The latest Russian-Ukrainian gas crisis in 2009 that left the South of Europe without Russian gas demonstrated critical vulnerability of Bulgaria to supplies cut when total country found itself with homes cold and factories closed. Despite the fact that Bulgaria has in general well-balanced energy supply and natural gas accounts only for 14% in primary energy mix it remains critically dependent on gas imports to satisfy demand needs.Presently, Bulgarian gas demand is covered by more than 80% at the expense of Russian gas supplies that reached 2.5 billion cubic meters (bcm) in 2012.
Energy dependency and cold winter of 2009 pushed Bulgaria (and other Central European countries) to revise its energy security options and policies. From the very beginning they were aligned with the EU energy policy targets which aim on diversification of gas supply sources. The European Commission clearly defined that gas supply energy security is to be reached via “… development of a Southern Gas Corridor for supply from Caspian and Middle Eastern sources… and … the member states must cooperate with partners such as Azerbaijan, Turkmenistan, Iraq, Egypt, Syria and Jordan in the short-term. In the longer term, supply of natural gas from countries such as Uzbekistan and Iran would be a significant additional source for supply to the EU”.Bulgaria in its national energy strategy until 2020 set clear commitment to EU goals by prioritizing “diversification of the sources and routes for supply of natural gas is important for country’s energy security and energy independence… including possible building of terminals for liquefied and compressed natural gas … reverse interconnections with Greece, Turkey, Serbia and Romania … possibilities for extension of the existing gas storage … and building of a new one at Galata. The development of new natural gas fields, including, without being limited to, shale gas and deep water wells in the Black Sea, will be actively supported”.
Meanwhile, scrapping the old model of energy dependency and highly energy intensive economy1 has proved to be a very difficult process for Bulgaria as it faced the need in balancing between the pan-European goals in field of energy policy and pressure of Russia that remains the dominant gas supplier in the CEE region and promotes new huge gas pipeline project – the South Stream – for further expansion of Russian presence at European gas market.
Bulgaria has been involved in the South Stream transit gas pipeline project since January 2008 when Russia and Bulgaria signed the corresponding Intergovernmental Agreement of Cooperation. In 2010 Russian gas giant Gazprom and Bulgarian Energy Holding EAD signed the Agreement on construction of Bulgarian part of the pipeline and set up the joint venture South Stream Bulgaria on equal basis (ownership rights were divided by 50%-50%) for building and operation the pipeline on the Bulgarian territory.
From the very beginning the South Stream was very warmly welcomed by the Bulgarian administration as “a strategic project of national importance” that hasnot only “an essential importance for the security of natural gas supply in Bulgaria” but also potentiallybeneficial for “the growth of economy and the increase of employment”.In spite of declared adherence of Bulgaria to common European energy policy goals it became obvious that the country was not able to resist the pressure of Russia thatused both carrots and sticks to persuade Bulgaria to join the South Stream project. The carrot was an 11 percent gas price reduction on imported gas between April and December 2012 and further 20 percent discount under a new, 10-year contract with Gazprom, signed in November 2012.At the same time Russia unexpectedly started to demand from Bulgaria obscene EUR 1 bn of compensation for the cancellation of Belene nuclear power plant construction, thus putting additional pressure on the cash-strapped Bulgarian Government.This allresulted in signing an agreement on the final investment decision for the construction of the Bulgarian part of South Stream which will be mostly financed by Bulgaria at the expense of Gazprom loan at about EUR 620 m at a 4.25 percent interest for 22 years.Gazprom started construction works on the Bulgarian section of the South Stream in October 2013 and announced that the first gas deliveries to Bulgarian consumers are expected in December 2015.
But is the South Stream really advantageous for Bulgaria? Without any doubts it is crucial for Russian gas monopoly as Gazprom cannot bypass Bulgaria along the route of South Stream without compromising the strategic value of the project but how it will contribute to security of Bulgarian natural gas supplies? Russia claims that the South Stream will be highly beneficial for Bulgaria as it will diversify its gas supply routes, reduce the costs and, respectively, the price of gas for final consumers and deliver numerous side-effects for national economy and employment. Moreover, it is stated that Bulgaria will not invest its own money into the project and, thus, it will be a profitable undertaking for the country.
For the first look the prospects of Bulgaria in the project looks bright but only if not to consider the situation from energy security prospective and the risks from closer ties with Russia. Really, the South Stream will add up another gas supply route to Bulgaria but, in the meantime, the country could lose its current gas delivery route through Ukraine as the current Gazprom’s strategy is aimed at bypassing its main transiting counterpart. Therefore, it may be harmful for the existing transit infrastructure and will further strengthen Gazprom’s supply grip and its monopoly pricing power on the region as in the future Bulgaria will be supplied only via South Stream. Additionally, Bulgaria’s participation in the South Stream will divert public funds at a time when they are badly needed for other urgent public expenditures with the loan taken from Gazprom; and pose a significant risk of losing current transit payments as the present gas transit route can be diminished while under the clauses of the contract, the country will not receive any money from transit fees for 15 years and all revenues generated by the gas pipeline during the period would go to Gazprom.As a result, Bulgaria will be tied to long-term dependence to Russian gas with doubtful outcomes for national economy and guarantees on gas discounts. The recent conflict of Russia with Ukraine demonstrate that Gazprom is often used as tool of pressure on a counterpart and gas price discounts are not really long-term even having the contracts signed and could be revised after the change of political landscape.
Finally, the decision of Bulgaria to support the South Stream project contradicts to a common European goal of diversification of sources of gas supply and even to own energy strategy as it oppositely increases the share of Gazprom and may prevent development of alternative Southern Gas Corridor and entering the European gas market by new suppliers. Also, contracting of new long-term gas supplies from Russia may further freeze the shale gas exploration and production efforts in Bulgaria as an alternative way to avoid the gas dependency from Russia. Also, the legal background for the South Stream on the EU level remains very uncertain as the European Commission triggered the anti-monopoly investigation against Gazprom on abuse of pricing power in CEE markets and claims the well-grounded anxiety that Gazprom is avoiding to open up the South Stream pipeline to another suppliers according to new EU competitive market rules and may use it for unfair gas pricing in the region.
Therefore, the events over South Stream disclosed the lack of clarity in Bulgarian energy policy, inadequacy in decision-making by administration, diplomacy and politics, and its complete unbundling with the appropriate European energy security goals. It also showed the inability of Bulgaria to stand its ground against its powerful energy supplier but also regarding the vastly anticipated efforts of Europe to speak with one voice on energy matters and thus leverage the interests of smaller Member States in the strive for energy diversification in Central and Eastern Europe.The European Commission should obviously play a stronger role as an arbiter in setting the framework conditions for the South Stream functioning with the goal to prevent the risks for competition and security of gas supplies in the region and Bulgaria as well.
