Hungary’s Gas Bill: Perpetual debt

The research presented here is part of a larger research project focused on the CEE region, privatization and energy relations with Russia. I’m publishing draft sections here as I work my way through the material. Therefore there may be mistakes or nuances I miss. If you have a correction or a different view you want to share, please drop me an email mcl [at] enegyscee.com. 

[Note: This post is corrects earlier mistakes concerning the ownership of FGSZ]

The fervor to reclaim Hungary’s energy infrastructure by Viktor Orban’s government now results in monopolistic state control of supply and distribution. The turn around since the 2010 elections occurred even faster than the turn towards a neoliberal market structure and the selling of energy assets by a cash starved Hungarian government in the 1990s.

This post asses government consolidation in the mid-stream gas sector (transmission, storage) and a limited overview of household supply (to be discussed later) . The purpose of this post is to show Hungary’s inability to grapple with the cost of natural gas. Since Communist days to the present, the true cost of Russian or imported gas is covered either by the state or in companies. End-users, particularly households, but even industry at times, does not pay the full cost. The aim here is to discuss Hungary’s need for energy imports to cover a lack domestic energy sources. Think of Hungary as the Japan of Europe, nuclear power, some domestic coal and gas, but a high reliance of oil and gas imports. The political choice to have Hungarian consumers avoid paying full costs results in an energy policy not conforming with EU market rules and forces the country to make deals with Russia.

Privatization of energy assets

In 1995, 14 power companies, a mixture of generation and distribution were put up for sale. Most were sold by the end of 1995. These included electricity and gas distribution companies sold to RWE, EON, GDF, EDF and ENEL. MOL, Hungary’s national oil and gas company, was privatized in a different way. Essentially, financial investors were sought to enable Hungarian management to stay in place and ensure Hungarian ownership. Therefore instead of one quick sell-off, the company sold its stocks in phases to investors (later this strategy would be severely tested, as OMV attempted a shareholder take-over facilitated by Russia) .

MOL’s management philosophy also lends it to being one of the best run oil and gas groups in the world (thus criticism should be muted when we see what a Hungarian company can do without government interference). Part of the consolidation process of a privately orientated MOL was to sell off the perpetual loss making business of buying and selling gas on the Hungarian market. This is the focus of our story here. Essentially, management got it right, knowing government interference would always be present – and subsidizing users is not profitable. Since Communist times, the state subsidized financial losses through MOL. By selling these gas assets to (naive) private companies MOL would break free of this continual debt trap. The results have proven them right.

In 1994, MOL lost 1.3 billion forints because of the higher gas import prices compared to the price they were able to sell on the Hungarian market. This was despite MOL buying gas from the state owned Mineralempex – which held the monopoly on gas imports from Russia. The 1996 projections were 70 billion forints would be lost by MOL with them selling gas to the privatized gas distribution companies (discussed below). Thus, while there was private ownership for gas distribution, the true cost of gas was hidden by the losses incurred by MOL. In 1994, Hungarian consumers were paying 9.8 fts per cubic meter, compared to 56.9 ts per cubic meter in Italy or 29.1 ts per cubic meter in the UK (see Bogel et al 1997).

Transforming Hungary’s gas sector

In 2004, MOL entered into agreement with E.ON to sell fully its gas wholesale trading (MOL Földgázellátó) and storage business (MOL Földgáztároló) and 75% of its existing 50% stake in gas import company Panrusgas (with the other half owned by Gazprom Export).  The transmission system operator (TSO) Foldgazszallito (FGSZ) would remain with MOL. Thus MOL retains ownership in Hungary’s transmission system, but offloads to E.ON the responsibility for imports and selling gas on the domestic wholesale market.

The agreed purchase price for the three companies was €450 million, including the accumulated debt of €600 million. In the end, the accumulated debt of Hungary’s gas importer were higher than the worth of the company. Thus, the subsidizing of consumers in Hungary were carried out by the partially government owned, but privately Hungarian controlled MOL.

The history of the gas intermediary companies is worth to spend time on. In her very well researched and written book (really, an excellent piece of scholarship), ‘Power, Energy and the New Russian Imperalism‘, Anita Orban (Hungary’s former Energy Ambassador) devotes attention to the shift from the Communist era Mineralempex and the new Russian Imperalist gas strategy of owning intermediary companies, such as Hungarian registered Panrusgas, where corruption could occur (e.g.Ukraine).  (As a side note, in Google books, the book is hidden by its mislabeling as one dealing with the history and legends of snakes – I’ll leave it up to you dear reader to make an inference).

Picture of a young Communist worker building the foundation of Hungary's Paks Nuclear Power Plant. Hungary is highly dependent on Russian resources and technologies.
Picture of a young Communist worker building the foundation of Hungary’s Paks Nuclear Power Plant. Hungary is highly dependent on Russian resources and technologies.

Before 1994, Mineralimpex was owned by the state and was the intermediary dealing with Gazprom Export buying Russian gas and selling on the domestic market. In the fall of 1994, the Socialist dominated Hungarian Parliament passed a law requiring MOL to take possession of Minerlimpex by the end of 1994. At the same time Panrusgas was set up with an external ownership structure of 50% owned by Gazexport (Gazprom) and by 1995, 50% owned by MOL (Orban 2008, 45-46). Panrusgas took over the exclusive supply relationship to Hungary.

“Panrusgas did not own property, pipeline, or equipment; its core operation was based on two contracts, one with Gazexport and the other with Mol, which have been valid since 1996 and was suppose to expire in 2015” (Orban 2008, 46).

It is this contract expiration that highlighted Putin’s visit to see Orban in 2015. Panrusgas thus serves no purpose but ensure Gazprom Export profited – in addition to Gazprom – by the trade with Hungary. Thus under the original set up, any profits achieved through Panrusgas would be withdrawn by Gazprom Export’s 50% ownership, while MOL’s ‘profits’ were offset by the sustained financial losses by MOL’s purchase of gas to be resold onto the domestic Hungarian (regulated) market – even if the sales went through private gas distribution companies.

The losses to MOL can be seen in the early year’s finances, as described above. MOL lost 1.3 billion forints in this gas arrangement in just a few months of 1994, while by 1996, 70 billion was the projected loss (Bogel et al 1997). By 2004, when the deal with E.ON to sell MOL’s gas business – including its 50% holding in Panrusgas was announced, the debt grew to over 150 billion Forint ( €600 million). Thus, even with private distribution companies operating (E.ON, RWE, GDF) they were not paying the full price of gas. Historically, even with private ownership existing in Hungary’s energy system, it can be stated that Hungary’s energy system was still on an unsustainable path.

In 2004, E.ON bought Panrusgas and MOL’s gas storage and wholesale trading companies,  (MOL Földgáztároló and MOL Földgázellátó), these were finalized in 2006. The Orban government in matching with its national consolidation of the energy sector, bought back these two companies from E.ON in 2013 and Panrusgas in 2015. MVM is now the proud owner of these three companies.

Ownership and name changes for gas trading and storage companies spun off from MOL after 2004:

Gas Trading:

  • MOL – MOL Földgázellátó (sold 2004)
  • E.ON – E.ON Földgáz Trade or “EFT” (sold 2013)
  • MVM – Magyar Földgázkereskedő or “MFGK” (current owner)

Gas storage:

  • MOL – MOL Földgáztároló (sold 2004)
  • E.ON – E.ON Földgáz Storage or “EFS” (sold 2013)
  • MVM – Magyar Földgáztároló or “MFGT” (current owner)

(source: Hungarian gas industry expert)

Gas intermediary:

  • Panrusgas (English)/Panrusgaz (Hungarian)
  • 50% MOL ownership (sold 2004)
  • 50% E.ON (sold 2013)
  • 50% MVM (current owner)

From the Panrusgas website:

Panrusgas Gas Trading Plc. was founded on October 1st, 1994.
Company’s main profile: sales of natural gas in Hungary originated from GAZPROM (Russia).
Shareholders: LLC “Gazprom export”, MVM Hungarian Electricity Private Limited Company, Centrex Hungária Zrt.

Hungary returns to state ownership

However, in the intervening years, despite private ownership, the financial hole surrounding the gas trading and storage companies only got bigger. The Hungarian government (through MVM), paid E.ON, 261 billion Forints (€881 million) for the two companies with an option to purchase Panrusgas later. The debt balloon just gets bigger and bigger. Just as E.ON had assumed the earlier debt of 150 billion Forints in 2004, MVM would assume a company that had a negative net worth of 355 billion forints (€1.2 billion). The intervening years were not kind to these companies balance sheets.

The total possible cost to state owned MVM would be 616 billion forints, or €2 billion ( €881 million purchase price plus €1.2 billion debt). This was the starting price for changing the country’s wholesale gas market to a centralized state owned system governed by ideas of ‘illiberal economics’. To fulfill a broader view of illiberal energy markets, most of the privately owned companies that were sold off, would now be bought back, regardless of cost. The transformation of the retail electricity and gas sector will be discussed in another post.

Why Orban needs Putin

Putin’s visit to Hungary in February 2015 and Orban swanning over him, (as I wrote at the time) related to pushing down Hungary’s gas bill – and the overall losses the state would incur by subsidizing all consumers.

The subsequent renegotiation of the take-or-pay clauses in 2015 between Putin and Orban may have reduced the overall debt assumed by the company. (For full story see: Atltszo for the original documents and Hungarian Spectrum for an English summary.)  Nonetheless, in comparison, MOL’s loss of 1.3 billion Forint loss in 1994 looks manageable.

Wrapped up in the overall negative value of E.ON’s Foldgaz storage and trading (MFGK and EFS) is the accumulated debt and fullfiling the take-or-pay clause expiring in 2015. Because of reduced gas consumption and rising imports of gas from Austria (another reason to block gas from Austria and Slovakia) Hungary was liable to pay 3 billion euros for the unused contracted take-or-pay gas.

Nonetheless, the background on the take-or-pay claus is the  contracted roll-over of amounts past 2015 was already agreed with E.ON and Gazprom in 2008, while EU courts had earlier ruled in favor of RWE that these take-or-pay clauses were not valid. But it was essential to secure the lowest price possible to pay for Russian gas. Any new losses in 2015 would be born by state owned MVM and not a private company.

The final purchase to secure the Hungarian government’s total control of company’s providing transit services and owning assets in Hungary occured on the eve of President Putin’s visit to Hungary in February 2015. MVM exercised its option, established at the time of the 2013 purchase of E.ON Foldgaz storage and trading to buy Panrusgas from E.ON. The state paid €3 million for the 50% of the middleman owned by E.ON with the other 50% owned by Gazprom Export and another firm (that somehow emerged on the scene) Centrex Hungaria Zrt, which according to Wikipedia is a front for Russian highlevel interests. This also matches (the now) Ambassador’s Orban’s overall description of the purpose of Panrusgas. Interestingly, Hungary did not seek to exclude Panrusgas as an intermediary even as it restructured the rest of the wholesale gas market.

Summary: Oh the debt!

To summarize, since the 1990s MOL was incurring losses on its gas import business. Retail prices did not reflect the total cost of the imported Russian gas. In 2004 MOL struck a deal with E.ON to sell its trading and storage units (MOL Földgázellátó and MOL Földgáztároló) with a future option on Panrusgas. After the EU signed off on the deal the purchas was finalized in 2006. The price paid was €450 million (excluding debt). In 2013, MVM bought the two companies back from E.ON for €881 million and Panrusgas in 2015 for €3 million, almost double the price for both companies. In 2004, the negative value (debt or liabilities) of the storage and trading companies  was €600 million (150 billion forints), by 2013 this grew to €1.2 billion (355 billion Forints) – double previous liabilities from just 9 years earlier.

Thus in 2013 the Hungarian government (and taxpayers) became the sole owner (once again) of €2 billion worth of FGSZ gas infrastructure and accumulating financial losses because of the structured domestic gas market, which relies on losses being incurred in multiple companies. Concluding an agreement with Russia that offers lower priced gas is only one area that can reduce the perpetually hemorrhaging Hungarian gas system.

Hungary’s future gas

And finally, in order to structure and absorb these losses, the Hungarian government has created a new holding structure spread out among different state owned institutions (MOL, MVM, the Hungarian Development Bank and even the Interior Ministry). In a separate post, I’ll discuss the actions of the privately owned gas distribution companies (RWE, E.ON, GDF and Enel), but here I want to bring it full circle to show the results of this gas buying spree by the government.

In 2015, all gas distribution companies (privately owned that participated in the 1994 privatization process) returned their universal service licenses. After years of accumulated losses they gave up (I’ll write more later on these companies and their financial losses). As an overall example, utility sector profits inverted from total profits of HUF 224 billion in 2009 to HUF 119 billion losses in 2012. The Hungarian government is now taking over some of this debt.

Don't try contacting MFB - there are no contact details on the website.
Don’t try contacting MFB – there are no contact details on the website.

In 2015, the Hungarian Development Bank bought out the city of Budapest and RWE for their share in Budapest’s distribution company FOGAZ. After all the distribution companies gave back their licenses to supply households in the summer of 2015, FOGAZ will now supply the entire household sector across the country.

In 2013, the Hungarian Development Bank (MFB), bought a 51% share from MOL of the MMBF Natural Gas Storage company. The other 49%, was a share increase for previous joint owner MSZKSZ – the Hungarian stockpiling association (an association tasked with energy security of Hungary ). [Note: I cannot find the ‘purchase price’ of the storage facility]. The importance lies in the MFB ownership of three gas companies: 1) gas supply rights (FOGAZ), storage (MMBF) and even owning a registered gas trader (MFB Földgázkereskedő Zártkörűen Működő Részvénytársaság).

Importantly too, under legislation passed in 2014/2015 the ownership of gas in storage can be passed around with only the Hungarian energy regulator being informed about the trades. For example, gas ‘stored’ by Russia in Hungary, could be traded between government or private entities and the applicable tax is applied only when the quantity is withdrawn from storage. In stark reality – gas trading and all financial transactions are done in a black hole. Thus Panrusgas may be an opaque business entity that imports and profits from gas imported into Hungary, and just as MOL incurred losses that system users did not see, other companies may accumulate profits or losses when trading occurs below ground.

Based on the entire history of Hungary’s gas system, there are always financial leaks. That is, there are always losses born by some parties. The new arrangements looks like a government owned orchestra. Financial losses will be born by Hungarian government owned companies, so households have ‘cheaper’ gas. Overall, it appears MFB will be the entity incurring these losses this time. In my opinion, the solution is to pump state money from central funds into MFB to recapitalize it for losses incurred on the gas market. Thus, gas prices for households can stay low – perpetually – while the government uses the low energy prices as propaganda to support its popularity.

Inherent in this new arrangement is a political trip wire (as I’ve written before). Any attempt at a future government to have gas users pay full market price will need to raise household rates to cover system costs. My use of ‘full price’ does not address previous debts accumulated just within FGSZ, which stand at hundreds of billions of Forints, and somehow have to be paid off. Since Hungarians have never paid the full price of gas then politically moving towards a market based energy system is near impossible. Illiberal economics may now dominate over neoliberal market arrangements, but this new system also requires an illogical accounting method to make it work. The history of the Hungarian gas sector demonstrates, losses just may be kicked down the road another twenty years. If Hungary is already this indebted to Russia and holds cozy relationships for lower gas bills, what will the country do in twenty years when the gas debt is more than doubled its current amount?

 

Useful sources:

Atlatszo. “Akár 600 Milliárd Forint Veszteséget Okozhat Az Eon Földgáz-Nagykereskedő Megvásárlása,” August 13, 2014. http://atlatszo.hu/2014/08/13/akar-600-milliard-forint-veszteseget-okozhat-az-eon-foldgaz-nagykereskedo-megvasarlasa/.
Felsmann, Balazs. “Can the Paks-2 Nuclear Power Plant Operate without State Aid? A Business Economics Analysis.” Energiaklub, June 23, 2015. http://www.energiaklub.hu/sites/default/files/study_can_paks-2_operate_without_state_aid_energiaklub_2015.pdf.
Berend, Ivan T., and Tamas Csato. Evolution of the Hungarian Economy 1848 – 1989. Vol. 1. One-and-a-Half Centuries of Semi-Successful Modernization 1848 – 1989. Columbia University Press, 2001.
Department Of State. The Office of Website Management, Bureau of Public Affairs. “Hungary.” Report. Department Of State. The Office of Website Management, Bureau of Public Affairs., April 11, 2013. Hungary|. http://www.state.gov/e/eb/rls/othr/ics/2013/204657.htm.
Bogel, Gyorgy, Vincent Edwards, Marian Wax, and Tibor Benko. Hungary since Communism. MacMillan Business, 1997.
Andzsans-Balogh, Kornel. “The Road to Hungarian Energy Security,” March 15, 2011. http://ensec.org/index.php?view=article&catid=114:content0211&id=278:the-road-to-hungarian-energy-security&tmpl=component&print=1&page=.