Alerts. Real-time analysis of events occurring at the intersection of economics, finance and global security concerns.

On March 3, Gazprom announced a retroactive price reduction of 40.33% (dating from August 2019) on its supplies of natural gas to Bulgaria.  As of April 1, 2020, the price of gas being sold by Gazprom to Bulgargaz will be based on a formula that is driven by oil and natural gas prices at European hubs.  This means that Bulgaria could receive Russian gas at even lower prices than set today, should their spot market pricing decrease in the future (prices will be adjusted monthly).  Due to the retroactive effectiveness of the agreement, Gazprom will return approximately $83.6 million to Bulgargaz – a significant sum that is reportedly to be distributed to local end users.

Bulgarian Prime Minister Boyko Borisov described the event as a “symbolic gift” that overlapped with the 142^nd anniversary of the Russian liberation of Bulgaria from Ottoman rule.  Local media, however, has characterized the concession as a response to Bulgarian efforts last month to reopen an antitrust case against Gazprom with the European Commission.  The case, which targeted Gazprom’s export monopoly in eastern Europe, was closed in May 2018, once Gazprom committed to adjusting its gas prices to align with the average market prices in the EU.  It appears, however, that Bulgaria was not among the seven (of the eight) claimant countries to receive a reduction in gas prices.  Sofia sought to reopen this case last month to lay claim to these corrective measures, amid rising tensions between the two countries.  Other aspects of the bilateral relationship may also have motivated Gazprom’s decision – they are as follows. 

Expediting Completion of Turk Stream’s European String

Russia’s response is also perceived to be part of its efforts to accelerate construction of the Bulgarian section of the Turk Stream pipeline (Balkan stream).  Whereas, the Serbian section of Turk Stream is reportedly completed, and the Turkish section is operational, the Bulgarian section – the pipeline’s critical bridge to South and Central European markets – remains incomplete.  This has been a contributor to recent tensions between the two countries that saw President Putin accuse Bulgaria of deliberately delaying construction due to Western pressure and even a threat to bypass Bulgaria completely, rhetoric that is intended to accuse Borisov of deferring to the interests of Western allies over the economic needs of Bulgaria.

Delays to the construction of the Nord Stream 2 pipeline and concerns over China scaling back its gas imports through the newly established Power of Siberia pipeline (potentially citing force majeure due to coronavirus) have likely lowered Russia’s appetite for dispute with Sofia (at least for now).

Regional Energy Diversification Efforts and Imminent Gas Market Competition

Another reason for the reduction in price could be that Gazprom recognizes the new competitive market reality in Bulgaria and the region, related to the role of LNG imports (likely to increase) and import potential for non-Russian Caspian gas (through the Southern Gas Corridor coming from Azerbaijan).  The Bulgarian Government announced, for example, in February 2020 that it would source 50% of its natural gas from non-Russian sources.  Gazprom may have decided the timing was appropriate to flex its muscle (with regard to price reductions) in what is a relatively small volume market – challenging these two sources of competition (i.e., Azerbaijani supplies and LNG imports).  Indeed, on March 11, Bulgargaz requested a renegotiation of the 2013 contract with the SOCAR, Azerbaijan’s state-owned energy company, on account of it not being profitable anymore due to the deal with Gazprom.  Under the contract, SOCAR, was to supply 1 bcm of natural gas annually over a period of 25 years.

In the past, Gazprom leadership has stressed that Russian supplies of natural gas will always be cheaper in Europe.  Although, in practice, this has not always been the case, the recent deal with Bulgaria reflects pressure Moscow likely feels to ensure this perception is not broken.