Sanctioned Russian National and ‘Cosa Nostra’ Company to Build ‘Turkstream’ in Bulgaria

Nikolay Marchenko

The sanctioned by the United States Trubnaya Metallurgicheskaya Kompaniya (OAO “TMK”), a manufacturer and supplier of steel pipes, owned by billionaire (No.29 on Forbes Russia with USD 2.2 billion) Dmitry Pumpyansky will build “Turkstream 2” in Bulgaria. TMK is in a consortium with the Italian Bonatti S.p.A., linked with the legendary organized crime group “Cosa Nostra”, about which Bivol already wrote. The Saudi Arkad consortium, a leader in the Middle East won the tender, but it was announced this week that it had not filed the documents on time. On the other hand, the European Commission (EC) does not see any point at all in the project launched by Bulgartransgaz (BTG), an official letter by European Union (EU) Commissioner for Energy and Climate Action Miguel Arias Cañete, sent to Bivol, reveals. Bulgarian Deputy Prime Minister Tomislav Donchev says that Sofia would not even ask the EU for a “green light”.

In 2015-2016, the Russian state bank Vneshtorgbank (VTB), known in Bulgaria with its investments in tobacco manufacturer Bulgartabac, the telecom BTC and the now-collapsed private lender Corporate Commercial Bank (CCB) bought 13.44% of TMK’s shares. The money went to repay TMK’s debts. In 2017, however, TMK bought the VTB package back.

In March 2019, TMK agreed to sell its American subsidiary to the Italian company Tenaris. However, the planned initial offering of shares (IPO) was canceled due to the publication of the so-called “Kremlin Report” by the US Treasury Department suggesting sanctions against people close to Russian President Vladimir Putin.
In March 2019, TMK, together with the Italian Bonatti S.p.A., had rented an office in Sofia, Bivol learned from its sources in the energy sector. Despite the advice of their consultants, the Russians and the Italians had not wished to register a Partnership under the Obligations and Contracts Act in the Trade Register. They had been waiting for the Bulgarian State-owned gas grid operator Bulgartransgaz’s (BTG) decision on the winning bidder in the “Turkstream” competition.

When the Russians and the Italians had learned the news that the Saudi consortium Arkad won, they had been furious. Obviously, they had been promised to be ranked first. At the same time, they had been appalled that the Saudis had no experience in the region and could not submit their tender documents on time.

In Romania, TMK has owns the TMK Artrom metallurgical plant in the city of Resita. TMK Bough the plant in 2008. Then, the fiscal year ended with a loss for the company of EUR 13.43 million.

Their turnover has doubled in ten years – to RON 1.4 million or EUR 288.6 million, according to data for 2018. Last year’s profit was RON 55.56 million, or about EUR 11.6 million.

Urgent tender for the Bulgarian section

On April 3, 2019, the Saudi-Italian consortium Arkad won the “race” against DZZD Consortium Gas Development and Expansion in Bulgaria, comprising Italy’s Consorzio Varna 1 (established by Bonatti Group and MAX STREICHER S.p.A.) and the Bulgarian branch of the Luxembourg-registered Completions Development. The cause of the loss is not the Italians’ ties with the Mafia, but their high price of EUR 2.6 billion, against the EUR 1.1 billion of the Saudis.

On May 28, however, the Head of BTG, Vladimir Malinov, announced that Saudi Arabia has been disqualified because Arkad had not submitted the paperwork required for signing the contract within the legal deadline. Thus, one of the leading companies in the Middle East lost the project despite offering an acceptable for Bulgaria price, while the controversial pair TMK – Bonatti emerges as the winning bidder.

As Bivol wrote on April 3, BTG announced the procedure in December 2018. The public tender for the 484 km pipeline line was worth BGN 2.286 billion, excluding VAT.

In March 2019, the cost of the project was already BGN 2.8 billion, excluding VAT, with two compressor stations and an 11-kilometer connection with the Turkish border. At the same time, the project had its first jobs openings with 350 people needed for excavations (“rescue archeological research”) along the route of the “Turkstream” pipeline near the western city of Vidin, as announced on March 20 by the director of the Regional History Museum in Vidin, Fionera Filipova, in an interview with the Bulgarian National Radio.

Is Dmitry Medvedev pushing for “Turkstream 2” in Bulgaria?

Only ten days after the visit of Russian Prime Minister Dmitry Medvedev to Sofia (accompanied by Energy Minister Alexander Novak and Gazprom President Alexey Miller), on March 14, 2019, the BTG’s website published a protocol on the work of the Commission in an open procedure under the Public Procurement Act (PPA).

The document had been sent to the three participants – DZZD Consortium Gas Development and Expansion in Bulgaria, the Association between “Industries Fovallkozo Zrt.” and “Industries – KVV Kivitelezo Zrt.” and the Consortium Arkad.

On April 3, BTG announced that it had “successfully completed the public procurement contract for the contractor selection. “After conducting an open procedure under the PPA, the commission appointed by the assignor ranked the participant Consortium Arkad first and proposed the same to become the contractor”.

The US Bloomberg Agency drew attention to the words of Energy Minister Temenuzhka Petkova about a BTG deferred payment scheme, where the builder will receive an advance of BGN 250 million and a percentage of the projected transit fees, which are currently estimated at about BGN 340 million per year until 2040.

Saudis and Italians around ENI

The Consortium that lost the project for the construction of “Turkstream 2” in Bulgaria is a partnership between Saudi Arabia’s Arkad Engineering and Construction Company and Italy-registered Arkad ABB. In the Bulgarian Trade Register, there is no information about the participants at this stage, at least with the names announced in the BTG’s press releases. The address of Consortium Arkad is Saudi Commission for Health Specialties Building, 4th – 7th floors King Saud Road-Rakah, Al-Khobar 31952, Saudi Arabia, while Arkad – ABB S.p.A. is registered in Milan at 16-20124 Via Vittor Pisani.

Arkad was founded in 2011 in Al Kobar, Saudi Arabia as the company Saudi KAD. On March 1, 2017, the Chair of the Board of the company announced a massive rebranding of Arkad. The company claims that it has 9,000 employees around the world and has “been a long-term subcontractor” of the Saudi gas giant Saudi Aramco to build “several strategic pipeline projects”.

Arkad announces on its official website an aggressive global expansion in Europe, Asia, America and Africa, reporting primarily on its numerous gas pipeline projects in Saudi Arabia.

Obviously, for Arkad, the Bulgarian section had to be their first foreign project outside the Arabian Peninsula. “For Arkad, this is a change in the game in our business: we will be moving through new latitudes and we will increase our success in our wide portfolio of projects.”

“We look forward to working with our partners on this project and to building a world-class gas pipeline in Bulgaria,” Arkad commented in a brief press release on winning BGT’s competition.

Bivol obtained information on the new winner with the help of our colleagues from Italy, Bivol’s partner center Investigative Reporting Project Italy (IRPI). According to the reports from the Italian Trade Register Register (see 700 pages for ABB S.p.A. in PDF and another 61 pages in PDF for the Arkad – ABB S.p.A. Consortium), the first has EUR 110 million in capital and 110 million shares.

The Consortium between the Italians and the Saudis has a capital of EUR 8.05 million and 8 million shares of EUR 1 per share. The parent company of ABB, ABB Holdings P.V., is registered in Amsterdam, Netherlands, at 65, Burgeermeester Haspelsaan.

According to the IRPI journalist Luca Rinaldi, Arkad and their partners from ABB S.p.A. are very active in the construction and energy sectors in the implementation of a number of international projects.

“ABB de facto builds nothing in Italy, like their Bonatti rivals; they work mostly abroad,” Rinaldi told Bivol.
According to him, it is interesting that like Bonatti, ABB is a subcontractor of the Italian energy giant and top partner of Gazprom – ENI S.p.A: “They were contracted to build a nuclear power plant (NPP) in Congo. Arkad is very active in the specialized oil and gas pipeline sector,” said the Italian investigative journalist.

EC: For each project, there are EU regulations

“The European Commission recalls that all new pipelines must be built in full compliance with EU legislation, in particular in the sectors of energy, the internal market and competition.”

This is the answer given by the EC and the office of EU Commissioner for Energy and Climate Action Miguel Arias Cañete to the ten questions by Bivol on the execution of “Turkstream 2”.

They further remind that the EU currently imports about a third of its natural gas from Russia, about half of which passes through the territory of Ukraine. “While European domestic production is expected to decline over the next decade, existing transit capacities from Russia are still not fully utilized today,” says Cañete.

That, according to the Commissioner’s office, should show clearly enough that the current transport routes from Russia to the EU, including through Ukraine, already meet the needs of the EU for existing and possible future gas pipeline deliveries from Russia to it.

According to Cañete, the EC’s role is to be the guardian of the treaties and it must ensure that the EU internal energy market legislation is fully and correctly implemented by the Member States, regardless of any routing of the energy infrastructure.

The letter also highlights that there is no way to have exceptions for “Turkstream 2” as the EC guarantees that in the future any gas pipeline project implemented across the EU will have to fully comply with the EU legislation in force. In particular, this concerns both the Third Energy Package and the rules on competition and public procurement.

It is obvious that the Bulgarian government has a different opinion, especially about whether it should consult the EC at all, as is the case with the Belene NPP restart project.

Tomislav Donchev sees no need to ask Brussels

Asked by Bivol whether the Cabinet is awaiting the EC’s opinion and why BTG ventures to start the project without any consultations between Sofia and Brussels, Deputy Prime Minister Tomislav Donchev said that Bulgaria did not need approval.

According to him, no “EC authorization” is necessary at all and the Third Energy Package had not been violated by the authorities in Sofia.

“The expansion of BTG’s gas network is in line with Bulgarian legislation and that of the EU,” said Tomislav Donchev.

Blackmail and pressure by Gazprom

At the end of March, a small and largely-unknown Ukrainian site wrote: “Gazprom has warned Bulgaria that it could stay cold in the winter if it hinders the construction of the pipeline again by following the United States’ lead,” alleging that Gazprom has sent a letter to the Bulgarian Energy Minister Temenuzhka Petkova.

“The construction of the second pipeline on the territory of Turkey is underway, construction works are also starting in Bulgaria, and in the coming weeks they have to start in Serbia,” wrote the Russian Kommersant on its part. Leading Russian energy experts are sounding the alarm that Sofia has rushed the tender too much and the project might repeat the fate of “South Stream”, which was stopped in 2013.

“These are bluffs in an attempt to blackmail by Moscow, but the pressure on Bulgaria is going to intensify,” the co-founder of RusEnergy, Mikhail Krutikhin, who for years has criticized the use of Gazprom as a main political weapon by the regime of Vladimir Putin, told Bivol.

He has examined the BTG’s technical requirements and according to him, the price of EUR 1.3 billion for this government procurement is rather insufficient for a quality pipeline implementation, while the offer of the Italian-Luxembourg consortium of EUR 2.4 billion is inflated.

Asked whether there are risks to the Bulgarian nature and protected areas near the future Bulgarian section of “Turkstream 2”, he said that it was too early to comment on this without the final design documentation and the environmental impact assessment (EIA).

He, however, noted that in the realization of “North Stream 2” the protected areas were sacrificed in the name of the project. According to him, it is also too early to comment on possible terrorist threats to a pipeline built in the Balkans.

Regarding the political aspect, the founder and managing director of East European Gas Analysis, Mikhail Korchemkin says that the Kremlin continues to use Gazprom as a Kremlin weapon in Europe and it had proven with “North Stream” that it could shrink the supply in each of the pipes.

“In the winter of 2014-2015, Moscow punished the bad behavior of the German RWE after it dared to sell gas to Ukraine.” The expert is certain that there will be no exceptions for Sofia and if the Kremlin does not like something in Bulgaria, Gazprom will punish it as well.

According to Korchemkin, the advice to use more gas in a country’s energy consumption “is comparable to an advice to an alcoholic to switch from vodka to beer”.

“The environmental risk is based on the fact that the more fossil fuel is consumed, the more time it takes to switch to clean energy,” he says.

Korchemkin is categorical that environmentally friendly energy should be a priority in planning for the coming years, and for Bulgaria.

According to him, the gas pipeline could be built in principle if the Russian gas competes successfully with the TANAP Azerbaijani gas pipeline: “It would be beneficial to the consumer.” The expert is, however, of the opinion that the limitations of “Turkstream” should be taken into account as the monopoly has already spent over EUR 20 billion on the Russian section and underwater pipes. These high transportation costs are likely to make it raise prices.

Korchemkin explains that Gazprom is already losing the competition with Turkey, which imports gas from Azerbaijan. According to Turkish statistics, in the first quarter of 2019, the supply of Russian gas to Turkey through the current Trans-Balkan gas pipeline has collapsed by 71%.

He says the EC is slow about its position on “Turkstream 2” because it has to compare the project’s competitiveness with the supply of Azerbaijani gas (TAP and TANAP) and check whether this pipe has a positive impact on competition.

According to the Chair of the Bulgarian Energy Forum Ivan Hinovski, it is important to pay attention to how BTG is inflating project costs, as was the case of the failed “South Stream” project in 2008 – 2013. As a project consultant, he says that the price has increased about ten times, to EUR1.25 million.
“This price is rigged because there are experienced companies in Bulgaria whose experts who can do that same work for 90% cheaper – for EUR 125,000.”

The energy expert is firmly convinced that BTG had done a trick to circumvent the regulations of the Third EU Energy Liberalization Project. “There are many ways to bypass EU standards, and they have formally complied with all the conditions, listing the project as an extension of the national gas transit network.”

“The Commission will test us about what quantities we want to transport and in what direction, and we do not have, and we did not ask for any notification on their part,” Hinovski summed up for Bivol.

According to the Managing Partner of Innovative Energy Solutions and former Bulgarian Ambassador to Moscow, Iliyan Vassilev, the open tenders on “Turkstream 2” are a sign of unlawful behavior by Bulgaria in relation to the EU and the Third Energy Package:

This is a violation

“Especially in the context of amendments to the EU gas directive, which will be adopted in April 2019, and there is an accelerated deadline for harmonization in national legislation,” he told Bivol.

The expert also commented on the words of the Deputy Prime Minister who is of the opinion that Sofia is not mandated to ask the EC for permission to participate in “Turkstream 2”:

“If it was a matter of expanding a network to meet the domestic needs of an EU member – Tomislav Donchev is right”.
However, according to Vassilev, this is about the expansion of a transit capacity that affects the gas market in the EU and concerns two or more EU countries – Bulgaria, Hungary, Austria (and neighboring countries like Serbia) and that falls under the jurisdiction of the EC.

“Amendments to the directive were adopted. Their text leaves no doubt that this is about the so-called extension – South Stream Light, Balkan, Bulgarian or any other stream,” firmly believes the former Ambassador to Moscow.


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