The battle for succession is beginning. July has seen two significant developments among potential players in the game of international gas flows in Bulgaria. On July 9th, a joint venture (JV) was signed between the American firm Linden Energy and Overgas, Bulgaria’s largest private gas firm, in which Linden is to acquire a 50% stake. And more recently, evidence has emerged that the well-connected company Energiko Trading Bulgaria (ETB), currently applying for a gas-trading licence, has signed a contract for supply by Gazexport or some other affiliate of Russian giant Gazprom.
None of this is surprising. With the contract between Gazprom and state-owned gas trader Bulgargaz due to expire in 2023, manoeuvres are underway that could trigger reshuffles in the Bulgarian gas market before as well as after that expiry. Prominent Bulgarian business people are seeking niches to act as brokers for natural gas imports, which are generally associated with significant financial flows. Some are betting on the Southern Gas Corridor to diversify supplies and challenge Gazprom. Others are relying on Russian gas.
Rising gas prices and gas shortage on the European gas market, with storage facilities well below seasonal benchmarks, help Bulgarian businessmen’s positioning, in line with much higher energy-financial flows.
The prizes are vast: due to the escalating spot prices of natural gas, Bulgargaz will pay Gazexport more than $1 billion for the gas purchased this year, well above the $420 million spent in 2020. And, while current annual consumption in Bulgaria is in the 3-3.1 billion cubic meters (bcm) range, planned new gas turbines, replacing coal-fired generating capacity at the Maritsa East 1, 2, and 3, Varna and Bobov Dol thermal power plants (TPPs) – and other gas-fired projects across the country – could easily add another 2-2.5 bcm by 2026.
It’s no accident that these manoeuvres on the gas front coincide with Gazprom’s exit from Overgas, when Russian gas started flowing into Serbia via the Turk-Balkan Stream pipeline. The 50% in Overgas bought by Linden Energy is, in fact, the share repurchased by the Bulgarian company when Gazprom relinquished it last December. The JV underlines Overgas/Linden’s ambition to intensify competition with Gazprom in and beyond Bulgaria, profiting from gas in the Southern Gas Corridor. As the exit and entry routes to North Macedonia and Serbia are under Gazprom’s complete control, the JV will seek alternatives to access markets in the West Balkans – Albania, Kosovo and Montenegro.
Bulgargaz, of course, is far from finished just yet. The liberalisation and diversification of Bulgaria’s natural gas market have yet to happen. Despite Azeri gas flows from the start of 2021, the Russian share in the gas market risen to 95%, the highest in a decade. The modest imports of Azeri gas – 119 million cubic meters (mcm) in H1 2021 – have displaced LNG imports, not Russian gas. Bulgargaz’s role in retaining Gazexport’s market share has been pivotal, as it has preferred to increase its purchases of more expensive Russian gas rather than opt for cheaper Azeri gas. Bulgargaz seems to have pinned its hopes on mirroring Gazprom’s monopoly on the Bulgarian gas market due to its exclusive supply contract with Gazexport and the 30% oil-indexed component in that contract’s pricing formula, which makes Russian gas more competitive than the gas bought via spot-based contracts.
But the Bulgarian state-owned gas trader’s market shares are surely destined to dwindle. It has experienced years of failure to build a regional presence. And its “elder brother” – Gazprom affiliate Gazexport – now seems determined to undermine it.
This emerges from the website of the Energy and Water Regulation Commission (EWRC), Bulgaria’s sector watchdog. According to a document relating to EWRC discussion of ETB’s application for a gas-trading licence, ETB has presented “sufficient and credible evidence” and a two-year contract for supplies at Strandja 2, the delivery point on the Turkish-Bulgarian border. Now, it’s difficult to see who could be the other party in this contract apart from Gazexport or some other Gazprom affiliate. And, geographically, it seems likely that this relates to a supply contract with Lukoil Neftochim, the giant Russian-owned oil refinery in Burgas on Bulgaria’s southern Black Sea coast.
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If so, it’s a juicy contract that will soon become even juicier. Lukoil Neftochim is one of Bulgargaz’s top clients, with an annual gas takeup of around 180 mcm. That could rise to almost 500 mcm when a major investment at the refinery comes on stream: this is a planned $210-million TPP with an installed capacity of 230 MW of electricity and 980 MW of thermal energy. Which would make the TPP the second-largest gas consumer in the country.
And there’s a certain neatness in the deal. Of the moving forces behind ETB, one is gas insider Ivan Drenovichki (a former head of state-owned transmission company Bulgartransgaz), but the other is Bulgarian oligarch Valentin Zlatev, who used to be CEO of Lukoil Bulgaria. Nowadays he proclaims that he has “nothing to do with” the refinery but obviously seeks other ways to broker between Russian energy resources and the pocket of the Bulgarian consumer.
One other detail emerging on the EWRC website might be noted. In its application, ETB claims to have booked the relevant part of the remaining free 20% of the entry capacity at Strandja -2. This effectively crowds out any competition at this critical entry point of the Bulgarian National Gas Transmission Network (NGTN): the absence of an interconnector agreement between Turkey and Bulgaria practically hands Gazprom control over gas flows from Turkey – with a 100% booking of the exit capacity at Malkoclar in Turkey and 80% at the Strandja-2 entry point. The new ETB contract tightens Gazprom’s grip still further. (The situation is mirrored on the Bulgarian-Serbian border where, nominally, there is a potentially tradeable 10% tradeable exit capacity, but Gazexport fully books the entry capacity into Serbia).
None of which is good news for Bulgaria. Nor, it would seem, does Bulgargaz have much to smile about. It has spared no effort to conciliate Gazprom. Bulgargaz has tried to shore up the the exclusive nature of its contract with Gazexport by purchasing additional quantities of relatively expensive Russian gas. It has laid on €1.5 billion worth of red-carpet treatment, in the shape of funding for Gazexport gas and for the construction of the Balkan-Turk Stream pipeline. And yet, the Russian gas monopoly seems determined to play its own game:
First, Gazexport continues to refuse to trade gas on the Balkan Gas Hub:
Second, Gazexport has a Memorandum of Understanding with the Ministry of Energy, signed under Bulgaria’s last government, that of the Putin-friendly Boyko Borisov. This effectively hands control over the Bulgarian NGTN to Gazexport until 2030, ruling out any offshoots and gas metering stations along the Balkan Stream route that could benefit regional gas distribution networks.
Third, Gazexport books all essential cross-border capacities (Trans-Balkan pipeline) to Romania, Serbia, and Northern Macedonia, effectively preempting competition.
One further bit of gloom for Bulgargaz might be noted. ETB has presented a three-year business plan to EWRC, stretching only until end-2023. And yet it has applied for a 35-year trading licence. The most obvious explanation is that it is a prelude to a longer-term gas supply contract with Gazprom.
Few of the things that matter occur in the visible spectrum. The ETB story and the emergence of new Gazprom gas brokers in Bulgaria most certainly have a more profound and broader hidden context. And to one thing is indisputable – Bulgargaz’s market shares are up for grabs.
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