for reverse supplies of Russian gas to Turkey drops by 5%;
  • At Turk/Balkan Stream’s exit to Serbia, de facto monopolised by Gazexport, the tariff decreases by 17%;
  • Exports of Russian gas to Greece will be encouraged by an 11.5% reduction in tariffs;
  • And the tariff at the exit point for Russian gas to Macedonia beats all records with a 26% drop.

And there’s a final twist. The tariffs BTG sets out cover only 27% of the transmission services market. The other 73% is the subject of direct transit contracts with Gazexport, signed following capacity tender allocations. And, according to new arrangements reported by the specialist energy information agency Argus, these are to be subject to discounts based on prepayments, should Gazexport choose to exercise this option. So, all in all, the Russians would appear to be getting a pretty sweet deal from BTG.

Voices off…

Now, voices have been raised about all this.

One objector has been the European Agency for Cooperation of Energy Regulators (ACER) which has sent a dedicated communication to both BTG and EWRC. In it ACER criticises the potential for tariff cross-subsidisation favouring a preferred client at the expense of all others. The BTG has not shown much sign of taking notice so far. And it should be noted that, though EWRC doesn’t approve tariffs now, it is entitled to scrutinise BTG’s declared methodology (and, presumably, to object if its tariffs don’t correspond to that methodology). Also, incidentally, though competition laws have obviously been breached, there’s no sign of action either from the quaintly named Commission for Protection of Competition (CPC).

There were other dissenting voices, mine included. I expressed similar concerns at the time of the final (binding-offer) stage of the Balkan Stream’s Open Season, when BTG’s management agreed to reduce the Balkan Stream tariff below their calculated tariff cost following a non-negotiable offer by Gazexport.

It’s pretty obvious what has been going on here.

First, the “bidding” process between BTG and Gazexport has been a mockery: BTG knew from the very beginning that the proceeds generated from Balkan Stream would not be enough to service, let alone repay the debt of €1.4 billion that BTG has racked up in building entirely Gazexport-dedicated capacity.

Second, BTG is acting irresponsibly in cutting its tariffs for Gazprom gas when it’s clearly short of money. It is, in fact, selling out Bulgarian—not to mention its non-Gazprom clients, whom it is forcing to cross-subsidise Russian gas.

Third, BTG has a severe short-term cash flow problem: its willingness to grant discounts for prepayments suggests as much. Nor is this a surprise, since BTG does not just have to worry about servicing the costs of today’s pipeline. Its parent company, BEH, which always comes to its rescue, has a debt of almost of €98 million to Gazprom left over from the pipeline that never happened—South Stream.

It’s all a rather sordid mess. And there’s high politics involved too.

One aspect is the last government’s rather absurd insistence that Balkan Stream is not an independent transit project but an “expansion and modernisation of the gas transmission network”. That will be one reason why the Road Map signed with Gazprom by former energy minister Temenuzhka Petkova—on the orders of prime minister Borisov—has, allegedly, “gone missing”: that document states precisely the opposite, that Balkan/Turk Stream is a transit pipeline explicitly serving the transit needs of Gazexport and will have no regional nodes anywhere along the route (in contrast to IGB). Another reason is that, in said Road Map, Gazprom effectively vetoes the development of Bulgaria’s transmission system, violating Bulgarian and European anti-trust legislation.

Another aspect is a serious campaign of vilification against IGB on grounds of alleged corruption. The most prominent mudslinger is former interior minister Rumen Petkov, well placed because his protégées are in the entourage of president Rumen Radev—sponsor of the current caretaker government. One of several Putin sympathisers in the Bulgarian President’s inner circle, Petkov is banned from entering the US, but has proudly met the head of the Russia’s foreign intelligence service, the SVR: tirades against IGB are no doubt useful distraction from overflowing corruption in Turk Stream and elsewhere.

Third, elections are just over a week away and their outcome is bound to be complicated. Gazprom will have admirably muddy waters in which to fish for allies, make clandestine arrangements and firm up a grip that has been loosened somewhat by political changes. Indeed, the “hidden” picture we have described hints at a much deeper grand corruption scheme and a geopolitical set of dependencies that, if not exposed and removed, could be reproduced in subsequent joint corruption projects, “privileged” tariffs and unilaterally binding long-term transmission contracts. The coming gas tariff year ends on October 1, 2022, overlapping the period which will see the negotiation of the long-term contract with Gazprom that will replace the current Bulgargaz contract when it expires in 2023. The next 18-24 months will be crucial.

For this reason, maximum transparency and maximum exposure are needed now. And corresponding action. Given that BTG’s new tariff plan patently discriminates against Gazexport’s competitors, there’s every ground to involve several state agencies. EWRC (invoking emergency powers) should critically review the tariffs. So should the CPC. And the prosecutor’s office, the State Agency for National Security and the government itself have a legitimate interest: the Borisov strategy behind the tariffs runs counter to national interests, and hints at a more profound and hidden set of dependencies on Gazprom that could invite EC and the United States closer scrutiny and sanctions.

Which—who knows?—might achieve more than the current analysis.

Ilian Vassilev

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One thought on “The Geopolitics of Tariffs

  • Michael Grossmann

    As always, great insightful analysis.

    These discriminatory tariff changes at Bulgartransgaz are something for the DG ENERGY to look into, in addition to ACER.

    It’s surprising that, while all the media attention goes to NS2, what is going on in SE Europe is getting no notice.


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