Bulgaria Rejoins Gazprom’s South Stream Project

Publication: Eurasia Daily Monitor Volume: 7 Issue: 208

On November 13 in Sofia, Russian Prime Minister, Vladimir Putin, and his Bulgarian counterpart, Boyko Borissov, witnessed the signing of Bulgaria’s accession to Gazprom’s South Stream project (Interfax, BTA, Novinite, November 13, 14; Dnevnik, 24 Chasa, November 14, 15; Kommersant, Vedomosti, November 15, 16).

Bulgaria holds the pivotal position among all participant countries in Gazprom’s South Stream project. The pipeline is supposed to run from Russia across the seabed of the Black Sea to Bulgaria, there to bifurcate into a northward branch (Bulgaria-Serbia-Hungary-Austria, with proposed branch-off lines to Macedonia, Bosnia, Albania, Croatia, Slovenia, and northern Italy); and a westward branch (Bulgaria-Greece-southern Italy) in which Gazprom’s initial partner, Italian ENI, no longer seems to exhibit confidence (“South Stream Project Facing Intractable Problems After Bulgaria’s Signature,” EDM, November 16).

Signed by Gazprom CEO, Aleksei Miller, with the state-owned Bulgarian Energy Holding (BEH) Executive Director, Maya Hristova, the agreements establish a joint company, South Stream Bulgaria, to conduct the “preliminary design” as well as to finance, build, and operate the transit pipeline on Bulgarian territory. Gazprom and Bulgargaz (a division of BEH, which is at the same time a stakeholder in the Nabuco project) will each hold 50 percent of the shares in South Stream Bulgaria. The joint company will be legally registered in Bulgaria. No cost estimate is available or even possible for the Bulgarian section while the pipeline route on the country’s territory remains undetermined. The Russian side promises to start construction work in the second quarter of 2011 and complete the project by the second half of 2015.

The Bulgarian government has apparently failed to achieve two high-priority goals: 51 percent of shares in the project and a lead role in setting the fees for transit service. Gazprom has not allowed any partner country (actual or putative) in South Stream to hold 51 percent of the shares on that country’s own territory.

Two other, major issues from Bulgaria’s standpoint seem either unresolved or the object of undisclosed negotiations. Bulgaria wants to retain full, undisputed ownership of the land along the route of newly constructed South Stream pipelines, whereas Gazprom insists on leasing such land in Bulgaria for 100 years. It remains far from clear to what extent will South Stream use existing pipelines in Bulgaria, if at all.

Gazprom is offering insignificant or deceptive advantages to the Bulgarian side. It proposes to cover Bulgaria’s share of financing the first phase of construction in 2011 and apparently beyond (“advance” the funds). This could ensnare Bulgaria into indebtedness to Russia and make it impossible for this or another government to extricate from the project (Bulgaria already drew perilously close to such a situation with the Belene nuclear power plant project). The South Stream company’s board of directors will consist of three Bulgarians, including the chairman, and two Russians. This apportionment, however, does not ensure Bulgarian independence because the board will take all decisions with mutual consent –or, under Russian veto power. The joint venture will keep its funds in the state-owned Bulgarian Development Bank.

Putin told his Bulgarian audience that the country could earn some “2.5 billion” in transit revenue from the South Stream project. This sounds like Putin’s usual fast-and-loose numbers game. Putin failed to specify the currency or the time period for this projection. Nor could a transit revenue estimate be credibly offered while South Stream’s pipeline routes via Bulgaria and their lengths in the country remain far from clear.

Hours before the signing ceremony, Russian media released a statement purportedly from the Russian government, promising a 5 percent to 7 percent cut in the price of Russian gas for Bulgaria from 2012 onward (ITAR-TASS, November 13). Some Russian analysts calculate that Bulgaria could save some $20 per one thousand cubic meters of gas, or $60 million annually on the gas bill (RossBusinessConsulting, November 13). Putin and Miller, however, equivocated on this issue at the signing event, denying a link between a gas discount and Bulgaria’s accession to the project. They implied that a discount of that size could be achieved by removing intermediary gas-trading companies from the business. Two of these had earlier been inserted into this business by Gazprom itself and its local allies.

Russia currently supplies almost 100 percent of the approximately 3 billion cubic meters (bcm) of natural gas consumed annually in Bulgaria. A new, long-term supply agreement is due for signing by June 2011. According to Bulgargaz, it pays $338 per one thousand cubic meters of Russian gas at the Bulgarian border (entering Bulgaria via Romania). This price is far above spot-market prices for non-Russian gas in various European countries at present (Vedomosti, November 15).

The Bulgarian government could have driven a hard bargain, capitalizing both on the country’s geographic location and on Gazprom’s evident need to keep South Stream politically in play. The government, however, apparently failed to exploit those advantages in the negotiations with Moscow. The previous government, socialist-led and Moscow-friendly, had signed the South Stream inter-governmental agreement (along with oil transit and nuclear power agreements) during Putin’s visit in January 2008. Borissov’s center-right government suspended Bulgaria’s participation in all three projects as soon as it took office in July 2009, pending a review of their terms. The government agreed in July 2010 to draw up a road map on Bulgaria’s participation in South Stream; but it skipped the road-map stage, moving directly to sign the project agreements with Russia on November 13.

Putin personally briefed Bulgarian President, Giorgi Purvanov, on the agreements just signed. Purvanov, a socialist rival to the current government, hailed the agreements for “resetting” relations with Russia. For his part, Borissov responded to critics from his own coalition that if the US and Germany respect Russia and its interests, then so should Bulgaria. As in Poland, the uncoordinated “reset” processes seem to be spinning out of control, serving to justify the breach of common Western policies.