Bulgaria signs South Stream, gas delivery contracts with Gazprom

Written by on November 15, 2012 in Bulgaria, Business, Europe, News - No comments

Bulgaria secured lower delivery prices for Russian gas and gave a final approval for the South Stream gas pipeline on November 15, signing agreements to that end with Gazprom in Sofia.

The exact price remains confidential, but Bulgarian Prime Minister Boiko Borissov, in attendance at the signing ceremony, said that it would be about 20 per cent lower than the one Bulgaria pays now. That would put the price at about $430 for 1000 cubic metres of gas.

Bulgaria will receive 2.9 billion cubic metres a year and will be required to buy at least 80 per cent of that amount – known as the take-or-pay clause, it is one of the main instruments used by Gazprom to shore up its declining exports to Europe. Here, too, Bulgaria has secured some gains, as it was previously required to buy at least 90 per cent of the contracted amounts.

The contract is for 10 years, but contains a clause that allows renegotiation six years into the deal, when Bulgaria can reduce the delivery amounts if domestic production increases, as well as ask for a further reduction in the price of imported gas.

(In August, Bulgaria gave French energy giant Total a five-year exploration licence for the Khan Asparouh 1-21 block on the Bulgarian Black Sea shelf. Total, which will prospect the area together with Austria’s OMV and Spain’s Repsol, is expected to invest more than one billion euro over the period, mainly in two high-depth oil and gas wells. Bulgaria’s optimistic expectations are that the group will find gas reserves comparable, if not greater, to the 40 billion to 80 billion cubic metres found nearby in the Romanian Black Sea shelf, with extraction possibly starting as early as 2017.)

However, in case of “changes in market conditions”, import prices could still be “corrected”, Gazprom chief executive Alexey Miller said. As with other contracts with European countries, Gazprom’s deal with Bulgaria links the gas price to that of oil on international markets.

Nevertheless, Bulgaria is receiving a preferential price in the name of future strategic partnership, Miller said. Comparisons with gas prices paid by other European countries like Germany were inappropriate because Russia’s co-operation with Germany in the energy sector was on a considerably greater scale, he said.

Last week, Bulgaria’s Cabinet approved the South Stream final investment decision, but explicitly linked it to reaching “satisfactory terms” on the gas deliveries deal. Miller, re-iterating earlier statements, said that the signing of the long-term gas contract and the final investment decision on South Stream was merely a coincidence.

Some observers have said that this position was motivated by European Commission’s ongoing anti-trust investigation against Gazprom, suspecting that the Russian company used its market position in a number of Eastern European countries, Bulgaria included, to hinder competition.

Bulgaria was the last country to sign a binding South Stream contract – in recent weeks, Russia sealed similar agreements with Hungary, Serbia and Slovenia. Earlier on November 15, Gazprom said that a final investment decision for the underwater stretch of the pipeline had been inked as well.

On the issue of financing for the Bulgarian stretch of the pipeline, Borissov said that Bulgaria will not offer any budget guarantees, again re-iterating a long-established stance. Earlier reports in Bulgarian media said that the draft agreement envisioned that construction costs would be taken on by Gazprom, with Bulgaria using the transit fees it will receive over the first 15 years of South Stream’s operation to pay the Russian company back.

The pipeline is set to pass under the Black Sea before coming ashore near Varna in Bulgaria, from where it will continue to Italy via Serbia, Hungary and Slovenia. The goal is to bypass Ukraine, with whom Russia has had an uneven relationship over the past decade, but which remains a key cog in Russia’s existing pipelines to Europe.

At full capacity, South Stream would pump 63 billion cubic metres a year through four separate sections, the first of which is expected to become operational in 2015. Plans for branching out sections to Austria and Greece have been abandoned, but Macedonia is set to receive a direct line and has already started talks on association to the project, reports in Russia media said in recent days.

Gazprom set December 7 as the date for the groundbreaking ceremony to mark the start of construction at Anapa, on the Caucasus shore of the Black Sea. Borissov has been invited to attend, according to earlier reports in Bulgarian media, but on November 15 he once again downplayed the issue.

He confirmed the invitation, but underlined that securing a big discount on gas prices, as well as direct deliveries, was more important than his attendance in person and said he might join in by video link.

Negotiations on the gas deal started last year and often appeared to be stuck, mainly because Bulgaria insisted on direct deliveries, rather than through intermediary firms. The main reason for the demand is that it would offer Sofia a way of seeking compensation in case of halted deliveries – as happened in the winters of 2006 and 2009, when price wars between Russia and Ukraine led to a stoppage of deliveries to Central and Eastern Europe (in 2009, it coincided with a bitter week-long cold snap in Bulgaria).

The current contract, which will take effect on January 1 2013, was signed with Gazprom Export, a fully-owned subsidiary of Gazprom. Miller said that the final details were hashed out during a midnight call between Borissov and Russian President Vladimir Putin.

(Bulgarian Prime Minister Boiko Borissov and Gazprom chief executive Alexey Miller. Photo: government.bg)

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Alex Bivol is the news editor of The Sofia Globe.