Corridor of power

It’s designed by politicians to get alternatives to Russian pipeline gas into Central Europe, largely in the form of liquefied natural gas (LNG) received via Greek terminals. But markets might rule otherwise, with price dumping by Russia’s Gazprom threatening to hijack the VGC and squeeze out LNG. Brussels has the means to do something about that. It must act – and quickly.

Anyone who has been following the history and progress of the Turkish Gas Hub (TGH) idea will have noticed Russian president Vladimir Putin’s plan to use Russian pipeline gas flows in Turkey to create his own gas market benchmark, in opposition to West European exchanges and in particular the Dutch benchmark TTF.
And anyone following the dynamics of gas exchange prices in Turkey, Bulgaria and the Netherlands will have noticed that, in recent months, there has been a steady gap between prices on the regional exchanges of Turkey and Bulgaria, on the one hand, and West European exchanges, on the other. Spot gas on the Turkish exchange is usually around EUR 4-5/MWh cheaper than that sold on the TTF, but the spread between Dutch and Bulgarian exchange prices is rather wider (at the time of writing, for example, it is just over EUR 6-7/MWh).

True, the Russian gas volumes being traded at the moment are not impressive. But they are increasing. And that’s a trend that could have a destructive effect on both regional and EU gas markets if Mr Putin gets his way and manages to call the shots on the Southeast European (SEE) gas market via Turkey.
That’s clear. But we need to ask also why natural gas is cheaper on the Bulgarian exchange than in Turkey. The question is not such a difficult one, but the answer is certainly interesting. I would suggest that we are witnessing a Kremlin trial operation, designed to test how far it is possible to go without provoking a response from the EU. And Bulgaria’s Balkan Gas Hub (BGH) exchange is the logical place to carry out that test. It offers access to an integrated EU market without export and transit restrictions. Which, of course, is not the case with the Turkish gas exchange, where the authorities in Ankara strictly control all access to export capacity, thus limiting competition.

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Seasonal factors may also have a role in explaining why prices are lower on the Bulgarian than on the Turkish exchange. At present demand in Bulgaria is quite restrained, since local gas consumption tends to be relatively low in summer, while the Bulgaria’s underground gas storage facility (UGS) at Chiren is already fairly well-stocked (as are other regional UGS facilities).

But it seems plausible that our “testing the limits of EU patience for Russian gas” explanation is the main reason for the TTF-BGH spot price difference. And it has to be said that those limits have not been reached yet. Brussels has so far taken almost no notice, at least in public.
Of course, all that nice cheap gas is good news of a sort for Bulgarian and regional consumers and industry. But only “of a sort”. Look more closely and the good news turns out to be rather limited and superficial.
LNG: the big squeeze

Precisely because the Kremlin dictates Gazprom’s pricing policy, and because Gazprom is dumping its gas in order to maintain its last avenue of access to the European gas market – namely access via Bulgaria – Bulgaria’s trade in liquefied natural gas (LNG) and its LNG imports via Turkey and Greece have been effectively blocked in recent months. In a desperate move a week ago, state gas trader Bulgargaz – having not so long ago signed a long-term contract with Botas, the Turkish national oil and gas company, for the use of Botas’ terminals and transmission network – announced, that it was terminating that contract because it was unable to secure competitive LNG supplies. The same applies to all other LNG suppliers in the region, especially those with longer-term contracts, for those contracts are becoming a burden in the context of Gazprom’s heavy discounting of spot prices.

Buyers who want to diversify away from Russian pipeline gas are now being systematically punished, as Gazprom effectively kills competition. And that brings us to the grand interplay between Mr Putin’s “Russian-gas-via-Turkey-to-Europe” game-plan and the “Vertical Gas Corridor” (VGC).

Gazprom and the VGC: hijack and frustrate

Now, readers will recall from previous A&A publications that the VGC is an ambitious geopolitical initiative of the EU, aimed at achieving diversification away from Russian natural gas flows by emphasising northward flows from non-Russian sources, largely via LNG regasification (regas) terminals in Greece and then onward to Bulgaria, Romania, Slovakia, Hungary, Moldova, Ukraine and beyond. This would involve expansion of gas transmission systems to allow larger gas flows. And the bottom line would be to allow non-Russian gas into Central Europe, replacing the Russian gas that has hitherto been transited via Ukraine.
Which of course is a noble aim. But unfortunately Moscow is working on ways of turning the VGC to its own advantage. In a nutshell, the strategy of the Kremlin and its local proxies consists of two stages.

• Stage 1: use the EU’s grand VGC scheme to secure an expansion of gas transmission networks from the Southern Gas Corridor to Ukraine, Slovakia, Romania, Hungary and Austria – politically and financially supported by US and EU money.

• Stage 2: quietly bring to the fore “market realities” that will effectively wipe out any LNG as an alternative. Namely, the availability of huge quantities of cheap Russian pipe gas in Turkey – “cheap” because it is be-ing sold at dumping prices.

In this way. ironically, the transmission capacity made available for diversification away from Russian gas will be used for Russian gas – albeit Russian gas disguised as a “Turkish mix”.

And, in fact, this is precisely what is happening at the moment, judging by the volumes of natural gas entering Bulgaria from Greece and Turkey.
According to Bulgarian transmission system operator (TSO) Bulgartransgaz, monthly totals at present include the entry of 1.7-1.8 billion cubic metres (bcm) from Turkey, but only 88 million cubic metres from Greece. As to Azeri gas, virtually all of that is coming via pipelines – the Trans-Anatolian Natural Gas Pipeline (TANAP) and the TAP-IGB route (involving the Trans-Adriatic Pipeline and the Greece-Bulgaria Gas Interconnector or IGB). LNG, by contrast, is at present hardly involved at all in the gas balance of Bulgaria.

The likelihood of this “market” reality changing is close to zero, at least until there is a change in the market rules that guarantees the ability of Mr Putin to offer ‘political’ prices for Russian pipeline gas to his buddies in the EU. Or, perhaps more accurately, a change in the near-absence of rules that has that effect.
For, however you describe the current regulatory situation, it is one that encourages buyers and TSOs to be seduced by the dumping prices offered by a Kremlin desperate to dispose of gas that, through its aggression and illegality, it has become otherwise unable to sell.
Infrastructure in doubt

But it’s worse than that. In recent months, Russian natural gas has not just effectively destroyed LNG’s share of the regional gas market. It has also severely damaged the chances that alternatives to Russian gas will be able to book transmission infrastructure and find end-users.
For instance, this applies to the reverse-flow capacity of the Trans-Balkan Pipeline (TBP). Now, TBP’s original purpose had been to carry Russian gas from Ukraine, through Romania and Bulgaria, to Turkey. But its reverse-flow use is an important part of the VGC idea.

However, that use rather depends on the availability of non-Russian gas from LNG terminals in the south and demand for it at a price that would justify capacity bookings. If, as at present, such gas is absent or undercut by “Turkish mix” Russian gas, then the only thing VGC will achieve is to allow Gazprom to transport gas to the north and northwest, where it used to send it southwards. Hence, the VGC could effectively serve as an instrument of, and a cover for, Gazprom’s dominance in Eastern Europe, including Moldova.

Again, the prospects that market tests currently underway will justify significant expansion of the non-Russian gas TAP seem bleak. And the same may be true even of market tests concerning the expansion of IGB, which, crucially, provides access to the VGC for gas that has entered Southern Europe as LNG via Greece. And that doubt may apply especially in the critical phase, which we are just entering, in which prospective traders book transmission capacity via binding proposals.
Alexandroupolis FRSU: Only connect…

Then again, there are the significant delays in the commissioning of the floating LNG regas terminal (FRSU) at Alexandroupolis in northeastern Greece. How to explain those?

Well, the orthodox assumption is that GasTrade, the company implementing the project, is having trouble with the pipeline that will connect the floating platform to the onshore infrastructure.

But that is hardly convincing: Saipem is a company with the reputation and expertise to build and commission hundreds of kilometres of subsea gas pipelines in the highly aggressive environment of the Black Sea. A firm of that calibre isn’t likely to be struggling with the implementation and commissioning of such a short connecting pipeline.

No: it’s far more probable that traders’ lack of interest in LNG supplies is the real reason for the foot-fragging. If traders aren’t willing to book capacity, then even the most formidable of terminal operators won’t see the project as viable.
A variable: the Ukrainian transit question

For the sake of completeness, it might be added here that it’s not entirely clear how important a successfully “hijacked” VGC would be for Russia. It could be absolutely central or it could be quite marginal. It all depends on what happens in future about the transiting of Russian gas to Europe through Ukraine. If it stops, pushing “Turkish-Russian” gas up the VGC becomes urgent, since no oth-er route will be available. If it continues, there’s rather less urgency, since there will be less surplus gas – and a less dramatic shortfall of revenue. This said, the VGC would still be a “nice-to-have” for Mr Putin and the bosses of Gazprom,

The reader might excuse a little digression here, since the question of Ukraine transit is quite topical at present, in two senses.

First, the current transit contract – which, strikingly, has remained operational throughout the current full-scale hostilities – is due to expire at the end of this year and there’s doubt whether it will be renewed. There have for some time been persistent reports of talks on possible renewal, but the presumption, till quite recently, had been that Ukraine would refuse to renew.

Second, however, the most recent signs strengthen the evidence that this pre-sumption may be somewhat misleading.

Specifically, information “creatively” leaked to the media by Hungary – which has just taken over the presidency of the EU Council – and from western media sources has added suspense to an already tense situation.

Ukraine is reported to be discussing – with the EC’s blessing and guidance – various options for the continuation of gas transit through Ukraine. The latest novel idea is that transit could continue, but that the gas in question could cease to be Russian and instead be Azeri. To be precise, Azeri gas brought in via (wait for it) Russia!

Now, to put it mildly, that’s implausible, for at least two reasons:
• First, Russia has been transiting via Ukraine over 14 bcm per year, and it’s hardly conceivable that Azerbaijan could find anywhere near enough gas to replace that.
• Second, it’s even more absurd to imagine that Moscow – notorious for a plethora of sabotage incidents in the transit of Kazakh, Azeri, Turkmen and Uzbek gas – would allow the transit of any non-Russian gas to Ukraine if Gazprom itself is denied access.

So, taken at face value and in detail, the idea just doesn’t make sense. But there’s good reason to believe that something important is going on.

For a start, Ukrainian president Volodymyr Zelensky has very recently con-firmed publicly that such talks are underway. And you hardly need to be Sher-lock Holmes to link these remarks to the recent visits, first to Kyiv and now to Moscow, of Viktor Orban – Hungary’s prime minister and now the somewhat incongruous holder of the rotating Presidency of the Council of the EU. Nor does it take much imagination to guess that some transactional diplomacy is “in the pipeline”.

For there could be something in it for everyone:
• For Russia, certainly. In practice, the only gas available to be transited is Russian: it would just need to be disguised as Azeri.
• Which means that Mr Zelensky could save face by telling his compatriots that he is of course not transiting Russian gas.
• Meanwhile, Ukraine generally would benefit:
o If Russian gas is being transited, that might spare at least some of Ukraine’s transmission infrastructure from Russian missile attacks.
o Ukraine, too, would continue to receive much-needed transit reve-nues (which both the EC and the US would be happy to encourage).
• Finally, there would definitely be something in it for Mr Orban, who would not merely be doing a favour to his friend Mr Putin but also show-ing himself – for once – to be doing something useful for the EU.

IP crossborder booking
To stay on the subject of recent news, it might be noted that Mr Orban’s travels are not the only items – and perhaps not the most interesting. On July 1, booking auctions for capacity at various gas interconnection points (IPs) were held, and the detail on these published by energy information specialist ICIS is instructive.
For a start, there was very keen interest in booking of capacity at IP exits from Hungary to its neighbours, which confirms the role of Lord High Distributor of Russian Gas that Mr Orban seems to have bestowed upon himself.

But things were even livelier at Strandzha and Strandzha-2, the key Bulgarian IPs on the border with Turkey, through which Russian-Turkish gas enters Europe. The capacity on offer at Strandzha was fully booked for two gas years to come – while for Strandzha-2, it was three years. When you remember that this is in addition to existing long-term capacity reservations by Gazprom, Botas, Bulgargaz and MET, things become pretty unambiguous: Gazprom is preparing for some very brisk and high-volume trade in the next few years – and, let’s not delude ourselves, that means it’s heading for complete control of the Southeast and Central European gas markets.

To sum up, the VGC project could be frustrated – through a mixture of blocking and hijacking – by the destructive effect of Russian gas being dumped on the regional market.

And that would leave Vladimir Putin sitting pretty. Unless something is done about it.

So, to quote Lenin (another very annoying Vladimir): What is to be done?

In general terms, the answer is simple. The European Commission (EC) must wake up and do its job. It must do so with aggression and determination, making full and intelligent use of the considerable powers already at its disposal and the sophisticated and generally quite enlightened framework of rules and regulations that is already in place. It must investigate the Kremlin’s sale of gas at dumping prices, as well as the illicit practices, obviously rife, by which Russian gas is being sneaked into the EU. And the EC must also remove the non-market advantages of Russian gas coming through Turkey by using a combination of sanctions policy instruments and competition decisions.

It can be done and it must be done. It’s a question of political will. And it’s also a crucial test of whether the EU is capable of living up in practice to its lofty ideals in this tough old world that we find ourselves in.