Bulgaria Analytica: How to read the news from the world of gas and petrol and learn from it

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I have always thought that awareness is the foundation of good management practice. However, information in the form of news and analysis is not automatically converted into good findings and hence into good practical and optimal solutions. Unfortunately, in our country, what prevails is the inertia of “stability” understood as status quo reproducing itself, with the lack of analysis of costs and benefits and proactive management on a public and corporate level, rather than the employment of catching-up and breakthrough policies.

Let’s try and read through the news from last week that we cover in our newsletter.

The first item is that margins in processing costs between refineries in America and Europe and the rest of the world have decreased. Markets globalize and integrate.

The second is that the spread between crude oil prices and the price of end products has also been reduced. All over the world. Not in our country, though.

The third piece of news is that the differences between American (WTI) and European (Brent) crude oil benchmarks have increased. Ibid – all over the world, not here.

While the world’s governments have withdrawn from the direct impact on the markets in different segments – upstream, downstream and midstream, at home global trends are either turned upside down or Chinese walls are constructed that isolate us from the world.

It is not only the margins in the refining of crude oil in Burgas that are firmly protected from the competition through a series of “blind” policies: for example, huge investment costs are approved without audit or verification, justifying huge depreciation and accounting losses in the refinery for years to come. The only possibility to exercise pressure is by competition in the wholesale prices of fuels produced by the refinery. Still, there is cast iron protection there too, through excise warehouses and the lack of or highly manipulated competition from imported fuels not only and not so much in the quantities imported or prices. People are looking for the culprit in the cartel and there is no cartel – there is just the playing according to the tune of the market monopoly, behind which is the state.

As a result, while the spread between the prices of crude oil and refined products is shrinking globally, at home it remains at sustained high levels. The state interferes with the market, preventing it to perform and consumers pay an excess of nearly a billion lev every year.

We come to the same conclusion by looking at the discount prices of crude petrol from the European benchmark Brent, by which the Urals type is accounted for as expenditure paid at the refinery in Burgas. The difference between WTI and Brent on European markets is growing as is the spread between Urals and Brent, but the minimum discounts/at least a dollar less than they should be/charged on crude oil imported by the refinery open additional opportunities for exporting revenue from the refinery. The National Revenue Agency know everything and are keeping quiet.

Hence the conclusion that Bulgaria is detached from global trends, and the government appears not to care.

News of the interrupted development of the next stage of the Shah Deniz field produced by the main player BP – 3 is more than natural. Things have changed enormously since 3-4 years ago when Azeri gas was, if not the only, still the main hope for competition to Russian gas and supply diversification.

Recently discovered deposits in the Eastern Mediterranean exceed the discoveries in the Caspian Sea and are closer to Southeastern Europe. In addition, there are findings in the Black Sea and there is the “sea” of natural gas which is teeming towards the region from the global market for liquefied natural gas. All this is happening against the backdrop of a stagnating market for natural gas consumption in Europe.

In summary: Azeri gas has lost its exclusive status and this inevitably affects the economics of the development of new deposits. This in its turn affects the economy and the related infrastructure. The effects are yet to be measured and evaluated.

Good news for buyers and consumers.

The information from the UK that if they win the next election, Laborites and their next government will ban hydraulic fracturing (fracking) in opposition to the efforts and support for onshore oil and gas industry, is not news. The relationship between parties of the left and environmental movements, both in total negation of fracking and in general of the future of natural gas, is not news either. Socialism as well as the uncritical apologetics for renewable energy sources, deprived of any business logic, comes to an end when leftist governments lose their access to public money, i.e. other peoples’ money, in the words of Baroness Thatcher.

Enforcing renewable energy sources outside market logic including by totalitarian bans on competitive or complementary energy sources and removing key segments from the energy chain is the reason behind the declining competitiveness of European companies and European economy. Of course, this is not of great importance to Labor and other socialists; for them it is more important to build new highways to the future and say what is allowed and what is not.

The other two pieces of news are also extremely important, but it is worth reading them in the context of the opportunities open to Bulgaria.

SOCAR is interested in the involvement of capacities from Bulgarian gas storage in Chiren. This is not news. The problem is that many other companies are interested too, but there is no free capacity, at least not enough to satisfy the demand. The extension has also been delayed for seven years now. We are losing hundreds of millions, but it is nobody’s fault, no one responsible for what is happening. Apart from Chiren there are other viable projects for expanding Bulgaria’s gas storing capacity but nothing is being done about them.

The market shift from long-term to spot and short-term contracts has sharply increased interest in gas storage. By this traders can provide products to industrial and individual consumers, exempting them from the need to enter firm contracts and commit significant financial resources to cover peak consumption which is hard to predict. Significantly, each buyer must be ready to buy and sell in order to optimize behavior. Have we seen a dynamic shift in strategy and adaptation to these trends in Bulgargaz? Not really, nor will we see one. As a result, the company is losing its capitalization and the chances of the country to have a national public player in the regional market, as it follows the fate of so many other public companies that were not sold when they were worth a lot of money, i.e. the Balkan Airline syndrome.

The last piece of news is that Asian consumers are using listing from the British NBP hub instead of regional Asian indices. This reveals the complete vanity of the Bulgarian anguish surrounding our hublet but also the vanity of a number of other European governments and companies that believe that it is their country that will become a hub and so obtain business from it.

The global gas market is integrating according to a model that is very similar to the model of the market of crude oil, which certainly means that out of the current 6-8 reference points for trade in Europe only one, maximum two, will remain but this will not exclude the possibility of buyers and sellers using the benchmarks of more liquid markets, such as the US for example and the Point Henry Hub. The above is for the information of my Bulgarian colleagues who so very wisely, in their opinion, rejected as risky the tender for the supply of natural gas, which followed the Henry Hub formula: price plus premium plus transport.

The main conclusion is that Bulgaria stubbornly refuses to globalize. However, as it comes to objective processes and trends on whose development we have no control, we are left with a negative balance of damages/benefits to which we are doomed, given that we miss our chances to read correctly the news of the world.

This is no longer an objective, external process but the result of subjective processes, determined by the human choice of Bulgarian citizens.