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.