Bulgargaz as an extension or a competitor of Gazprom

The tension over the change at the top of the state gas trader is highly indicative of the state and prospects of the Bulgarian gas market and especially of its lead player – Bulgargaz. Yet unfortunately, the crisis around Ukraine and Russia has once again proved how far we are from understanding what the gas market should be and the role of the state.

The Bulgarian public has regarded Bulgargaz as a mirror image of Gazprom long enough to be alarmed by the possibility of it docking off the mother ship amidst a highly volatile, geopolitically burdened and transitioning European gas market. 

All eyes are now on the new long-term contract with Gazprom, and rightly so. It is the Rubicon, a borderline of the state gas trader’s transition from Gazprom’s domestic monopoly to a competitor.

Let’s start with the “unthinkable” –  imagine that we end up with no contract with Gazprom., It might be helpful as a working hypothesis for measuring the degree of dependence that we need to explore and manage.

The current position: “Gazprom above all and everything” has left other supply options downright neglected. Such behavioural patterns undermine the liberalization and, specifically, the diversification of the market, cementing the secondary importance of competitors to Russian gas.

After years of domination, Russia’s gas monopoly status is intact – controlling 95 per cent. Moreover, the recent ‘information war’ over the change of leadership of Bulgargaz demonstrates the reluctance of former governments to contain the spread of Gazprom’s control, disguised as a nationalistic concern to preserve the monopoly of Bulgaria’s gas trader.

Such forces will not hesitate to pull the carpet from under the current Government, using the Bulgarian Socialists and the new pro-Kremlin ITN political party to preserve their positions and material benefits linked to Gazprom’s status. These groups with different political backgrounds and social ranking are bonded by a shared interest in Russian backed and sourced political power and related financial flows.

The long-term contract for natural gas supply with Gazprom maps the entire corruption network of dependencies that serves Russia’s energy interests in Bulgaria. Henceforth, whenever the time comes to negotiate a new LTC, the political fireworks light up the sky of Bulgarian politics, with everyone jostling for a piece of the corruption pie and a place in its food chain. As a result, parties, MPs, business and political oligarchs, magistrates, media moguls recognize the fact – that these few months of negotiation offer a rare chance for a place under the Russian energy sun.

Whoever signs the LTC gets the exclusive right to nominate the names in the “List”. However, Gazprom is free to add their own, in the best of ‘divide and rule’ tradition.

Such developments are not unique to gas or confined to present times – an analogous pattern preceded and followed the acquisition of the Burgas oil refinery Neftochim by Lukoil. Consequently, all key political parties and top players lined up on the commissions’ queue, and many saw their names on the List – either as appointed “party” representative to the BoD of the refinery or in “privileged” contracts for media and journalists. The perfect politicians-business tradeoff: Lukoil took hundreds of millions, not paying corporate profit taxes. The anti-competition authorities turned a blind eye on ‘parallel fuel pricing’, a euphemism for price cartel, returning tens of millions to the said selected group on the List.

Look no further for an explanation for the vicious and ruthless attacks by the media, controlled by the former government leaders, unleashed on the Government of PM Petkov – all these political commissars at the top of Bulgarian National TV, BTV and Nova TV were called to past dues.

The new guys in power soon realized that the Bulgargaz management were pulling their legs on true motives for not taking the cheaper Azerbaijani gas with the excuse of the absence of the interconnector with Greece. Given the severe energy and gas crisis, it was a matter of time for PM Petkov and his team to figure out the truth and fire the head of the state gas trader. Furthermore, indictments are pending changes at the Chief Prosecutor’s replacements, as the same political mafia group has captured its offices.

In the meantime, Bulgaria’s gas diversification options closely follow intersystem agreements between the transmission system operators, determining the gas import/export routes with the TSO Bulgartransgaz plays the leading role here. The lack of IS agreements with Turkey, Serbia and Northern Macedonia remains a limiting factor, disallowing gas traders operating on the Bulgarian market from taking full advantage of the regional natural gas market.

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And now about the infamous ‘roadmap’, signed between Gazprom’s CEO Alexei Miller and the Minister of Energy Temenuzhka Petkova, which went strangely missing. Yet, all the current GoB needs to do is ask Vladimir Malinov, head of Bulgartransgaz for a copy or the original. He will eagerly trade it off to keep his job. The notion that a document critical for the future of Russian gas transmission via the epitome of grand corruption – Turk-Balkan Stream, could vanish, is for the naive. The map grants control over all relevant of Bulgaria GTN’s exit and entry points

The commitments made effectively block significant quantities of Azeri or other competing gas, LNG included, from the Southern Gas Corridor. Moreover, the Gazprom – MoE Agreement obliges the Government to secure priority treatment for Gazprom’s flows over any other gas in transit to Serbia, North Macedonia and most importantly, Romania, effectively hampering competing gas deliveries to Ukraine and other Central and Eastern European countries. If BTG seeks to escape Gazprom’s grip, this should come at the cost of additional investments, additional time and higher tariff charges.

For example, Gazprom uses only 1/5 of the transmission capacity of the gas pipeline to North Macedonia, yet this does not seem to bother the Bulgarian or NM governmenta. At least, in theory, non-Russian gas supplies should be made possible and agreed upon on a bilateral basis.

No demand? Come on, Gazexport sells RNM consumers the most expensive gas in Europe. Bulgargaz and other gas traders operating in Bulgaria should sell their gas surpluses in RNM and compete with Gazprom. Bulgarian and international businesses are interested in gas-consuming or distribution projects, expanding gas demand. Bulgargaz does not dare raise the issue or sell a cubic meter in Serbia and North Macedonia, depriving the Bulgarian GTN of additional revenues.

Bulgaria failed to open its transit system for gas destined to the Western Balkans. While PM Kiril Petkov launched the ideas of a common gas market with Greece, Serbia and Macedonia, Gazprom’s political and business proxies in Bulgargaz and Bulgartransgaz sacrificed Bulgaria’s strategic opportunities by subordinating them to Kremlin’s pincer strategy, blocking Ukraine.

Not a single cubic meter of natural gas, other than Russian, now crosses our western borders – the legacy of ex-PM Borisov, ex-MoE Delyan Dobrev, BTG’s CEO Malinov and Bulgargaz ex-CEO Pavlov.

Greece consistently and systematically enhances its interconnectedness logically building up on TAP and the Ionian-Adriatic pipeline, with links to North Macedonia and further linked to Kosovo, that will allow natural gas flows from the Southern Gas Corridor to the West Balkans.

Athens invests in various gas supply sources, from the Caspian and the Mediterranean to the global LNG market, securing a future as a gas hub for non-Russian gas, not denying itself Gazprom gas. 

Bulgaria, on the contrary, has kept its 90+ per cent dependence on Gazprom, downplaying alternative sources and routes, seeking a role as a hub for Russian gas, where the ‘road map’ fits in.

This veiled in contrived secrecy document is popular in many high office quarters, careful not to scandalize the public.

Now, let’s return to the strategy of negotiations with Gazprom on future natural gas supplies.

Once it has become clear that Russian natural gas is not the cheapest option for gas, we could shed some light on the corruption networks in our country. Precisely because Gazprom’s price is not by default the lowest, and it includes an incremental premium for political intermediaries, the level of mandatory ‘take or pay”, limiting flexibility, becomes a critical issue. Hence, the need to substantially lower that ToP level in the future LTC with Gazprom from the current 2,46 bcm/y to well under 50 per cent of the current gas consumption levels, i.e. 1,5 bcm/y. Of course, Gazprom could seek a higher market share but needs to compete and offer lucrative prices.

The LTC term should not exceed five years because the current market is unbalanced, suffering conflicting trends. And in such transient times, with competition bound to deepen, betting on one horse, one supplier, might be counterproductive.

Gas supplies options and routes are on the rise, not only from the Caspian, the Black and the Mediterranean seas, but the global LNG market, and suppliers should be left to compete for the money of the Bulgarian consumer. Bulgargaz might be dear to me in the classic tune, but even dearer to me are the Bulgarian consumers that should be entitled to the best that government’s favorites can buy.

The Bulgarian gas trader should not be babysat; it has to learn to survive under tough market competition. If it succeeds in the process, good; if it fails, divestment is always an option.

No one can beat in price and terms the locally produced natural gas due to the lack of a transport component. Russian gas comes from more than 3,000 kilometres away, adding to the cost of $60 per 1,000 cubic meters for transport. When gas market prices are in the lower range, as in 2020, at $140 per TCM, transportation costs represent a high percentage and sparing them makes sense.

In the coming years, the amount of gas produced in the region will be significantly higher, and consumers should take advantage. However, Bulgargaz has ignored the option to buy gas directly from the gas field and invest in exploration and production on its own.

The more diversified the national gas mix, the better the management of supply disruption, transport and price risks across the price range – from oil indexation to gas-to-fas indexation.

Oil indexation is a mixed blessing, as the price of crude oil may soon top $ 100 a barrel. Yet, even when oil hit $ 140 a barrel 15 years ago, natural gas prices never reached the record highs of 2021. The crude oil market is truly global, integrated, more liquid and less volatile.

The jump from 0 to 70% in EU hub-spot benchmarks in the price formula under the 2020 amendments to Bulgargaz’s contract with Gazprom, with no intermediate stages, turned out to be with profoundly punitive effect.

Alas, European gas exchanges are a lousy benchmark, extremely unpredictable, primarily due to the lack of significant quantities of local EU gas production to dampen external shocks. 

In the context of the coming war in Ukraine, EU countries will have to inevitably reduce dependence on Russian gas by lowering mandatory ‘take or pay’ volumes in long-term contracts with Gazprom. In Greece, Turkey, and Romania, Russia’s natural gas market share has fallen below 50 per cent over the last years. Even Putin’s buddy Orban has signed a new LTC contract with Gazprom at almost half of the former levels – only 4.5 billion cubic meters.

Long-term contracts cover both pipeline and liquid natural gas supplies. They add predictability and stability to the gas market.

Yet, Bulgargaz ignored a proposal to sign an extremely profitable LNG LTC with an U.S. gas supplier some six years ago.

A Bulgarian delegation, led by MoE Nikolov and including the heads of Bulgargaz and Bulgartransgaz, is visitng the United States, expecting to further negotiate for emergency gas supplies and possibly a long-term LNG contract.

However, long-term natural gas supply contracts are not a panacea; Bulgargaz must engage in active short-term cross border trade at spot prices as a critical prerequisite for balancing consumption and market.

Finally, concerning negotiating the new LTC with Gazprom, timing is of the essence. Ideally, it should be finalized after other LTCs for the pipeline gas and LNG are in place. Bulgargaz will then hold strong cards when negotiating with the Russian gas monopoly. Even if the agreed volumes in total exceed national gas demand – the regional market would accommodate the difference.

Let us not forget that Bulgargaz is only one of many companies operating on the Bulgarian market, and its role as a public supplier will inevitably disappear. With a high level of market competition and gas liquidity, there is no need for a provider of last resort, hence no need for regulation and consumer protection. Different companies can contribute to strategic natural gas reserves. 

Regrettably, the previous Bulgargaz management wasted precious years to step out of its shoes as an extension of Gazprom’s monopoly and learn to navigate independently. The Ukrainian crisis will undoubtedly galvanize the debate on its future as a state gas trader and bring to the fore the divestment in controlling or majority share, while Bulgargaz still holds the lion share of the Bulgarian gas market.

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