Gazprom Denies Price Discount until Sofia Accedes to South Stream

Bulgaria is under renewed pressure from Russia to sign the final investment agreement on the South Stream gas pipeline by November 15, 2012. Otherwise, Gazprom threatens to forsake the promised 11 percent discount for natural gas supplies, which was supposed to be given for the period April-December 2012, but never came into effect. Gazprom claims that the discount is dependent on Sofia’s commitment to the South Stream pipeline, which will bring Russian gas to Europe along the Black Sea bed, bypassing Ukraine (Standart, June 11). 

The Bulgarian state gas company, Bulgargaz, announced on June 10 that the agreements on the gas price reduction made in March by Bulgarian Minister of Economy Delyan Dobrev and Gazprom Chairman Alexei Miller could not be implemented because Gazprom would not sign the documents. Minister Dobrev confirmed that the gas discount depends on the final decision of Bulgaria to accede to South Stream (Capital Daily, June 11). 

However, the delay of the promised short-term discount is not the biggest problem for the government in Sofia at the moment. Negotiations with Gazprom on the next round of long-term natural gas contracts are pending, since the current contracts expire at the end of 2012. Moscow’s position is clear and forceful: Bulgaria will continue paying high gas prices if it does not join the South Stream pipeline or delays its construction. The project is a priority for Russian President Vladimir Putin, who reiterated on June 4 that construction will start by the end of this year (RIA Novosti, June 4). 

The cost of Russian gas for Bulgaria is the highest in Europe, reaching at times an astonishing level of $600 per one thousand cubic meters of gas (AFP, March 30), as compared to a $450 average price of Russian gas in Europe. Bulgaria is dependent on Russian natural gas for 80 percent of its consumption. Consumer gas prices in the country have increased by 30 percent since June 2011, becoming a serious public concern and an impediment to business development (Capital Daily, June 19). 

Moscow is in a hurry to complete negotiations with Bulgaria and start building South Stream before the end of 2012 in order to avoid complying with new EU regulations, which will come into effect in March 2013. The EU’s Third Energy Package mandates access of EU companies to pipelines built by non-EU countries such as the Russian Federation. Russia is determined to retain its monopolistic position on the European gas market. Building Russian-owned and controlled pipelines in the EU is a major part of this strategy. 

Bulgarian Economy Minister Dobrev told Parliament on June 8 that Gazprom has presented Sofia with new provisions of the South Stream investment agreement that must be carefully reviewed against Bulgaria’s national interest. Russia and Bulgaria are arguing over the upfront costs and the profit allocations for the South Stream project. Gazprom will own 50 percent of the 538-kilometer pipeline on Bulgarian territory (from the port of Varna on the Black Sea to the border with Serbia); the other half will belong to the Bulgarian National Energy Holding company. The pipeline partially overlaps with the projected Nabucco gas pipeline; consequently, access to it by other suppliers will be critical in the future. 

The documents of the joint holding company “South Stream Bulgaria” provide that the two partners will use their own funds to cover 30 percent of the total cost and 70 percent will be secured through loans. But Bulgaria is not willing to invest its own capital in the pipeline and prefers to finance it through loans (Klassa, June 18). In addition, the Russian side offers an investment return of only eight percent, an extremely low figure considering that the normal investment return is considered to be between 13 and 16 percent, said former Minister of Economy Traicho Traikov (Mediapool.bg, June 8). 

Evidently worried by Sofia’s hesitation to sign the investment agreement, the Russian giant Gazprom even offered to finance the Bulgarian portion of the South Stream project (bTV, June 8). Moscow has had a bitter experience with the cabinet in Sofia, which scrapped two Russian energy projects in four months: it cancelled plans to build a new nuclear power plant on the Danube in March 2012 and quit a Russian oil pipeline from Burgas to Alexandropoulis in December 2011. 

Minister Dobrev is optimistic about solving disagreements with Gazprom over South Stream. He stated that once the Bulgarian government makes the final investment decision, the country would receive the promised discount of 11.1 percent, backdated from April 1, which will save Bulgaria between $115 million and $120 million for gas in 2012 (darikfinance.bg, June 11). 

For now, the Bulgarians were served with another energy price increase of almost five percent from July 1 (BTA, June 19). Initially, Bulgargaz requested an increase of almost 16 percent, but the state regulatory body opposed it. Bulgargaz was forced to postpone buying gas supplies for its storage facility until the discount comes into place, possibly in late fall (Mediapool.bg, 12 June). However, domestic gas prices will sharply go up if negotiations between Sofia and Moscow on South Stream fail or are delayed. Bulgarian industrialists have already warned that the sector cannot sustain an increase of ten percent because it will make industrial production too expensive to compete on the market. 

Although gas prices are vital for the country, the Bulgarian government seems far from ready to sign the investment agreement in November. As Capital Daily reported on June 10, the mandatory ecological assessments for the construction of the pipeline are not even ordered yet, and they can take a long time. Pressure on the Bulgarian government is likely to increase in the next several months before the stated deadline for the final investment agreement on November 15.