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Local Gas War in Bulgaria Between State and Gazprom-Owned Distributor

This is a strange one indeed especially as its not clear what side Gazprom is on

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Private Bulgarian natural gas distributor Overgas Inc, the only competitor of state-owned Bulgargaz, has been threatened with the loss of its gas distribution licence after the local market regulator launched on January 6 an extraordinary investigation into its wholly-owned subsidiary Overgas Networks.

The sudden regulatory check comes after a week of curious developments, resembling a war between the Bulgarian state and Overgas, which even included an accusation by prime minister Boyko Borissov that Overgas had plotted against the government. Russia’s Gazprom, which owns 50% of Overgas and supplies some 3bn cubic metres of gas a year to Bulgaria, more than 93% of its entire consumption, has been also involved.

The Energy and Water Regulatory Commission (EWRC) said in a statement it will check the financial condition of Overgas Networks as well as how it has been fulfilling the obligations stemming from its licence. The regulator has the right to fine the company or even strip it of its licence if it finds irregularities.

Actually, Bulgargaz, which delivers 90% of locally consumed gas, buys more than 93% of this total from Gazprom, while the remainder is domestically produced. Overgas, which delivers gas to some 55,000 households and about 3,000 corporate clients, buys all its gas from its Russian shareholder for 10% less than Bulgargaz pays.

The row started unfolding late on December 30 when Bulgargaz CEO Zhaklen Koen told local media he had received a copy of a letter from Gazprom to Overgas, in which the Russian gas major said it was stopping supplies to Ovrergas as of January 1.

Overgas, whose other 50% owner is local businessman Sasho Donchev, denied receiving such a letter. On January 2, it said that Gazprom confirmed the sudden halt as late as after 5pm local time on December 31, saying just that it could not fulfil the order.

Meanwhile, Overgas reached an agreement on gas supplies with Bulgargaz so as not to interrupt deliveries to some 200,000 people. It told its corporate clients to go directly to Bulgargaz. At the same time, the state-owned firm said it had been assured by the Russian corporation that it would receive the additional quantities needed to cover the needs of its clients.

Borissov’s plot allegation made on a bTV morning show on January 4 came after other state officials hinted in December at unpaid debt as the reason for the halt in gas supplies. On January 2, Overgas published a statement, saying it had no outstanding debts either to its Russian partners or to other lenders.

To support its claim, Overgas said on January 7 it had paid Bulgargaz BGN17.5mn (€9mn) in advance for gas supplies in January.

Moreover, Overgas has hinted that Bulgargaz and the state are trying to steal its business.

In the January 4 bTV interview, Borissov described Overgas’ statements and explanations as “insolent”. He claimed that the company’s failure to announce the halt in gas supplies earlier had put at risk the whole energy distribution system of the country, which could have collapsed if all Overgas clients had switched to electricity on New Year’s Eve.

Gazprom’s role

There has not yet been any reasonable official explanation for the reasons behind the conflict. However, many theories have been developed by local media and analysts.

It is important to note that the row unfolded about a week after a report in Capital weekly claimed that Gazprom had agreed to sell its 50% stake in Overgas to Donchev by the end of April.

Ilian Vassilev, an analyst and a Bulgarian ambassador to Russia from 2000 to 2006, told Nova TV on January 4 that by halting direct supplies to Overgas, Gazprom will significantly reduce the value of the company just before the sale of its stake. However, this will also make the company less attractive to potential western European investors, which could otherwise jeopardise Gazprom’s dominance in Bulgaria’s gas sector. Moreover, a western European entry into Bulgaria’s gas sector could hurt Russia’s plans to relaunch the stalled South Stream gas pipeline and/or the Burgas-Alexandroupolis oil pipeline projects.

This theory is confirmed by a letter to the European Commission sent by Donchev on December 23 and quoted by EurActiv. In the letter, Donchev warns of abuse of Gazprom’s dominant position at the upstream supply level and a risk of serious harm to competition.

“Any interruption of supplies by Gazprom Export, even for a short period, would lead in all likelihood to the permanent extinction of Overgas as the only remaining competitor in Bulgaria," Donchev wrote, as quoted by EurActiv.

Dontchev has also revealed that on December 21, Gazprom’s deputy chief Alexander Medvedev warned him of the upcoming halt in supplies as of January 1, irrespective of the fact that its contract expires at end-2017.

“Overgas suspects that [the alignment of interests between Gazpom and Bulgargaz] is politically motivated by Russia’s desire to reanimate the South Stream project in light of current tensions between Russia and Turkey," the letter reportedly says.

EurActiv also quotes another letter to the EC, dated December 30, in which Donchev claims that the halt of gas supplies is an abuse of a dominant position and urges the body to apply article 8 of Regulation 1/2003, which states that the Commission may on its own initiative order interim measures where there is the risk of serious and irreparable damage to competition.

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