Brussels gets wise to the Strandzha 1 schemes of Bulgartransgaz
A recent Bulgargaz tender for LNG to be delivered to Turkey – and presumptive evidence that the Bulgarian company has booked capacity at Turkey’s soon-to-be-opened Saros LNG terminal to receive it – implies that collaboration between the two countries’ gas barons is going smoothly. The European Commission is taking notice of the highly irregular contract that enables this collaboration. But, aided by state ownership, the sectoral elite appears to have considerable skill at evading or ignoring Brussels’ rules. And Bulgartransgaz CEO Vladimir Malinov is rumoured to be the mastermind behind a planned sequel to his previous success in engineering the Turk Stream pipeline. The struggles over “Turk Stream-2” should be an interesting spectacle.
Continued state ownership of Bulgarian energy companies – in a (theoretically) post-communist world where many countries long ago finished privatisation – is the subject, shall we say, of mixed reviews and differing interpretations. Take the two state-owned enterprises (SOEs) which deal with natural gas: the transmission system operator (TSO), Bulgartransgaz; and the state gas trader and public supplier, Bulgargaz.
One school of thought is that state ownership of these is a symbol of Bulgarian independence and a guarantee of the country’s national sovereignty and energy security – not to mention synonymous with low gas prices and protection of national interests. Most notably, when dealing with overwhelming corporate power like that of Russia’s Gazprom, national champions, at least in the past, have proved essential in thwarting off the extremes of Moscow’s abuse of natural gas as an energy weapon.
But there’s another view, according to which state ownership is both a mask and a mechanism for the defence of none-too-savoury special interests. It’s the instrument that allows what is either a sectoral Old Guard or a behind-the-scenes pro-Russian elite (or both at once) to block gas market reforms and the entry into the national market of competitors to Russia’s Gazprom and its Bulgarian avatar Bulgargaz. Like Hungary’s Viktor Orban, Bulgaria’s dismal duo – former prime minister Boyko Borissov and current president Rumen Radev – have used their national energy champions to exert their own grip on associated financial flows and effect their subsequent conversion into political power.
Which, when you think about it, should be no surprise. For Bulgargaz is a miniature copy of Gazprom. And Gazprom itself was established (in 1989) as the corporate successor to the Soviet Ministry of the Gas Industry (to the extent of keeping the minister, Viktor Chernomyrdin, as the new company’s CEO!). When the Soviet Union fell to bits a couple of years later, Gazprom just became a little smaller, keeping the sector’s Russian assets and operations. And, despite an interlude of 1990s-style pseudo-privatisation, it remained essentially part of the Russian state. So, indeed, it remains, especially after Vladimir Putin tightened the state’s (and his own) grip on the economy generally. As such it’s an instrument of state policy and, by default, is not meant to compete on even terms on the market. So it’s natural that Bulgargaz, as little Bulgaria’s very own mini-Gazprom, should operate along much the same lines.
It won’t come as any surprise to regular readers of Analyses and Alternatives (A&A) that I think the second of these views is closer to the truth. Far, far closer.
And, on top of this, it’s not state intervention and state ownership that would guarantee Bulgarian (or any other country’s) consumers the lowest possible gas prices. It’s competition, liberalisation and diversification which will do that.
After all, Bulgarian domestic gas prices are not renowned for being low. They are not among the lowest in Europe, nor in Central and Eastern Europe (CEE), nor in the narrower region of Southeastern Europe (SEE). Now, gas received under the long-term contract (LTC) of Bulgargaz with the Azerbaijan Gas Supply Company (AGSC) – a contract for a billion cubic metres per year (1 bcm/y) of Azeri gas, around a third of Bulgaria’s annual consumption – that actually is the cheapest in the EU. Bulgargaz should prize that contract as the jewel in its crown. But instead it has been consistently ignored by the state gas trader, at the time when the contract became active in January 2021 and initially took less than a third of the agreed volumes – less than 300 mcm in that year. Bulgargaz consistently gave preference to more expensive Gazprom gas and that was not an entirely corporate, but rather a political decision by government of the day, headed by Boyko Borissov.
So you see: market logic and sound judgement do not always rest with governments. Nor with the SOE managers appointed by them.
The strange case of Strandzha 1
Consider the tender announced on February 25th by Bulgargaz for the supply, in April, of a cargo of liquefied natural gas (LNG) to a terminal in Turkey. That will be the first delivery to take place on the basis of the contract signed at the end of last year by Bulgargaz and Turkish national gas company Botas, and agreed at the highest political and state level. As discussed in an earlier A&A article, this enables Bulgargaz to transit gas so received through the Turkish transmission system and to enter Bulgaria via the Strandzha 1 interconnection point (IP).
Now, close attention to the details of the tender raises many questions. Not only about the specific deal. But also questions about a growing mismatch. On the one hand, you have the EU policies and regulations governing the gas sector. And, on the other, you have the direction in which the sector is headed in Bulgaria. They don’t seem to be consistent and are becoming less so over time. So let’s explore these inconsistencies – and the factors that are driving them.
For a start, if you look at the Bulgartransgaz website – as well as at the relevant page on the Regional Booking Platform (RBP) site – you will see an interesting contrast between the coverage of the Strandzha 1 and Strandzha 2 IPs. There’s plenty of data on Strandzha 2, which is where Russian gas flows into Bulgaria via the Turk Stream pipeline. But there’s no data at all either on the capacity offered at, or on the natural gas flows through, Strandzha 1, which as noted above, connects the systems of Botas and Bulgartransgaz.
Even on Strandzha 2, incidentally, things aren’t entirely straightforward. Experts are still trying to figure out how Turk Stream’s exit capacity at Malkoclar (on the Turkish side of the border) can be less than 16 bcm/y, while the entry capacity at Strandzha 2 (on the Bulgarian side) is set at 20 bcm/y. One possible explanation is simply that it’s a trick, to allow apparent adherence to the EU Gas Directive – which limits utilisation by a single user (in this case, Gazprom) to a maximum of 90% of the capacity of any given IP – while still ensuring that Gazprom has whatever capacity it needs (90% of the inflated 20 bcm/y capacity being higher than 16 bcm/y) and complete control over the nominal gas flows, leaving its competitors with the impossible task of securing exit options from Turkey.
Back to Strandzha 1, however…
Bulgartransgaz gives two excuses for not publishing data on this IP:
- First, the absence of an interconnection agreement with Botas (which is TSO as well as gas trader, among many other functions). That’s no surprise, incidentally. There is no particular push to change this state of affairs from either the Bulgarian or the Turkish TSO, since the lack of a level playing field for all allows impromptu deals favouring a selected few.
- Second, the “irrelevance” of this entry point for the European gas market.
The latter, you might think, is a somewhat eccentric thing to say about an entry point with an annual capacity of 13 bcm. But let that pass. With or without an interconnection agreement, Bulgartransgaz is obliged by EU rules to declare the available entry capacity of Strandzha 1 on the international RBP platform. That is what transparency is all about. But nothing happens.
Bulgarian gas: a dysfunctional market
Now, you may recall that, in December 2018, the European Commission (EC) had fined Bulgartransgaz, Bulgargaz and the Bulgarian Energy Holding – their very indulgent mother-company (and sectoral mastodon) – a cool €77 million for non-compliance with the EU Gas Directive, and specifically for denying access to the national gas transmission network on equal terms to the competitors of Bulgargaz. In a very unusual move, the Bulgarian government of Mr Borissov — whose timid reaction to Russian companies’ abuse of their dominant position is the stuff of legend (or at least of anecdotes) – suddenly decided to stand up to the EC and challenge its fine in the EU’s General Court.
Which at least implies a certain consistency over time in the attitude of Bulgarian governments on the subject of gas – of EU regulations vs national sovereignty. That is, they are consistently wayward about the EC’s efforts to achieve and enforce a competitive framework in a sector that’s very difficult to regulate. And consistently prone to prioritise relations with (and favour the interests of) non-EU players, be they Turkish or Russian, who don’t set much store by level playing fields. That’s worth bearing in mind when the Botas-Bulgargaz deal really comes into the limelight, and when Bulgartransgaz, Bulgargaz, and their cohort of political fixers begin to squirm and sqawk in protest. At least they’ll be running true to form.
While we’re on the subject, by the way, you may also have heard a lot about the liberalisation of the Bulgarian gas market, diversification of sources, competition, and so on. Don’t you believe it, however! Not in most senses that really matter. A&A readers – who are used to it by now – may perhaps forgive a little digression here.
GRP – RIP
Consider the sad fate of the Gas Release Programme (GRP). That was a rather sensible policy, a standard EU antidote to a non-competitive situation on a national gas market – a requirement designed to secure liquidity in an illiquid market and to tame the more extreme abuses of dominant players. Bulgargaz, in case you’re wondering, is certainly dominant, since it still has a market share of over 80%. Under the GRP, Bulgargaz had the obligation to carry out regular and transparent offerings of gas on the Bulgaria-based Balkan Gas Hub Exchange (BGHE). Which it did, but often bypassing the BGHE in favour of the second private Gas Exchange – the Bulgarian Energy Trading Platform – which operated in rather strange ways. Offers were made without decent advance notice of the time at which bids were to be accepted, and deals closed within seconds of those offers being made. Far be it from A&A to suggest impropriety of any sort – still less that buyers were, in any sense, pre-selected and favoured – but… well, gas was sold by Bulgargaz at significantly lower average prices than those on the market generally. And later resold at much higher prices. Yet nobody did very much about it.
Nevertheless, GRP was something. Until, that is, the drums of war began to roll in Ukraine – and Bulgaria’s parliament abolished those GRP obligations, leaving the Bulgargaz management to make its offers on BGHE whenever and however it wanted. National interest in an emergency, you see? And caretaker government of President Radev has been invoking force majeure and the war in Ukraine to sustain the Bulgargaz monopoly on the domestic market, and enter into long-term gas supply contracts, arguing that the two are equivalent to national energy security. On which subject, the sector regulator is strangely silent.
One final point. In case you’re also wondering who has the 20% of the market that Bulgargaz doesn’t control, the answer is: largely Lukoil. That’s right: a Russian company, one of whose subsidiaries, as we’ll see below, has secured a 14% market share by virtue of Gazprom gas deliveries to its Neftochim refinery in Bourgas. As to the remaining 6%, that’s shared between a number of small gas traders, none of them with much clout on the market.
So much for competition…
However, digression over and rant over! Let’s get back to Bulgargaz and Botas – and visit the Gulf of Saros.
Bulgargaz: sitting pretty at the Saros terminal
Last week, after the Bulgargaz LNG tender was announced, Botas published data on the capacity available at the new Saros terminal – a floating storage regasification unit (FSRU), which is due to come online at the end of March. The Bulgargaz LNG deals will, by implication, be among the new terminal’s first. The Botas page showed that unloading capacity of 2 million cubic metres (mcm) per day for most of April, had been booked at Saros, roughly matching the minimum volumes of 48 mcm (including shared cargo options) requested by Bulgargaz in the tender.
In short, Bulgargaz is in a strong position vis a vis Saros, and is making good use of it. The strength of that position should be emphasised. Bulgargaz is the only EU gas trader with secured exclusive access to terminals in Turkey; to its transmission system; and to that system’s entry and exit points. And it also seems that this exclusivity extends to unique access to the Bulgarian fragment of the EU’s integrated gas network at the ‘shadow’ entry point of Strandzha 1. Transparency and control at Bulgaria’s borders are certainly hot issues, ahead of the country’s entry into the Schengen Zone. The is true in more than one respect, but gas interconnectors loom high on the list.
Brussels steps in
Now, we noted in our earlier article that EFET – the European Federation of Energy Traders – had reacted to the Bulgargaz-Botas contract by sending a letter to two of the EC’s Directorates-General, those for Energy and Competition. In this, EFET drew attention to possible unlawful state aid and abuse of monopoly power in the contract’s provisions for access to transmission capacity at the Strandja 1/Malkoclar IP. And on February 22nd a meeting was duly called in Sofia with the participation of representatives from the EC, Bulgaria’s Ministry of Energy, Bulgargaz, Bulgartransgaz and the Commission for Energy and Water Regulation (KEVR), Bulgaria’s none-too-watchful sectoral watchdog.
Information that has leaked from the meeting points to a “mastermind” at work – albeit behind the scenes – and it isn’t anyone from Bulgargaz, whose contract with Botas was, after all, under review. No, said mastermind is none other than Bulgartransgaz CEO Vladimir Malinov, the man who made Turk Stream-1 happen. And he is using war-driven emergencies and Bulgargas as a front, thanks to that contract with Botas, to push through his real agenda item – namely that set of arrangements which we might call collectively “Turk Stream-2” (TS-2). Bulgargaz will be covering ‘national interest’ over Bulgarian gas needs, importing every now and then US or other non-Russian LNG (the contract with Botas refers to 1.5 bcm/y) while Bulgartransgaz transits ten times that amount of “Turkish gas mix”.
This would guarantee significant outflows of natural gas from Turkey, based mostly on inflows of Russian pipeline gas into Turkey, but with sporadic US and other non-Russian LNG supplies for “geopolitical balance” (otherwise known as “appearances”). It’s a classic encore of the transactional diplomacy used to steer Turk-Balkan Stream through a geopolitical minefield.
Then, Russia got its pipeline and the gas transit that the pipeline required, while the US got to sell F-16s to Bulgaria and US Solar gas turbines for the project. Now history seems to be repeating itself, or at any rate – as Mark Twain might have said – rhyming rather neatly. The current batch of US turbine sales cover the interconnector with Serbia, which has been brought to the fore with perfect timing. And more sweeteners have been added to appease the US – more orders for F-16s and Westinghouse nuclear fuel to replace Russian TVEL fuel rods for the Kozloduy NPP’s fifth block.
Instead of taking part of the blame for untying Mr Putin’s hands to unleash the war on Ukraine, the team at the Bulgarian end of the Kremlin’s Turk Stream 1 operation is now contemplating an extension. The Mastermind Malinov’s game plan is to use the reverse flow capacity through Strandzha 1 of the Trans-Balkan Pipeline (TBP). Once upon a time, TBP’s main purpose was to carry Russian gas – after its transit through Ukraine – southwards through Romania and Bulgaria, then on to Turkey. Using TBP in reverse mode will now allow a kind of “northbound” version of Turk Stream to come to life. Westbound gas moves through TS-1 to Serbia and beyond. “TS-2” will involve northbound flows to Romania.
Legally tricky? Well, don’t worry too much on that score. The TS-2 project receives profuse amounts of highly-paid consultancy support in both Turkey and Bulgaria from Gazprom’s EU legal offices, which had previously provided invaluable assistance in pushing TS-1 (that is, Turk Stream and its Bulgarian continuation Balkan Stream) through the EC, squaring it with Brussels bureaucrats and Brussels regulations. At the peak of the transactional diplomacy associated with Turk Stream-1, the then Prime Minister Borissov used regular expulsion of Russian diplomats to balance off his geopolitical project bias. These days, expulsions aren’t an option and, on the surface of things, Gazprom’s subsidiary Gazexport isn’t selling gas directly gas to Bulgaria. So, ostensibly there is no Russian interest to account for. Ostensibly.
Russian gas laundering
Now, TS-2 will depend on passing off Russian gas that comes into Europe via TBP as non-Russian – or at least (and for as long as Russia remains a pariah state) on making its origins ambiguous enough for those not blessed (or cursed) with hyperactive consciences not to ask too many questions. That is, Russian gas, by passing through Turkey, will be given a replacement “certificate of origin” making it indistinguishable from any non-Russian gas that has entered Turkey. Depending on your taste in metaphors, you can refer to this process as “laundering” or “de-russification”.
Most of the laundering of Russian gas for TS-2 will happen in Turkey, beyond the reach of the EU or the US. Moreover, it’s not likely that TS-2 will get less lavish and loving attention from Gazprom’s lawyers than TS-1. For it is vital to extending the access of the prospective “Turkish Gas Hub” to the EU market, and especially to Eastern Europe. This game plan has every chance of success as EU buyers will be keen to buy “de-russified” gas in Turkey.
This will not be news to anyone who has been following Turkey’s intermediary role in helping Russian companies circumvent sanctions, whether as exporters (of metals, strategic raw materials, or fertilisers) or as importers (of electronics, components, chips, etc). And in all of the above instances, Bulgaria is an essential pass-through entry gate to the EU. If it happens for all those commodities, why not with Russian gas?
Theoretically, the volumes of de-russified Russian gas passing through Turkey could reach a figure equal to Turkey’s natural gas consumption, which is over 50 bcm/y. But, of course, the schemes will start at a lower level, with their authors gradually testing the range of the possible, watching EC reactions. As noted above, the entry capacity to the Bulgartransgaz system at Strandzha 1 is over 13 bcm/y, and the idea is to secure a dominant share for derussified gas in the total of gas emerging from the Turkish Gas Hub, an essential upgrade to the de facto monopoly of Russian gas via Turk Stream of 15.7 bcm/y. On top of this, as hinted at above, a daughter company of Lukoil’s EU trading subsidiary Litasco – optimistically called “Sustainable Energy Supplies” (SES) – is using part of the capacity at Strandzha 2 that is left unused by Bulgargaz to deliver Russian gas to Lukoil’s refinery in Bourgas. And SES has already secured, in yet another shadow operation, a 14% share in the Bulgarian gas market overall.
This is a developing story and – now that Nord Stream-2 is history – the direction this story takes will largely determine the success of EU and NATO efforts to block Russian energy commodities’ access to the European market. So watch this space – with A&A, of course! The best guide, as always, is: follow the money!