NATURAL GAS AND OIL PRICES WILL INCREASE
If the contract for natural gas transit between Bulgargas and Gazprom is changed according to the Russian side's requirement and payment is effected in cash instead of by the agreed quantities of gas at preferential prices, imported oil and natural gas will be hikes by 8.7-11.3% still in 2006. That was pointed out by the analyses unit of Industry Watch which studied the consequences of the various options of agreements with the Russian Government about which the Minister of Economy and Energy Roumen Ovcharov announced last week. The analysts predict as well that if the contract is changed towards mid-2006 instead of in the beginning of 2007, it would result in a 5% higher current account deficit of Bulgaria's balance of payments or about 0.8% of the gross domestic product (GDP). The reason for that is that the deficit in our country's trade balance is to a certain extent due to the import of expensive fuels.
There are various options. In the most pessimistic case natural gas will be hiked by 10 per cent, claims Lyubomir Denchev, Executive Director of Bulgargas. However, the company's former head Vassil Filipov is of the opinion that the price increase will be about 30 per cent. He reproached Mr. Ovcharov for his participation in the notorious mediator in the natural gas business Topenergy, established back in 1995 by former premier Andrei Lukanov (assassinated October 2, 1996 outside his home). It turned out that Roumen Ovcharov was not protecting Bulgaria's but Russia's interests then and these are facts, Mr. Filipov said.
Now, eleven years later, it is interesting who protects whose interests. If the contract with Russia on natural gas transit is changed in mid-2006 instead of in the beginning of 2007 the effect from the fuel's price hike on the domestic market in the remaining six months of the year will be most strongly felt by central heating companies (about 14% increase of the total annual expenses) and the chemical industry (about 10-12% increase of the total annual expenses), Industry Watch experts point out.
According to Vassil Alexandrov, Executive Director of Agropolychim, the eventual price hike will have an adverse effect on the production of fertilizers and will render it uncompetitive. He recalled that some time ago natural gas price reached USD300/1,000 cu m, and currently it is USD180/1,000 cu m. However, the USA quickly diversified their production by building plants in countries where gas is dirt cheap and are exporting for Europe as well, said Mr. Alexandrov. More than a month ago the Association of Fertilizers and Metallurgical Industry whose members the biggest gas consumers are, asked for a meeting with minister Ovcharov in order to understand how the negotiations were going on. But in the words of Agropolychim's CEO, there is still no answer.
The battle with the Russian gas company is lost in the long run, is the stance of Luchezar Bogdanov from Industry Watch. Under the present scheme for transit, he says, there is a real danger of the EU raising the question if the State was not subsidizing consumers by the cheaper gas sold on the domestic market. He explained also we should consider carefully what concessions to give to the Russian side and what Bulgaria will get in turn.
Under this scheme of forming internal prices in Bulgaria there is indeed subsidizing on the part of the State, an observer of the gas market from London told the BANKER weekly. But it would be quite a different matter if the State collects all due amounts for the transit and leaves only the operational and investment expenses for Bulgargas. With that money from the budget the Government could then cushion the pressure on natural gas and oil prices, what is in fact done in Poland, the Czech Republic and mainly Slovakia. The more so that hardly anyone from the EU would blame us for charging high prices for the transit of Russian natural gas through our territory.
Thus, the problems regarding Russia's pressure to cut down transit fees are entirely Bulgaria's and the Cabinet itself should judge the effect in the country from the reduction of fees and the increase of gas prices. However, Bulgargas managers are adamant that if there is no willingness to come closer with the Russians' stances there is real danger for Bulgaria to remain without gas after the year 2010 due to the shrinkage of the market worldwide. According to Mr. Filipov, however, exhaustion of gas deposits can be observed and no new ones are found. Therefore, Bulgaria should not renegotiate the terms under the agreement with Gazprom.
The Bulgarian Government's policy regarding Russia and natural gas deliveries should be considered within the context of all other big energy projects, dependent on bilateral understanding and considering the macroeconomic effects from the decisions made, Industry Watch analysts believe. They note that the projects for oil and gas transit alone, whose implementation depends directly or indirectly on the agreements in the Intergovernmental Bulgarian-Russian Commission, are worth between EUR6-7BN. These include the oil pipelines Bourgas-Alexandroupolis and Bourgas-Vlyora, as well as the Nabuko gas conduit. Investments of some EUR1.3-1.5BN are expected in Bulgaria, or about 4-5% of the projected total investments in Bulgaria's economy within the next four years. The Bourgas-Alexandroupolis project alone is expected to open 2,300 additional working positions, Industry Watch analysts say. Judging by the study, the effects from the possible changes in the contracts with Gazprom will be concentrated in the short term, while consequences from the investments in oil and gas transit will be distributed in a longer period of time.