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Doublespeak: Russian energy policy and Bulgaria’s Botas contract – Part 2

Mr Hristov’s memo: the “risk-free agreement”

In Part 2 of our three-part article, we take a closer look at the January 2023 contract between Bulgargaz and Turkey’s Botas – and its vital context, the Tripartite Protocol signed in the same month by those three companies and Bulgarian TSO Bulgartransgaz (BTG). In particular, we pay attention to the scandalous way in which the then energy minister Rossen Hristov failed in his duty by ignoring its risks and costs in the report he submitted to the Council of Ministers (CoM) recommending it. Be warned: the resultant picture is not a pretty one.

Our narrative has brought us to January 2023, and to the contract signed between Bulgargaz and Botas in that month. As is well known, this came about after a meeting in Turkey the previous month between Bulgarian President Rumen Radev and his Turkish counterpart Recep Tayyip Erdogan and in the context of the arrangements reached by the two men. This, obviously, was a matter of top-level policy, and no mere company-to-company deal and an extension of the Putin-Erdogan arrangements.

Oddly, there is, to this day, no trace of a fully-fledged agreement between Botas and Bulgargaz, just a few pages of the Term Sheet – that is, the key points of agreement. More importantly, before this Term Sheet appeared, a Tripartite Protocol was signed between Bulgartransgaz, Botas and Bulgargaz, which gives Botas exclusive rights and access to BTG’s transmission network.

Now, all the talk has been of the agreement between Botas and Bulgargaz, but the cornerstone of the matter is this Tripartite Protocol, as it opens up the gate of the EU gas market to Botas brokerage of Russian gas via the Turkish Gas Hub.

The Protocol has never been greenlighted or even considered by the CoM. But without it, the agreement between Bulgargaz and Botas seems pointless. The Protocol enables Botas to use the contracts of Bulgargaz for capacity on the BTG network to ship and sell gas into and beyond Bulgaria – in the Western Balkans, Hungary, Austria and Germany – where BOTAS has already obtained licences for gas trading.

The management of Bulgargaz, aware that the contract with Botas made them personally liable for defects in it and unintended consequences, requested that the government give an explicit green light to the Term Sheet, thus absolving them of personal responsibility. The procedure was initiated in a report of then Energy Minister Hristov to his CoM colleagues, setting out the reasons for the contract, its background and the benefits implied by it.

In this report, Mr Hristov did not mention any risks or problems for the state budget or for the company itself: the bottom line was that the contract was risk-free, and that a cornucopia of benefits lay ahead.

And then, on January 12, 2023, the government rubberstamped the Bulgargaz-Botas contract. It was really classic doublespeak. There was obfuscation (the hidden and apparent benefits Botas received both directly and indirectly were simply ignored in government statements); there were half-truths; and there were arbitrary interpretations that were just at variance with reality.

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No intersystem agreement

Now, the long-term objective of the EU has always been an intersystem agreement between the Bulgarian and Turkish TSOs, which would open up gas flows and space for competition between traders operating in Turkey and the EU. But to date there has been no such agreement.

And, here again, the malign influence of Bulgartransgaz is crucial. For BTG’s management isn’t concerned with ensuring equal access and competition for the maximum possible number of traders and shippers – and the maximum volumes of gas transited through Bulgaria – that an intersystem agreement would achieve.

Such an option could have allowed the Bulgarian TSO to diversify its business risk away from Gazprom.

It would have enabled the reduction and, in time, an end to reliance on transiting Russian gas to the Kremlin’s buddies – Serbian president Aleksandar Vucic and Hungary’s premier Viktor Orban. And this reliance could have been replaced with the altogether more wholesome and less precarious business of transiting non-Russian gas from Turkey and Greece along the so-called “Vertical Gas Corridor” – to Romania, Ukraine, Moldova, Slovakia, and the Republic of North Macedonia (RNM), as well as to Hungary and Serbia.

But that isn’t happening. Compare the 4 million cubic metres (mcm) of gas transited daily through the Bulgarian transmission system to Romania with the 32 mcm that go to Serbia, and you’ll see which is winning out: it’s Russian rather than non-Russian gas, and it’s Turk Stream rather than the Vertical Gas Corridor. BTG has, to date, been getting its way.

A flawed report on a flawed agreement

So the January 2023 agreement marked a missed opportunity – or, at least, emphatically continued a long track-record of not “taking the European (business) way” in respect of gas transit. A momentous decision gravely taken, then? Apparently not, to judge from the manner in which Rossen Hristov, the minister responsible for Bulgargaz and its doings, discharged his statutory duty of justifying the agreement to his CoM colleagues. This was cavalier in the extreme, in a variety of ways:

1. Costs and risks: Now, as a matter of course, reports to the CoM are required to contain assessments of the fiscal effects, direct or indirect, of the proposed decision on policy, contract (etc) being reported on. And this is one of the ways in which Minister Hristov’s submission in early January 2023 was, shall we say, somewhat wanting.

For his memo, as referred above, stated that there were no costs and no risks, despite the blindingly obvious facts that Bulgargaz was faced, under its contract, with the certainty of imminent and substantial prepayments and the risk that, if things went wrong somehow, it could incur serious penalties. Mandatory capacity-booking payments to Botas under the contract cost Bulgargaz half a million dollars per day – and the contract states that they are to be paid in advance for a year.

This subsequently prompted the auditor of Bulgargaz, the international firm Grant Thornton, to include a “red alert” in its 2023 midyear report, saying that it doubted whether Bulgargaz could continue to exist as a going concern unless the state intervened substantially.

But in his January 2023 memo, Mr Hristov simply ignored the coup de grâce effect of the agreement on Bulgargaz’s finances.

2. Finance ministry scepticism:  There’s been another striking development recently. It now turns out that, at the time, the Ministry of Finance (MoF) rejected the energy minister’s request for an opinion on his memo, stating that it could not give one “because the materials are not accompanied by a signed agreement” between Bulgargaz and Botas. In other words, there was no substantive basis on which the MoF could rule. According to the then finance minister Rositsa Velkova-Zheleva, this gap “limit[ed] the ability of the Council of Ministers to make an informed decision”.

Which has turned out to be pretty appropriate scepticism, given that Bulgarian budget has since had to provide EUR 120 million in loan guarantees to ensure the survival of Bulgargaz – state aid recently approved (in December 2023) by the EC.

Incidentally, the MoF was not the only ministry in the Donev cabinet with concerns. The Ministry of Foreign Affairs (MFA) also rejected Mr Hristov’s request for an opinion, saying that it did not believe it was the job of the MFA to approve a commercial contract that “goes beyond the functional competence of the Ministry of Foreign Affairs”.

Again, as a basis for this conclusion, the MFA’s Permanent Secretary, Ivan Kondev, pointed to the fact that the text of the agreement itself had not been attached to the memo.

3. Potential penalties: Energy Minister Hristov also hid both from the MoF and from his CoM colleagues a clause on penalties for early termination of the contract equal to a maximum of $2.3 billion in revenues for the entire 13-year term – the amount of payments due multiplied by the period left until the end of the contract. Since neither Bulgargaz nor Bulgartransgaz could handle that sort of penalty, that risk is passed on directly to the state budget.

4. The question of the Sofia and other heating utilities: It should also be noted that the state aid given to Bulgargaz – and approved by the EC – does nothing at all for secondary traders, distributors or consumers; that is, for those that resell or use the gas supplied by Bulgargaz. That applies both to the latest batch – that EUR 120 million worth of state guarantees issued recently – and to the earlier aid that came in the form of a loan to the gas company.

In particular, there was not a eurocent’s worth of assistance for the Bulgarian capital’s heating utility, Toplofikatsiya Sofia (TS) – the Sofia District Heating Company – which is the largest debtor of Bulgargaz. TS has accumulated over BGN 1.6 billion in debts, precisely because Bulgargaz has been charging market inflated gas prices in 2022 and 2023, while the country’s energy regulator denied TS permission to make an equivalent rise in heating energy prices. Which means yet another land-mine sitting under the state budget, since TS can’t turn anywhere but to the state for help with handling that debt. In fact, the recently adopted 2024 budget includes a line (Art. 108) referring to that bail-out option worth BGN 1.6 billion.

Therefore, even a rough estimate of the risks for the country’s budget from a possible “rescue” deal in the gas sector – bailing out Bulgargaz and Bulgartransgaz, as well as certain companies indebted to them – would be in excess of BGN 5 billion. Yet Energy Minister Hristov’s report to the CoM at the time of Bulgargaz-Botas deal was all sun and roses, and mentioned no risks.

5. Compliance with European law: Even more incredible than the way Mr Hristov ignored questions of risks and penalties is the arrogance with which he wrote that there was “no need to prepare a report on compliance with European law since the contract does not transpose norms of European Union law”.

Not surprisingly, it has since proved that Brussels begs to differ: in November 2023, the EC’s Directorate-General for Competition launched an investigation into the Bulgargaz-Botas contract and the Protocols between Botas, Bulgargaz and Bulgartransgaz. This is still ongoing, but early signals on the outcome do not look good for Mr Hristov or Bulgargaz.

If things go awry, things could end up in an infringement procedure, fines to Bulgargaz and the annulment of the agreement. The EC could also punish BTG independently of Bulgargaz. And the resultant fines could be quite heavy – possibly in the hundreds of millions of euros – and, given that they would be determined as percentage of annual turnover, the figures would be boosted by the fact that both companies’ turnover was significantly higher in 2022 than it will prove to have been this year.

6. Fallout from a non-compliance verdict: And there’s a final twist. If the two Bulgarian companies were found to be non-compliant, the bill to be paid wouldn’t be confined to fines imposed by EU institutions on them. Thus:

  • First, should the EC effectively declare the agreements between them and Botas null and void, this would give Botas grounds to sue the Bulgarian government for damages and lost profits – and the amount for 13 years would be well above $2 billion.
  • Second, Botas is at present busily signing numerous contracts for the supply of “Turkish” (meaning disguised Russian) gas to the national gas companies of Moldova, Romania, Hungary, and countries in the Western Balkans (as well as other companies within these countries). All these contracts will depend on Botas’ contract with Bulgargaz and the Tripartite Protocol. Possible cancellation of these two key agreements would jeopardise the ability of the Turkish company to meet its obligations, which could swell the amount of damages and lost profits, adding billions of dollars.

And yet again, it would be the Bulgarian state budget that would finally have to pick up the bills – because Bulgargaz and Bulgartransgaz would then still be on the ropes, and their situation could only have got even worse given the new contracts and the volumes specified in them. And, of course, Bulgaria’s long-suffering MFA would once again have to deal with the diplomatic scandals that would inevitably result.

In short, Energy Minister Hristov did precious little to inform his colleagues about the January Botas-Bulgargaz agreements – and still less to inform them accurately. They were starved of vital texts and misinformed of financial, commercial and regulatory risks. In the final instalment of this three-part article, we will look at the lessons to be drawn from, and the possible consequences of, this fiasco.

Link to Part one

Ilian Vassilev

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