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The Kremlin Playbook in Bulgaria: Turning the Page or Business as Usual?

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Key points:

  • The pivoting of Bulgarian business and political leaders back towards direct gas deliveries from Gazprom is wrong. It is based on an exaggerated risk of possible gas shortages in winter, ignorance of the substantial geopolitical risks for Bulgaria, and severe myopia towards the continuing blackmail by the Kremlin.
  • Infrastructure and political bottlenecks are the main reason for the current crisis. Bulgaria has very small gas consumption and plentiful entry points through which it can supply the needed gas. However, the country still had no direct access to non-Russian gas supply at present.
  • Additional LNG supply is necessary to reduce the reliance on gas from Chiren and the security of supply beyond December, especially for the rest of the heating season. The Bulgarian government needs to be ready to step in to cushion gas price impacts on the most vulnerable households and businesses.

Europe is facing an unprecedented energy and climate security crisis. It began before the Russian invasion in Ukraine and has been precipitated continuously by the Kremlin to blackmail Europe into submission. In 12 months, Gazprom has reduced the supply to its European customers four-fold, triggering price jolts on the gas markets. At EUR 200/MWh in August 2022 the price is already more than 10 times higher than the five-year average before August 2021. Yet, it was the European Union that sleepwalked into this trap. The geopolitical risks to European energy security have deteriorated by more than 20% since the annexation of Crimea in 2014 as a number of European countries deepened their dependence on Russian natural gas imports. Germany and Italy have accounted for the bulk of EU’s growing dependence on Russian gas imports over the decade preceding the war in Ukraine. Central and Southeast European countries have followed suit, with political leaders in Hungary, Serbia and Bulgaria cornered so much as to insist on breaking European ranks on Kremlin sanctions.

In a tight spot: Bulgaria’s situation is among the most difficult in the EU. Until the end of April, 2022, it depended on Gazprom for 94% of its gas consumption. The country secured most of the supply through TurkStream under a long-term contract ending on 31 December, 2022. The Russian company unilaterally suspended deliveries on 27 April 2022 after the state-owned dominant wholesale market supplier Bulgargaz refused to accept a ruble-based payment scheme. Since then, Bulgargaz has been buying gas month by month largely from companies in the SEE region with long-term contracts with Gazprom (so effectively buying Russian gas) at prices at between 20 and 30% higher price than the one in its existing long-term contract. Further delays on the construction of the key interconnector pipeline with Greece has meant that Bulgaria pays a higher price for the Azeri gas for 2/3 of the contracted volumes although the Azeri supply based on a 25-year 100% oil-indexed agreement is currently much cheaper than the average European gas price on the spot market.

“There is no gas” has become a popular refrain among Bulgarian business and political leaders as a new caretaker government took office on 3 August 2022. The cabinet and Bulgargaz have been urged to renew talks with Gazprom and if possible renew the deliveries directly from Russia. This would be wrong and would increase Bulgaria’s long-term vulnerability to Gazprom blackmail. While the risk of gas shortages in winter is real, it is manageable even if Bulgaria does not start buying directly from Russia again. In fact, resuming imports from Russia fails to address the root cause of the present crisis and leads to an even greater risk for a supply disruption in the future.  Gazprom has proven itself to be an unreliable supplier with a long track record of arbitrary, politically mandated cut-offs to a dozen EU member states including to its “most loyal” customers – Germany, Austria, the Netherlands and Italy.

Tracing the source of the crisis: The Bulgarian gas market remains marginal in the grander scheme of things, with national gas demand being less than 1% of total EU demand.  Securing such small quantities from the global gas market should not be an issue, even in the current tight market. Yet, the political and infrastructural bottlenecks are significant.

Bulgaria has plentiful entry points for gas but only one of them provides direct access to non-Russian gas supply – the yet to become operational IGB interconnector that will bring Azeri gas via Greece. The access to existing regasification facilities on the Aegean and the Mediterranean coasts depends on the good will and national supply considerations of neighbouring Greece and Turkey.

Securing enough gas for this winter would be challenging in case of a complete Russian gas cut-off in Europe. Azeri gas can cover only about one-third of national demand. This is sufficient for the needs of households and district heating companies. Industrial consumers, however, are at risk. Bulgargaz purchases the necessary volumes month by month without a long-term contract and at prices around the TTF benchmark — which is 30% higher than the Gazprom long term contract (LTC) which has a 30% oil-indexation component. 

Crucially, any price comparison in the public debate remains speculative, as the exact prices are a trade secret. Generally, however, due to the TTF indexation in Gazprom’s long term contracts with European companies, the resulting price is generally close to TTF prices and occasionally becomes even higher. This happens because the LTC price reflects TTF prices with a delay of at least one month.

According to a leaked government document, Bulgargaz has received an offer from Cheniere for the supply of US LNG – 3 cargoes, one for each month over October-December. Based on the reported size of the cargoes, this would cover roughly another one-third of demand – if Bulgaria manages to secure a route for the LNG to reach its territory, either through Greece or Turkey.

Even if Bulgaria manages to secure LNG regasification capacity and receives the 3 Cheniere LNG cargoes, this still leaves a deficit, which according to the Bulgargaz document would not be filled with gas from the Chiren storage site at any meaningful rate (just 240 GWh over December or on average 7.7 GWh per day). This is despite the expectation that all contracted Azeri volumes will be delivered starting in September. The estimated deficit for the fourth quarter is 1TWh-1.5TWh.

Figure 1: Gas shortages expected by Bulgargaz

Source: CSD based on data from the leaked letter from Bulgargaz to the Ministry of Energy

 

Bulgargaz projections raise two main questions – how realistic are the demand figures and can additional volumes from the Chiren storage site help reduce the shortages?

Regarding demand, the figures from Bulgargaz are only slightly higher than the projections of ENTSOG (The network of European gas transmission system operators, where Bulgartransgaz is a member), which are in turn based on seasonal averages. There is, however, a strong case to be made for a lower demand case in the 2022/2023 heating season. Based on ENTSOG data on daily flows to final consumers in Bulgaria, these flows have been 20-30% lower than last year over the past several months, with many consumers likely reducing consumption due to the prohibitively high prices.

Regarding the gas from the Chiren storage, the maximum withdrawal capacity is 40 GWh per day (gradually declining when the storage gets emptier). While it is currently 48% full, it could reach 76% by 1 October (if the filling rate from the second half of July is maintained.  Hence, Chiren could fully meet the October and November supply deficit vs normal demand. By early December, however, the storage site will be back to 48% full and will only be able to maintain 38 GWh per day as maximum withdrawal rate. This would leave a 17% supply deficit uncovered and by the end of the year, storage levels would be as low as 30%. In a low demand case, however, (assuming 20% drop vs normal levels) the storage trajectory closely matches the 2021 figures, while also leaving no supply gap.

Figure 2: Natural gas demand and supply scenario

Source: CSD based on ENTSOG, leaked letter from Bulgargaz to the Ministry of Energy, AGSI

 

Figure 3: Gas in Chiren – historical values and forecast

Source: CSD based on AGSI data.

 

The supply deficit seems manageable with appropriate demand and supply-side measures. Bulgarian gas consumers are already responding to market signals, helping bring down demand by more than 20%. Demand from residential heating is likely to also drop significantly over the winter period, as retail gas prices for households have skyrocketed, incentivising a shift to electricity. Additional government support for the investment cost, especially for heat pumps, could further help accelerate this market-driven gas phase-out. Organising tenders for demand response from industrial consumers are also an adequate strategy to not only reduce demand but also to have a much clearer view of what the actual gas demand from the sector will be over the coming months.

Dealing with high prices: Cheniere's price would be about $30/MWh-$50/MWh lower than prevailing TTF prices. Considering that the price under the long-term supply contract with Gazprom has a 70% TTF-linked component, the proposed price for the LNG cargoes is likely to be no more than 10-15% higher than Russian gas would have been in October. However, it could be around 60% higher in December, based on forward monthly contracts – still a highly uncertain outcome. This price differential prompted one of Bulgaria's industrial lobby groups to demand in an open letter that the government resumes talks with Gazprom and accepts its rouble payment scheme instead of seeking alternative LNG supply. Adopting this strategy at this point in time would be a mistake, Bulgaria and other European countries have already repeatedly made.

The security of supply risks coming hand-in-hand with this proposed approach by far outweigh any potential (and highly uncertain) price advantage to be gained. Ultimately, this issue boils down to deciding whether potentially lower gas prices for a month or two is worth the risk of continuing to submit the country and its economy to other arbitrary cuts and blackmail by Gazprom in the future.

In any case, the tenfold increase of global gas prices requires emergency measures to protect the most vulnerable parts of society. Ensuring adequate residential heating at affordable prices for households will require financial support from the government. The same applies to industrial consumers to preserve their competitiveness. The Bulgarian government budget is sound and can sustain such measures, as have already been implemented in the electricity and fuel markets.

What’s next?:  Securing additional LNG supply is necessary to reduce the reliance on gas from Chiren and the security of supply beyond December, especially for the rest of the heating season, which usually continues until the end of March. The Bulgarian government needs to work out a plan to secure an offloading slot at the Greek Revithoussa facility under a broader solidarity agreement based on the available EU framework and via bilateral talks with the Greek government. LNG supply to a Turkish terminal should also be explored. Current terminal data show that there is no available capacity until the end of the year, while a delivery at a Turkish terminal will depend on the conclusion of an interconnection agreement between Bulgarian and Turkish gas system operators, which is still pending. Bulgaria should reach out to the Turkish counterparts to accelerate the agreement that has had EU support since at least 2015.

For the industrial consumers, ensuring an orderly demand reduction requires the immediate roll-out of a system for demand response tenders. This approach will also help countering some of the negative effects of prohibitively high prices, as the most-impacted consumers will be paid for not consuming some gas.

Households using gas for heating should receive support, where investment support for switching to electricity should be prioritised over fuel subsidies, which incentivise higher consumption. Meanwhile, district heating companies should receive targeted support, so as to maintain their normal operation and prevent a severe price shock for households.

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