Analysis 19 Apr 17

Bulgaria Stands to Gain from EU-Gazprom Deal

Deal easing restrictions on gas sales between EU member states and offering better prices could be a big win for Bulgaria - though some fear the country will not make the most of the changes.

Boryana Dzhambazova
Bulgaria hopes to benefit from a provisional EC-Gazprom anti-trust deal | Photo: Pavlo Palamarchuk - EPA

Bulgaria stands to benefit from a provisional anti-trust settlement between the European Commission and Russian energy giant Gazprom - but experts fear the country may fail to take full advantage of the deal.

"For the first time, Gazprom has acknowledged that the company has been violating EU rules on re-exporting gas from one member state to another," Martin Vladimirov, an analyst at the Centre for the Study of Democracy, told BIRN.

He stressed that the potential for a good settlement is “unprecedented” but added his voice to a group of experts who are concerned about how the deal will be implemented in Bulgaria, against the backdrop of Russia's overwhelming influence over Bulgaria's energy sector.

After some countries in Central and Eastern Europe have been complaining for years of paying higher prices for gas than those in Western Europe, a provisional agreement announced last month will allow Brussels to secure a more competitive gas market in Central and Eastern Europe, including in Bulgaria.

Brussels launched the investigation in 2012 following raids in Gazprom offices the year before and filed charges against the Russian company in 2015.

While denying the accusations, but also trying to avoid paying a hefty fine, Russian company came up with a number of suggestions to address the charges, including promises to ease restrictions on gas sales between EU member states, as well as better gas prices and contract terms.

“Gazprom is welcome to sell its gas in Europe but it has to follow EU rules, including our competition rules,” Margrethe Vestager, EU competition commissioner, said last month in Brussels.

Facing fierce competition at home and abroad and a drastic drop in global oil prices, Gazprom, which supplies around a third of the EU’s gas, seems keen to make some concessions.

While the consumption of gas in Europe dropped in the last decade from 489 billion cubic meters in 2006 to 397 billion in 2015, the European Union is still a key market for the Russian company.

In addition, more countries are trying to diversify by using renewable power sources.

Energy dependency poses dilemma for Bulgaria:

Bulgaria, the poorest EU member state, is largely dependent on Russian energy. Gazprom is the sole provider of natural gas for the country, which consumed 2.9 billion cubic meters in 2015.

Eight years ago, Bulgaria was one of the countries most affected by a price dispute between Moscow and Ukraine, which resulted in Gazpom cutting off gas supplies to Eastern Europe for almost two weeks in mid-winter.

Following the announcement of the provisional agreement, the European Commission expressed concern that Gazprom had “isolated the Bulgarian gas market and may have been charging excessively high prices in Bulgaria compared to Western European benchmarks”.

At the moment, Sofia buys from Gazprom at a contract price, pegged to oil prices, which has forced the country to pay a premium cost for gas compared to its counterparts in Western Europe.

If it is adopted, the settlement will allow Bulgaria to renegotiate the prices if they are higher than those paid in gas hubs in Western Europe.

Kaloyan Staykov, from the Institute for Market Economics, welcomed such potential changes.

“So far, Gazprom has been using its dominant position in the gas market to influence politics in the region,” he told BIRN.

“Now the European Commission will determine the rules and Gazprom has to offer competitive solutions.”

Former Bulgarian energy Minister Traicho Traikov said that the deal would lead to lower gas prices.

“We can expect a drop of 30 to 40 per cent in gas prices,” he told Bulgarian National Radio this month, calling on Bulgaria’s authorities to send feedback on the draft agreement.

Russian influence remains overwhelming:

Some experts, however, doubt the settlement will translate into actual benefits for Bulgaria.

“Bulgaria is almost fully dependent on Russian gas and the Russian influence in the sector is overwhelming,” Vladimirov said.

Oil and gas exports from Russia were equivalent o over 12 per cent of Bulgaria’s GDP in 2014, according to the Kremlin Playbook, a report by two think-tanks – the Sofia-based Center for the Study of Democracy and the Washington-based Center for Strategic and International Studies.

The paper, released last October, examined Russia’s economic presence in five Eastern European countries, including Bulgaria.

According to the Kremlin Playbook, Russian investments in Bulgaria amounted to 22 per cent of the country’s GDP, which the researchers said makes Bulgaria a “captured state”.

Ilian Vassilev, a former Bulgarian ambassador to Russia and an energy consultant, also worries that politics might get in the way of business benefits for the country.

“Some people in powerful positions are not interested in having lower gas prices,” he said, adding that Bulgaria’s relations with Gazprom so far gave him little hope.

“Since 2012, many countries in Central Europe took steps to secure better contract conditions with Gazprom or even sue it,” he said. “Bulgaria is the only one which did nothing.”

Gazprom also promises not to seek any damages from Bulgaria after the cancelation of South Stream pipeline, which was due to bring Russian gas through the Black Sea to Bulgaria and Central Europe.

In 2012, the Russian company reduced the gas price for Bulgaria by 20 per cent following the country's pledge to participate in the project.

The gas giant has also pledged to remove any limits on resale of gas in Eastern Europe, which will now be able to export and import gas across borders. Under its contract with Gazprom, Bulgaria was obliged to buy gas directly from the company, even though it could have bought gas at cheaper rates on other gas markets.

The settlement could also ease plans to build a gas interconnector link between Bulgaria and neighbouring Greece.

Despite worries about how Bulgaria uses the settlement, once it is signed, Staykov see it as a big improvement.

“The opportunity to renegotiate its contract with Gazprom and make the process much more transparent is a big step forward for Bulgaria,” Staykov said.

He hopes the European Commission will push Bulgaria to review the contract terms if the country is slow to take advantage of the settlement.

“Now Brussels can have better control over the process and can ask why the Bulgarian authorities didn’t achieve better conditions,” he said.

Bulgaria and the other seven member states mentioned in the settlement have until the beginning of May to send feedback or object any of the proposals.

If it is adopted, the agreement allows Brussels to fine Gazprom 10 per cent of its global annual turnover if the company breaks the agreement.

However, the settlement doesn’t come in force by default. Each member state has to make the necessary steps to take advantage of the new provisions.

“Now the door is open,” Vassilev said. “Whether we’re going to enter, it’s completely up to the Bulgaria... Once, the settlement is finalized, the ball will be in the court of the Bulgarian government.”

Boryana Dzhambazova is a Bulgarian journalist based in Sofia. This article was produced as part of a project funded by theBlack Sea Trust for Regional Cooperation.

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