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Energy needs to give Bulgaria regional advantage[Over]

January 17, 2014 07:59AM

Valentin Stoyanov
EGF Affiliated Expert

Bulgaria fails to bring in the ‘big energy projects’
Over the past two decades Bulgaria has had no success with the so called ‘big energy projects’. The recent failure of NABUCCO was also a failure of the country’s efforts to diversify its gas supplies. The prospects for shale gas exploration and production look similarly grim after a moratorium was imposed by the Parliament in the beginning of 2012.

Over the last few years some global energy players have left the country. E.ON sold its grid company in the north east (one of three distributing companies in Bulgaria) and Enel sold its thermal plant (TPP) in the central south, keeping only its business in the domestic renewables sector. Of course, one might argue that the reasons for these withdrawals are the global restructuring programs of the two companies. In addition, nuclear giants Rosatom and Areva had to cancel their plans for a second Bulgarian nuclear plant (NPP) when their controversial BELENE project was suspended in March 2012. Chevron, another energy colossus, may also remain disappointed if the newly elected National Assembly does not lift a ban on shale gas exploration and production.

The country’s energy sector yet to reach its potential
In the last two decades Sofia has had a quite modest record and a disillusioning experience with so called “big energy projects”. Since units V and VI (1000 MW each) of the sole Bulgarian NPP “Kozloduy” were launched in 1987 and 1991, respectively, it seems that nothing substantial and strategically new occurred in the country’s energy sector. This may sound provocative, but we will try to substantiate it.

For the past decade, there has been a lot of media hype about two big oil pipeline projects planned to cross Bulgaria. Eventually, both the US-backed AMBO and the Russia-backed Bourgas-Alexandroupolis oil pipeline projects vanished. NABUCCO was declared dead, and now the prospects of South Stream look quite grim. That news means no major development has occurred on the gas front either. As for nuclear, the situation is quite blurry but it may be even more bleak than the one with hydrocarbons. Four out of the six reactors of the NPP “Kozloduy” were shut down in the course of the country’s EU accession, and there are signals that a planned life extension of reactors V and VI may be problematic.

For the time being, some steps have been taken and a contract for preliminary work has been signed between Rosenergoatom and EDF, but there remains speculation about a serious delay in extending reactors V and VI. Another unclear point remains: the project for a second NPP near the town of Belene on the Danube River that was blocked by the Parliament almost two years ago. As a matter of fact, there is talk that the newly appointed government may revive the plan, alongside with the project launched by the previous government for unit VII in “Kozloduy”. Some unprepared foreign observers may be confused by the dynamics, but one thing is obvious: the primary reason for this stalemate situation in the Bulgarian energy sector is the high degree of political confrontation both on a national and international level.

So, no significant energy projects were implemented in Bulgaria over the past two decades. Instead, some smaller projects have evolved over the years. For instance, US-based AES launched a TPP with installed capacity of 670 MW in the central south, and other big TPPs were overhauled and upgraded. The country’s gas infrastructure was substantially upgraded between 1998 and 2003, when its capacity was boosted and more than 400 km of pipeline was added. Several gas deposits were developed in the Black Sea shelf which somewhat relieved the national economy from Gazprom’s supply monopoly. In the meantime, over 1100 MW of photovoltaics and ca. 700 MW of wind power was installed over a few years. We can also add the privatization of some assets (grid companies, TPPs, district heating utilities and the oil refinery near Bourgas), but most of these deals are highly controversial. These are more or less the greatest achievements in the Bulgarian energy sector for the past two decades.

Bulgaria’s central energy pillars holding firm
From a strategic and geopolitical point of view the Bulgarian energy sector is based on four pillars:

• The first pillar is the Maritsa basin, with deposits of two billion tones of lignite and three large TPPs. Two of the latter are owned by US companies and the third one, the largest in the region of south east Europe (SEE), is state owned. Located in the central south, the Maritsa basin contributes substantially to the country’s relative energy independence. The TPPs provide baseload to the national economy and the state owned Maritsa East 2 is a substantial exporter of electricity.
• The second pillar is the NPP “Kozloduy”, which still provides up to 40% of domestic electricity production. The older four units (440 MW each) were shut down in December 2002 and December 2006. Bulgaria started its nuclear program in the 1960s and unit I of Kozloduy was launched in 1974, so the country has both experience and potential in this field. Public opinion still favors nuclear energy to a very large extent.
• The third pillar is the gas infrastructure of Bulgartransgaz, a state owned company. This includes transit pipelines with a total length of 945 km, 6 compressor stations with total capacity of 214 MW, the internal gas ring, and the sole Bulgarian gas storage at Chiren. This storage contains ca. half a billion cubic meters of gas.
• The fourth pillar of the Bulgarian energy sector is the biggest oil refinery in SEE, which is owned by the Russian major Lukoil. The refinery has an annual capacity of 9,5 million tons of oil and underwent several modernizations and reconstructions since privatization in 1999.

Much uncertainty remaining ahead
Of course, we must not only focus on physical projects and construction. Lots of significant developments and events take place in the sector. One of these major developments is the high indebtedness of the Bulgarian energy sector. The state owned National Electric Company (NEC) seems to be in very bad financial condition, and some of the state owned companies gathered under the roof of the almighty Bulgarian Energy Holding are also in rough shape. One of the reasons for this is years of mismanagement and the influences of politics. Another is the reluctance of the political establishment to create a more open market environment, which would inevitably push electricity prices upwards but alleviate the indebtedness of much of the sector.

A lot more is to be done. There is still no energy stock exchange in Bulgaria. The long awaited unbundling of the Transmission System Operator (TSO) and NEC is about to be finalized soon. There are prospective areas under exploration where huge quantities of natural gas can be discovered. The renewables sector is growing and it is highly likely that Bulgaria will reach the target of 16% of its gross domestic consumption being comprised of ‘green energy’ by 2020. Meanwhile, a number of old and obsolete energy units will be shut down in the next few years. The TSO has discussed a loss of a total installed capacity of 2175 MW by the beginning of 2015, mainly in coal fired power stations which do not meet environmental criteria and standards. This would inevitably lead to a further decline of the coal industry, mostly in the south west of the country.

Some projects remain likely
One energy project is certain to start soon. This is the “Gorna Arda” (Upper Arda), a hydroelectric cascade in the south that encompasses three hydroelectric power stations with installed capacity of 170 MW. The project will be financed and co-owned by the Austrian firm, EVN, one of the leading investors in the Bulgarian energy sector.

All and all there seem to be “cycles” of activity in the development of the country’s gas infrastructure. After the intensive works between 1998 and 2003, no major gas infrastructure developments took place until 2011. This has been changing gradually, with an array of interesting, though small, projects planned in the gas sector. For instance, Bulgartransgaz will invest some 120 million euros in the reconstruction of four compressor stations. There are also interconnector projects with Romania, Greece and Serbia started. As for South Stream, its future is questionable without exemption from Third Energy Package rules and we are already quite certain that Gazprom has abandoned the projected southern leg (Bulgaria-Greece-Italy) of the pipeline.

Speaking again of the gas sector, the consortium comprised of Total SA, OMV and REPSOL recently started exploration in the giant “Han Asparuh” block of the Black Sea shelf and prospects for commercially viable discoveries seem good. Three ships will explore the 14 thousand square km field in the next few months. This is a very important development with potentially far-reaching strategic and geopolitical effects, since Bulgaria is almost entirely dependent on Russian gas.

The nuclear question
The nuclear sector remains a heated topic. The Belene project for a second Bulgarian NPP on the Danube (2 units, 1000 MW each) was cancelled by the previous Sofia government in March 2012. The newly appointed government has stated numerous times that it intends to revive the project. This, however, depends to a very large extent on the outcome of arbitration hearings dealing with Russian company Atomstroyexport demanding compensation from Sofia for suspending the project unilaterally. The financing issue is also crucial since new nuclear projects are quite capital intensive. Finally, there are always behind the scenes geopolitical considerations.

EU-driven changes are also on the line. The Third Energy Package has not been fully implemented yet with the expected unbundling of the TSO. The Large Combustion Plants directive will play an ever bigger role. The renewables and the energy efficiency targets remain clear.

Can energy provide Bulgaria with a much needed regional advantage?
First we have to leave aside old fashioned, ideological expressions, such as the idiom “energy center of the Balkans”. Can Bulgaria be an energy hub in south east Europe? It is one of the biggest net exporters of electricity in the EU (together with fellow nuclear countries, France and the Czech Republic). For the past few years exports varied between 10 and 12 TWh. Moreover, some of the biggest net importers of electricity in Europe are in the region of SEE (Turkey and Greece, as well as Serbia and the Republic of Macedonia). Sofia has the potential to remain a leading producer and exporter of electricity on the continent. With installed capacity of over 13 GW, the country’s power sector covers a substantial part of the energy deficit in the region. Eight out of the ten biggest Bulgarian companies operate in the energy sector and it represents 16-20% of the GDP. Finally, the country has the lowest domestic energy prices in the EU.

In addition, Bulgaria is an important natural gas transit country. The annual transit amounts to some 13 bcm to Turkey, four bcm to Greece, and minor quantities to the Republic of Macedonia. Moreover, projects for gas junctions with Romania, Greece and Serbia are under way. The junction with Romania will be launched in 2014. Another major development would be an interconnector with Turkey. Furthermore, the capacity of the country’s sole gas storage at Chiren can be almost doubled, and, if approved, a second gas storage in the Black Sea shelf could be launched within a year by the Irish company Petroceltic.

The aforementioned project “Gorna Arda” and massive investments in the oil refinery near Bourgas are imminent as well. Alive and kicking, yet still in the sphere of speculation, remain projects like South Stream and the nuclear proposals (both new NPPs and the life extension of existing facilities). The latter, if realized, would potentially put Bulgaria back on the energy map of Europe.

In the times of Soviet-led trade bloc, COMECON, a quarter of century ago, Bulgaria specialized in electronics, agriculture, tourism and a few other industries. In a modern, strongly interconnected Europe, Bulgaria could once again reinvent a comparative advantage inter alia in the energy sector. Industry and policymakers alike should keep this option strongly under consideration.

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