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Tsunami warning

Gas storage levels are unprecedentedly low, spot prices unprecedentedly high. That presages a tsunami of trouble later this year. The authorities need to act now to avert it. And the means are at hand.

It’s odd how triumph can turn into tragedy. Back in February 2020, the government of Boyko Borisov – still sitting pretty – was trumpeting a newly amended long-term contract (LTC) of national gas company Bulgargaz with Russia’s Gazprom as an iconic achievement. Now it just looks like a disaster, the most spectacular failure in Bulgaria’s energy policy since the beginning of the transition.

Its centrepiece was the replacement of a pricing formula largely dependent on international oil prices with one dominated (70% weighting) by spot gas prices on leading EU exchanges. Which is unfortunate, since said spot prices are now at insane levels that would not have been thinkable even a year ago: the latest price per MWh is €42 (the equivalent of BGN 80). The regulated wholesale price of gas in Bulgaria for August is BGN 57.6/MWh (or €29.5). The difference implies the potential for massive price rises: given current trends, indeed, even September’s regulated price per MWh seems bound to exceed BGN 65 (€33) Price movements of that sort are a serious matter. They could kill whole industries and hit the long-suffering consumer very hard.

Troubles in store

There’s worse to come. High prices in the low season for natural gas – which we are in now – practically guarantee expensive gas, supply shocks and price shocks in the high season, winter. Gas storage levels in Europe generally are ultra-low. And, in addition, so are those at Bulgaria’s underground gas storage (UGS) facility at Chiren, operated by Bulgartransgaz.

BTG figures for the end of last week show record low gas injection levels in the UGS Chiren. At the same time in 2019, 280 million cubic meters (mcm) had been injected, almost all of it owned by Bulgargaz. Current cumulative figures for gas injected since April stand at 200 mcm, slightly more than 160 mcm are held by Bulgargaz. At current daily injection rates of 2.35-2.36 mcm, the company won’t catch up in August and September. A minimum of 3 mcm/d is needed.

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Moreover, the situation is compounded by the financial woes of Bulgargaz: it’s having problems securing the funds to pay for more expensive gas, which preordains record low gas reserves in Chiren ahead of the winter season. Shortage of funds is a recurring issue, given that there is a lag of anything from three to seven months between the moment when gas is bought and stored and the time when it’s sold and yields revenue.

In addition, high levels of client indebtedness impair Bulgargaz’s ability to borrow – a situation that will only get worse with record-high gas prices. The company’s risk is too high for banks to consider lending the additional BGN 200 million needed to secure the critical minimum level of gas storage. And, finally, there’s no hope whatever that the Bulgarian Energy Holding (BEH) – the state-owned sectoral behemoth of which Bulgargaz is a part – will step in to help its troubled child: Bulgaria’s energy system is on the verge of collapse due to climate policies and pandemics, so the BEH cupboard is bare. The Bulgarian government has to step in to help Bulgargaz secure the full amount of contracted Azeri gas and its payment.

So it could be a very nasty winter. There will be little gas underground in Chiren when the time comes to balance peak demand in freezing temperatures in the coming winter. There will be scant help from allies since Europe generally will be short of gas. And, as readers of this blog will be aware, the Kremlin will be playing geopolitics for all it is worth: The Russians have made it no secret that, unless the EU greenlights certification of the operator of the Nord Stream-2 and Turk Stream-2 pipelines, it will keep the EU’s gas consumers desperate for the next batch of gas in the coldest days of winter. A perfect storm, one might say – or a perfect freeze.

Shah Deniz to the rescue?

But it’s not inevitable. There’s a solution that is both obvious and easily available – namely, gas from Azerbaidjan’s Shah Deniz field. Thanks to its contract with the Azerbaidjan Gas Supply Company (AGSC), Bulgargaz has a claim on 1 billion cubic metres (bcm) of this per year. This is the cheapest natural gas in Europe – at, incredibly, less than BGN 33/MWh! – and, needless to say, is way cheaper than Gazprom’s fuel. That makes it indispensable, for the countries alongside the Southern Gas Corridor, including Bulgaria, in balancing extremes on the European gas spot market and inevitable peak demand in winter.

And yet, by end-July, the Bulgarian gas trader had taken less than 25% of the contracted quantity. It would be insane not to take advantage of this opportunity. In fact, the only way to make up for the coming shortfall of gas is to take all the contracted quantities of Azeri gas. And the Bulgarian authorities – caretaker or not – should do whatever is necessary to allow this to happen. To make it happen.

In fact, it remains a mystery why Bulgargaz didn’t take more advantage of Azeri gas in the first seven months of the year instead of paying for expensive Russian gas. But only somewhat. On the one hand, it has not really been subject to “take-or-pay” discipline from ASGC, which seems content to wink at Bulgargaz non-compliance and get a premium of up to €10/MWh by selling the “unwanted” gas on the spot market in Italy. As to Bulgargaz management, well, we’re used to them treating the interests of Bulgarian consumers and taxpayers as relatively low priority. We’re used to them running the company as an affiliate of Gazexport, relying on political protection and a shield of impunity offered by the highest levels of government in Bulgaria – whoever happens to be in power.

But it’s time to get real.

The top men at Bulgargaz, if they have even a trace of corporate self-interest, need to know that subservience to Gazprom won’t do Bulgargaz any good at all. Gazprom is in the process of dumping exclusive buyer status to Bulgargaz and, if the company is to have a future, it must make that future itself.

And the political class must realise that what’s at stake now is Bulgaria’s national security. The tsunami warning has been sounded and there’s just one chance to mitigate its effects on Bulgarians, the most energy-poor of all the EU’s citizens. In fact, a tsunami is a natural event. What could be about to happen is the effect of deliberate malign action – a crime. If the President, the caretaker government, and Parliament fail to act, they will become accomplices.

Ilian Vassilev

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