Clare Nuttall in Bucharest -

Just a day after ordering all work on Bulgaria’s section of the South Stream gas pipeline suspended, the country’s economy and energy ministry revealed on August 19 that South Stream Bulgaria has raised its capital by almost €200m. The tussle illustrates the pressures at play on member states at the Eastern end of the bloc as Brussels and Moscow face off. 

A joint venture with both state-owned Bulgarian Energy Holding (BEH) and Russia’s Gazprom holding 50%, South Stream Bulgaria raised its capital to BGN397.6m (€204m) from BGN15.588m, according to a statement from the ministry. The increase was registered the day after Economy and Energy Minister Vassil Shtonov made an official statement suspending all action on the controversial pipeline. Shtonov said on August 18 that the project could not proceed since it did not comply with European Commission requirements. 

BEH, which holds a 50% stake in South Stream Bulgaria, issued its own statement refuting responsibility for the capital increase. The company said it has “undertaken all necessary actions for freezing the activities under [the] South Stream project until all issues related to the procedure for awarding the engineering, procurement and construction contract have been finally clarified and in compliance with the requirements of EC.” 

That could imply that the cash injection was made unilaterally by Gazprom, which is controlled by Moscow and is the original investor in South Stream, but the possibility of that is unclear. Brussels, which is seeking to reduce dependence on Russian gas as well as support the Ukrainian government, has clashed with Sofia and other CEE states set to host the pipeline, which is planned to carry 63bn cubic metres of Russian gas into southern Europe, bypassing Ukraine's transit system. 

Shtonov says he wrote to BEH on August 7 ordering the company to stop all action on the pipeline, adding that he reiterated the decision at a meeting the following day. The meeting also covered the next steps in bringing the project into line with EU standards. The ministry statement also says that BEH’s executive director wrote to Gazprom chairman Alexey Miller and to South Stream Bulgaria on August 11, warning them “not to take steps to increase the capital and to take no related action to begin implementation of the contract for engineering ... and construction of the pipeline.”

“This action [the capital increase] by the management of South Stream Bulgaria, constitutes a breach of [the] decision of the Minister Vassil Shtonov … to cease all activities in the project to bring it into line with European legislation,” the statement continues. The ministry says it plans to ask the prosecutor’s office to investigate. 

Landfall

Bulgaria’s previous government made South Stream a priority project, eyeing transit fees and cheaper gas, for which Bulgaria is fully dependent on imports from Russia. As relations between the West and Russia have deteriorated, former Prime Minister Plamen Oresharski, whose government resigned in July, reluctantly announced the suspension of construction on the Bulgarian section. 

That decision was made under pressure from the EU, which has upped long-held objections to the project as the Ukraine crisis has deepened. Leveraging the bloc's legislation on energy market liberalization, Brussels insists that the contracts between Gazprom and the host nations must be redrawn, and the European Parliament voted in April to put the project on hold. 

Bulgaria is not the only country to object to the EU stance on South Stream. Serbia, Hungary and Austria are also keen on the €16.6bn project, the first line of which Gazprom still says it hopes to launch in 2015. Moscow's well-practiced skills at splitting the EU were illustrated in June, when Austria's OMV signed up to provide the main hub for the pipeline, despite the ongoing tensions and sanctions spiral.

However, with Bulgaria the spot that South Stream makes landfall from its travels under the Black Sea, Sofia's handling of the situation has drawn particular criticism from Brussels. It has also seen fighting within the country, with domestic opponents claiming the €3.5bn local project cost is inflated. The selection by Oresharski’s government of a consortium led by Stroytransgaz – a Russian company owned by Gennady Timchenko's Volga Group and one of the targets of US sanctions – to build its section of the pipeline only added fuel to the foire. The EU has also launched infringement procedures citing a lack of transparency in the tender process.

Indeed, the capital increase is not the first time that suspicions have risen over Sofia's verbal commitments to put South Stream on hold. Despite earlier pledges, the government was revealed to still be moving forward with the project in late July. Immediately before Oresharski’s government resigned, the Bulgarian press reported BEH was preparing to make a decision on a €620m loan from Gazprom to finance the pipeline's construction. This was nipped in the bud by President Rosen Plevneliev, who said on July 22 that all activities related to South Stream should be suspended pending an agreement with the EU.

The latest news suggests the new, interim government - appointed after over a year of political instability - has yet to get a grip on the situation. Although it will only hold power until October, the caretaker administration is currently embarking on an overhaul of the energy sector. Interim Deputy Prime Minister Ekaterina Zaharieva said on August 19 that a new energy board will be created by the end of the month. 

"The main goal of the energy board is to propose solutions for the stabilization of the sector, which is on the verge of collapse, due to imbalances accumulated as a result of inefficient decisions made under political pressure," Zaharieva said according to Novinite. In addition to the thorny issue of South Stream, the caretaker government is also considering other questions such as reviewing incentives for renewables producers and whether to lift the ban on fracking and allow shale gas extraction to go ahead.