Global Economics

Bulgaria Rethinks Pro-Russian Energy Policy


Long one of Russia's most reliable energy customers, Bulgaria is now reconsidering its dependence in favor of diversifying suppliers and investors

Bulgaria's energy minister recently likened his country's energy sector to the way English football used to be played – "with lots of energy, lots of running around the field, and comparatively little efficiency in achieving its goals."

It's been that way for a long time. Critics say that under the previous Socialist-led government, the industry's development was shaped more by the country's close bonds with Russia than by the needs of the national economy.

Finance Minister Simeon Dyankov recently said that until now Bulgaria's energy landscape has been dominated by the "anything Russia wants" principle.

Until, that is, a new government, installed after July elections moved recently to freeze the country's participation in three major projects dear to Moscow: a new nuclear plant in Belene, the South Stream gas corridor, and the Burgas-Alexandroupolis oil pipeline.

Although the Kremlin has urged Sofia to make a decision as soon as possible, the government is taking its time. Some analysts say it is also searching for a way to loosen Moscow's grip on its energy industry.

SECOND THOUGHTS

Bulgaria is extremely dependent on Russian gas and oil. In 2007 Moscow provided 92 percent of the roughly 4 billion cubic meters of natural gas delivered by Bulgargaz, the state-run gas monopoly. Bulgaria's Neftochim Burgas, the biggest refinery in the Balkans, is controlled by Lukoil (LKOH.RTS), and the country's Kozloduy nuclear power plant uses Russian fuel.

Bulgaria was one of the Soviet Union's closest satellites during the Cold War, and Sofia continued to nurture close ties with Moscow after the democratic changes in 1989. But those good relations with the Kremlin didn't help in January when Moscow cut off gas supplies to Europe for almost a month. The gas crisis hit Bulgaria hard, leaving tens of thousands of homes without heat and forcing local schools to close.

In the face of an economic downturn, the current cabinet has begun to scrutinize closely the costs and benefits of the three major energy projects.

The government intends to reduce its 51 percent stake in Belene, a project whose soaring costs the government estimates could reach 10 billion euros. Sofia's goal is to finance the Belene nuclear plant entirely by private funding, without state guarantees (although that approach could further entrench Russia, as investors from that country have shown interest in picking up the released shares).

Some experts insist that a new 2,000-megawatt power plant is unnecessary in any event.

"The construction of Belene is not justified, as there is no domestic need for such an enormous facility," said Ruslan Stefanov from the Center for the Study of Democracy think tank. Given that Bulgaria's demand for electricity is unlikely to increase, Stefanov said, it's not reasonable to build a second nuclear power plant just to export electricity.

Meanwhile, RWE (RWEG.DE), a key German investor in Belene, has walked away from a preliminary agreement it had with the previous government. The company, which had a 49 percent stake, withdrew due to the global economic crisis and delays in the project.

"The one and only investor in the project ran away. That goes to show there's no interest in Belene," said Martin Dimitrov, chairman of the parliamentary committee on the economy and energy and a member of the right-wing Blue Coalition, which warns that any further financial engagement in the project could cost the state its economic stability.

This week, Foreign Minister Rumyana Zheleva told the Associated Press that the government is seeking greater involvement from American companies in large energy projects, including the Belene plant.

So far the cabinet has given mixed signals on the South Stream gas pipeline. Earlier, Economy and Energy Minister Traicho Traikov said Bulgaria would take part in South Stream only if it is profitable for the country. Then, he confirmed the country's participation in the pipeline after an October meeting with Russian Energy Minister Sergei Shmatko.

However, Traikov said several questions remain, including the volume of gas transported and whether Bulgaria's current transit network would be used for the purposes of the Russian-backed system.

South Stream got a boost when Turkey signed on to the project in August, and on 14 November the Slovenian energy minister signed an agreement to cooperate with Russia on the Balkan branch of the pipeline. Moscow proposed South Stream several years ago as a new route for Central Asian and Russian gas that would bypass the existing pipelines across an unreliable trading partner, Ukraine. However, after his meeting with Shmatko, Traikov denied speculations that the pipeline might now be re-routed away from Bulgaria and be laid across Turkey's Black Sea waters instead.

The fate of Burgas-Alexandroupolis also appears uncertain. The government is assessing the technical requirements and the environmental impact of the pipeline meant to carry Russian oil from the Bulgarian Black Sea port of Burgas to the Greek Aegean port of Alexandroupolis. Although, as pipelines go, it is relatively inexpensive, at a cost of around 1 billion euros, it has raised environmental concerns.

"An expected annual profit of $30 million is a ridiculously small amount of money, considering the possible ecological risks for tourism that the pipeline poses," Dimitrov said.

A SAFER DISTANCE

Many observers say the review of the projects marks a shift in Sofia's position.

"By all means this [freezing of the projects] is an attempt to get distance from Russia," said Vessela Tcherneva, a senior policy fellow at the European Council on Foreign Relations and head of its Sofia office. "At the moment the Russian lobby is in a weaker position than it used to be during the time of the previous cabinet," she said.

Petar Ganev, a researcher at the Institute for Market Economics in Sofia, said the state seems set to reduce its energy dependence on Russia. "At the moment [the government] is looking for a way to be more independent. We're about to see if words will translate into further actions," he said.

Foreign Minister Zheleva told an energy seminar in Sofia that the government is "working on all possible alternatives" in an effort to diversify its gas supply.

Dimitrov, the member of parliament, said the government's decision should be pragmatic, not ideological. "The debate whether Russia is good or bad is pointless. The important thing to do is to reduce our dependence on a single pipeline," he said.

The EU-supported Nabucco pipeline, seen as a direct rival to South Stream, offers one opportunity for energy diversification. The government has repeatedly declared its participation in the 3,300-kilometer pipeline, designed to bring gas from Caspian region to Austria, a priority.

"We shouldn't let Russia twist our arm, despite our energy dependence. It's all a matter of diplomacy because Bulgaria has to protect its interests," Dimitrov said.

But even if Sofia were to strike out on a different path, independence from Russia is a long way off.

"It's a matter of how far we can go in distancing ourselves from Russia. Let's not forget that currently the fuel for the Kozloduy nuclear power plant is supplied by Russia, and Bulgaria is almost 100 percent dependent on Russian gas. So to some extent we should comply with some of Russia's wishes," Tcherneva said.

While Bulgaria reviews its further commitment to the projects, it hasn't officially abandoned any of them. However, some analysts argue that freezing the projects is just the first step.

In any event, the recession may make the decision for the government.

Both Tcherneva and Dimitrov said Bulgaria has neither the money nor the expertise to manage energy ventures of such a scale.

"At the moment the government's hands are tied due to the bad economy. The state can't promise to support such grand projects, when it just doesn't have the money," Tcherneva said.


Steve Ballmer, Power Forward
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