Four men in a Hub

Messrs Putin, Erdogan, Radev, and Orban – the leaders of Russia, Turkey, Bulgaria and Hungary respectively – seem set to resume progress with their project of a Turkish Gas Hub (TGH) that will serve as a basis for “laundering” currently unfashionable Russian gas and smuggling it into the European Union (EU) through the back door. The “test” tender recently announced by Bulgartransgaz for capacity at the Strandja interconnection point (IP) is the latest step in this direction. But the scheme’s realisation is by no means a foregone conclusion. Those Four Men (and their minions in the region) still have everything to fight for. And so, if we’ve any sense, do we.

Recep Tayyip Erdogan is not beating about the bush. One of the first vows he made on being reelected as President of Turkey – and duly congratulated by his Russian counterpart Vladimir Putin – was to work together with Russia and complete, within a year, the establishment of a gas hub in Thrace, the European part of Turkey.

And the various partners involved along the Turkey-EU route did not waste time in restarting work. Last week, Bulgaria’s transmission system operator (TSO), Bulgartransgaz (BTG), announced than it “intends to launch auctions on the RBP capacity booking platform for monthly firm capacity product in both directions” at the critical entry point from Turkey – and the proposed Turkish Gas Hub (TGH) – at the Malkoclar-Strandja interconnection in a test mode and just for June. The aim was to identify interest in capacity booking for the Trans-Balkan Pipeline (TBP) that links Bulgaria and Turkey at this point. And capacity in both directions is on offer – 62,000 MWh/day (5,8 mcm/d) in reverse mode from Turkey to Bulgaria and another 32,000 (3 mcm/d) MWh/day in direct mode from Bulgaria to Turkey. No results have yet been formally announced either on the Bulgarian (BTG) side or by Botas, the state-owned Turkish national oil and gas company, whose functions include that of gas TSO.

In this test are discernable the contours of potential future developments around the emerging TGH and their long-term implications for the gas market in the region as a whole – ramifications that concern geopolitics, energy security and EU-Turkey relations.

Some Background

Let’s go back a few years, to remind ourselves of the context.

In 2019, the Turk Stream (TS) gas pipeline was commissioned. TS has a design capacity of 31.5 bcm/y, and runs from Russia, under the Black Sea, to a receiving terminal on the Turkish coast. At this stage it is in fact not one pipeline but two, one (TS-1) intended for the Turkish market and the other (TS-2) for the European market. Also commissioned in 2019 was the pipeline from the receiving terminal on the Turkish Black Sea shoreline to the Strandja-2 entry point on the Bulgarian-Turkish border, This has a total capacity of 15.75 bcm/y, which was entirely reserved by Gazprom Export under bilateral agreements signed between Russia and Turkey. Commercial deliveries of 100% guaranteed Russian natural gas via the pipeline started on January 1, 2020, securing both transit of gas via Bulgaria to Serbia, Hungary, Greece and the Republic of North Macedonia (RNM) and gas supplies to state-owned gas trader Bulgargaz EAD and the Bulgarian market.

In February 2022, little more than two years after Turk Stream came online, the Russian army invaded Ukraine.

Now, Turk Stream had been built as part of a dual bypass strategy, to allow the Kremlin to send gas westwards to the key European market without using the well-established transit route through Ukraine.

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.

The northern element – or ‘pincer’ – of this strategy was the Nord Stream (NS) pipeline from Russia’s Baltic coast to northern Germany. The first stage of this, NS-1, had been operating for more than a decade at the outbreak of war, but ceased to deliver Russian piped gas after Gazprom shut down the Nord Stream 1 pipeline “for maintenance” on June 11, 2023, shortly after the Russians invaded Ukraine. NS-1 then achieved a rather longer-term irrelevance in September 2022, when apparent, though still unexplained, sabotage made both of its “strings” (or pipes) inoperable, perhaps irreparably. As to NS-2, it was technically ready to go in February 2022, but held up by serious (indeed, principled) EU and German regulatory problems – a hold-up that became indefinite with the invasion. One string of NS-2 was also affected by the September incident. Finally, liquefied natural gas (LNG) from Russia’s nascent liquefaction capacities in the Baltic area – a possible alternative for some of the gas that Nord Stream could no longer pipe westwards – soon found itself unwelcome in northern Europe.

So the Northern Route was dead, or at any rate in long-term hibernation. But the Southern Route – Gazprom’s southern ‘pincer’ Turk Stream (or, specifically, TS-2) – was, and remains, essentially unaffected. It’s still operational – and still delivering at full capacity. No doubt, the Kremlin has clearly identified the Southern Route as the most promising and the weak spot in EU’s strategy.

For a start, Bulgaria’s transmission and transit operator – Bulgartransgaz EAD – continues to transit Russian natural gas supplied by Gazprom Export. Which, indeed, no-one on either side is disputing.

But also, Bulgaria is continuing to import Russian gas – and rather a lot of it. Which deserves a little more comment. For, on April 27, 2022, Gazprom Export had announced that it was cutting off gas supplies to Bulgargaz.

This, we should notice in passing, was on the highly counter-contractual grounds that Bulgaria would not comply with the Russian demand that Bulgaria should switch to payment in roubles (where the contract specified dollars). And, by the way, the cut-off was a Russian step, not the result of some EU or general Western ban.

However, that may be, the main point is that imports have continued and nothing very much in the situation seems to have stopped them.  

According to data from Bulgaria’s National Statistical Institute (NSI), quoted by the reputable local news outlet Mediapool, Bulgaria continued to import natural gas from Russia and Gazprom Export after the April cut-off and throughout 2022. Between April 27 and end-2022, writes Mediapool, natural gas imports from Gazprom worth BGN 600 million (€306 million) entered Bulgaria. And almost two thirds of this (BGN 380 million) entered the country in the final four months of the year – when the caretaker government appointed by the notably Russophile president Rumen Radev was in office.

A portion of these gas volumes has been injected into Bulgaria’s Chiren underground gas storage facility (UGS) and sold on the local market via the Bulgarian Gas Hub. Parts were used to replace the US LNG cargoes ordered in mid-2022 but then cancelled by the caretaker government. The Bulgarian Ministry of Energy introduced a mandatory requirement for a certificate of origin – to prove that no Russian gas was being imported – conveniently overlooking the fact that certificates are rather vulnerable to “substitution” and that neither the energy ministry nor the state gas companies are especially picky about verifying them.

The already built physical infrastructure for the import of Russian gas remains intact, allowing Gazprom Export if not to retain at least to slow down the loss of its share of the Bulgarian and regional market. Real gas diversification comes with opening to completion the entry capacity at Strandja 2 and Strandja.

On top of that, Russia’s Lukoil refinery in Bourgas not only received a derogation for imports of Russian crude oil, but continued to import Russian gas via Sustainable Energy Supply OOD – a local gas trader affiliated to Lukoil’s trading arm Litasco.

Finally, despite vows and pledges, Mr Radev’s caretaker government continued to follow the tried and tested principle of former prime minister Boyko Borissov – that of favouring Russian gas over gas from Azerbaijan. Recent Eurostat data, quoted by Trend News Agency, reveals that from January through March 2023 “Bulgaria has imported a total of over 196.5 million cubic meters of Azerbaijani gas”, well below the target of 250 million cubic metres provided in the contract, despite the fact that its price was 39 per cent lower than the average internal regulated price for the same period.

In other words: Azeri gas imports down; indirect Russian gas imports up. The Deep Gas State is fully operational in Bulgaria, it seems.

In the context of the present BTG tender for entry and exit capacity at Strandja, these moves – clearly coordinated with Turkey’s Botas – could mark a broader action plan to smuggle the Turkish Gas Hub into the EU through the back door.

There’s more than one parallel with the Turk Stream game plan and once again false premises are in abundance.

Turk Stream echoes

To begin with: back then, when BTG sought to get around EC vigilance, the Turk Stream extension into Bulgaria was presented as an ‘expansion’ of the country’s gas transmission system, implying that it would serve as both transit and local gas transmission network, which could supply parts of northern Bulgaria with natural gas. Thus BTG’s management misled the Bulgarian public, which expected direct benefits for local gas consumers.

Moreover, by spending money on Turk Stream’s Bulgarian segment in the name of Bulgarian energy security, BTG promised to guarantee long-term supplies from Gazprom to Bulgargaz at competitive prices. Yet this later proved a false claim when, in 2022, Gazprom Export unilaterally terminated the gas supply to Bulgargaz, but Bulgartransgaz continued to provide transit services for Russian natural gas.

BTG presented the Turk Stream extension project to the EC as critical to national security – the security, that is, of Bulgaria’s national the gas supply. In parallel, BTG requested EU funding and, in 2016, secured the project’s entry into the EU’s list of “projects of common interest” (PCIs).

In 2018, after it became apparent that BTG was acting as a smoke-screen for Gazprom and that Turk Stream served only Russian interests, the European Commission (EC) removed the project from the EU PCI list and denied it EU funding, leaving it as the responsibility of the Bulgarian government, to be financed by that government.

BTG and the then-prime minister Boyko Borissov, who oversaw the project, changed its name from “Turk Stream” to “Balkan Stream” in a rather pointless attempt to distance it from its Russian origins. No-one was fooled, however: the pipeline is still known as “Turk Stream” in both Turkey and Serbia.

After passing the initial EC-clearance stage and carefully identifying the Commission’s red lines, Mr Borissov and Bulgartransgaz CEO Vladimir Malinov proceeded to ignore those red lines by going full steam ahead with the real plan, with the support of a Saudi company (Arkad), which acted as a front for the real contractors – who were Russian and Belarusian. Most of the funding came from South Stream Transport BV, totally owned by Gazprom – also not a very European thing to do.

History repeats itself?

And now the current capacity allocation tenders are following a pattern remarkably similar to that of the Turk Stream project.

• The tenders  are being presented as an integral part of the “Solidarity Ring” project, which is being marketed with the politically correct EU verbiage of diversification of sources and routes, emphasising the role of Azeri gas as “non-Russian” gas.
• European funding is being sought to increase capacity and synchronise transmission and infrastructure interoperability along the national segments of the entire route from Turkey to Hungary and Slovakia.
• As with the Balkan Stream/Turk Stream project, the scriptwriters appear to have a ready-made “Plan B” for financing the gas hub in Turkey and the necessary infrastructure expansion along the route of the “Solidarity Ring”. This seems likely to involve funding by Gazprom itself – the subject of ongoing investigation by Analyses & Alternatives – with a Saudi company possibly fronting the scheme again.
• And, as with Balkan Stream, this initial “June testing” is meant to identify weak spots in the EC’s “institutional firewall” that could be exploited to whitewash Gazprom gas by including it in the “Turkish Gas Hub mix” and overcome the relevant regulatory barriers.

Now, technically speaking, there are at present no formal sanctions against Russian gas imports into the EU. But whether this remains so will depend entirely upon events on the battlefields of Ukraine. To put it simply, the project’s promoters are unable to accommodate Putin’s Russia political risk. Hence, Gazprom’s enablers in Turkey, Hungary and Bulgaria are racing against time and need to make long-term capacity bookings at the Strandja entry point a fait accompli as soon as possible.

The lack of an intersystem agreement

Bulgartransgaz and Turkey’s Botas prefer to circumvent EU regulation and operate without an interconnection agreement, as this shifts the decision-making ball out of the EU’s court and into that of Turkey. As a result, only traders that own gas in Turkey and have successfully cleared Botas’ exit capacity tender at Malkoclar will, in  effect, be allowed to bid for entry capacity at the Strandja interconnection point.

This is evident from the data published on the Turkish regulator’s website, which lists only two companies as potentially eligible to take exit capacity in Markoclar, Turkey – namely:

• Botas itself, with 5.1 mcm/d of capacity that the company is “qualified to reserve” (eligible to reserve), all of which is Russian gas from Turk Stream (sourced from the TS entry point in Turkey – Kiyikoy).  This is a clear indication of Botas’ Russian gas brokerage role.
• SOCAR Energy Trade, an affiliate of Azerbaijan’s state oil and gas firm SOCAR, with 1.8 mcm/d of gas entering TANAP – the Trans Anatolian Pipeline (the relevant entry point in Turkey being Turkgozu).

No other company could qualify to bid for exit capacity in Turkey, and  therefore no other company could bid for entry capacity at Strandja. We have received confirmation that both Botas and Socar have booked the exit capacity at Markoclar (though that is not formally announced) and are eligible to take the entry capacity (90% if announced BTG figures are matched against capacity taken at Markoclar) to Bulgaria as well. The entry capacity ratio split between the two companies indicates the potential (4 to 1) for whitewashing Russian gas in the Turkish Gas Hub’s design. The only other option is entry at the Strandja-2 IP, which is reserved exclusively for Gazprom Export. So, at both Strandja-1 and Strandja-2, non-Russian gas and EU companies are simply excluded except for small Azeri gas quantities.

This might explain why Botas and BTG have gone silent in recent days, with no tender results announced on either side. In detail, the possible explanations are three in number:

First, that they have been waiting for Turkish president Recep Tayyip Erdogan to be declared winner in elections and formally confirmed in his post. One of the first commitments he made was to the Turkish Gas Hub, which invites closer attention to news on the capacity allocation coming from Botas and BTG.

Second, that the early “problem-identification phase” has demonstrated that the EC will not tolerate such blatant discrimination against EU companies and the parties try to fine tune circumvention strategy.

Or, third, that both TSOs may be waiting for the outcome of government formation in Bulgaria – since anything other than yet another caretaker government nominated by president Rumen Radev has the potential to stall the process.

Whichever of these is the case, management at BTG headquarters must be awaiting the outcome very nervously indeed. For the stakes are high – existential, in fact.

BTG’s Turk Stream gamble

Existential indeed. For not only is BTG 100% reliant on revenues for transit services rendered to Gazprom Export. In addition, the war and possible sanctions against Gazprom’s direct access to EU infrastructure might jeopardise both repayment of BTG’s debts and its ability to cover the operational costs related to Turk Stream’s Bulgarian section.

BTG is in a precarious position after the overdose of Kremlin projects. The company is extremely vulnerable and heavily indebted to Gazprom for the construction of the Turk Stream pipeline, and its revenues from transit fees are now in jeopardy due to the war in Ukraine and effectively immitigable Russian-Gazprom political risk. As a result, BTG is desperate to secure long-term contracts for Russian gas, leaning heavily on Turkey.

One way that BTG could do this is by playing along with the Erdogan-Putin Turkish Gas Hub plan – which could provide additional transit volumes through the Strandja entry point. However, there are a number of factors that could make it difficult for BTG to repeat its Turk Stream ‘success’ story.

-First, only companies with exit capacity or entry capacity in Turkey can participate in BTG’s auction. This means that BTG will be excluding European companies from access to NGTN – Bulgaria’s National Gas Transmission Network – and favouring non-EU companies. This is a no-go with the European Commission.

-Second, the Turkish government has shown a willingness to favour Russian companies in the energy sector. This could make it difficult for Botas or even Azeri companies to participate, openly or tacitly, in the “whitewashing” of the war-toxic Gazprom, even if it offers the lowest gas price.

-Third, the EU is increasingly concerned about the security of its energy supply. As a result, it may be reluctant to approve any contracts that would allow Russian gas to flow into the bloc. I say “may be reluctant”: but in fact this is a matter of “when” – not “if”.

Given these factors, it is unlikely that BTG will be able to repeat its Turk Stream game plan in circumventing EU market and institutional reactions. However, the company is likely to continue to try to secure long-term transit contracts for Turk Stream gas. This is a high-stakes gamble for BTG, but it is one that the company feels it must take in order to survive.

The June capacity auction

So, back to where we started – the June capacity auction. This might more accurately be called the “June-July capacity auctions”, for It is being held in two phases:

• The first phase, which is currently underway, is a test auction to gauge the level of shippers’ interest in the Strandja entry point and play the competitive tender book of the EU.
• The second phase, which will be held in July, will be the actual capacity auction.

The test auction, logically enough, is being held in “test mode”. This means that the results of the auction are limited to a month. However, these results will exhibit Botas-BTG game plan’s weak spots – its discriminatory nature.

The July capacity auction will be the real test for BTG. If the company awards any capacity contracts to Botas and Socar Energy, it will be a major step forward in its efforts to secure long-term contracts for the Turk Stream gas it so covets. However, if BTG is unable to award any contracts, it will be a major setback for the company and could further compromise the future of Turk Stream and Russian gas flows in general.

The results of the auction will also have a significant impact on the European energy market as more Russian gas will be flowing into the EU. Although, at least in theory, this could lead to lower gas prices for European consumers, the nature of Gazprom’s gas politics favours intermediaries and political brokers, rather the end consumer. If the Botas-BTG tandem fails to deliver, the repercussions will be immense – at corporate level, but above all at geopolitical level. Stable and substantial gas sales by Gazprom are essential for the Kremlin’s ability to fund its operations in the region, including those of its secret services – the FSB, the GRU and the SVR – and, more recently, those of the ever-more-assertive and ever-more-sinister Wagner Group and its army of mercenaries (and convicts).

Some detail on Strandja-2 entry point

Let’s turn for a moment from geopolitics and existential threats to something which at first glance looks too technical for non-specialists to understand or care about, but which is actually quite important. This is the fact that the Strandja-2 Gas Measurement System (GMS) – through which natural gas from Turk Stream gas enters Bulgaria – hosts two separate streams on Bulgarian territory: one to the transit pipeline and the second to the internal transmission network, which covers local consumption. It is through the “local” pipeline that Russian natural gas has continued to enter Bulgaria since the termination of Bulgargaz’s contract with Gazprom Export on April 27, 2022.

That’s important for a very specific reason. One way of “laundering” Russian gas is by having it come in from the Turk Stream in Turkey via the 11 km dedicated pipeline at Strandja-2 and out back to Turkey again via the Strandja-Malkoclar pipeline, after which it can be traded without restrictions. Alternatively, if what enters is the current blended Botas (Russian gas) and SOCAR Energy Co gas mix, that can also be sold directly on the (Bulgarian-based) Balkan Gas Hub exchange. In other words, there are ways round EU restrictions.

The Gas Corruption Bond and the War

There is a strong interest in buying Russian gas as it is traded at a discount of 7-8% below the TTF benchmark price – the EU standard set on a Netherlands-based gas exchange – making it attractive for brokering deals in Bulgaria, Romania, Slovakia and Hungary. Consumers still pay top prices, of course, but some very nice profit margins are on offer for political and business brokers. Only companies approved by Messrs Putin, Erdogan, Radev and Orban can join in the profiteering – using the proceeds, in part, to fund other avenues of Russian influence.

The BTG and Botas Plan A for the Solidarity Ring project seems to involve only Botas-approved traders, who target an increase in gas supply up to 19 bcm/y, effectively blocking the reverse-flow capacity of the Trans-Balkan Pipeline, putting it beyond the reach of any EU competitor. At 2022 average TTF prices, the additional cash flow into Putin’s war chest could top $7 billion.

So it’s not only BTG management that’s waiting nervously. For the warmonger in the Kremlin, too – and, by extension, all his partners in Southeastern Europe – this is a life-or-death issue. Which explains the current hysteria of Russia’s fifth column in Bulgaria about the formation of the new regular government, that will take away the levers of executive power from President Radev.

Ilian Vassilev