Hungary continues to suckle from Mother Russia

The price the Hungarian government has placed on energy security for the country is 1.9 billion Euros. The price the Hungarian government paid to the Russia’s Surgetneftegaz for buying  21.2% of MOL shares, the Hungarian oil and gas group. The move was promoted by National Development Minister Tamas Fellegi, as a radical move towards energy independence, re-balancing the countries security of supply. It would also allow the country to be more competitive and enable it to hold more economic weight in the region. These two points do not hold up when Hungary’s – and the region’s energy  supply sources are examined.

First, let’s define energy security.

“Energy supply security in fact is very close to the notion of the ‘sustainability’ of the energy system. In conformity with the precautionary principle, investing in supply security implies to incur current costs in order to avoid greater future cost…. This reinforces the demand for active, forward-looking, even if costly risk management” (Directorate-General for External Policies of the Union, Policy Department 2007, 22).

Does the 2 billion Euro purchase of MOL shares improve sustainability of the energy system? No. Hungary, and the CEE region are highly dependent on oil imports from Russia. Hungary and Slovakia are 100% dependent on the oil from Russia. As the graphic below demonstrates, no where else in the world, are two countries so highly dependent on one supplier. Hungarian Prime Minister Viktor Orban and his Government are making false claims if they say that owning a quarter of MOL improves the countries security of supply.

(This shows the dependency between oil importer (down) and exporters (across). The darker the square, the more dependent an importer is of an exporter.  Importing countries are listed from most dependent to one single source to least dependent. Exporting countries are listed form most likely to cause dependency to least likely. Eastern European countries depend a lot on Russia, for instance. A few countries rely on Libya, such as Ireland, Austria, Switzerland or Italy. Countries like USA, Spain or France have very diverse sources of supply.) Source

Hungary, is around 80% dependent on Russian gas. While there are plans for gas diversification (Nabucco, South Stream, etc.) there is no discussion of oil diversification from Russia. As I wrote about before, Hungary and other CEE/SEE may become more squeezed in the future as production falls off in Russia and any additional/remaining supllies are redirected to more lucrative markets.

Follow the oil

Government ownership of a quarter of MOL shares (add in nationalized pension fund shares) does not seem to improve Hungary’s long term sustainability in energy security. When you are essentially 100% dependent on one country for your long-term oil and gas supplies, along with 50% of electricity from Russian nuclear power technology, then significantly high vulnerabilities remain in the short and long term.

The purchase of MOL shares does not improve security of supply within this assessment. In fact, it may undermine it further by politicizing the operational management and strategic focus of MOL. Further government meddling may financially weaken the company making it easier for another attempt of a hostile take-over. But then the state can step in and purchase more shares, so don’t let this fact keep you up at night..

The second argument put forward that this move will make Hungary (and the region?) more competitive falls flat. It is important to consider for a moment, the deregulation of electricity companies in the US in the 1990s. The US Midwest was one of the most active regions to deregulate their electricity markets. This was mainly prompted by the effort to reduce electricity prices by inducing competition which would offer manufacturers lower electricity prices, making them competitive against other states and regions in the US. This was the exact spark that started it in Michigan (see my PhD thesis). Hungary is claiming that the synergies between the bloated state owned electricity intermediary, MVM and MOL can create an energy powerhouse that will propel Hungary forward in the region, and no doubt, move these companies more actively into other countries in the region. MVM-MOL becomes a CEZ on state supplied steroids.

This argument is undermined again, by the fact the Hungary and the region are so heavily reliant on the raw energy commodities supplied by Russia. CEZ runs on coal and can source gas from both Eastern and Western European gas markets. Can the operational and management costs be squeezed so low as to reduce consumers costs? MOL is already the most efficient oil and gas group in Europe, while MVM is non-transparent government owned elephant and no doubt could lose a few pounds.

Finally, The idea that purchasing the MOL shares improves Hungary’s security of supply and fosters a more sustainable energy system, by reducing risks in the short and long-term, proves elusive. Essentially, if Surgutneftegaz’s voting rights, if they were ever allowed to be exercised, were capped at 10%. Over 50% of the companies stocks were held by MOL or friendly investors.  MOL was not in impeding danger of becoming part of the Russian energy empire. If this was the case, then there could be some justification for spending 2 billion Euros, but it is clear that Surgutneftegaz was only a minor shareholder with limited voting rights.

Hungary has not improved its energy security of supply with this purchase. In fact, by introducing state ownership and talking about how MOL fits in with a national energy company, the independence and operational efficiency of MOL are already  becoming eroded. Hungary can only improve its energy security by diversifying supplies and reducing demand for Russian sourced oil and gas. Until it develops and begins to implement a long term strategy of energy reduction and diversification, Hungarian security of supply is dependent on the decisions made by Russian companies and their government.

MOL and Hungarians Lose – Surgetneftegaz and Orban win! (and I predicted this)

My wife came back from the children’s hospital the other night after the doctor unclogged the poo that was a major discomfort for our young son. “You would think that they could spend some money on soap in the hospital,” she said. Any hospital that we have been in Budapest does not have soap in the public areas, including the bathrooms. When my wife gave birth – no soap, when I go to the doctor – no soap. But I’m not a medical doctor, just a doctor of the books, so maybe it is alright to be in a hospital and not wash your hands.What could happen?

Exposing your backside

Oh – energy security. So the Hungarian government spent 1.9 billion Euros of the IMF money that was meant to save Hungary from economic ruin. They did this to take control of their energy security so the Russians couldn’t threaten to take over one of the few companies that is economically successful and is an integral part of the Hungarian economy. The reasoning, as stated by Prime Minister Orban, and reported by

The PM said the government “fought a tough battle in the past year”, but Hungary has managed to “bring to safety” its national company that has a key importance for the country. One of the keys to success in the region is the reduction of its energy dependence and the revival of national industries, he said, adding that the Hungarian government must always stand up to defend its interests. “No country can be strong if its energy supply is exposed,” Orbán added.

It was a good thing that Orban didn’t turn around while stating this because Hungary is still hugely exposed to the ‘whims’ of Russia. Most – if not all – of Hungary’s oil and gas comes from Russia.

There are a lot of aspects to this story to explore, and as with the aftermath of any big game, it will take awhile to analyze it all (I’ll have another post later on this). But it is fair to state, that I predicted that this would happen, as it was previously proposed in Tajikistan. Forcing the Hungarians to pay out money for a questionable increase in energy security (you think Orban reads my blog?). It is the citizens of the country that are being forced to pay for this stock buy, over more effective investments in either the economy or social programs.

Hungarians in Tajikistan selling bread to pay for their MOL shares

I questioned following this Tajik model, because it does not improve Hungary’s economy, society or energy security position. Rather, it becomes more state owned, as in the good days of Communism. The energy security argument that the government is spinning for MOL, is there should not be Russian ownership, or even a foreign government’s ownership in a nationally important energy company. This is one of the arguments that successive Hungarian governments have used for protecting MOL. However, it is now the case that the Hungarian government also owns, through MOL, almost a majority of the Croatian oil and gas company, INA. This should really strike some pride into Hungary’s right wing – including Fidesz. But it is questionable as to how much Hungary’s energy security is undermined if is already supply dependent on the Russians.

It is also stated that relations with the Russians will now improve, since ownership in MOL was a major sticking point in any negotiations between the two countries.  Development Minister Tamás Fellegi stated that this was a major hindrance in Russian-Hungarian relations, but the buy-back was connected with no other developments. There is no doubt Surgutneftegaz’s ownership in MOL did cause friction between the Hungarians and Russians, but it is also a fact that Hungary’s relations even with EU neighbors is at historic lows due to their inept handling of foreign and domestic policies.

The fact that the Hungary could not connect the buy-back with any other projects with Russia indicates the lack of effective negotiating position that the Hungarians deployed. This is a major win for the Russians (as they made a 500 million Euro profit), and if part of this was to improve relations between the two countries, then at least there should be a symbolic cooperative development that both countries could show demonstrating that things are back on track. Essentially, if you hand over 2 billion Euros there should be some room for smaller cooperative projects to be at least publicly announced – demonstrating a new period in Hungarian-Russian relations. The fact that this did not occur, does indicate the continuing tension between the countries.*

Finally, MOL should be worried. As the Development Minster indicated, the government has plans to increase its shares in strategically important sectors. With this hefty bit of MOL, combined with the shares from the pension funds that were nationalized at the start of 2011, the government has a nice chunk of MOL. If MOL management was worried about Austrian or Russian influence in company operations, it should be equally, if not more concerned about the Hungarian government becoming involved in its operations. The success of MOL is down to it withdrawing from the gas retail sector and focusing on transportation and storage. E.ON and others, are now losing money because of the price pressures placed on them by the government. MOL, has made clear in Croatia – through INA, that losses in this distribution sector will need to be covered by the government or they will sell it –  like in Hungary.

It is too early to tell, how the government will begin to impact the operations of MOL. But the infusion of politics into company operations could be expected. If Orban’s and Fidesz’s proclamation to the nation that is now posted in every public office makes its way into MOL offices and refineries, then we will know the new owners have something planned. Essentially, if the government pays out 2 billion Euros out of the rainy day fund, and walks MOL home, they are expecting more than a kiss at the door.

The explanation that the Hungarians wanted to sooth relations with Russia for the price of 2 billion Euros, doesn’t really stand up. We took our son to the underfunded hospital because his poo was causing a big discomfort to him. Did the Hungarians really pay out 2 billion Euros to ease their discomfort? Or did they really pay that amount to begin their path at gaining ownership in strategically important industries? This last point is only half true. As I wrote previously,

With some … significant government ownership [in private energy companies], the Orban government will realize its objective of imposing state ownership over the countries energy assets – and somehow keep prices low.

As I said before, and even in my Tajik commentary, I feel absolutely crazy for writing these statements. But this is what has now transpired, and as the government continues to consolidate its ownership – in a Hugo Chavez style, the Hungarian taxpayers citizens (there are only 2 million taxpayers in Hungary), will fail to realize the benefits of either a market economy or democracy. This is how high the stakes are now becoming. So Hungarians (and foreigners) should not expect any soap in the hospitals in the foreseeable future, while they pay off their IMF loan that financed the purchase of a minor amount in Central Europe’s most successful energy company.

*note: yesterday was the first day that the metro arriving at Moskva ter that it was announced it had reached “Szell Kelmen ter.” The reaction of people in the carriage was not positive, maybe the Hungarian government could keep Moskva ter to foster better relations with the Russians. But then, they also got rid of Roosevelt ter – the Orban government really is not concerned with improving relations with any country.

Fishing for boots: My lens of change on the energy sector

The interest in the current gas market in Central Eastern Europe demonstrates the increasing knowledge about our energy sources. Over the past few weeks I have answered a lot of questions from students and journalists about the gas pipeline projects and energy security in the region. I’ve never considered myself an expert on these topics, more a student myself. The energy sector is so multidisciplinary it takes knowing (and even mastering) several topics to begin to be a true expert on the overall subject. It is important though to have a base, or a prism, that the wider changes or processes involved in the energy sector can be seen through. For me, it comes from researching and analyzing change in the policy and regulatory environment in the energy sector and how this is connected to the local. This is the basis of my approach to analysis how markets and regulations interact to diversify energy supplies by fostering investment, or more broadly improving security of supply.

The solitude of thought

The history of energy is filled with transition periods, and if you take the long view, constant change and technological evolution becomes the norm rather than the exception. But all this change occurs within systemic parameters. Due to the significant capital investments and tight legislative and regulatory conditions that are infused into every activity of the energy sector, change is gradual. Transition from one technology to another is gradual, and altering habits, industrial processes and financial regimes all takes a very long time. This is why, as described elsewhere, the transition to a low carbon economy will take a long time unless, these systemic parameters can be altered and streamlined (here is the long journal article version of this argument).

Gas and electricity diversification, or energy security, therefore does not emerge from the sudden need to alter long established trade patterns. Crises no doubt can and does play a part in this, but the constant transition that occurs is partly the result of purposeful actions by stakeholders and broader inertia of regime change. Regulatory regimes, provide the context to frame the need to create specific change, whether for market liberalization or carbon reduction. Within this regime are broader societal, governmental and scientific thoughts that make an immediate impact and hold the potential for long term impact on the energy system. An example is the reduction in car use during high gasoline prices while long term is the increase of alternative energy inputs or alternative modes of transport.

Appreciation of the political-historical context also allows a framing of today’s energy battles. A recent conversation with a reporter, had him fishing for a quote that would describe a new period of relations with the Austrians and Russians. This stemmed from the establishment of a joint company to build 50 km of South Stream in Austria by OMV and Gazprom. Do I perceive a new era in the strong historical relationship between Austria and Russia? No, not really. My Hungarian history book has a few examples of cooperation between the Austrian and Russian monarchies and the squeeze that they put on the Magyars. Should we be surprised when two state owned oil and gas companies seek to pressure the main Hungarian oil and gas company. It was only the failure of OMV and Surgetneftegaz executives to understand historical context that led to their failed attempts to storm the battlements of MOL.

Hungarian Husars - just add a suit and tie for our modern day politicans and company executives protecting energy supplies

My main contextualization of the current transition efforts to reduce carbon stem from the study of the deregulation efforts in the US and the creation of regional markets. What I discovered was the actual deregulation had nothing to do with the perceived political actions for deregulation. In two case studies, of Michigan and Wisconsin – the first deregulated and the second didn’t – it was clear that the public understanding and the technical conditions for public choice of suppliers didn’t exist. Michigan while offering choice of suppliers for consumers, did not lay an effective foundation for competitors to compete with Michigan’s existing utilities. While Wisconsin politicians made it clear there would be no deregulation. However they took strong steps to separate the Transmission System Operator from the vertically integrated utilities, and began integration into a regional market. Essentially laying the basis for competing generation companies to enter the market. This is similar to the current EU attempt in market liberalization.

Underlining these two examples is the role of the local. Local control and local attempts to position their own energy companies to remain strong in the face of competition and possible take over. The laws and new rules instituted to keep MOL Hungarian correspond with the steps in Michigan and Wisconsin. Underlining the restructuring that occurred in Michigan and Wisconsin was fueled with the idea that local manufacturing needed to have competitive electricity rates, but the electricity companies needed to be pushed into offering lower priced electricity, while also protecting them from out of state corporate take overs. It is strongly felt, and the history of electricity in the US reflects this, it is through local control or local/state ownership of electricity companies that results in the ‘best interests’ of the community being fulfilled. Companies will have vested interests in the communities and therefore will act on behalf of the local.

The lens that can be used to analyze energy policy and markets needs to account for the local. It is the local leaders and their local energy companies that will work together to ensure a locality has sufficient levels of security of supply. Within this local formula of measuring security of supply is price, local control and technologies that are used. Crises, or external knowledge, along with new regulatory regimes (i.e. thoughts on how markets and society should be organized) all influence the pace of change. Stagnation of technology or the regulatory structure will impact the ability of the system in the medium and long term to adapt to external ‘threats’. This may be shown in a single large or a series of events. It is through this prism of the historical local political-corporate interests and the role of  technology that my analysis is based. Fishing for the ‘new’ in energy will only land you with an old boot.

Shale Gas Offers Diversity Over Game Playing

If geological formations are like children, as the head of a gas exploration company recently said, proclaiming shale gas as a revolution is akin to stating your child will be the leader. There needs to be fertile ground for a revolution to take hold, not self proclaiming prophecies.  Shale gas extraction technology is evolutionary rather than revolutionary offering diversification rather than independence.

Read the rest of the article at Natural Gas for Europe

Why V. Socor is wrong. Or Austrians show their small size

Following the gas sector in Europe can be exciting, particularly watching the marathon-like stamina of the backers of South Stream and Nabucco. But the emergence of obstacles, or the use of strategic moves, should come as no surprise to spectators. Wrapped up in the Great Gas Game, are geopolitics and individual tactics. Russians like to strong arm their way through, while the Europeans like to appear business like. But what happens when the participants start to draft off the backs of the other competitor? Should we be shocked? There is no rule book, so we shouldn’t be.

The news that the big Nabucco leader, OMV is establishing a joint company with Gazprom to build and operate a section of South Stream in Austria was big news. One of those remarking on this is the highly respected commentator, Vladimir Socor of the Jamestown Foundation. In commenting on this development he states,

The Gazprom-OMV agreement raises at least theoretically the possibility that the South Stream pipeline could outrun and overtake Nabucco in Austria, with Gazprom reaching Baumgarten ahead of the EU-backed project….

Gazprom’s move in Austria forms part of its general mobilization of business and political allies in Europe to stop the Nabucco project.

The explanation and the possible reasoning that Socor gives for Gazprom’s move and the potential impact that this has on one level are correct. But deeper down, the analysis falls short for three reasons. The news that a joint venture between Gazprom and a Nabucco member was established are indicative of things to come, and shouldn’t really be unexpected.

First, Despite what the European countries think of themselves, they have small companies. And in Central Eastern Europe, where the two big gas pipeline projects pass through, is it even theoretically possible that Nabucco and South Stream will be built without the participation of each countries’ main gas company? Such as OMV for Austria and MOL for Hungary. In Hungary, the Hungarian government hides behind the large state owned electricity company, MVM to play with the Russians. However, the technical studies for the joint Russian-Hungarian South Stream project company are being conducted by MOL (a Nabucco member). When it comes to expertise there is no real alternative than the ‘private’ companies that are already in the Nabucco Consortium.

Second, so far Nabucco is the commercial pipeline and South Stream is the political one. In this piece a while ago, I stated the hard decision making the Hungarians would have to make in eventually choosing South Stream or Nabucco. Will it be political or commercial interests that drive participation in ONE gas project? Because ultimately, the Hungarian government (like the other governments) is going to need to pump some money into these projects. And things are tight, so tough decisions will need to be made. Not just hand shakes and saying, “sure, let’s do lunch next week to discuss it- again.”

As I wrote before, Bulgaria is already ahead of the game, telling the EU, “if you want us to participate in Nabucco, then don’t count our government debt that we’ll have to take on to finance it.”

The third reason Socor is wrong to be paranoid about this Russian/OMV deal is – it is old news. (I say paranoid, because one of the great things Socor does, is to draw on paranoia of Russian intentions – I think he does this well, since those not living in these region do under estimate/not understand, the Russian energy moves in the region). Yes, OLD NEWS. Maybe I over estimate the knowledge that people have about these projects, but for the bankers, politicians and those in the gas sectors, the strategies and approaches of Nabucco and South Stream partners have been on display for a few years now. Those following these projects should not be surprised by some consolidation/cooperation of the projects. The Austrians and Russians are old friends, therefore, it is easier for them to go first, than the Hungarians and Russians, who currently have some strained relations (particularly over MOL/Surgetneftegaz shares).

The marathon is now turning into a grueling marathon with strong head winds. Now Nabucco won’t be operating until 2017. The necessity of participating companies and governments to begin to show a few cards should not be unexpected. Can Nabucco or South Stream really be built in Austria or Hungary without OMV or MOL? No. The finish line is a  long way off, but what is unknown is for how long the game that both of these gas pipelines will be built independently of each other will go on. In Austria, the OMV/Gazprom section is only 50 km. However, for the Hungarians both pipelines traverse large sections of the country. The choice between the political South Stream and the (somewhat) commercial Nabucco will need to be decided closer to the end. As in a marathon, if you set a quick pace at the beginning you just may be crawling to the finish. The question is will both projects being crawling or will they be standing and supporter each other at the end?