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Scott Belinksi

Scott Belinksi

Scott Belinksi is an international energy consultant currently based in Moscow. His interests and areas of expertise include Eastern European politics, shale gas, deep-water drilling…

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European Gas Struggles Leave Bulgaria In A Tight Spot

NatGas

Despite the EU’s best efforts to diversify suppliers, Russian gas exports to Europe grew by 8.1 percent to hit a record high of 193.9 billion cubic meters last year. More than a decade after Russia first shut off the spigot to Europe over a pricing dispute with Ukraine, Gazprom’s share of the EU gas market has increased from a quarter in the 1990s to a stunning one-third today. This worrying development comes at the same time Bulgaria, a country sitting squarely in Moscow’s long shadow, assumes the presidency of the EU Council and considerable sway over European affairs. What do the next six months have in store for Europe’s shaky energy security? And could the US help?

Indeed, other than Brexit and the refugee crisis, the Nord Stream 2 file is the trickiest dossier Sofia will have on its lap for the next six months. Bulgaria now has a key role to play in the potential expansion of a gas pipeline that would allow Gazprom to send more gas to Europe. There is still no agreement on whether to give the European Commission a mandate to negotiate the project with Russia at present. The US has been pushing Poland and other states to ask for the negotiating mandate, while Germany – the pipeline’s final destination – thinks there is no need to involve Brussels.

As the bloc’s umpire for the next six months, Bulgaria’s position will be key – but it’s unclear whether Sofia has the mettle to go toe-to-toe with Moscow.

Russia has been harboring ambitions to build the Nord Stream 2 under the Baltic Sea (alongside the Nord Stream 1 pipeline) to Germany for years, much to Washington’s understandable chagrin. Nord Stream 2 wouldn’t just grant Russian gas an almost impregnable position on the European market; it would also deal a blow to the Ukrainian economy, which makes over a $1 billion a year from gas transiting its territory to reach Europe. The expanded pipeline would also offset the need to use the Soviet-era “Brotherhood” route connecting Western Siberia to Slovakia via Ukraine.

Related: Azerbaijan: A Crucial Energy Hub

As president of the EU Council, Bulgaria will have to perform a high-flying balancing act on this thorniest of energy questions. It will need to grapple not only with various intra-EU disputes, but also with internal dynamics and its own relations with Russia and the US. In addition to American concerns, Poland and other EU member states remain highly distrustful of Moscow and the threat posed by Russian gas dominance.

The Nordic states have also raised security questions about plans to construct the pipeline along their coasts, where Moscow is strengthening its military footprint. To hedge against Russia’s growing control of the market, both Poland and Lithuania have built new terminals to receive liquefied natural gas from the US and other suppliers. In July, Poland received its first shipment of US LNG at the new ?winouj?cie terminal. In August, Lithuania obtained its first spot shipment via its floating LNG terminal in Klaipeda.

Bulgaria itself would see minimal impact from Nord Stream 2, but Sofia remains highly dependent on Russian gas and is perfectly conscious of Moscow’s ability to switch off the valve. Gazprom is the only natural gas supplier in the country, which was hit by a price disagreement between Russia and Ukraine that caused Gazprom to halt gas supplies to Eastern Europe for nearly two weeks last winter. The Kozloduy nuclear power plant in Northern Bulgaria is entirely dependent on Russian fuel and equipment. Lukoil also maintains a heavy presence in Bulgaria and owns the only oil refinery in the country. While the government is currently negotiating the construction of several cross-border interconnectors with its neighbors, energy independence remains years away.

Russian business interests have penetrated other sectors deeply as well, warping Bulgaria’s investment climate. According to a recent study by the Washington-based Center for Strategic and International Studies, investment with direct or indirect Russian origins accounts for more than 22% of Bulgaria’s GDP. According to those findings, the country qualifies as a “captured state.”

That captured state will now be asked to stand up to Vladimir Putin’s ambitions and preserve Europe’s energy independence.

Unsurprisingly, these oligarchic networks are closely entwined with domestic politics up to the highest levels of government. According to a collection of leaked US diplomatic cables, Prime Minister Boyko Borissov himself has been implicated in a series of criminal dealings and has longstanding ties with Lukoil and the Russian embassy.

Russian government interests have their own history of bankrolling questionable campaigns in Bulgaria. In 2015, Bulgarian and international observers identified Kremlin-backed Orthodox priests as a main instigator behind environmentalists’ successful campaign to enact legislation banning fracking for oil and gas. The rules eventually drove out Chevron, dealing a setback to Bulgaria’s hopes for weaning itself off Russian gas. Related: $70 Oil Cripples European Refiners

Moscow is not the only outside player Bulgaria will have to be conscious of when it comes to negotiating the Nord Stream 2 project. Despite President Trump’s pro-Russian rhetoric, the US remains strongly opposed to the proposed pipeline and has not hesitated to make its feelings known. New sanctions against Russia have already made financing major projects like Nord Stream 2 incredibly difficult, and the State Department has said European companies involved in the project could face US sanctions depending on the “contours” of the deal.

These competing dynamics leave Bulgaria in a tight spot, caught between sparring EU states but also between Moscow and Washington. How it performs in navigating these competing interests could impact Europe’s drive to achieve energy independence and wean itself off reliance on Russian gas for years to come.

By Scott Belinksi for Oilprice.com

 

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  • Douglas Houck on January 20 2018 said:
    "...Europe’s drive to achieve energy independence and wean itself off reliance on Russian gas for years to come."

    Lets be clear, Europe is not trying to wean itself off Russian gas, nor is there any hope of it achieving energy independence.

    Gazprom already has long term contracts to supply natural gas to European countries as it is the lowest cost provider. What is being decided is how Russian gas is going to get to Europe. Will it be through Ukraine or through the two new pipelines, NordStream 2 and Turkish Stream.

    The contract Gazprom has with Naftogaz of Ukraine for natural gas transit ends Dec. 31, 2019 and neither party seems able to extend it. If no new contract can be negotiated and signed, then one option is for Gazprom to tell the Europeans that they will bring the gas to eastern Ukraine and it is up to the Europeans to provide for its transit through Ukraine (i.e., Europe accepts the risk and costs of getting its gas through Ukraine, something they obviously do not want to do).

    The other option is to declare force majeure on a proportion of its long term contracts, which is considered unlikely.

    For a full discussion, and not the usual Russophobia propaganda, see the somewhat dated 2016 Oxford Institute for Energy Studies: https://www.oxfordenergy.org/wpcms/wp-content/uploads/2016/02/Russian-Gas-Transit-Across-Ukraine-Post-2019-NG-105.pdf

    At this time the most likely scenario is for the two pipelines to be built, and the contract with Naftogaz to expire.

    Europe has no desire to buy a lot of expensive gas which puts them at an economic disadvantage and Gazprom has shown itself to be a reliable partner (unlike Ukraine) in providing it at a lower cost than most anyone else, geopolitics aside.

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