Link to original in Bulgaria Analytica
Two events overshadowed the geopolitical landscape on the eve of President Trump’s visit to Poland to attend the Three Seas Initiative Summit. The TSIS is a joint Polish-Croatian project, launched in 2016, with the aim of strengthening trade, infrastructure, energy and political cooperation among countries bordering the Adriatic, the Baltic and the Black seas. Twelve countries are members: Poland, Hungary, Czech Republic, Slovakia, Romania, Bulgaria, Lithuania, Estonia, Latvia, Croatia, Slovenia and Austria.
The fact that the American President will preach the case to CEE leaders for US LNG imports comes as no surprise, yet there is a hidden context and a more complex backdrop against which both the expectations and the deliverables of the visit should be judged.
The Case for US LNG gas
Washington has long insisted that US LNG exports should give CEE countries the chance to part with total dependency on Russian gas. Some have already started profiting from the new option with the first cargo delivered to the Swinoujscie terminal in Poland in June. Croatia is speeding up work on its LNG terminal on the Krk island. Most of the CEE gas markets are interconnected, and in extreme events could use LNG gas to balance domestic supplies and emergencies through LNG terminals in Poland, Lithuania, Greece and Turkey as well.
Both US Cheniere and Tellurian have stated their RAW capacity to compete for the CEE market and bite market shares off Gazprom.
Yet the road is uphill and certainly not offering an easy ride to new comers to the EU gas market. Regardless of President Trump’s rhetoric in support of US LNG, the size of its potential future share in the CEE and EU, will largely depend on its commercial appeal – its competitive price edge, flexible terms and on its resolve to design and implement a more aggressive market strategy with access to end users. There are hidden barriers and no level playing field for competition with Gazprom, which might easily prove President Trump wrong.
After all, Gazprom has two key allies in the battle against US LNG – the first is privileged terms under long-term gas supply and transit contracts, established transit routes, often negotiated at intergovernmental level. Even if prices and quality are competitive, importers of Russian gas have developed over time an addiction to their sole supplier, which stifles both gas market liberalization and diversification. The purchase of gas in the CEE is rarely done through open and competitive tenders and there is heavy political bias.
The second is Gazprom’s North Stream allies, as more Russian gas flows into Germany. This could turn the odds against LNG gas when and if the German, French and Dutch partners of Gazprom start preferentially trading and brokering Russian gas against US LNG in the CEE market. So far, Gazprom’s partners in the North Stream-2 project have not identified any of the US gas exporters as strategic source partners in the EU gas market.
Sales of US LNG in Germany, France or the Netherlands, in substantial volumes, are still yet to happen. EoN signed in 2015 a 20-year contract for imports of US LNG, but the first sizeable quantities are yet to arrive.
While North Stream-1’s objective was to secure Gazprom’s gas flows into Germany, sparing it the Ukrainian transit risk – real or perceived – one of the key goals of North Stream-2 is to stave off US LNG in EU markets. EU companies will be extending credit lines, secured against future Gazprom gas deliveries. The scheme does not provide for any tangible role for US LNG gas.
The European Commission’s role
The European Commission should be able to play an honest broker role for US LNG by insisting on market integration, liberalization and diversification. There is little, however, the Commission could do to specifically promote the case of US LNG imports. Furthermore, President Trump has gone to extremes in alienating key EC leaders, making preaching the business case for US LNG to EU politicians substantially less persuasive.
The EC is trying to walk a fine line between the core interests of CEE countries for better market mix and greater diversification away from Gazprom’s domination and the need to accommodate governments’ support in France and Germany for North Stream-2 and more Russian gas imports. Given recent hard talk between President Trump on one side and President Macron and Chancellor Merkel, on the other, as well as the unfolding Russia-gate and the US President’s sympathy for Vladimir Putin, which gets on the nerves of many East Europeans, it is less than certain that the visit to Poland and the message that Donald Trump will deliver will add political weight to the commercial appeal of US LNG in the CEE or in the EU in general.
The North Stream Tug of War
A little over a month ago, the European Commission sent out a letter to all 28 member countries, requesting a mandate to negotiate with Gazprom the terms for application of EU law to subsea segment of the North Stream-2.
Bonn’s belief that the countries of Central and Eastern Europe are too dependent on Germany’s financial, trade and political clout, which will leave them no choice but to swallow their pride and let North Stream go, is hardly the ultimate case for political wisdom.
The EU energy ministerial meeting, held last week, has been used by the Commission to launch a new draft compromise on North Stream’s compliance with EU law, suggesting that third-party access will be honored should other Russian gas exporters, different from Gazprom, join in use of the pipeline. Brussels elegantly passed the ball into the Kremlin’s court, nurturing fresh hopes among Gazprom’s domestic competitors that they are welcome to trade directly in the EU gas market. The chances are slim that the Commission will be able to convince the Russian government to end Gazprom’s sacred export monopoly. But the new move will certainly add ammunition to Gazprom’s strong opponents in the internal Russia debate. Sooner rather than later, the Kremlin will have to choose whether it is more interested in gas revenues’ total in the budget or in sustaining Gazprom’s exclusive role as a foreign policy lever.
The Balkan Hub Case
Bulgaria has so far abstained from expressing an opinion on North Stream-2, careful to stay away from the hassle, fearing negative impact on its bilateral projects with Gazprom. This was the case with the March 2016 letter by eight EU member states to European Commission President Jean-Claude Juncker, opposing the North Stream-2 project. At the very last moment the Bulgarian government chose to pull out and refused to sign.
Bulgaria’s reaction reflects a degree of policy capture stemming from Gazprom’s total control on supplies and routes (effectively 100 percent).
Bulgaria’s government, headed by Boyko Borisov, holds no secret that it is willing to accommodate Gazprom’s interests. This policy line went on unabated under Ognian Gerdjikov’s caretaker government, in the formal response to Gazprom’s proposal for its anti-trust case settlement. Bulgaria was the only country among the initial nine countries in the scope of the anti-trust case supportive of Gazprom’s version.
An identical storyline follows the recent request from the EC for a mandate on North Stream.
There was not a single line in the Bulgarian media, with few notable exceptions, on the intent of the government. More light was shed, due to coverage of the EU energy ministerial event by the Russian media. An article in “Vedomosti” alluded to the fact that Portugal and the countries of Eastern Europe have been favoring giving a mandate to the EC, while France and Germany have expressed reservations.
It has long been a Bulgarian tradition, when faced with complicated and divisive issues at the EU level, to keep a low profile and follow the mainstream. Given the recent track record, however, the muted reaction of the Bulgarian government might backfire.
A leading motive has been to not undermine the chances of the Balkan hub – the pet project of Prime Minister Borisov. In his interpretation it relies almost totally on supplies of Russian natural gas.
A publication in Kommersant Daily ascertains that Energy Minister Petkova signed a binding ‘road map’ with Gazprom on a mini-South Stream version. This has been confirmed by statements made by the Hungarian Minister of Foreign Affairs and Trade Péter Szijjártó, quoted in the website of the Hungarian government: “Bulgaria and Serbia have already signed the required agreements, according to which the financing of domestic development projects must be established by the end of this year and the required permits must be acquired by the end of 2018 to enable the pipeline from Serbia to Hungary to begin operations by the end of 2019, carrying up to 8 billion cubic meters of natural gas to Hungary if required.”
Following the failure of South Stream, Gazprom is skeptical that Bulgaria would “clear” the project through the EC. Due to Gazprom’s lack of will and resources to finance the construction of new transit capacities on the territory of Bulgaria and Serbia, the Bulgarian government has agreed to implement and finance the necessary upgrades in its gas transmission system in order to allow the transfer of not only 8 Billion cubic meters of gas destined for Hungary, but an additional 3 billion for Serbia and new quantities for Austria – all together up to 15.4 billion cubic meters, as indicated by Prime Minister Borisov.
There is a high probability that the investment and project risk in such an undertaking would not be successfully managed by Bulgartransgaz, solely based on back-to-back transit contracts with Gazprom in different countries. The European Commission will hardly allow an infringement of the Third Directive as upgrades in pipelines would not ensure equal access and equal treatment of gas from “third parties”, including from US liquefied natural gas.
The Balkan hub is a political project, an emanation of ambition and dedication, a triumph of emotion over reason, which implies a strong likelihood of squandering of public funds and rushing through preliminary project feasibility studies.
Against this backdrop, President Trump’s proposal to assist US companies in selling more LNG to the CEE would imply that Bulgaria first develops its interconnectors and secures capacities at LNG terminals in the region. But most importantly, that the country strips Gazprom of its monopoly status and local traders and consumers buy/sell natural gas in open and transparent tenders – where US LNG could compete.
The final decision on the North Stream-2 project, due later in the year, will have immediate repercussions on Gazprom’s plans to enter the Southern Gas Corridor in Turkey and then cross into the EU – into Greece or Bulgaria.
Whereby the North Stream will shift almost 10 billion euros in potential benefits from the CEE countries to Germany and its neighbors, Turkish stream will deprive Bulgaria of $100 million each year, even at the current heavily subsidized Gazexport transit tariff rates.
Judged against the forecasted gas glut in the global gas market North Stream – 2 looks like an increasingly obsolete and geopolitically biased project. Countries with access to the global LNG market are the first to feel the boon of excessive supplies – the rest, relying on pipeline gas and long-term oil indexed contracts, will lag.
The markets would ultimately decide, not the politicians. The best Mr. Trump can do is to make sure there is a level playing field for US LNG exporters in the CEE and EU in general and that Gazprom does not continue to enjoy exclusive privileged terms for transit and trade. And this a most reasonable and legitimate US expectation of it allies and partners – a call Europeans should heed.