Sofia is putting too many eggs in Gazprom’s basket

Sofia is putting too many eggs in Gazprom’s basket

The construction of TurkStream’s extension via Bulgaria will make the country too reliant on Russia again

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© SERGEI KARPUKHIN


It is already like an axiom: if Russia's footprint is found in an energy project in Bulgaria, there is always something fishy. The construction of the extension of TurkStream gas pipeline of Russia's Gazprom in Bulgaria is no exception.

The new pipeline will handle the redirection of part of Gazprom's exports to Europe. Russia's gas monopoly is building two strings of the pipeline under the Black Sea to Turkey, one of which carries gas for consumers in Turkey, while the other is intended to continue via Bulgaria to Serbia and then to Hungary. Gazprom has already reserved 90% of the new pipeline's capacity and there are no objections from Brussels to the project because it follows EU rules.

However, the Balkan Stream, as Bulgaria's Prime Minister Boyko Borissov prefers to call the transit pipeline, has the dubious economic rationale for Bulgartransgaz, the state-owned gas transmission operator. It doesn't bring Bulgaria additional benefits like diversification of gas supplies or lower import prices and, because of the muddled tender that delayed the start of construction works, Gazprom could demand penalties.

On top of that, there is a strong suspicion that Saudi Arabia's Arkad Engineering, the company that won the construction contract, was forced to accept a Russian pipe supplier who had actually lost the tender, thus tainting the whole procurement process.

Kremlin's call

Despite criticism in Bulgaria, murmurs in Brussels and direct objections by the US, the project goes on and is expected to be finished by the end of next year. However, on December 4, Russian President Vladimir Putin quite unexpectedly accused Sofia of deliberately dragging its feet on the construction of the gas pipeline and threatened to circumvent Bulgaria.

"If the Bulgarian leadership does not want it (TurkStream to run via its territory) we will find other ways to implement it in southern Europe," he said during a joint news conference with Serbian President Aleksandar Vucic in the Russian Black Sea resort town of Sochi.

Boyko Borissov replied that even though the project was delayed by three months because it followed the EU's public procurement rules, pipelaying is progressing at five kilometres per day. "My answer to President Putin is that he is welcome to visit and see the speed with which we are building it," Borissov said.

It is unclear what cаused Kremlin's wrath. A possible explanation is Mr Putin's experience with South Stream, the abandoned Gazprom's project that was supposed to carry gas from Russia under the Black Sea to Bulgaria and then to Europe. Bulgaria cancelled it in 2014 after Brussels threatened to sue over infringement of EU procurement rules and the US intervened against the pipeline as well. TurkStream is actually a substitute for South Stream.

After Bulgaria promised the US that it would expedite the construction of pipelines that would deliver gas from sources different from Gazprom, Moscow might have concluded that TurkStream would suffer the fate of South Stream. To make the message clearer, after waiting for two months, on December 5 Russia expelled a Bulgarian diplomat in retaliation for Sofia's decision to declare a Russian diplomat persona non grata in October.

But Bulgaria has no interest in ditching the project. Bulgartransgaz has been investing more than one billion euro in new infrastructure and without Gazprom the pipelines will remain dry, something which Moscow knows very well. Putin's words might be a warning that delays in construction will not be ignored and Gazprom could ask for compensation for the time it was unable to use the transmission infrastructure.

Suspicious selection

The problems actually started well before the construction began.

Even before Bulgartransgaz had completed the market test for the new pipeline, i.e. before any decision had been taken on the construction of the Bulgarian section, Russia's RBK reported that TMK Holding, a big diversified Russian company, would be the chosen contractor. And there was little doubt about Russian reporters' accuracy. Several years earlier, Russian media reported that South Stream Bulgaria (a joint venture between Gazprom and Bulgarian Energy Holding) would select Russia's Stroytransgaz as a contractor for the ill-fated pipeline. And indeed, Stroytransgaz got the contract in 2014 in a consortium with several well-connected Bulgarian companies.

So when in April Bulgatransgaz picked Arkad Engineering to build the extension of TurkStream in Bulgaria, it was a pleasant surprise - contrary to expectations, the Bulgarian company defied Moscow's plans. However, a month later, in an unprecedented decision, the state-owned gas transmission operator changed its choice, citing Arkad's unpreparedness to sign a contract and decided instead to turn to the Russian candidate who was ready to lower its price to that of its Saudi Arabian competitor. Arkad filed a complaint with the Commission for Protection of Competition and in late June the anti-trust authority overturned Bulgtransgaz' decision.

This could have been a happy ending showing that Bulgaria was not bowing to pressure and behind-the-curtain deals. But a few months later, when the contract was finally signed Mr Borissov inadvertently admitted that 90% of the pipes had already been delivered to Bulgaria. TMK was so sure that its deliveries are guaranteed that it brought the equipment well before that selection procedure ended. In September it turned out that the Russian company had become Arkad's subcontractor, reaping the cream of the project. The development revealed yet again that public tenders in Bulgaria are only bureaucratic smokescreens for awarding contracts to politically connected companies and businessmen.

Not profitable at all

The project touted as a salvation for Bulgaria's gas transmission revenues, might end up as a serious burden for the country's state owned gas companies.

The 474 km pipeline's construction will cost 1.102 billion euro. To finance it, Bulgartransgaz asked the prospective gas shippers to reserve capacity for 15 years. Without real competition (only Gazprom is interested in the new pipeline), the first two calls failed and the state-owned company had to amend the financial terms of the project. The pay-back period was made longer, which leads to more favourable transmission fees for Gazprom but decreases the financial gain for Bulgartransgaz.

In addition, the Bulgarian company invested 220 million euro to ensure reverse flow in the existing transmission pipelines. Currently, the gas runs southward from Romania to Turkey and Greece but now it has the technical possibility to flow in the opposite direction. Bulgartransgaz explained the investment with its plans to import gas from Turkey but in reality, the multimillion-euro investment had to show Gazprom that Bulgaria is serious and won't change its opinion at the last moment. However, this investment was not taken into account when Bulgartransgaz calculated the fees it would collect for shipping gas from Turkey to Serbia. If it is included, the project might not be profitable and this hidden cost is in practice a subsidy for Gazprom.

This strange business logic could be explained by the overwhelming desire to keep the transit of Russian gas after Gazprom ceases to ship its product via Ukraine to Bulgaria in 2020. But according to the existing contract, Bulgartransgaz would have received 700 million euro in guaranteed revenues up to 2030, which is all profit since the old infrastructure was repaid long ago. Under the new contract with Gazprom, the gas transmission operator will hardly receive profit in the next fifteen years.

Even though Bulgaria offers favourable terms to Gazprom, it won't see the reduction of gas prices either. Currently, Bulgaria pays Gazprom to double the price paid by consumers at Central European gas hubs.

To sum up, the current expansion of Bulgaria's gas transmission network is more valuable for Moscow than Sofia.

Author: Capital

It is already like an axiom: if Russia's footprint is found in an energy project in Bulgaria, there is always something fishy. The construction of the extension of TurkStream gas pipeline of Russia's Gazprom in Bulgaria is no exception.

The new pipeline will handle the redirection of part of Gazprom's exports to Europe. Russia's gas monopoly is building two strings of the pipeline under the Black Sea to Turkey, one of which carries gas for consumers in Turkey, while the other is intended to continue via Bulgaria to Serbia and then to Hungary. Gazprom has already reserved 90% of the new pipeline's capacity and there are no objections from Brussels to the project because it follows EU rules.

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