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.