VZCZCXRO1437
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSF #1696/01 3551341
ZNR UUUUU ZZH
P 211341Z DEC 06
FM AMEMBASSY SOFIA
TO RUEHC/SECSTATE WASHDC PRIORITY 2997
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 SOFIA 001696 
 
SIPDIS 
 
STATE FOR EUR/NCE MNORDBERG 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG ECON RU BU
SUBJECT: BULGARIA LOCKS IN NEW DEAL WITH GAZPROM UNTIL 2030 
 
Ref: SOFIA 1554 
 
¶1. (SBU) SUMMARY: Bulgaria signed December 18 a deal with Russian 
gas giant Gazprom, guaranteeing Russian natural gas deliveries and 
transit until 2030.  Insiders tell us the price of gas will 
gradually rise 40 percent by 2012 - largely due to the termination 
of the agreement to barter gas in lieu of cash transit fees.  In 
return for Bulgaria's concession to pay higher gas prices, Russia 
will increase the amount of gas transited through Bulgaria to third 
countries.  The Bulgarian government is expected to receive four 
times more in transit revenues over twenty years as a result of this 
increase.  The lack of transparency surrounding the deal, however, 
raises suspicions that there are undisclosed side deals.  END 
SUMMARY 
 
¶2. (U) Following nearly year-long talks, the Bulgarian government 
has agreed with Gazprom on a new gas supply deal to replace the 
current agreement which expires in 2010.  A memorandum to this 
effect was signed December 18 by Gazprom CEO Alexei Miller, Deputy 
Minister of Economy and Energy and Chairman of the BoD of Bulgargaz 
Valentin Ivanov, and the CEO of Bulgargaz Kiril Gegov.  Minister of 
Economy and Energy Rumen Ovcharov, who led the with Gazprom and 
fiercely fought within the ruling coalition to get approval for the 
deal, hailed the agreement as favorable for Bulgaria's macro 
economic stability, saying Bulgaria has won "unprecedented 
concessions" from Gazprom.  Ovcharov has admitted that details of 
the deal will not be fully disclosed at Gazprom's request; the 
Russian monopoly is currently in talks with several east European 
countries. 
 
KEY PARAMETERS OF THE DEAL 
 
¶3. (U) There will be a gradual rise in consumer gas prices over the 
next six years: 
 
* A 40 percent increase of consumer gas prices by 2012. 
* The first increase will occur on April 1, 2007 and will be less 
than 10 percent, followed by another smaller price increase in July. 
 
* The price increase will be highest in 2007.  Additional increases 
will be evenly distributed over 2008, 2009, 2010, and in the last 
two years (2011 and 2012) the increases will be small. 
* Gas supplies will be paid only monetarily, i.e. there will be no 
more barter of transit fees in the form of gas. 
 
¶4. (U) In 2007 Gazprom will begin to increase the amount of gas 
transiting through Bulgaria.  The minimum guaranteed volume of 
natural gas flowing through Bulgaria until 2030 will be 17.8 Billion 
cubic meters per year.  The transit quantity may increase by 5 
Billion cubic meters per year after 2010.  According to the Ministry 
of Economy and Energy, revenues from the increased transit of 
Russian gas will grow to USD 3.1 billion over twenty years from the 
current USD 800 million.  Under the most optimistic forecasts about 
transit, revenues could reach USD 5.2 billion.  The transit tariff 
will increase every year indexed to the EU inflation rate. 
 
¶5. (U) The government has further estimated that the new deal will 
cost Bulgargaz USD 500 million by end-2012 due to increased prices. 
Others put that number closer to USD 750 million.  The government 
claims that losses from the reduction of the amount of transit gas 
through Bulgaria after 2010 could have cost state revenues between 
USD 2.3 billion and USD 4.4 billion if Russia chose to divert its 
gas through other routes.  It appears that consumers will assume the 
burden of the price increase, while the government will retain the 
increased transit fees and not pass on the benefits to gas 
customers. 
 
CURRENT CONTRACT 
---------------- 
 
¶6. (U) Bulgaria currently buys Russian gas under two different 
contracts due to expire in 2010 - one for the direct supply of gas 
and one for gas in exchange for transit.  Bulgaria presently 
receives 1.4 billion cubic meters of gas in barter for gas transit 
at USD 83 per 1,000 cubic meters.  The remaining 1.7 billion cubic 
meters Bulgaria pays at the market price of USD 250-260 per 1,000 
cubic meters.  In this way, the country has managed to keep its 
current domestic prices relatively low, at about USD 170 per 1,000 
cubic meters. 
 
COMMENT: 
 
¶7. (SBU) The long-term contract will mean a long-term dependency on 
Russian gas imports and Russian energy policies.  Bulgaria's deal 
with Gazprom was signed in the absence of transparent public 
discussion, raising questions about who really profits from the 
arrangement.  We have repeatedly pressed senior leaders over the 
past year that Bulgaria should avoid locking itself into long-term 
 
SOFIA 00001696  002 OF 002 
 
 
contracts and must continue to pursue alternative supply routes. 
While the government agrees to the need for energy - especially 
natural gas - diversity (Nabucco, Southern Corridor, Liquified 
Natural Gas), this agreement takes some of the urgency out of those 
efforts. 
KARAGIANNIS