Gas games and tender spots
The first and the second parts of this article looked at the history and the politics of Bulgaria’s energy dependence on Russia, and at recent developments in two of the three areas of that dependence – nuclear fuel and oil (including refined products). We saw that the current caretaker government, appointed in the wake of inconclusive elections by Russian-leaning president Rumen Radev, has done little to reduce that dependence and a good deal to reinforce it. We also noted that, in respect of oil, this government has striven valiantly to maintain the flow of cash into the coffers of Russian president Vladimir Putin and has been notably unassertive vis a vis Lukoil, Russian owner of Bulgaria’s only big refinery.
In this part, we will explore the “third dimension” of this energy dependency.
Dimension 3: Natural gas
Deep down, things are not so different in the field of natural gas. The dominance of Russian state-owned behemoth Gazprom superficially looks as if it has been reduced to a great extent; it has in fact been reduced to some extent; and there’s a lot of lip-service to the desirability of reducing it further. The link between Russian gas market share and government efforts to sustain it is simple – the greater the share, the greater the cash flows, the greater the political brokerage fees. Below the surface there’s been considerable effort to keep the market share of Russian gas as high as possible. And decisions by the caretaker cabinet have been a prominent part of that effort.
Love me tender?
Now, Mr Radev’s caretaker government has shown a marked fondness for gas supply tenders. On September 20, in fact, it (or rather, its obedient servants at the top of state-owned trader Bulgargaz) announced no less than three of them, inviting bids for deliveries of gas, respectively:
- For the period up to the end of this year (i.e. in November and December 2022), with a deadline for offers of October 3, results announced October 10);
- For 2023 as a whole (results to be announced November 30, 2022); and
- Over the ten-year period of 2024-2033 (also referred to as the “long-term contract” or “LTC”). Bids for this were due in March 2023.
In addition, the government had shown its enthusiasm for tenders not long after it took office on August 1 this year. On that very day it had declared a “crisis” of gas supplies and set up an “anti-crisis task force”. The most prominent sequel had been the cancellation of a contract that, although not awarded in a formal tender, was still confirmed to be most competitive when benchmarked to bids received later. This was the agreement with the US firm Cheniere Energy – providing for the delivery of several cargoes of LNG in the periods up to end-2022 and between January and April 2023 – that the Petkov government had concluded in its final days. And it was the cancellation of this which cleared the way for those September tenders.
Now, you might say all this is fine. It was quick and decisive action and nominally the tenders explicitly preclude participation of entities under EU sanctions. And Mr Radev and his underlings were just showing a praiseworthy regard for transparency, competition, and many other things bright and beautiful – rather than upholding disadvantageous deals stitched up behind closed doors by departing politicians, to the advantage of foreign fatcats. And, potentially, of greedy, superfluous intermediaries, though the Cheniere contract had in fact involved direct deliveries by a producing company.. (So, incidentally, had one with France’s Total, prominent among several supply agreements concluded and executed under the Petkov government.)
But you’d be wrong. We’ve covered some of the reasons why in some previous posts on Analyses and Alternatives (A&A), so we’ll be brief here:
- First, the seven-cargo Cheniere deal represented some sort of certainty about the short-term future (the winter) at a very uncertain time. It was “a bird in the hand” – proverbially worth two in the bush;
- Second, the deal was actually pretty good. It was benchmarked to prices on the US-based Henry Hub (HH) – the world’s most liquid gas market – rather than to the higher prices prevailing on TTF, the EU’s premier natural gas exchange. And that would have more than made up for the costs of moving the LNG across the Atlantic. Witness the spread between gas spot and futures prices, with the latter standing above €110/MWh for January, when HH-priced gas for DES deliveries is generally below $70/MWh for long-term LNG supply contracts (a DES, or “delivered ex-ship”, price is one that values LNG delivered at its final location, thus including the costs of transportation);
- Third, the White House had been key to arranging the deal – as part of a broader, 15 bcm US-EU LNG supply package – and the wisdom of turning down friendly help in such a tricky international situation was, to say the least, questionable. Not to mention the bad taste potentially left in the mouth of Cheniere, delivered proven by market most competitive;
- Fourth, despite all the invective about intermediaries, the Cheniere and Total cargoes are, as it turns out, now being replaced by gas brought in by…. actual intermediaries! That is, by companies that do not produce gas, notably Greek traders DEPA and Mytilineos.
- And fifth, regrettably, it can not be assumed that Bulgarian tenders are invariably transparent.
Finally, of course, the usual question has to be asked: “Cui bono?” Who benefits? And in this case, the answer isn’t hard to find.
Gazprom uses the tradesman’s entrance
We demonstrated beyond reasonable doubt early last month (October 3 and 4) that the tanker Pskov had loaded up with LNG from the Portovaya gasification terminal near St Petersburg in early September and ended up at Greece’s Revithoussa regasification (regas) terminal, with its gas then entering Bulgaria via the Sidirokastro-Kulata cross-border link. And it has become clear that, ever since Bulgargaz announced its tender on September 20, LNG tankers carrying Gazprom gas have been unloading their cargoes and cross-border flows of the resultant gas into Bulgaria have been on the rise.
To be precise, the gas flows in question have not consisted solely of regasified Russian LNG, but have also included pipeline gas which Greek traders DEPA and Mytilineos have received from Gazprom – which has not cut off supplies to Greece – and is then backhauled to Bulgaria.
According to Russian media, Mr Radev’s caretaker ministers had managed to secure reverse flows from Greece, including flows of Gazprom gas, in September, at a rate of 4 million cubic metres per day (mcm/d), through the intermediation of these same two Greek companies. Which was ironic. Lambasting the intermediaries had formed the alpha and omega of GERB’s criticism of Mr Petkov’s government. Today these practices are at their peak. And yet Mr Borissov’s energy gurus remain silent. Deafeningly silent.
These articles analyses and comments are made possible thanks to your empathy and contributions, which are the only guarantors of independence and objectivity in our work. The Alternatives and Analysis team.
For the record, the volumes of Russian gas being imported in September – despite the cancellation of direct supplies in April – were higher than those of Azeri gas, which were running at 3 mcm/d at most. Lately, Bulgargaz has been boasting that gas prices in October were lower than in the previous month. But if that was true for October as a whole it certainly can’t have been because of these Russian LNG supplies replacing US-sourced gas: Gazprom sells at prices indexed to the previous month’s TTF levels, and TTF prices for September were significantly higher than those for US LNG. The “low price” claim just might be true for late October and early November, due to exceptional weather patterns. However, that can hardly be treated as a benchmark for winter prices.
Now traders are asking what exactly is the point of these Bulgargaz tenders. It’s a fair question, since it seems obvious that the, shall we say, “hands-on” approach of Mr Radev’s government to energy policies has restored Gazprom’s access to the Bulgarian gas market. And it’s no wonder that big Western companies – those which stepped forward to supply gas to Bulgargaz during the brief Petkov interlude – are now increasingly hesitant to take part in these tenders, since they might be used as a smokescreen for deals with Gazprom through Greek (and Turkish) companies.
This year, next year…
Only one of the three tenders has so far been completed, the short-term tender for gas deliveries in November and December. The results of this were announced on October 10th, with Greek companies DEPA and Mytilineos emerging as winners, as might have been expected from our general analysis.
And, also as expected, early deliveries under the contract do indicate that Gazprom gas is involved.
In purely commercial terms, it makes sense for Greek companies to control unloading slots at the Revithoussa LNG terminal and broker Russian and any other gas to Bulgaria and elsewhere in the Balkans. Gazprom recently has been selling it at a record discount to TTF prices, so the profit margins to be had from re-selling it are sky-high. And this could be the case in the very near future, because Gazprom has at least three problems:
- First, it is having difficulty finding buyers for the gas it is unable to store and consume internally, now that the Nord Stream pipeline is closed to it;
- Second, though it evidently has some tankers at its disposal, Gazprom lacks the LNG tanker fleet it needs to sell to new customers;
- Third, 95% of the world’s LNG tankers are insured or reinsured via the London market, which is closed to Gazprom because of financial sanctions.
Other than this, however, it’s debatable how instructive the outcome and immediate aftermath of the short-term tender are. It failed to produce proof that Bulgargaz and Bulgarian consumers would get the best possible deals from such proceedings. The management of Bulgargaz – which, to put it bluntly, is generally a lot less experienced than it thinks it is – benefitted on this occasion more from luck than from skill or good judgement. Specifically, it was helped by warm weather and by a drastic drop in gas prices as excess supply coincided with decreased demand. In particular, low prices have allowed a substantial drop in the average price of the gas stored in the Chiren Underground Gas Storage (UGS) facility, which has reached 94% per cent of capacity ahead of the cold winter days.
Well, that disposes of the short-term supply tender. As to the medium-term tender, for the year 2023, we await details of contenders (November 17 is the deadline for binding bids) and of the winner (likely to be announced November 30). But there is already a significant piece of information.
The annual slot-booking tender for capacity at the Revithoussa LNG Terminal took place in Athens on the last day of October – and Bulgargaz failed to book really substantial slots. Its bookings, both in the off-season (April and October), amount between them to capacity of just 2 million MWh – less than 190 mcm, or 6.3% of Bulgaria’s total annual gas consumption. This means that, whatever else Bulgargaz is planning, it won’t be able to make direct imports of LNG from Greece. So most likely Greek-based companies, having booked cargo unloading slots, will be brokering gas for Bulgargaz in 2023. And probably that will include Russian gas and higher intermediation fees.
So much for “avoiding intermediaries”…
The long haul
And the long-term, ten-year supply tender? Well, the most immediately striking thing has been silence. There has been no debate whatsoever about it. Not in Parliament, and not in the media. The only time President Radev has addressed the issue was during a consultation meeting with GERB – part of the long process of forming a government in the wake of inconclusive elections. And, as we shall see, GERB’s foremost energy expert (and former energy minister), Delyan Dobrev, was alarmingly deferential on the subject that he himself had raised at the meeting.
So, in the absence of public debate, A&A will ask a few of the questions that need to be asked.
Question 1: Why now?
Yes, LTC would be a replacement for the current (though now inoperative) LTC with Gazprom, which expires at end-2023. What LTC – pipeline gas or LNG? The international gas market is extremely volatile nowadays as a heady cocktail of war, climate policies and multiple crises generates unmitigable risks. That point has two aspects:
- In the long term, the continuing rise of LNG and the consequent globalisation of the gas market will make pipeline gas LTCs less and less appropriate as an arrangement as the coming decade proceeds. And this will be true, even though, short-term, LNG will be unable to match the loss of Russian gas in Europe in 2023 and possibly 2024, which will put opportunity-seekers centre-stage.
- In the medium term, and more regionally, it will be necessary to contend with the huge – and at present unpredictable – reconfiguration (pipeline gas vs LNG) that is bound to follow the Ukraine war (whenever that ends, which is also unpredictable).
On both counts, it’s very doubtful whether a ten year LTC is useful at all at the moment, even if it was a good idea in the past.
Making long-term bets in a crisis-driven, extremely volatile market entails high risk, as immediately registered gains can easily turn into losses beyond a none-too-distant time horizon. The market needs to stabilise before long-term arrangements, beyond crisis management mode, take precedence. And, come to that, before a sensible decision in principle is made as to what sort of long-term arrangements, how long-term, and whether we ought to be thinking long-term at all.
Moving more slowly – delaying things by three or four months, beyond the immediate winter risk horizon. And certainly we would know more about long-term trends in autumn 2023 than we know now, or than we would know in March.
And even if it proved impossible – or undesirable – to have a signed contract in place by end-2023, what would be wrong with another annual contract to cover 2024, before the hypothetical LTC kicked in at the start of 2025? By which time, of course, we would know even more…
Question 2: Why launched by a caretaker cabinet?
A second question is connected with that of timing. Should a caretaker cabinet be setting such a tender in motion? A caretaker cabinet, after all, is supposed to be a short-term thing, serving only as long as it takes for the country’s politicians to get their act together and form a regular government that, in terms of parliamentary support, is viable – at least for the moment. If they can’t do that within two months (which on recent form they may not) there’s another election, possibly also followed by a caretaker cabinet – though not an identical one. So why is a body so temporary (and incidentally so unaccountable to parliament) as the interim government decide on a gas supply contract covering the next decade?
The alternative, obviously, is that the tender should be delayed until it can be presided over by a regular government. That was, in fact, a suggestion made by Mr Dobrev during his party GERB’s consultations with the president.
Mr Radev had an answer: a regular government would be in place by March 2023, to complete the tender; meanwhile, the key thing was for the process not to be delayed. And that was enough to shut Mr Dobrev up rather abruptly, which may say something about who is calling the shots at present, or about the former energy minister’s talent for pantomime – and about GERB’s game plans.
Be that as it may, it should be noted that Mr Radev’s argument wasn’t really a convincing one, for three reasons. One is that, as suggested above, the urgency of the tender is by no means as great as the president assumed. Another is that recent political stalemate suggests that it isn’t a foregone conclusion that a regular cabinet will be in office by then. And the third reason is that, even if a regular cabinet were in place, it wouldn’t have a free hand.
That last point needs a little expansion.
A regular cabinet could do very little if, by March, Gazprom’s big competitors had given up and the only choice that remained were between different Russian proxy gas traders in Greece or Turkey, delivering via the proposed European Gas Hub in Turkey or via LNG terminals.
Yet that is precisely the situation that is likely to have developed by then. For the long-term supply tender is a multi-phased, iterative process:
- It starts with an invitation for expressions of interest;
- Then there is a pre-selection process through which candidates are shortlisted;
- These candidates then write their own draft framework agreements, dealing with such topics as volumes and prices (and principles for the adjustment or variation of both), and whether or not a “take-or-pay” clause is to be included;
- Then there are consultations;
- Then, in the light of these consultations, the modified drafts are incorporated into binding proposals;
- Only then, finally, are there bid evaluations and a choice.
That’s a lot of stages, involving a good deal of room for the exercise of discretion and rather less for the application of clear-cut criteria. Suffice it to say that ultimately Bulgargaz has to evaluate and choose between HH- and TTF based bids, and between pipeline gas and LNG, where the two benchmarks play entirely different roles. And by March 2023 most of the stages will have been gone through, all or most under caretaker government supervision. Nor need one have an overly suspicious mind to predict that the March deadline for completing the long-term tender might fit in nicely with the timing planned by Mr Putin and Turkish president Recep Tayyip Erdogan for launching the European Gas Hub in Turkey.
Now, I have my own ideas about the direction in which that discretion might be exercised, but what matters more is that some of the Western majors which supplied LNG to Bulgaria during (and after) the Petkov government are having second thoughts about Bulgaria and doubt the impartiality of the procedure and of its supervisors.
And if heavyweight Western companies are thinking that way, there’s no reason for them to participate in the long-term tender – and every reason why they should just leave it to the traders.
Which, of course, is probably just what Gazprom’s Bulgarian proxies want. The President’s men are insistent that the LTC tender be held so early because, the earlier it is held, the more certain he will be to make his mark on the process and ensure that the final selection is made in a pre-ordained manner.
Question 3: Why just one partner – and what partner?
The third question is in fact a combination of two points:
One is this: the terms of the tender make it clear that its outcome will be an LTC with a single partner. Why? Surely prudence dictates that two suppliers should be found. If not more than two.
The other is this: if you’re going to have an LTC and it’s going to be with a single partner, you’d better be sure that partner is a trustworthy and stable one – and one that is going to remain trustworthy and stable in the long term. So, is there such a partner? Well, if the Western majors are being driven off, who’s left? Are those Greek and Turkish traders capable not only of providing competitive terms to gas consumers – and, more importantly, of mitigating Russian political risk – on a long-term basis, if all they are doing is brokering Gazprom gas, bypassing possible EU sanctions? Hardly. And if you want an illustration of that, by the way, you need look no further than Germany’s record as such a broker!
A final point for the government to consider, incidentally, is the following. Eventually, things may be calm enough for Gazprom’s abrupt cut-off of pipeline supplies to Bulgaria in April this year to come before an international court of arbitration. So how will all these back-door dealings with the Kremlin look then? And how will that affect the dispute settlement?
In short, the type of LTC contemplated looks like a pretty risky idea for Bulgaria. But it would be a very good idea for Mr Radev and for the part of the country’s business elite that benefits from gas trade with Russia, since an LTC would do wonders for mitigating their individual risk – the risk, that is, of losing political brokerage fees in opportunistic shorter term gas supplies.
So much for our questions. But we’re not quite done with gas yet. In the final instalment of this four-part article, we will consider some “nuts-and-bolts” details of the LTC that seems to be in prospect, then step back to put it in the context of Bulgarian politics and of Gazprom’s overall strategy. And we will end with a statement of what should by then have become obvious: that the conceived LTC under Radev’s interim government must not be allowed to happen – and that the efforts of Gazprom’s trio Radev-Borissov-Peevsky and his friends to perpetuate Bulgaria’s energy dependence on Russia must be decisively rejected.