The Balkan Gas Hub: A European Gas Trading Platform or South Stream Lite?

With the completion, in November, of the offshore section of the TurkStream natural gas pipeline from Russia to western Turkey, the Bulgarian government kicked its preparations for creating a Balkan Gas Hub into high gear. On November 30, Bulgaria’s parliament included the construction of the Balkan Gas Hub in the national energy strategy until 2020 (Dnevnik.bg, November 30). The project involves expanding the country’s gas transit network and using part of the Trans-Balkan Pipeline, currently delivering Russian gas to the Balkans through Ukraine, in reverse mode to transport gas volumes from the second string of TurkStream to Serbia and further to Central Europe (see Margarita Assenova, “Bulgaria’s Ambitions for a Balkan Gas Hub: Challenges, Opportunities and the Role of a New Offshore Gas Storage Project,” The Jamestown Foundation, December 2018).

Sofia says that the Balkan Gas Hub would also transit and trade gas volumes from the Southern Gas Corridor (from Azerbaijan through Turkey to the Balkans and Italy) and potential liquefied natural gas (LNG) sources. However, Bulgaria has secured only one billion cubic meters a year (bcm/y) of natural gas from Azerbaijan starting in 2020, while the main link to the Southern Gas Corridor, the Interconnector Greece-Bulgaria, has not even broken ground yet.

Russia, meanwhile, has offered fifteen times higher gas volumes through TurkStream. As the Russian newspaper Kommersant reported last month, Gazprom had decided for the second string of TurkStream to extend to Bulgaria, Serbia, Hungary, Slovakia and Austria in 2019. The selected route largely replicates the defunct South Stream pipeline project from Russia to Bulgaria on the seabed of the Black Sea, which was canceled by Russian President Vladimir Putin in December 2014 and replaced with TurkStream. However, the gas volumes offered for advanced booking during the European Union’s Open Season auctions in October–November—15.75 bcm/y)—were four times smaller than the 63 bcm/y designed capacity of South Stream (Kommersant, November 22). Nevertheless, the prospect of transiting and potentially trading that much natural gas raised the hopes of the Bulgarian government that the country could become a major regional gas hub.

As much as Sofia is worried about the security of its gas supply, it also fears losing its relevance as a transit country within the regional gas market. Earlier in November, as President Putin was visiting Turkey to mark the completion of the offshore section of TurkStream (see EDM, November 28), the Russian natural gas exporter Gazprom Export notified its Bulgarian counterpart, Bulgartransgaz, that after 2020 it would terminate the transit of Russian natural gas through Ukraine via the Trans-Balkan pipeline to Bulgaria, Turkey, Greece and Macedonia (Bulgaria Analytica, November 22).

Bulgaria depends almost exclusively on Russian gas supplies: 98.3 percent of its natural gas demand (3.14 billion cubic meters in 2017) is delivered from Russia via Ukraine (Global Legal Insights, October 2018). As such, this Eastern Balkan country remains the European Union’s most vulnerable member to Russian gas supply interruptions, despite the lessons of the gas supply crises in 2006 and 2009, when Russia stopped gas flows via Ukraine. Sofia still has no alternative gas suppliers, has failed to complete critical reverse-flow interconnections with Greece and Turkey, and lacks adequate gas storage capacities that would provide crucial backup in case of long-term supply disruptions.

Moscow is evidently using both threats and incentives in its usual manner to subvert Sofia’s energy policy to Russian commercial and geopolitical interests. On one hand, Russia’s plans to cease gas deliveries to the Balkans through Ukraine threaten Bulgaria’s gas supply security. But at the same time, Moscow offers Sofia a prominent role in the TurkStream gas transit system to Europe. So while it intimidates Bulgaria with potential losses of gas transit revenue from the Trans-Balkan Pipeline from Ukraine, Moscow dissuades Sofia from seeking damages for the canceled long-term contract with Bulgartransgaz by offering another profitable scheme—receiving revenues for transiting Russian gas in the opposite direction, from Turkey to Europe.

Bulgartransgaz’s current contract for transiting 16–17 bcm/y of Russian gas to Turkey, Greece and Macedonia does not expire before 2030. It brings annually about $107 million in revenue to Bulgartransgaz, or almost two-thirds of this company’s total revenue. In its desire to secure Russian gas for the Balkan Gas Hub, Sofia reportedly would forfeit seeking compensations for the cancelation of the current contract (Bulgaria Analytica, November 22). The Bulgarian parliament decided that Bulgartransgaz should simply restructure its current long-term contract with Gazprom Export (3e-news.net, November 30).

The amendments to the national energy strategy directed Bulgartransgaz to take all necessary steps, by the end of 2018, to expand the gas transmission infrastructure from the Bulgarian-Turkish border to the Bulgarian-Serbian border. The main task outlined in the strategy is to build a new 474-kilometer pipeline from the gas distribution station in Provadia, near Varna, to the Serbian border, along with two new compression stations. The project will cost over $1.63 billion. By the end of the year, Bulgartransgaz should begin work on establishing a gas trading platform and set up a subsidiary company for the Balkan Gas Hub. At the same time, to secure non-Russian sources of gas, the company must take steps to acquire 20 percent shares in the LNG terminal at the Greek port of Alexandroupolis (Dnevnik, November 30).

The Balkan Gas Hub has the potential to become an important gas-trading platform for natural gas from diverse sources. Bulgaria’s advantageous geographic location along major transit corridors from Asia and the Middle East to Europe has become critical for both gas exporter and gas recipient countries in the Balkans and beyond. If Sofia uses its position wisely, it can become a major contributor to energy security in Southeastern Europe. But if it fails to prioritize the diversification of natural gas supplies and chooses the lucrative prospect of becoming a transit country for Russian gas, it could help entrench most of the Balkans into deeper dependence on Russian gas and cement Gazprom’s monopoly in the region.