Alternatives & Analyses: Minister Petkova with a mission impossible in the US

Starting Monday, January 27th, the top managers of the Bulgarian state energy plus the Energy Minister will be on a visit first to Washington, then to Houston for meetings with US gas traders and energy companies active in Central and East Europe. If the US-Polish pattern of exchanges in the field offers any lead, the delegation will be meeting Cheniere, Sempa Energy, and Tellurian. Not sure whether a meeting is scheduled with Exxon Mobil, who will be the nearest alternative supplier - if and when gas production kicks off from the Neptune field in the Romanian Black sea offshore.

The mission of Bulgaria's state-energy top-level executives is to pass on a message to the US administration, at the background of the expulsions of Russian diplomats, that Bulgaria is serious in its attempts to diversify away from Gazprom and Russian dependency.

How serious are the CEOs of the Bulgarian Energy Companies in substantiating the claims of PM Borisov and his energy minister that this time it is more than talk?

Bulgargaz has been offered US LNG in the past. Initially, the US companies were willing to deliver to the Bulgarian border. Some still do, but most will deliver to the nearest LNG terminal - could be Revithoussa in Greece or Marmara Eriglisi in Turkey. The logistics to the Bulgarian border remains the responsibility of Bulgargaz. The company has never considered engaging in contracts for alternative sales or purchases beyond the Bulgarian borders. The few instances of LNG cargoes with a final customer Bulgargaz, when not involving gas swaps, were arranged by intermediaries. They reaped most of the gains from the 30 % lower prices, leaving Bulgargaz with less than a 10% lower price tag, which wiped out most of the competitive edge of the spot LNG market.

Both the intermediaries and Gazprom share an interest in pre-empting direct sales from US traders to Bulgargaz. That will not change during or after the US visit of Bulgaria's state top energy brass.

All the last gas supply closed auctions that Bulgargaz announced, featured terms of references, specifically tailored to disfavor direct purchase of US LNG while guaranteeing the interests of Bulgargaz intermediaries. This discriminatory attitude is a well-known fact for US gas traders.

Bulgargaz is lost when it comes to price formulas different from Gazrpom's oil-indexed ones. Spot price trading at EU gas exchanges remains an intellectual challenge, while Henry Hub price indexation generates shockwaves.

Throughout their years in power, the GERB governments have consistently and deliberately ignored a critical element for the imports of LNG - the Under Ground Storage's expansion from 0,55 to 1,2 billion cubic meters capacity. Lacking sufficient free storage space denies the US or any other LNG trader in the region a chance to compete on a level play with Gazprom's piped gas. No wonder many gas experts believe that the delay with the Chiren UGS expansion is at the behest of Gazprom and the Kremlin.

Bulgargaz's ability to buy gas from alternative suppliers remains confined to the volumes above the mandatory 'take-or-pay' in the contract with Gazprom, roughly 300-400 mcm/y. The management of the state gas trader has dragged its feet and failed to renegotiate a lower price and á lower percentage in December 2019, for 'take-or-pay' volumes (now standing at 80 percent of a contract of 3 bcm/year). 

In short, when and if real diversification of Russian gas comes to the Bulgarian gas market - Bulgargaz will not be the driver, as the company has spent years in subservience to Gazprom. 

Bulgartransgaz (BTG) focuses entirely on completing the Turk Stream until the end of May 2020. The main objective of the current working visit of Minister Petkova is to offer the promise of a deal with LNG in return for a lenient attitude by the State Department and the Department of Treasury towards the Turk - Balkan stream. 

The threat of US sanctions is realistic, despite last-minute efforts by some US officials to consider deals-for-leniency compromise. Some experts believe this is what has motivated Borisov's sudden anti-Russian drive - the need to impress and underwrite promises and goodwill that will be offered in abundance this week in Washington by Mrs. Petkova.

Bulgaria could be spared direct sanctions by the US Government - as a NATO ally and against commitments made. Still, many remain skeptical of the outcome and whether expectations will be met. Everything Borisov needs is a time-out until the Turk Stream pipe gets completed, and he reports to Putin of Turk Stream mission accomplished. 

Until then, Bulgargaz and Bulgartransgaz could talk the talk, but would hardly walk the walk. MoUs or LoIs buy time, but they are not contracts, as they leave Gazprom's monopoly intact.  

US sanctions might happen in more discrete form - silent denials of US companies (General Electric or Solar Turbines) to deliver equipment or spare parts destined for the Turk Stream or other critical segments of the Bulgarian gas transmission infrastructure.

The US administration would find it difficult to justify an exemption for Bulgaria, and a different treatment for Borisov and Turk Stream, from the hard-line on Nord Stream-2, Germany and Chancellor Merkel. Under Secretary of State for Political Affairs, David Hale has pointedly reminded the Bulgarian PM that Turk Stream, a Russian geopolitical project aimed at dividing Europe, is unacceptable, and companies will be sanctioned.

The only option out of the swamp is for the Bulgarian Government to adhere to the range of the objectively feasible things, regarding the Turk Stream. It also needs to consider privatizing both Bulgargaz and Bulgartrangaz as the Greek Government has done. PM Borissov needs to prove he is serious on diversification beyond the usual talk, and provide credible proof of his willingness to secure a level playing field to all gas traders, denying Gazprom privileges. He needs to reassure both the EC and the US Government that the Turk Stream extension in Bulgaria will comply with the EU regulatory frame, seeking compliance procedure in Brussels, not in Sofia. Then Gazprom should be offered max 50 percent of the entry and exit capacity of the Bulgarian segment of Turk Stream. 

Failure to change course, Bulgargaz's dependence on Gazprom will translate in a corresponding loss of market shares, and both Bulgargaz and BTG, as state companies, will look like old 'socialist' dinosaurs in a tight and competitive SEE market. 

Privatization, however, for Borisov and his oligarchic state-capitalist caste is a curse. This truism spells tough times ahead for the key players in the Bulgarian gas market.

While remaining skeptical of breakthroughs in Washington and Houston, I wish Minister Petkova that she proves me wrong.