Leaving the Gas On

Economic News

22 Jul 2010
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Less than two weeks after Russia settled a bitter dispute with Ukraine over gas prices, a similar row with Bulgaria is heating up. Bulgaria has refused to negotiate new terms for its current contract with Russian gas monopoly Gazprom, which is seeking to double the price Bulgaria currently pays for its supply.

"[Gazprom's] offer is unacceptable," Bulgarian Economy and Energy Minister Rumen Ovcharov told reporters as the year got underway. "We see no reasons and no conditions that could lead to a review."

Currently, Bulgaria's state-owned energy company Bulgargaz purchases gas from Gazprom under two contracts: one for direct delivery and a separate one for transit shipments from Russia to Turkey, Greece and Macedonia.

The existing agreement, signed by the two counties in 1998 and set to expire in 2010, sets the price at $120 per 1000 cu metres while the new Gazprom proposal ups the price to the current market value of around $257 per 1000 cu metres.

Gazprom spokesman Sergei Kupriyanov told the press that the current arrangement was unacceptable and that the transit price doesn't correspond with the reality of the market.

Under the new deal proposed by Gazprom, the gas-for-transit agreement would be terminated in favour of direct payments based on current market value for both domestic use and transit deliveries.

The cancellation of the transit agreement would have a significant financial impact on Bulgaria, as the fixed costs that Bulgargaz currently pays allow for significantly cheaper domestic prices. As of January 1, local Bulgarian consumers paid about $180 per 1000 cu metres - well below the current market price.

In addition to the increases in domestic prices, there is also apprehension that Russia might decrease the volume of gas that flows through Bulgaria in favour of alternative pipelines to Turkey which run under the Black Sea.

In 2004, 13.5bn cu metres of Russian gas passed through Bulgaria en route to Greece, Turkey and Macedonia. During the same year, Bulgaria purchased 2.85bn cu metres from Russia, fully 97% of its total gas imports.

Estimates of the costs to Bulgaria for a contract renegotiation are as high as $1bn over the remaining four years of the current agreement.

"The situation in the country could become really worrying if we agree with such a contract review," Ovcharov said.

While Bulgaria appears to have little financial incentive to agree to Gazprom's proposal, neither side appears to want a repeat of the debacle that occurred earlier this month between Russia and Ukraine over similar issues.

That dispute bubbled out of control when Gazprom raised Ukrainian gas prices from $50 per 1000 cu metres to $230 per 1000 cu metres.

Negotiations subsequently deteriorated amid accusations that Ukraine illegally siphoned off $25m worth of Russian gas from a pipeline supplying western Europe. Russia consequently cut supplies to Ukraine, while Kiev then rebuked these claims and countered that the price increase was politically motivated and was tantamount to blackmail.

Eventually, a compromise of $95 per 1000 cu metres was reached between the two countries.

The event attracted serious concern from other European countries, including Austria, Italy, Germany and Poland, who are dependant on the Russian stocks and saw their supply decreased by 14-40% during the dispute. Gazprom provides a quarter of western Europe's natural gas needs, 80% of which flows through pipelines that traverse Ukraine.

Both Bulgaria and Russia appear to want to resolve their disagreement more tactfully. Fear of reduced volumes of gas from Russia similar to what happened in the Ukraine dispute have been downplayed, and Ovcharov said that the two situations were not comparable. Similarly, a Gazprom spokesman stated that the problem would be resolved "in a civilised manner".

Despite Bulgaria's refusal to re-negotiate its current gas contract with Russia, both countries have expressed interest in discussing an extension of the gas transit agreement, the extension of the transmission network and other energy projects. There is a possibility that agreements made on these projects could be contingent on negotiations over the current gas contract.

Some of the projects for which Bulgargaz and Gazprom are considering co-operative efforts include the future privatisation of Bulgarian thermal power plants and the construction of the Belene nuclear power plant.

Bulgaria's hard line on its gas contract with Russia has left little doubt as to its position concerning any changes to the current agreement. With the recent row with Ukraine still fresh in the Russian gas monopoly's mind, the issue now is whether or not it has the stomach to push the issue and risk involving itself in another inflammable dispute.

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