State-Owned Gas Transit Company “Bulgartransgaz” Gives up BGN 26 Mln. in Compensation for the Failed Expansion of Chiren Underground Gas Storage

Without providing justification, “Bulgartransgaz” EAD has decided not to seek damages and contract-stipulated compensation of some BGN 26 mln. from the private consortium behind the failed expansion of the Chiren Underground Gas Storage, a project of strategic significance for both Bulgaria and the European Union.

This is the latest in a string of scandals involving the ill-fated project, currently under investigation by the European Public Prosecutor’s Office (EPPO). The proceedings were initiated following a tip-off alleging serious violations of public procurement legislation committed while “Bulgartransgaz” EAD, the state-owned company behind the expansion project, was headed by Vladimir Malinov, Minister of Energy in the caretaker government. The reported violations could have caused financial damages worth almost BGN 400 mln. to the public (including European) budget.

By today (26 November), 13 new wells should have been dug at Chiren as part of the expansion works. Instead, several days ago, Bulgartransgaz published a notice about the termination of the contract. According to the notice, a month prior, Bulgartransgaz had decided not to press for the contract’s completion, nor to seek any contractual penalties, compensation for damages or loss of earnings — all with the agreement of ”Bulgartransgaz”.

The failed project is the focus of the newest investigation by the Anti-Corruption Fund Foundation (ACF) titled Chiren: Tenders with Convenient Incline.

 The investigation reviews previously unpublished documents and relies on testimony provided by Velko Peev, the former internal auditor for Bulgartransgaz, who had alerted the company of grave violations in the project’s implementation, of risks that co-funding may be lost, and of possible safety risks.

Following the submission of his audit report, Peev received threats for his life and was subsequently arbitrarily dismissed.

Mr. Peev’s report has resulted in the initiation of proceedings by the EPPO which in August 2024 carried out searches and seizures in several buildings belonging to Bulgartransgaz. Back in August, as news of the investigation broke, Malinov, already a minister in the caretaker government, announced that work on Chiren’s expansion would be suspended for the duration of the investigation. However, ACF’s own investigation clearly shows that, by the time of Malinov’s announcement, the project had already faced such significant delays that completing it on time would have been practically impossible.

Failing this strategic project comes at a high cost — possibly losing EUR 78 mln. in EU funding and continuing to face significant energy security risks due to the non-completion of gas storage expansion.

In early October, Glavbolgarstroy, the company leading the awarded consortia, announced that it was pulling away from the well-drilling contract. Typically, such decisions entail serious financial repercussions. However, in November, it transpired that, without offering any explanation for its actions, Bulgartransgaz had agreed with no objections with what essentially amounted to the end of the expansion project. Furthermore, the state-owned company was not going to seek compensation for and damages, including contractual compensation to the amount of up to BGN 26 mln.

Bulgartransgaz’s decision to eschew compensation for damages is just one of many questionable decisions dating back to the time in 2022 when the public procurement procedure to appoint contractors was first announced. Contrary to international best practice to carry out the expansion as one whole project, it was artificially divided into three tenders. This increased the overall cost and the technical challenges in implementing the project. The splitting of the project into three was also the reason why large international companies decided not to participate and initiated court proceedings. The decision seems even more questionable considering that all three public tenders resulted in the selection of consortia lead by the family-owned Bulgarian private company Glavbolgarstroy.

The checks, subsequently initiated by Velko Peev, Bulgartransgaz’ internal auditor, uncovered grave violations in the implementation of the contracts, especially when it came to the project’s most critical part — drilling new wells for the gas storage facility.

Several months after winning the contract, Glavbolgarstroy informed the tenderer that it would diverge from the terms of reference and the submitted offer. Instead of applying a technique known as horizontal directional drilling to construct the ten new high flowrate exploitation wells, the contractor offered to drill vertical wells, a simpler technical solution costing 40 per cent less to execute. The proposal failed to take into account the project concept, adopted as far back as 2011, stating that the high flowrate, inclined wells were the solution to guarantee that the project can be implemented safely and effectively.

“Changing the scope of work outlined in the tender procedure while already implementing the contract is a grave violation of the Public Procurement Act. Drilling vertical wells is significantly cheaper and saves the contractor between 35 and 40 per cent of the cost — BGN 90 mln. (45 mln EUR) from the already significantly inflated cost of the project of BGN 221 mln. VAT excluded compared to market estimates of BGN 133 mln VAT excluded,” said Denitsa Rukanova, a legal expert with ACF.

Also at stake is the safety of the underground gas storage. According to the concept for the expansion works, vertical wells are not a safe solution for the Chiren site because of the risks of explosion. In addition, the use of vertical wells makes it impossible to achieve the targeted capacity of the gas storage facility. To compensate for this, significant amounts of buffer gas would be needed, adding at least another BNG 100 mln. ( 50 mln EUR) to the price tag of the project.

Despite the serious implications of Glavbolgarstroy’s proposal, it was adopted without objections by the Management Board and the Supervisory Committee of Bulgartransgaz.

Following the approval of the change in the terms of reference, Glavbolgarstroy, for the third time, changed its subcontractor. The international company PM Lukas, with experience in gas wells drilling, was replaced with a Turkish – US consortium of two companies without the relevant experience, managed by a recently married couple. The new subcontractor even shared an address with Glavbolgarstroy.

In numerous letters PM Lukas warned Vladimir Malinov, then executive director of Bulgartransgaz, of the technical difficulty of the project and the risks in bringing in a less experienced subcontractor. The risk of explosions and negative impacts on air space above Bulgaria and Romania were specifically mentioned. The company and its attorneys from Dentons USA sounded the alarm about significant political pressure by two different parties on the project, mentioning Delyan Peevski, a political leader from DPS and businessman sanctioned by the US under the Global Magnitski Act as well as by the United Kingdom.

Vladimir Malinov ignored the letters and the requests to meet representatives of PM Lukas. In late January 2024, he approved Glavbolgarstroy’s request to appoint a new subcontractor. Furthermore, Malinov ignored Peev’s internal audit report which contained serious indicators for violations.

Peev alerted the Management Board and the Supervisory Committee of Bulgartransgaz. Subsequently, he also filed reports with the State Agency National Security, the ministers of energy and finance, and EPPO.

Shortly after submitting his audit report, Peev was denied access to Bulgartransgaz’ internal information systems. He also started receiving warnings that, should he continue to cause problems, he may share the fate of Georgi Gegov, the late executive director of the company who died suddenly while on a business trip to Vienna in 2018 at the age of 42. Gegov had been discovered unresponsive in his hotel room by Vladimir Malinov and Delyan Dimitrov.

In mid-June 2024, Peev was dismissed by Kiril Ravnachki, Malinov’s successor as executive director of Bulgartransgaz. Peev was dismissed arbitrarily on grounds that he lacked authorization to access classified information. In fact, such access was not necessary for Peev’s work and he had not had access to classified information since the past four years.

Of all public institutions that Velko Peev had alerted about the violations, not one reacted with the exception of the Public Financial Inspection Agency (PFIA) which was directed to intervene by the minister of finance. PFIA’s checks, however, only formally reviewed the public procurement procedure rather than the implementation of the subsequent contracts which is where Peev identified the gravest offenses.

Following the actions of the EPPO, it became apparent that the future of the Chiren expansion project was at stake. In statements to the media, Malinov acknowledged that the drilling works had not yet started. At that point, the timely completion of the drilling works would already have been impossible. It is, however, unclear why the contractor received substantial advance payments.

The contract termination notice published by Bulgartransgaz recently shows that it had reached an agreement with Glavbolgarstroy to amicably end the contract without seeking compensation for damages. By August 2024, the contractor owed estimated at least BGN 22 mln. in contractual penalties.

“Nothing can explain the decision of the public company to forego such a large sum which it is owed as per the signed contract,” said Rukanova. “As a result of the actions of the management of Bulgartransgaz, a strategic energy project in Bulgaria and the EU was delayed indefinitely, no compensation was sought whatsoever and Bulgaria will likely lose the EU funding as it has failed to complete the project in time.”

“The question is who will take responsibility,” said Boyko Stankushev, director of the ACF. “We will monitor the reactions of the institutions and we will notify the public of any new developments.”

Without providing justification, “Bulgartransgaz” EAD has decided not to seek damages and contract-stipulated compensation of some BGN 26 mln. from the private consortium behind the failed expansion of the Chiren Underground Gas Storage, a project of strategic significance for both Bulgaria and the European Union.

This is the latest in a string of scandals involving the ill-fated project, currently under investigation by the European Public Prosecutor’s Office (EPPO). The proceedings were initiated following a tip-off alleging serious violations of public procurement legislation committed while “Bulgartransgaz” EAD, the state-owned company behind the expansion project, was headed by Vladimir Malinov, Minister of Energy in the caretaker government. The reported violations could have caused financial damages worth almost BGN 400 mln. to the public (including European) budget.

By today (26 November), 13 new wells should have been dug at Chiren as part of the expansion works. Instead, several days ago, Bulgartransgaz published a notice about the termination of the contract. According to the notice, a month prior, Bulgartransgaz had decided not to press for the contract’s completion, nor to seek any contractual penalties, compensation for damages or loss of earnings — all with the agreement of ”Bulgartransgaz”.

The failed project is the focus of the newest investigation by the Anti-Corruption Fund Foundation (ACF) titled Chiren: Tenders with Convenient Incline.

The investigation reviews previously unpublished documents and relies on testimony provided by Velko Peev, the former internal auditor for Bulgartransgaz, who had alerted the company of grave violations in the project’s implementation, of risks that co-funding may be lost, and of possible safety risks.

Following the submission of his audit report, Peev received threats for his life and was subsequently arbitrarily dismissed.

Mr. Peev’s report has resulted in the initiation of proceedings by the EPPO which in August 2024 carried out searches and seizures in several buildings belonging to Bulgartransgaz. Back in August, as news of the investigation broke, Malinov, already a minister in the caretaker government, announced that work on Chiren’s expansion would be suspended for the duration of the investigation. However, ACF’s own investigation clearly shows that, by the time of Malinov’s announcement, the project had already faced such significant delays that completing it on time would have been practically impossible.

Failing this strategic project comes at a high cost — possibly losing EUR 78 mln. in EU funding and continuing to face significant energy security risks due to the non-completion of gas storage expansion.

In early October, Glavbolgarstroy, the company leading the awarded consortia, announced that it was pulling away from the well-drilling contract. Typically, such decisions entail serious financial repercussions. However, in November, it transpired that, without offering any explanation for its actions, Bulgartransgaz had agreed with no objections with what essentially amounted to the end of the expansion project. Furthermore, the state-owned company was not going to seek compensation for and damages, including contractual compensation to the amount of up to BGN 26 mln.

Bulgartransgaz’s decision to eschew compensation for damages is just one of many questionable decisions dating back to the time in 2022 when the public procurement procedure to appoint contractors was first announced. Contrary to international best practice to carry out the expansion as one whole project, it was artificially divided into three tenders. This increased the overall cost and the technical challenges in implementing the project. The splitting of the project into three was also the reason why large international companies decided not to participate and initiated court proceedings. The decision seems even more questionable considering that all three public tenders resulted in the selection of consortia lead by the family-owned Bulgarian private company Glavbolgarstroy.

The checks, subsequently initiated by Velko Peev, Bulgartransgaz’ internal auditor, uncovered grave violations in the implementation of the contracts, especially when it came to the project’s most critical part — drilling new wells for the gas storage facility.

Several months after winning the contract, Glavbolgarstroy informed the tenderer that it would diverge from the terms of reference and the submitted offer. Instead of applying a technique known as horizontal directional drilling to construct the ten new high flowrate exploitation wells, the contractor offered to drill vertical wells, a simpler technical solution costing 40 per cent less to execute. The proposal failed to take into account the project concept, adopted as far back as 2011, stating that the high flowrate, inclined wells were the solution to guarantee that the project can be implemented safely and effectively.

“Changing the scope of work outlined in the tender procedure while already implementing the contract is a grave violation of the Public Procurement Act. Drilling vertical wells is significantly cheaper and saves the contractor between 35 and 40 per cent of the cost — BGN 90 mln. (45 mln EUR) from the already significantly inflated cost of the project of BGN 221 mln. VAT excluded compared to market estimates of BGN 133 mln VAT excluded,” said Denitsa Rukanova, a legal expert with ACF.

Also at stake is the safety of the underground gas storage. According to the concept for the expansion works, vertical wells are not a safe solution for the Chiren site because of the risks of explosion. In addition, the use of vertical wells makes it impossible to achieve the targeted capacity of the gas storage facility. To compensate for this, significant amounts of buffer gas would be needed, adding at least another BNG 100 mln. ( 50 mln EUR) to the price tag of the project.

Despite the serious implications of Glavbolgarstroy’s proposal, it was adopted without objections by the Management Board and the Supervisory Committee of Bulgartransgaz.

Following the approval of the change in the terms of reference, Glavbolgarstroy, for the third time, changed its subcontractor. The international company PM Lukas, with experience in gas wells drilling, was replaced with a Turkish – US consortium of two companies without the relevant experience, managed by a recently married couple. The new subcontractor even shared an address with Glavbolgarstroy.

In numerous letters PM Lukas warned Vladimir Malinov, then executive director of Bulgartransgaz, of the technical difficulty of the project and the risks in bringing in a less experienced subcontractor. The risk of explosions and negative impacts on air space above Bulgaria and Romania were specifically mentioned. The company and its attorneys from Dentons USA sounded the alarm about significant political pressure by two different parties on the project, mentioning Delyan Peevski, a political leader from DPS and businessman sanctioned by the US under the Global Magnitski Act as well as by the United Kingdom.

Vladimir Malinov ignored the letters and the requests to meet representatives of PM Lukas. In late January 2024, he approved Glavbolgarstroy’s request to appoint a new subcontractor. Furthermore, Malinov ignored Peev’s internal audit report which contained serious indicators for violations.

Peev alerted the Management Board and the Supervisory Committee of Bulgartransgaz. Subsequently, he also filed reports with the State Agency National Security, the ministers of energy and finance, and EPPO.

Shortly after submitting his audit report, Peev was denied access to Bulgartransgaz’ internal information systems. He also started receiving warnings that, should he continue to cause problems, he may share the fate of Georgi Gegov, the late executive director of the company who died suddenly while on a business trip to Vienna in 2018 at the age of 42. Gegov had been discovered unresponsive in his hotel room by Vladimir Malinov and Delyan Dimitrov.

In mid-June 2024, Peev was dismissed by Kiril Ravnachki, Malinov’s successor as executive director of Bulgartransgaz. Peev was dismissed arbitrarily on grounds that he lacked authorization to access classified information. In fact, such access was not necessary for Peev’s work and he had not had access to classified information since the past four years.

Of all public institutions that Velko Peev had alerted about the violations, not one reacted with the exception of the Public Financial Inspection Agency (PFIA) which was directed to intervene by the minister of finance. PFIA’s checks, however, only formally reviewed the public procurement procedure rather than the implementation of the subsequent contracts which is where Peev identified the gravest offenses.

Following the actions of the EPPO, it became apparent that the future of the Chiren expansion project was at stake. In statements to the media, Malinov acknowledged that the drilling works had not yet started. At that point, the timely completion of the drilling works would already have been impossible. It is, however, unclear why the contractor received substantial advance payments.

The contract termination notice published by Bulgartransgaz recently shows that it had reached an agreement with Glavbolgarstroy to amicably end the contract without seeking compensation for damages. By August 2024, the contractor owed estimated at least BGN 22 mln. in contractual penalties.

“Nothing can explain the decision of the public company to forego such a large sum which it is owed as per the signed contract,” said Rukanova. “As a result of the actions of the management of Bulgartransgaz, a strategic energy project in Bulgaria and the EU was delayed indefinitely, no compensation was sought whatsoever and Bulgaria will likely lose the EU funding as it has failed to complete the project in time.”

“The question is who will take responsibility,” said Boyko Stankushev, director of the ACF. “We will monitor the reactions of the institutions and we will notify the public of any new developments.”