Bulgargaz is technically bankrupt. What’s next?

Bulgargaz has remained silent about its financial results and any remedy to fix them. But any action must be taken rapidly because the company is teetering on the verge of bankruptcy.

Buy low, sell high

Data from the company's financial statements indicate a rapid decrease of about 58% in capital inflows, with 666 million levs in the account at the end of last year compared to 1.6 billion levs a year prior. An additional point of concern is that expenditures have fallen at a slower rate to only 44% for this period. Bulgargaz's explanation is that, in the heat of the pandemic, the company was buying expensive gas in order to be able to pump the necessary quantities into the Chiren underground gas storage. "Prices were unusually high due to the highly strained market as a result of the conflict in Ukraine," the company states.

On the other hand, 2024 continues the trend of lower gas prices on the European markets due to the filling of gas storages, the provision of alternative LNG supplies, the new regasification terminals in more and more European ports, and the relatively warm winter, etc. Another contributing factor in weakening revenues is the decrease of gas prices compared to the previous financial year, but most notably - the decrease of usage compared to previous years. Data shows that towards the end of the first half of the year 9,088,363 MWh of natural gas were sold, which is a decrease of 30% compared to the same period in 2023. The reductions in sectors like glass and porcelain production (-33.8%), construction materials (-21%), distribution companies (-20%), and energy (11%) are the most drastic of all. Bulgargaz has lost a third of its market share in the country, which means it is now under 60%. In short, the state-owned monopolist is also getting shoved out the door by competitors.

All this is dictated by the reduction of the annual quantities claimed for 2024 by customers under bilateral contracts. This is mainly due to the entry of other suppliers of natural gas, which undercut Bulgargaz. An example of this is the Azerbaijani gas company SOCAR and licensed European traders buying gas of Russian origin at the Strandja 2 - Malkochlar entry point at a significant discount, according to Bulgargaz. In reality, however, there is something else - the state-owned company was never able to build the capacity of a regional gas player and trade effectively, because for years it was simply a reseller of Russian gas from Gazprom, which sold at regulated prices to Bulgarian consumers.

As in previous reports Bulgargaz points out in the current one that a large number of gas companies in the region, including state-owned ones, still have an active supply contract with Gazprom Export. "All countries neighboring Bulgaria, with the exception of Romania (which has its own production that covers its needs), continue to supply natural gas under their long-term contracts with Gazprom Export at a price below the market price," the company writes. What's more - these countries have a regulatory opportunity for transactions on the Bulgarian market and can sell part of these quantities on the Balkan Gas Hub platform at prices significantly below the European stock market indices for trading during the day or day ahead, and/or directly to deliver quantities to Bulgargaz customers.

The art of the bad deal

Bulgargaz's financial recovery is highly unlikely without further financial aid from BEH. However such action would likely have the short-term effect of significant loss of clients, which is further amplified by the unfavorable BOTAS contract. During the summer attempts were made to renegotiate its terms, which included payment of 4 bln levs. even if capacities are not used. In an uncovered letter, BOTAS warned that any non-fulfilment of the daily payments of around 840,000 levs by the Bulgarian firm would have "serious consequences".

According to the Bulgargaz financial report, for the past half year unused capacities stood at 133.7 million levs, or 734,000 levs per day, which is due to advance payments on delivery of liquid gas through Turkey for the current winter period. Interim Energy Minister Vladimir Malinov announced in May that a renegotiation of the terms of the agreement would be sought, and since then there have been several press releases from the department saying that negotiations are underway. But they have not been seen through, just like the sales of Bulgargaz.