GIF Inside Story: IGB launch in 2021 to change Balkan supply dynamics

Author: Luka Dimitrov

2020/09/15

LONDON (ICIS)--The 3 billion cubic meter (bcm) per year Bulgaria-Greece Interconnector (IGB) project aims to start commercial operations by July 2021, Teodora Georgieva, chief executive officer/executive director at project company ICGB told ICIS.

“From the point of view of the regulatory requirements, the project company also has a time commitment to the natural gas traders, who have reserved capacity in IGB, which is July 1, 2021. The Exemption decision specifies a date of commercial operation no later than 1 July deadline,” Georgieva said.

Bulgarian prime minister Boyko Borissov announced in May that IGB is expected to be operational by the first half of 2021. Capacity can then be expanded to 5bcm/year depending on market interest.

The IGB is designed to bolster Bulgaria’s gas supply diversity and end its dependence on Russian producer Gazprom.

The pipeline will allow access to Azeri gas from the 10 billion cubic metres (bcm)/year Trans-Adriatic Pipeline (TAP) and potentially to LNG at the planned Greek terminal in Alexandropoulis. TAP will connect to the Trans Anatolian Pipeline (TANAP) at the Greek-Turkish border and run west to Italy via Albania, bringing volumes from the Azeri Shah Deniz II field.

In 2019, Bulgaria imported nearly 500 million cubic meters (mcm) of gas from alternative sources, about one sixth of its 3bcm annual demand.

The planned diversification has already born fruit for Bulgaria as its state-owned supplier Bulgargaz in March was able to negotiate a 40% price reduction with Gazprom under a new hub price-based formula. The decrease was helped a prior agreement between the European Commission and the Russian company.

Under the previous long-term supply contract Russian gas coming into Bulgaria was priced on oil derivatives.

In the new formula, the bulk of the component will be based on regional gas markets, although it is not clear which hub will be used.

Georgieva said ICGB is striving for the launch to happen in 2021 but added that the date of commercial operation is not entirely related to Azeri gas, deliveries of which will start in December this year. “This is only one source of natural gas. We expect natural gas to be transported through the IGB from a variety of sources, including LNG,” she said.

The the spread of coronavirus affected the construction, delaying it by at least 2-3 months, and ICGB is doing everything possible to compensate them.

“We use all possible levers to avoid delays. We are putting enormous pressure on the construction to be in line with the implementation of the Southern Gas Corridor and other strategic projects in Bulgaria and the region. Our strategic partners monitor the process very seriously, and we regularly inform them about the current status of construction activities,” explained Georgieva.

On 27 August, ICGB, received the first €30m tranche from the European Investment Bank (EIB) for the construction of the pipeline, the company said in the beginning of September.

Booked capacity

Georgieva also told ICIS that US company Linden Energy has reserved 276 million cubic metres (mcm) per year capacity in IGB.

She added that Linden Energy intends to use the capacity to supply Bulgaria with regassified LNG delivered to Greece adding “we expect to sign a gas transmission agreement for 276mcm per year.” ICIS understands the transmission agreement is set to be signed by the end of this month.

“An important stage of the project was the signing of the gas transmission agreements, which secured the ICGB revenues in the long run, namely the function of long-term reserved capacity,” the ICGB executive director explained.

According to Georgieva, ICGB has reserved 1bcm of capacity per year based on the contract between Bulgargaz and the Azerbaijan state oil and gas company SOCAR. This contract is for 25 years and is key for Bulgaria, because with this 1bcm volume we become part of the Southern Gas Corridor and connect with TAP and the Hellenic Gas Transmission System Operator (DESFA).

“With these quantities per year from Azerbaijan we will change the appearance of the market in Bulgaria where total consumption is about 3bcm per year,” said Georgieva.

Greek public gas corporation DEPA and the Italian energy group Edison reserved 200mcm/year and 100mcm/year of capacity respectively.

“Linden Energy, DEPA, Edison and SOCAR are completely new players to the Bulgarian gas market and are entering the country for the first time, which is a great achievement for the state in the energy sector. The project is defined as a game changer because it allows new traders to enter the Bulgarian gas market,” said Georgieva.

The ICGB executive director stressed the ICGB is obliged to provide access to the gas pipeline to all traders in accordance with European requirements.

“We will also have significant synergies with the future LNG terminal in Alexandroupolis. It will be 60 km from our entry point in Komotini.”

On 24 August, the Bulgarian gas network operator Bulgartransgaz finalised a 20% stake in Gastrade, the developer of the planned Alexandroupolis LNG import terminal in northern Greece.

Georgieva also said that gas from the terminal in Alexandroupolis will pass through the IGB to Bulgaria, and potentially Ukraine.

“This is a terminal that will allow natural gas to reach nearby countries in the region - Ukraine is strategically important and there is significant market potential. Colleagues from Hungary and Romania expect these projects to be implemented as part of the Vertical Gas Corridor. Romania is also interested in supplying gas from various sources and routes,” Georgieva said.

Balkan liquidity

The construction of the gas link is set to boost the liquidity on the Bulgarian Gas Hub Balkan, according to Georgieva.

“I definitely think that the IGB will increase liquidity of the natural gas market and the gas exchange in the country.”

The liquefied natural gas terminal near Alexandroupolis will also contribute significantly to the efficient use of IGB capacity, and with increased demand for transmission capacity, we can increase the capacity of the interconnector by building a compressor station, added ICGB executive director.

However, in a separate development, Bulgarian regulator EWRC decided in August to not rise the price of natural gas from 1 September. Several market participants told ICIS on 3 September that this decision could put financial pressure on domestic traders dealing on the Balkan Gas exchange and hinder market liberalisation.

Each month EWRC sets out the regulated price of gas to end consumers, serving as a reference price for gas traders on the Balkan Gas Hub exchange.

At the end of August, EWRC proposed the price of gas from 1 September, to be Bugarian Lev (Lv)21.5/MWh, or €10.97/MWh - a 15% increase compared to Lv18.67/MWh for August 2020.

EWRC said on 2 September they had received a letter from incumbent Bulgargaz requesting “termination of the administrative proceedings for setting a September gas price due to an order of the Minister of Energy to inspect the manner in which Bulgargaz formed the price of natural gas for September”.

On 31 August, Bulgargaz executive director Nikolay Pavlov told Bulgarian National Radio (BNR) the reason for the higher price of gas for September was due to a more than 51% increase in prices on European gas markets.

The Dutch TTF month+1, the most traded gas contract in Europe, rose by €2.925/MWh (42%) from the first to the last trading day in August.

Bulgargaz in March changed the methodology for calculating regulated prices to reflect price movements in European markets, Pavlov added.

The changes were prompted by a negotiated 40% price discount in a supply contract between Russia’s Gazprom and Bulgargaz backdated to the start of negotiations last summer. The new agreement moved Bulgaria away from oil-indexed supply to a formula based partly on crude derivatives, but with the price being majority-derived from European hub prices.

Several market participants warned EWRC‘s decision not to align domestic prices with the rest of Europe from 1 September could undermine the market principles and negatively impact liberalisation efforts.

“The price freezing creates a legal vacuum and a real risk of blocking the financial flows in the sector, which are several million levs per day,” one said. “In addition, such state interference in the work of the independent regulator like EWRC could provoke EU inquiry and be a direct blow to gas market development.”

“There are many gas traders that cannot afford to sell gas at significantly lower prices, and this measure could financially burden some of them in a long run, if a decision for pricing is not announced soon,” a local gas expert said.

“This state involvement in the gas sector is unprecedented, illegal and anti-market. It could drain the liquidity on the Balkan Gas Hub and at the same time slow down the market liberalisation,” a trader told ICIS. EWRC did not respond to requests for comment by phone or email.