Botas-Bulgargaz Agreement – a Game-Changer?

Ilian Vassilev

The recent agreement between Bulgargaz and Turkey’s Botas – on access to Turkish LNG terminals and to the transmission capacity needed to transport the resultant gas westwards – has alarmed Greek commentators. They need to take a longer view. Instead of lamenting the lost monopoly of their Revithoussa terminal, they should remember that their country has a formidable project pipeline of other terminals. And they – and everyone else – need to stop thinking in terms of regional dominance, exclusive hub status and the like.

As Gazprom has found out the hard way, in the era of LNG, gas is no longer essentially a zero-sum game. And the market will eventually ensure that this is faithfully reflected in reality. All that’s needed is healthy competition, healthy scepticism on the part of politicians – and healthy assertiveness from Brussels in enforcing regulatory frameworks designed to underpin competition.

Once upon a time, Greece was a font of great wisdom. And I must admit that, even nowadays, Greeks can talk a lot of sense and I listen to them with respect.

Specifically, I’m thinking of an analysis carried recently by the online version of Greek national daily Kathimerini (eKathimerini.com). In it, energy and geopolitics expert Theodoros Tsakiris analyses the implications of a recent agreement between two state-owned firms – Bulgarian gas trader and supplier Bulgargaz and Botas, Turkey’s national gas company. Botas is the operator of the country’s transmission network and was, at the time of signing, gas trader, owner and operator of one of its two liquefied natural gas regasification (LNG regas) terminals. (The tally will rise in the next few days to two out of three). The agreement gives Bulgargaz the right, for 13 years, to book slots at Turkish regas terminals for the delivery of LNG, which can then be conveyed to Bulgaria via the gas interconnector between the two countries.

Dr Tsakiris’ focus is on the impact of this new import option for Bulgaria on Greece’s plans to realise its potential as a hub for South-Eastern Europe (SEE) and Ukraine. And this impact is quite radical. It’s a new situation, the author argues: Greece no longer has the monopoly of LNG import terminal capacity accessible to Bulgaria that it has hitherto enjoyed thanks to its regas terminal at Revithoussa near Athens. So Greece has to reconsider its plans and opportunities in the context of that Botas-Bulgargaz agreement. The news took many in Athens by surprise, Dr Tsakiris admits, and caused consternation there.

Now, LNG in the region is a subject that has been exercising me more than somewhat recently, as regular readers of Analyses & Alternatives (A&A) will have noticed. And I would certainly assent to the proposition that this agreement (and the new Turkish regas capacity that allows it) has the potential to be a game-changer. So the “consternation” in Greece’s capital is quite understandable – even if the surprise is less so. Hence my decision to use Dr Tsakiris’ article as a starting point for today’s piece.

Sitting pretty: some background on Greece and LNG

Let’s put things in perspective with a little history.

A&A’s recent coverage has been rather focused on the nefarious things that Russia has been doing with LNG in the current crisis, and that is – and will remain for some time – an interesting topic. It is no secret that, ever since Bulgargaz signed its first contracts for imports of LNG via the Revithoussa terminal four years ago, there has been great optimism in Sofia (and in Moscow) about the prospect of using the Greek terminal as an ‘alternative’ route for LNG imports, namely from the Russian state-owned giant Gazprom. Indeed, the route had been tested by Gazprom more than a decade ago, back in early 2009, when it discontinued gas supplies to SEE via the pipeline through Ukraine for a little less than a fortnight, in the course of its dispute with that country’s national gas company, Naftogaz.

However, for most of the last few years – and for the purposes of the present article – Russian LNG has been essentially a sideshow and LNG has been relevant above all as an alternative to Russian gas rather than as a way of sneaking it into SEE. So let’s examine how it has developed as such an alternative.

Well, after 2017, LNG supplies via Revithoussa started to become more or less regular – “more or less”, because much depended on the market situation and how competitive LNG sourced on the world market was in comparison with Russian pipeline gas at any given time. However, problems began to emerge. Problems of two sorts:

• First, problems with access to offloading slots at Revithoussa; and
• Second, problems with the cost of moving the gas, once offloaded and regasified, northwards through the Greek transmission network.

The first cargoes to reach Bulgaria had been unloaded at Revithoussa for the Dutch company Kolmar NL BV under an arrangement with Greece’s Mytilineos Group. They enjoyed what was, by the standards of the time, a handsome price arbitrage between LNG (cheaper) and Russian gas. However, the LNG arrived in Bulgaria laden with excess costs incurred during regasification and transport within Greece by intermediaries, making the case for LNG as a competitor to Gazprom gas a lot less compelling. And access to the terminal was reserved for key players, notably national gas supply company DEPA, the Greek-Italian energy joint venture ElpEdison and Swiss-based European energy holding MET Group, as well as Mytilineos. These essentially brokered LNG imports to Bulgaria in return for intermediary premiums.

Now, it’s fair enough for enterprising companies to go after such premiums in a free market. But a free market isn’t quite what we’ve got in the region. In fact, there’s no functioning, liberalised, effectively regulated, and reasonably competitive liquid gas market. So these excessive margins for a plethora of intermediaries became “rents” that unfairly burdened Bulgarian and regional gas consumers.

When Rumen met Recep

Things came to a head last November, when Bulgargaz failed to secure enough unloading slots at Revithoussa for the following year (2023), apart from three in the off-season – in April and October – in the annual auctions held by DESFA, the Greek transmission system operator (TSO), which manages the terminal. Insiders familiar with the bidding process claim that other contenders outbid Bulgargaz, raising prices to levels many times higher than the starting price in the auction, in the hope of making a premium by reselling the slots to Bulgargaz later. Which actually they are doing, if we can judge from the unloading of the LNG tanker Maran Gas Mystas the last few days, in which Bulgargaz was using MET’s slot.

Attempts by the Bulgarian government to help Bulgargaz negotiate access to the Revithoussa terminal were met with the inevitable (and legitimate) response from the Greek authorities: under EU regulations, officials said, we cannot “grant” anything without an auction. Which of course was true, just as the Bulgarian government could not “grant” Greek companies direct access to storage capacity in the Chiren UGS, Bulgaria’s underground gas storage facility, without a tender. But the practical difference was that, in the immediate future and as things had turned out, DEPA had access to Chiren, while Bulgargaz was essentially denied direct access to Revithoussa, and therefore forced to work – expensively, inconveniently, and precariously – via intermediaries.

The situation in 2022, in fact, had been pretty much the same: almost 35% of the LNG offloaded at Revithoussa – nearly 2.5 billion cubic metres (bcm) – ended up being exported to Bulgaria, but the percentage of terminal capacity that had been directly committed to Bulgargaz or other Balkan companies was not much above zero. And now 2023 looked like being equally bad.

This anomalous mismatch naturally led to a desire for risk-diversification. And terminal diversification. Something had to be done by Bulgargaz – and by Bulgarian President Rumen Radev and his (by now rather durable) caretaker cabinet. Hence Mr Radev’s visit to Turkey in early December 2022, to see his Turkish counterpart Recep Tayyip Erdogan. Which led, in turn and with remarkable speed, to that agreement between Botas and Bulgargaz that has so raised Greek eyebrows. No wonder: for the regas terminal and gas import capacity that it grants Bulgaria over a 13-year period is no less than 1.5 bcm/year – equivalent to around half of Bulgaria’s annual consumption and to 60% of that lucrative flow to Bulgaria via Revithoussa in 2022.

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Terminal trouble?

More broadly, the Greek media warn that an ongoing race between Greece and Turkey to secure LNG import and transmission services for gas flows could seriously undermine the economics of both Revithoussa and the new regas terminals now under construction or development in Greece – the one off Alexandroupolis on Greece’s north-eastern Aegean coast and the Dioriga LNG terminal near Corinth, as well as two more near Volos and Thessaloniki – since all rely on brokerage of LNG supplies to Central and Eastern Europe (CEE).

Adding fuel to the fire – and raising those Hellenic eyebrows just a little more – has been Turkish energy minister Fatih Dönmez. In December 2022, he announced that the new floating storage regasification unit (FSRU) terminal in the Gulf of Saros (80 km from Alexandroupolis) – Turkey’s third – would be commissioned in early February 2023, almost a year ahead of the date planned for the Alexandroupolis terminal. And Bulgargaz could make immediate profit from its capacity and switch LNG deliveries from Revithoussa in Greece and even from Alexandroupolis FSRU until it come online and even afterwards.

Now, it’s an open secret that the construction of the Alexandroupolis FSRU has been deliberately delayed over the years to keep at bay the competition posed by LNG to Gazprom gas. And it is this delay that has now allowed Turkey to open its LNG gateway to the region. In other words, Greece’s geopolitical energy planners have shot themselves in the collective foot. And if Athens needs to blame anyone for this, it doesn’t have to look any further than Dimitris Copelouzos, the Greek businessman – well-known for his joint ownership with Gazprom of Prometheus Gas – whose Copelouzos Group has been implementing the Alexandroupolis FSRU project so half-heartedly.

Unsurprisingly, Greek analysts have expressed fears that, if Turkey manages to secure better terms for LNG imports to SEE and CEE despite not being in the EU, gas traders will prefer it to Greece. Hence, clouds of doubt hang not only over the Alexandroupolis FSRU’s future, but also of that of the other LNG terminals in the pipeline in Greece.

Well, up to a point, yes. But I would argue that many of the concerns expressed in the Greek media are exaggerated. Not only by the general context of crisis. But also exaggerated by a specific and well-known type of political speculation: politicians tend to exaggerate their role in resolving problems of this sort and overestimate their ability to do so by administrative and political methods, rather than via market mechanisms and settled, pre-existing legal and regulatory frameworks.

A flawed contract?

For a start, that agreement between Botas and Bulgargaz has certain essential flaws built into it. Put briefly, it almost certainly runs foul of EU regulations.

Already the European Federation of Energy Traders (EFET) has drawn the attention of two Directorates-General of the European Commission (EC) – those for Competition and Energy – to possible unlawful state aid and abuse of monopoly power in the Botas-Bulgargaz contract, which governs access to transmission capacity at the Strandja-1/Malkoclar interconnection point (IP).

As a result, most analysts think an investigation by the EC against the Bulgarian government and Bulgargaz is likely, on the grounds that, by way of this contract, the country’s president and its energy minister have done what is sometimes referred to as “solving a private problem”. This means that they have adopted a measure which benefits only one player on the Bulgarian and European gas market – namely, state-owned gas trader Bulgargaz – while denying the rights involved in that solution to other traders. In concrete terms, no interconnection agreement has been put in place to provide other European companies with access conditions equal to those accorded to Bulgargaz under the contract. And that certainly will – and undoubtedly should – prompt EC action.

Especially, by the way, as it would be adding insult to injury. For Gazexport already controls 80% of entry capacity at the Strandja 1 IP, making it even more obvious that there is, at present, nothing remotely resembling fair, market-driven interplay between gas traders and shippers at this entry point to the EU gas system.

Some talk of Alexandroupolis

In the meantime, it’s worth noting a similar bias in the distribution of benefits in respect of the Alexandroupolis FSRU. Bulgaria’s state-owned TSO Bulgartransgaz holds a 20% stake in the (Copelouzos-led) project company which is building the terminal. And state gas trader Bulgargaz, quite possibly with a little push, has managed to book annual unloading and regas capacity at Alexandroupolis LNG terminal of 1 bcm (10.6 TWh) for the first 15 years of the FSRU’s operation. That’s almost one-fifth of the terminal’s total planned capacity – and one third of the capacity that has already been booked.

Now, these long-term capacity bookings guarantee Bulgargaz the ability to import LNG, allowing it to make direct LNG purchase contracts and to transmit the resultant gas through the Greece-Bulgaria Interconnector (IGB). And that’s an improvement on the current situation with the Revithoussa LNG terminal, in respect of which Bulgargaz is pretty much nowhere (as indeed are all other traders outside Greece’s current Chosen Few).

However, Bulgargaz is in a less than ideal position. Before the Botas agreement, it was rightly perceived by SEE gas traders as having bet on one horse that was slow (Alexandroupolis FSRU) and on another that was chronically temperamental and prone to playing hard-to-get (Revithoussa LNG). But now, the failure of the Gazprom monopoly to supply gas and the delays in interconnector and FSRU projects, have forced Bulgargaz to look for alternatives earlier than expected and has left it in the unfamiliar situation of having, long-term, more capacity than it needs.

Which may be no bad thing for Bulgargaz, since it may be able to engage in active regional gas trade and redistribute scarce capacity profitably or boost its transit volumes. But it does raise the question of whether the company may be forced to choose between Turkish and Greek LNG terminals, or fall victim to regional overcapacity.

Greece steps on the gas

Quite apart from where Bulgargaz stands, things generally might change with the coming online of Turkey’s Saros FSRU. This will compete with Greek terminals – whose number and combined capacity will actually be quite impressive, if completed, in a few years. In theory, Bulgargaz’s EU competitors could have benefited from the new Saros FSRU and Tekirdag LNG terminal, if the intersystem agreement had been in place. Regrettably – and for the moment – there is only an agreement between Botas and Bulgargaz for access to Turkish LNG terminals. But that could change, if the EU shows the necessary activism in defence of its own rules and if the Turkish government realises that it can’t pursue its regional gas hub pretensions without allowing free gas flows in and out of the country. So the intersystem agreement between Bulgaria and Turkey is likely to become a fact in the next months, rather than years, and that delay could mostly be explicable by President Erdogan’s jockeying for the best position for his ‘national champion’ Botas, in his complex interplay with President Putin regarding the Energy Hub in Turkey. Sooner rather than later he will have to concede that if Gazprom had failed to provide Russian with the ultimate energy weapon vis-à-vis Europe, it is a lot less likely that Turkey could act as an indispensable gas hub.

At any rate, the race between Greek and Turkish LNG terminals is on and Greece has speeded up work in both countries. The Revithoussa LNG terminal has recently been expanded to 6.9 bcm/y. And then there are four more Greek terminals in the project pipeline, currently at various stages of development. Apart from the Alexandroupolis FSRU (5.5 bcm/y), due to come online by the end of 2023 or early next year, there’s the Dioriga FSRU (2.6 bcm/y), just greenlighted by the Greek government. And then there are the Argo FSRU, to be deployed off Volos (5.2 bcm/y), and the Thessaloniki FSRU (whose proposed capacity is 7.3 bcm/y), due to start in 2025. The last two are have not yet reached the FID phase.

So, if all these Greek projects come to pass, they and Revithoussa together will represent no less than 27.5 bcm/y or 75 mcm/d of regas capacity for LNG alone in a few years.  That’s a lot of gas, especially relative to Greece’s domestic needs: 27.5 bcm/y is perhaps four times higher than Greece’s total consumption of just under 70 TWh (6,7 bcm) in 2022.

And that ignores the fact that Greece will presumably continue, in the interim, to receive pipeline gas, which at present covers more than 50% of its consumption – over 3.5 bcm in 2022.

Pipeline entry capacities, indeed, are even more considerable than that might suggest. At present they add up to almost 50 mcm/d, including the following: 21.9 mcm/d at Kipi (the pipeline from Turkey); 11 mcm/d at Nea Mesemvria (the Trans-Adriatic Pipeline or TAP); and 17 mcm/d at Sidirokastro, the site of Greece’s reversible pipeline link with Bulgaria. (These three account for all current entry capacity to the Greek system aside from the 22 mcm/d LNG entry point at Agia Triada, which serves the Revithoussa terminal.)

Now, all that is, in itself, is fine, since it just means that Greece will be transiting the resultant abundance of gas to other markets. But the trouble is that the 27.5 bcm of LNG entry capacity will also be way out of proportion to two other key figures, namely:

• DESFA’s system transmission capacity within Greece (TAP being a separate line) is around half as big as that LNG number, hence expansion is badly needed; and
• Exit capacity from Greece to Bulgaria, which by then will most likely amount to a little under 7 bcm/y – comprising a reverse capacity 1.9 bcm/y at the Sidirokastro-Kulata IP (always subject to conditionality of Russian gas imports) and another 5 bcm/y via the IGB.

(The latter figure assumes timely or even early implementation of plans to expand the IGB; but that seems a fairly safe assumption given that December throughput figures show that, after less than three months in operation, IGB’s capacity utilisation rate was already running at upwards of 90%).

Part of the problem will, by then, have been resolved by the proposed new gas interconnector between Greece and the Republic of North Macedonia (RNM) – which is slated to come onstream in 2024. However, given that said interconnector’s capacity will be just 2.8 bcm/y, the gas volumes involved are, in context, less than impressive.

Now, comparing total Greek regas and transmission capacity with entry/exit capacity at different borders might seem unwarranted, as adding transmission capacity is a relatively routine job. Yet, whereas FSRU projects have a clear project timeline – albeit a conditional one for the Volos and Thessaloniki FSRUs (pending FIDs) – the expansion of the capacity of DESFA’s transmission system might prove a conditio sine qua non.

And there’s one further complication to be taken into account. Though the IGB will rely primarily on imports via the Alexandroupolis FSRU, traders will also be able to use it – or at least, will aspire to use it – for LNG unloaded at other Greek terminals, once the IGB is linked to DESFA’s transmission system. And the IGB route could be used for interconnecting Turkish terminals too – notably the Saros FSRU. This will also be possible, once IGB has been linked to the Kipi/Ipsala Turkish-Greek interconnector and later at Komotini.

In sum, that will be quite a lot of regasified LNG competing for rather limited transmission and exit capacity to Bulgaria from Greece.

Well, so what? You might think that the line I’m taking is “Oh dear, what a complicated situation!” But I’m not. What I’m saying is this: neither Greece nor Turkey is going to have things all its own way, and that’s good.Good for the Balkans, good for EU traders, good for the region, and good for everyone except for politicians who want to Balkanise the market.

Diversifying risk – essential crisis mitigation

We’re in the middle of a global gas crisis, so risk-diversification and liberalisation are indispensable conditions for the stability and predictability of gas markets in SEE and CEE. That’s what needs to be borne in mind and, in the end, it’s what will see us through. The market will prevail – as markets do. And it will prevail regardless of the megalomania of politicians, in Russia, Turkey, Greece, Bulgaria or any other country, who thrive on extremes of energy nationalism and think – as politicians do – in terms of geopolitics, of regionally dominant roles for their countries and of “national champions”. And who therefore strive to secure unique “hub” status and geopolitical brokerage fees for said “champions”.

I mean: come off it and get real! If a giant like Gazprom has failed so miserably to dominate the gas market in Europe, what are the chances of any country in our region doing so? Zero!

For every obstacle and excessive ambition, there is a counterweight – LNG vs. pipeline gas, Greek vs. Turkish terminals, imports vs. indigenous gas production, supply vs. demand management, and so on.

In some situations, it is essential to have LNG terminals, as was the case at the beginning of the crisis, after Russia invaded Ukraine. In others, it is crucial to have domestic gas production, as insurance against excessively high prices. Under certain scenarios, it might be important for a country to have competitive gas traders with solid market shares, turning over large volumes and operating on several markets.  Or to have extensive gas storage facilities to balance consumption at the lowest possible prices and to meet peak demand. 

The competition between Turkey and Greece – competition for the “gas hub” title and the role of LNG door-keeper to the region – is healthy and will have a positive impact on the regional gas market. Not because either will succeed in a zero-sum sense. But because both will fail to do so – having meanwhile benefited both themselves and everyone else by their strenuous efforts not to be left behind.

Each of the two contenders has its strong cards to play in this contest. Thus:

Greece, as an EU member state, will remain a safer route for LNG imports and a country enjoying lower political risk. A lower ratio of domestic consumption to export potential bodes well for Greece’s ambitions to secure a major share of LNG imports into the region, notably to meet peak demand. However, difficulties with LNG unloading and transmission infrastructure and higher transmission costs might undermine its zeal. 

Turkey, on the other hand, is the region’s largest gas importer and consumer – and, therefore, has the most diversified supply and the gas liquidity needed to balance the regional market. Moreover, the start of offshore natural gas production from the Turkish section of the Black Sea, which should take place soon, will add further arguments to Ankara’s case.

However, Turkey’s political risk remains higher, for various reasons but three above all:

• First: Turkey is not an EU member state and EU regulations are not respected there. This comes at a cost, when gas originating in Turkey faces hurdles in the absence of an intersystem agreement between the TSOs of Bulgaria and Turkey.
• Second: there will soon be presidential elections in Turkey. Although the outcome is uncertain, it is certain that political risks will be propelled to record heights. Moreover, the sequels of possible negative outcomes for Turkey’s relations with the EU and the West generally are even less predictable. 
• Third and most important: Turkey’s incumbent president, Mr Erdogan – as I have argued before by A&A – has pinned his hopes on a scheme of brokering Russian strategic commodities, including gas supplies to the EU, disregarding sanctions. That’s an aim which has previously eluded other politicians, notably former German chancellor Angela Merkel, who was no mean political operator. So why should Mr Erdogan succeed where the almighty Mrs Merkel failed? And what will be the political consequences if he does fail?

And Bulgaria?

Well, Bulgaria’s strongest card is its transit and storage infrastructure. And yet, substantial shares of Bulgaria’s transit capacities are booked by Gazexport, at least 90% of those to Serbia, 65% in the case of Romania, and until recently 100% of transit capacity to North Macedonia. In theory, the Bulgarian government – and, for that matter, the Greek government – is powerless to offer anyone a way to bypass the EU’s regulated system of competitive allocation tenders for regas, transmission and storage capacity. Yet Gazexport managed to secure its dominant position due to a previous long-term contract (LTC) for transit with Bulgartransgaz that stretched for years into the future: the LTC booking lines 2 and 3 of the Trans-Balkan pipeline expires at end-2030. With volumes of (and revenues from) gas sold to its EU clients falling and sanctions beginning to bite deep, Gazexport will sooner or later have to release its grip on the transmission system of Bulgaria. But the capacity release issue is yet to be resolved.

Nevertheless, the agreement between Botas and Bulgargaz would seem to prefigure a new reality, even if it is challenged by the EC, as it will speed up the closure of the intersystem agreement between Bulgartransgaz and Botas. A reality, that is, in which LNG imports via Turkish and Greek terminals, in combination with non-Russian gas conveyed by pipeline via the Southern Gas Corridor, could completely offset the loss of Russian gas in Central and Eastern Europe, including Ukraine.