Why should Bulgarian gas pawn not lose hope yet to get another chance of becoming a new hub queen in South Eastern Europe?

Looking back at the expiring year to see once again a dramatic picture of EU gas market development filled with conflicts of interest we can note a number of important events, which triggered the transformation of priorities and put forward new objectives. One of such events occurred even earlier - two years ago when in December 2014 Russia made a decision to abandon the South Stream gas pipeline project blaming Bulgaria for delays in the issuing of necessary permits for the pipeline construction and announcing that under the circumstances it was not possible to continue the project implementation.

That event was welcomed openly in Brussels, Washington DC and some other capitals. By contrast, in South Eastern European countries the failure of the South Stream implementation caused a wave of mixed emotions when there was a prevailing sense that they had been falling victim to missed opportunities as well as a growing uncertainty in future development of their gas markets. Yet such an unenthusiastic response can be accounted for the fact that these countries have long been at the forefront in enhancing of their gas supplies, but no matter they are the most dependent, they were subjected to this painful blow.

Many of us have become aware that Sofia and Brussels did not share equally the primary responsibility to create the conditions that proved unacceptable for the South Stream project continuation. Very essential for future steps towards the integration of the gas market in South Eastern Europe was distinctly different decisions made by the European Commission with regard to the only two really existing projects that had been already commenced for provision of gas imports by pipelines to the EU. Those projects are the Trans-Adriatic pipeline (TAP) and the South Stream pipeline of which just the first one obtained an exemption from third party access to its pipe required by the Third Energy Package. As a result, the European Commission added another page in the historic way from the dusk of WTO that has been idealistically focused on the non-discrimination principle as applied in the context of trade in goods till the current dawn of global protectionism.

A common way to somehow extinguish the growing frustration and other negative reactions is a launch of new promises and initiatives. Therefore, it is no coincidence that right after the abrupt cancellation of South Stream project, Bulgaria's political leaders urged their country to create a modern gas hub. Bulgaria wants to build a European-scale gas storage facility to replace the canceled South Stream gas pipeline, and become ‘number one’ in terms of diversification, said Prime Minister Boiko Borisov in December 2014.

Slow and uncertain steps towards the implementation of the gas hub

One whole year had passed before in December 2015 Bulgaria and the EU Commission agreed to establish a joint working group to support the development of a gas hub in Bulgaria designed to serve the Balkan region. It was expected that the working group should begin with an assessment of legal, regulatory and financial requirements for this project. However, the gas hub initiative proceeded slowly unless to say that there was no any appreciable progress in its promotion.

In particular, this could be seen in results of the meeting of the Central Eastern and South-Eastern European Gas Connectivity High Level Working Group (CESEC) meeting, which took place in Dubrovnik on 10 July 2015. The meeting was devoted to integration of the EU and Energy Community energy markets. EU Commission Vice-President for Energy Union Maroš Šefčovič, EU Commissioner for Climate Action and Energy Miguel Arias Cañete and by the Energy Ministers and their representatives from 15 European countries (including Austria, Bulgaria, Croatia, Greece, Hungary, Italy, and others) signed the Memorandum of Understanding and Action Plan with project list in the appendix. There were 21 projects listed in the appendix that were considered to provide benefit to the region, particularly in terms of contributing to security of supply.

In fact, three projects in Bulgaria were given a prominent place in the list of CESEC Priority projects, among which are two new interconnectors - the interconnector Greece-Bulgaria (IGB) and the interconnector Bulgaria-Serbia (IBS). At the same time, no direct reference was made to the Balkan gas hub project in these outcome documents, but instead of it, there was a rather general task - "Phased Bulgarian system reinforcement (necessary to allow utilization of existing interconnections and interconnections being developed)."

Implementation of priority interconnector’s projects of course would improve conditions for the creation the Balkan gas hub. However, a well-developed gas transportation infrastructure actually is important, but it is not the sole condition, which is vital to making the gas hub project feasible.

A European-scale gas hub has to serve transit flows of gas currently lacking in Bulgaria

It is noteworthy that neither the majority of politicians nor least of all representatives of the expert community try to ignore the problem of accessibility to one of main primary energy sources - natural gas. It means that Bulgaria must gain access to gas sources and receive sufficient supplies to carry out all the gas hub operations competitively for local market and especially for the EU neighboring countries.

 

There was a recent attempt to look ahead to this challenge within the framework of the Investors Round Table held in Varna on 4-6 September 2016, where company Bulgartransgaz presented the concept for the construction of the Balkan gas hub on the territory of Bulgaria. In his address to participants of this event Klaus-Dieter Borchardt, Director Internal Energy Market at the EU Commission's Directorate-General for Energy underlined the importance of the Balkan gas hub for the European integrated market. "If we manage to attract considerable amounts of natural gas supplies the Balkan gas hub will become competitive with the already existing hubs in Germany, Austria and the Netherlands," added Borchardt.

The EU model for diversifying the gas supplies to Central and Eastern Europe and a competitive gas hub

"Each Member State in the region should have access to at least three different sources of gas," stated many times the senior European Commission officials, noting especially that it important for security of energy supply. At first sight, the EU Commission's suggestion should not cause any objections. However, in practice the Brussels gas supply model based on "at least three different sources of gas" seems idealized too much and far-removed from the reality all around us. If certain EU member states now do not have enough gas even to meet their growing domestic demand not to mention reaching and/or maintaining high levels of gas hub competitiveness then committing themselves to provide three more or less equal sources of gas supplies. In fact, it just may increase the risk that the implementation of the Balkan gas hub project would be postponed for many years.

Look at the map above - isn't that what reminds us a chessboard? There are chess figures like gas projects that generally can move in any direction. The only thing is that on the European energy "board" efficient gas volumes now can come from the east only as European gas trading and utility companies well know.

There are not too many projects, which are capable to keep a window of opportunity for Bulgaria's gas imports open, these include:

The Trans-Balkan pipeline has entry capacity 24.7 bcm, 99% of which comes from Russia and a very small part from Romania. It is important that a completion of the Turkish stream pipeline in December 2019 should reduce significantly the need for the entry capacity of the Trans-Balkan gas pipeline. It is planned that a new gas pipeline running from Southern Russia across the Black Sea to Turkish Thrace will replace the transit of Russian gas to Turkey through the territory of Ukraine, the volume of which in 2015 amounted to 12.7 bcm. Moreover, the current transit contract between Ukraine and Russia will expire in 2020 and its extension is hardly possible because of growing tension between the two countries. According to Gazprom, even though Ukraine and Russia manage to sign a new transit contract, gas transit across Ukraine would be reduced to 10–15 bcm, about half of which will be transported by Trans-Balkan pipeline to Bulgaria, Greece and FYROM. Meanwhile it is an undeniable fact that Ukraine’s Naftogaz are apparently already preparing for reduction of gas transit since Naftogaz refused to buy equipment worth 156 million USD for modernizing three gas-compressor stations that provide gas transit in southbound direction via Romania to Bulgaria.

The Turkish offshore pipeline currently under construction will consist of two parallel pipelines with a capacity of 15.75 bcm each. The first pipeline is intended for gas supplies to Turkey. It is planned that the route of the second pipeline will continue to its end point at the Turkish town of Ipsala, near the Greek border to deliver 15.75 bcm of gas to Greece, Italy and the Balkan countries. As you can see in the map above, the routes of the second pipeline line of the Turkish stream and the existing Trans-Balkan pipeline will cross giving an opportunity of transforming the latter to a reverse mode to supply gas to Bulgaria.

 

The Gas Interconnector Greece-Bulgaria (IGB) will provide a direct link between the Greek GTS and the Bulgarian GTS with an entry point in Komotini and an exit point in Stara Zagora. According to preliminary assessments, the project’s budget is estimated at 240 million Euros, of which 220 million Euros concern construction costs. By means of IGB Bulgaria intends to import gas from Azerbaijan prior to the commissioning of the Trans Adriatic Pipeline (TAP). The 182-kilometre IGB pipeline will carry 3.0 bcm of natural gas annually in its initial stage with a possibility for upgrading up to a maximum capacity of 5 bcm. According to Central and South-Eastern European Gas Connectivity (CESEC) High Level Group information, its construction was planned to start in December 2016 and be completed after two years. One bcm from the Shah Deniz gas field of Azerbaijan will be annually supplied to Bulgaria effective 2020.

A joint initiative of Bulgarian Energy Holding (BEH) and Greek natural gas company Gastrade to prepare a proposal to construct a floating LNG terminal in Alexandroupolis, northern Greece. This new facility would supply gas to Bulgaria via the IGB. Earlier Reuters reported that with an estimated capacity of 6.1 bcm. Alexandroupolis terminal will cost about 370 million Euros and is expected to be operational at the end of 2018.

As for the development of domestic gas E&P, Bulgaria would only be able to count on gas imports because the hopes for its own natural gas deposits have not been fulfilled yet. According to Financial Times, Bulgaria’s annual gas consumption could rise to four bcm in 2020 from roughly three bcm at present, partly because of growing demand from chemical and fertilizer companies. Although the amount of the above-mentioned sources of gas supply corresponds to the model proposed by the European Commission, in terms of volumes they apparently would be enough just to meet the growing internal demand in Bulgaria. Nevertheless, these incoming volumes of gas are clearly insufficient for creation of a European-scale gas hub.

The competitive position of Bulgaria is obviously inferior to Greece and Turkey, which are promoting their interests in gas hubs development relying on the new opportunities ensured by TANAP, TAP and the Turkish Stream pipelines in the near future. Implementation of these projects is going to make these countries main applicants for the crown of hub queen in South Eastern Europe.

However, the presence of other potential candidates does not diminish, but on the contrary may even increase the Bulgaria's chances of seeking a wider market access by means of a national gas hub. The optimistic scenario would be reasonable if the European Commission and Bulgaria considered the situation objectively and acknowledged that in the near future it is not possible to increase the volumes of gas imports up to the level necessary for the Balkan hub operations without adequate expanding of infrastructure capacities to supply much more gas especially from Russia. In August 2016, Bulgaria and Russia took a certain step towards that when the two countries agreed to set up working groups on joint energy projects.

Ultimately the European motivation for creation of the Balkan gas hub should be based on the understanding that development of these gas facilities both in Bulgaria and in the other countries of South Eastern Europe can improve competition in the interests of gas consumers by ensuring the greater availability of gas supplies for all consumers, especially for those most in need at present.

Why does Brussels - a fully-fledged chess grandmaster in the geopolitical game in the gas market of South Eastern Europe resembled a chessboard, instead of treating the EU countries like Bulgaria as a sacrifice, begin really to promote them to the position of hub queens?

There can be little doubt that it would also benefit many other EU countries.