MOL & Surgut Prediction Still Holding Water

The news was a shock…. Could I have been wrong? In an earlier post, I analyzed Hungarian and Russian wrestling moves in the area of gas. I predicted the Hungarian government wasn’t moving fast to release Surgutneftegaz from its holding in MOL. The news had Hungarian development minister,Tamas Fellegi, stating that the Hungarian government would be buying the 21.2% stake in MOL that Surgut holds.

But alas, apparently there was mixed up, and it was corrected the next day that the minister only stated that Hungary was interested in buying the stock as it would be beneficial for Hungary and Central Eastern Europe.

The news that emerged, which is interesting, Surgut’s holding in MOL are part of a larger discussion with Russia over a broad range of energy issues, according to the ministry’s corrected statement. Now this is interesting. Because a) it confirms Hungary is taking a holistic approach to its relations to Russia – in the area of energy and b) that I was right (which is important only for me). As I stated before, “Hungary can sit back and see if anything comes up they can either barter off, or raise the money to buy it outright.”

Maybe I’ve lived in Hungary for too long (which I have), but it is also clear that Hungary can gain more than just the 21.2% ownership in MOL if it decides to purchase it (apparently this can be financed by the open market). On the table for discussion is South Stream and a gas agreement for 2015. If there are other energy issues besides these, the government may also be seeking to gain some leverage. But based on these two topics, it can be seen where the Hungarians might be seeking some additional leverage. Why not make the Russians pay for more of the Hungarian portion of South Stream or gain some lower priced gas? (although this is relative in a market with current low gas demand and a post 2017 environment with South Stream/Nabucco/Krk LNG).

Overall, I’m more unclear as to how the Hungarians will be able to extract any significant, or meaningful concessions from the Russians in energy (particularly over these two mentioned areas). If the Hungarian Government wants to get away from energy dependency with Russia, a more productive path would be to limit further energy deals – not extend these. But then this is central Europe, and interdependency is important for all.

development minister Tamás Fellegi

The Hungarian Cabbage Tax Policy

I was watching my gulyas leves cook and reading through George Lang’s well written cookbook, George Lang’s Cuisine of Hungary, when I came across the section on ‘Potted Cabbage: Pickled or otherwise.’ The opening passage struck me. It turns out that understanding Hungarians’ passion for cabbage is also a great way to understand the current economic policies that are being implemented by the still relatively new Fidesz Government.

Every small nation must be chauvinistic in order to survive. There was a Hungarian professor, one Horvath by name, who carried this chauvinism to the extreme of trying to show that everything originated in Hungary, including Paradise. He even tried to provide a native etymology for cabbage, and that is not too strange when one considers that Hungary has probably invented more ways to prepare cabbage than any other nation. However, the Hungarian word for cabbage come from the Latin caput, meaning “head” (George Lang’s Cuisine of Hungary: p281, 1971).

I think we would all welcome the idea of Paradise in Hungary, but that does seem a little remote for the moment. Rather, it is an era of re-emerging nationalism. Characterized by the borderline chauvinistic national candor of the Hungarian Prime Minster,  Viktor Orban. In assessing his second economic plan for the country, it is clear that there is now the creation of a ‘native etymology’, not for cabbage, but for taxes.

I try not to place too much importance on politicians and nationalistic discourse, as economic policy and even the larger society can often carry on as normal (although that is a loaded statement – space is limited). What is emerging in Hungarian economic and social policy is this nationalistic chauvinism that directly effects the economic prospects of the country. And this has me concerned.

The introduction of new corporate taxes and the altering of the normal financial management of pensions is tinged with a nationalistic flare. This ‘reorganization’ appears both the expression of national chauvinistic interests and the attempt to create yet another new economic system.

Orban has already been noted for outlining the decline of neoliberal capitalism, that led us into our current financial crisis. The firm attitude against the IMF – in favor of international market financing of the country’s debt – while contradictory, also matches what is emerging as a decisive management style. With no public-private-partnerships currently being allowed, and the significant banking tax and now the taxes on other key economic sectors. Things appear black and white. If they are black they are cut down – even if they will impact those in the white.

The proposals this week for taxes on the energy, telecoms and retail chain stores is also part of a wider economic program that includes a flat personal income tax starting in 2011. Emerging this past week was also the freeze on the transfer of private pension contributions, which the state will hold onto for the time being (or until private pension plans are abolished in favor of a single state system).

Hungary, just as for the cabbage, is coming up with new taxes and financial arrangement that no one else could have dreamed of. Who could think of a special tax on grocery stores? Who implements a policy to prevent the transfer of pension payments? Now that it is getting colder out will there be a special tax on any product containing cabbage too? What kind of caput thinks of these policies and the astronomical tax rate (profit margins on retail chains are below 5%)?

I don’t mean to make light of the dire financial situation Hungary is in, or the radical economic restructuring that must be instituted in Hungary. But these taxes and financial arrangements are for short term gain and only provide long term instability for economic growth and business investment. The creative taxing plans create heightened uncertainty for other sectors, which could be affected if more tax revenue needs to be found. If the government does not operate  along EU rules (telecom’s tax illegal under EU rules),and does not apply a coherent long term tax structure enabling firms to create predictable financial and investment plans, then economic growth will not just stagnate but fall. The Government says the emphasis is now on SME’s for providing Hungary’s economic growth, but can they grow if the banks, because of the banking tax, are not lending money ?

Serving a good sauerkraut in Hungary takes months to prepare. George Lang recounts how families would prepare the cabbage in a large barrel in the kitchen then place it in the cellars for months before eating.

The good day’s hard work was amply rewarded a few months later on a snowy winter Sunday when the family sat around the table to enjoy the aroma, color and taste of a Transylvanian cabbage made with perfectly pickled sauerkraut (George Lang’s Cuisine of Hungary: p282, 1971).

Creating the right economic environment to foster long term investments takes longer than creating a tasty pickled sauerkraut. Building a national economy based on predictable economic and tax policies is what leads to job creation and long term economic growth. Creating new Hungarian recipes for higher tax revenues will taste like sauerkraut gone bad- even for German investors.

Reaching Zero Carbon by 2050

I was invited to give a presentation at the CEE Energy 2010 conference organized by EastEuro Link in Budapest September 30th and October 1, 2010. I decided to diverge from the typical conference presentation about energy developments and the need for cross border cooperation and how companies operate in the CEE and SEE region. Instead I went straight to the urgent need to speed up our institutional and professional efforts at reducing carbon output.

[slideshare id=5410892&doc=reachingzerocarbonlabelle-101011031245-phpapp01]

I drew on a current project that I’m doing for the Regional Centre for Energy Policy Research (REKK) at Corvinus University. It is the Pathways for Carbon Transitions – or PACT, an EU financed FP7 project. For this study I interviewed over 30 people and analyzed the risks associated for companies and institutions in transitioning to a carbon neutral society by 2050. This is a chief goal of the EU’s second strategic energy review (past posting here, on old blog).

To simplify the findings I’ve developed a very simple equation that attempts to capture the key elements that can lead us to reducing carbon output (in the energy sector) to near zero. Or more realistically, to really be on a path where this is entrenched into the institutional and business practices (along with society). The equation is this:

pace of change = institutional change + technological development + (political/social capital)

The pace of change is essential for getting us there on time. To express this I use the quote by Steven Chu, the US Energy Secretary.

Look how long it took to make the transition from wood to coal, coal to oil and gas: 50- 60 years. We cannot make this transition in another 50 or 60 years. It will be too late for the climate.

Therefore, we must speed up how we do things. I purpose that identification of risks can speed institutional and market change. This includes closer scrutiny and identification of the elements associated with risk governance that can enable faster change to come about. Governance risks involves: regulatory, geopolitical, institutional lock-in and technological lock-in and investment risk. For a full analysis please read a recent article I’ve submitted for review to a journal(Risk Governance and Technologies LaBelle).

The presentation offers a more simple explanation of the approach and ties it to periods of market and regulatory change in the CEE/SEE region. A key proposition I made during the speech is that we can learn a lot by looking at past periods of change in the energy sector. Most recently the deregulation of electricity markets in the US and the privatization of energy companies. All profound changes that have (and have not) brought about how energy markets operate. The limitations of change should be noted, but also how change did occur.

Bulgaria: Oh – I have to pay for the pipeline?

Will that be cash, credit or debit?

Bulgaria appears to be ahead of most countries signing up for gas projects. Probably only for the fact that they are the only ones that might be able to squeeze a little extra money out of others. Sofia now wants a little extra help from the EU to finance its pipeline construction to connect to Nabucco. I guess a transit pipeline is not much help if you can’t get the gas out of it. Seriously, though this raises two flags.

One, Bulgarian finances are tight, but so are the other CEE countries – Romania, Hungary, how will these countries be paying, not only to build the actual Nabucco pipeline but the connections for the off-take? Will MOL and Transgaz be able to self finance these portions? For me, this is a significant point as it indicates that the other countries will be coming out with similar requests for financial help or maybe even a reduction in their share of financing portions of the project. If things are financially tight now, for companies and governments alike how will they raise the needed capital in time to begin construction in the next few years?

Point, 1.1 For Bulgaria, Serbia and Hungary it also must be asked:

– What about financing of South Stream connections?

– What about financing for South Stream pipeline portions that are more directly connected to state participation?

Two, we have a on, of Bulgaria getting ready to join AGRI. Georgia is keen to export Azeri gas via tanker to Bulgaria. However, while the whole AGRI project remains speculative, it becomes even more unsure when it appears that Bulgaria can’t finance key aspects of the Nabucco project. Security of supply can be increased for each country, but participation in every new gas pipeline project that is announced seems dubious.

And three, what will also appeal to Hungary and Romania, is Bulgaria request to shift Nabucco costs out of national budgets – i.e. debt levels will not be seen.

Overall, the financial crunch is emerging for these projects. While countries continue to sign up and support all alternative routes – the deeper questions of who is going to pay for this still needs to be asked. In addition, if these pipelines/LNG facilities are built how much will gas cost for consumers? Will the cost be so high, as to reduce demand making these projects over ambitious?

AGRI another Gas Acronym and White Elephant for CEE

Supply diversification for securing energy is based on long term persistence. The recent agreement by Hungary to establish a project company to assess the viability of the LNG based Azerbaijan-Georgia-Romanian Interconnector (AGRI), may be an initial attempt. However, current gas projects cast doubt on the viability of this project.

The project company is held with a 25% stake by each of the countries. The plan is to create LNG facilities on the shores of the Black Sea, emminating from Azerbaijan, then transport the gas via upgraded pipelines to storage facilities in Hungary, or onward to points west.

The viability of this project falls flat when you consider the other pipeline and LNG projects that are at more advanced stages, and provide equal or higher supply diversification.

First, the LNG facility under development on the island of Krk, Adria LNG, which at the moment does not have a direct investment from either the Hungarian government or MOL or its Croatian subsidary INA, is a cheaper and more effective option at supply diversification. The cost of the facility is substantial, so much so, that RWE recently pulled out. Leaving a gap that Hungary/MOL/INA can fill. The high cost of one facility to construct with 4 other partners would be substantially cheaper than building two facilities with limited supply diversification.

The fact that the gas that would feed AGRI is the same gas that will be feeding Nabucco or even the Edison backed IGI (if it happens), means AGRI offers very limited supply diversification. If we consider that Turkey and Bulgaria will probably be stable transport countries. Investing in a sea based transport route literally becomes a floating white elephant – with gas.

The limited supply of Azeri gas is already a problem for Nabucco and IGI. Will Hungary and Romania (already Nabucco partners) really compete against themselves for the same Azeri gas? Although it was just stated by Turkmenistan that they have huge reserves they want to export, realization of this supply, in an efficient and timely manner, remains to be determined.

Cost is another component. Can AGRI really compete against a pipeline route? Most likely not. Nabucco will cost €8 billion for 31 bcm, while the Krk facility is planned to cost $1.5 billion for 10 bcm per year. But then use this equation (LNG terminal x 2 + #tankers = expensive).   AGRI has not stated the amount the capacity. I would also assume the long term operating costs are also much lower on a pipeline operation. In addition, the facility is being designed to be expanded up to 15 bcm.

There is plenty of room just in the Adria LNG facility to off set any need in AGRI. In addition, if additional Azeri gas is what Romania and Hungary really want, this can be transported through Turkey and bottled up and shipped via LNG tanker to Krk.

The peanut for this white elephant is the Hungarian government choosing to go with MVM to be the project company. If it was a viable project MOL would become involved in it, not a generation company that already distorts market operations. But just like South Stream is a government supported project with progress now amounting to the number of intergovernmental agreements signed, but limited identification of which Russian gas fields will be used, this project will be long on talk and short on results.

It is important to try to understand why Hungary and Romania are joining this consortium if it isn’t a serious project. I still stand by my earlier assessment of why Hungary is choosing both Nabucco and South Stream. However, I’m more unsure as to the purpose of signing up to this project, maybe it is to turn up the pressure on Russia. They can both press their positions on Gazprom and see if it is serious about building South Stream.

While Gazprom dallies to sign up new partners every day, at the end of the day, it may represent a political shot across the bow towards Russia by Hungary and Romania. They may be hinting to Gazprom to get serious. Romania may be pressuring Gazprom to choose it over  Bulgaria for the Black Sea landing spot,  while the new Hungarian government might just like to throw off balance Russia/Gazprom. Either way, AGRI is not a serious project for supply diversification – rather a mouse used to scare the elephant.

Hungary’s Dual Monarchy Turns into Dual Pipelines

Note: I’m reposting this as it originally appeared in the Energy Security blog, Feb 3, 2010. It still remains relevant in light of the appearance of yet another pipeline project

The roll-out of the gas pipelines continued last week as Hungary sought to add diversity to its gas supply. Diversity in this term refers to diversifying away from the Ukraine as a transit country, but not from Russian gas. The fifth Hungarian-Russian intergovernmental joint committee meeting resulted in Hungary progressing further in its balancing act of supporting both South Stream and Nabucco. The Hungarian state owned development bank (MFB) with Gazprom set up a joint company to begin pipeline preparations. Hungary may soon be bursting at the seams with gas – but why support both pipelines?

The geopolitical balance that Hungary must strike between competing pipelines results in it choosing a dual pipeline approach: a national compromise of sorts that balances the need to anchor it with neighbors for gas supply diversification and its pragmatic trading relationship with Russia. The Austro-Hungarian Compromise of 1867 attempted to balance the need for Hungarian independence and statehood with Habsburgian dominance and, in the age of Bismarck – realpolitic.

Under the Compromise of 1867, Austria and Hungary each had separate parliaments that met in Vienna and Buda that passed and maintained separate laws. Each region had its own government, headed by its own prime minister….The suggestion for a dual monarchy was made by the Habsburgs but Hungarian statesman Ferenc Deák is considered the intellectual force behind the Compromise….He also felt that Hungary benefited through continued unity with a wealthier, more industrialized Austria (Wikipedia).

The fact that the Russian army effectively put down the 1848 Hungarian revolution combined with Hungarian ties to the Habsburg European monarchy were large influences on the Compromise of 1867. The dual monarchy, as is the dual pipeline, is a reflection of Hungary’s continual balancing act. Unable to break free from Russian influence yet striving to be ‘in’ economically successful Europe, Hungary steers a path that reflects east-west relations. The choice between South Stream and Nabucco gas pipelines reflects this same dual approach.

The support given to both projects by Hungary is genuine. The country can benefit from not just diversity of supplies (routes and sourcing) but also from transit and storage fees that both pipelines can bring to the country. In the age of financial meltdown, social tensions and falling revenue streams Hungary is ill placed to deny additional revenue. Hungary’s oil and gas group MOL, last week reaffirmed an agreement with Gazprom to begin the development of an underground gas storage site at the depleted Pusztafoldvar-Dus gas field– which can/will be utilized by South Stream. Thus even in the case of MOL which is a key partner in the Nabucco project, benefits from participating in the South Stream project can be had. In addition, the Hungarian feasibility study for South Stream will be carried out by MOL within a joint venture MOL-Gazprom company. There should be no illusions, even Hungary’s premier Nabucco partner is set to gain from the Hungarian section of South Stream. Whether MOL would also participate in the actual building of South Stream is unknown, but no other company in Hungary has the expertise.

Therefore, whether one or two pipelines are built in Hungary, MOL may also be positioning itself to be involved in these dual projects. Therefore, without undermining MOL’s position and economic interests, the Hungarian government (with MFB) has stepped in to support the ‘competing’ or ‘complimentary’ pipeline (depending on ones perspective). Politically, Hungary can maintain its international relations, balance neighborhood policy and diversify its gas supply by moving forward in a dual manner.

According to Sergei Kupriyanov, Gazprom spokesman in a March 2009 interview with a Hungarian radio station, “South Stream will be built to supply Russian gas to European consumer. The two projects are totally incomparable; Nabucco and South Stream are not rivals.” And this is where the solution for the Hungarian government may lie. Diversification for security of supply concerns, as both South Stream (non-Ukrainian transit) and Nabucco (non-Russian supply) provide justification for the acceptance and support of both pipelines.

This ‘dual pipeline’ approach allows Hungary, as it has in the past, to walk a fine line between supporting the Russian position and economic interests while also showing support to the ‘neighborhood’ pipeline which seeks supply diversification. The dual monarchy that Hungary participated in, was not the ideal solution, nor the full expression of national sentiment – what it did, through Deák’s statesmanship, was satisfy the competing demands of the nation from internal as well as external tension. The failure of the 1848 revolution firmly placed the future state of Hungary within the Russian sphere of influence – along with the reaction (or lack thereof) of England and France – thereby relegating Hungary to the margins of Europe, where to this day, it still relies on realpolitic for economic and social development.

The acceptance of both South Stream and Nabucco demonstrates the continual balance Hungary, and its companies, play in advancing economic development and their security of supply in energy. The participation of France in South Stream while the demands of the EU (including Austria) lie with Nabucco symbolizes the geopolitical fate of Hungary.