Tag Archives: EU

Putin-Orban Politburo Meeting: Cash and energy co-dependency

The global fall in oil prices and the shaking foundation of Russia’s economy has analysts and the media questioning Russia’s commitment to financing and  building Hungary’s expanded Paks II nuclear plant. On February 17, Hungary’s Prime Minister will be in Moscow for a meeting with Putin – almost a year to the date Putin visited Hungary. Top of the agenda is energy. In this short analysis, I’ll simply be stating the importance of energy projects and the historical commitment both Russia and Hungary hold to supply side economics of energy resources. Their common energy policy is: Immediate cash is more important than long-term energy reduction methods. This is in contrast to more advanced countries which are moving to tackle demand side inefficiencies and rolling out low cost distributed generation technologies.

The autocratic habits of Putin and Orban make them susceptible to stick with supply side economics. Pushing out natural resources and producing more and more energy to grow an economy is straight from the Politburo playbook. Or more accurately, Gosplan’s book.

To frame my discussion on supply side history of energy resources let’s go back to the 1980s, when the Soviet Union’s organization of Gosplan set the five-year plans. And let’s frame this discussion within the general economic difficulties the Soviet Union found itself in the 1980s. Energy investments were planned to increase 50% between 1981 and 1985. More broadly, this “implied that energy was to absorb fully two-thirds of all new Soviet investment during the coming five-year plan…. [With] the share of energy in the planned increment of industrial investment came to a whopping 85.6 percent.” This means, almost all of the money meant to build the Soviet economy was going towards energy projects. Much of this was down to the increasing costs of extraction and expanding the energy network from Siberia (Gustafeson 1989, 36). We can also insert gas pipelines to Eastern and Western Europe. In short, the energy sector was the primary recipient of financial resources for the Soviet Union. The sector held both domestic and foreign political-economic dimensions.

Just to bring us back to the era of Soviet energy policy and the Politburo

Wrapped in the Soviet energy strategy was rolling out nuclear reactors across the Eastern bloc. Hungary was a recipient of this push with the building of Paks in the 1970 and early 1980s. But Hungary pursued Paks only after it became clear that oil was going to be very expensive over the long term for producing electricity. Paks II represents the continued economic investment abroad for political-economic influence, and this supply side ideology.

There was a moment of rationality, by 1983, Gorbachev recognized the need to re-orientate, at a significant scale, capital onto energy conservation measures. Nonetheless, by 1985, global oil prices plummeted along with the dollars fall against other currencies. Oil profits were wiped out in the Soviet Union (Gustafeson 1989, 36, 46 -48).

It is important to pause here, I’m spending time on this, as it reflects our world today – in 2016, low oil prices and external conflicts (even down the the Syria/Afghanistan comparison).  The push for conservation was a watered down for the five-year plan starting in 1985, investment into energy supply would continue at a high pace – the money was needed, while energy conservation was given lip-service (Gustafeson 1989, 36, 46 -48).

An energy conservationist?

Russia is built on an export hand-to-mouth energy system. Political influence and immediate cash needs supersede long-term planning for efficiency and effectiveness of energy resources. Putin is lucky to find a friend like Hungary’s Orban who also understands the benefits of supply side energy for political and economic purposes. Cash generated from consumers helps to finance government expenses.

Hungary holds no ambition to reduce its raw energy needs. The solution of the Orban government since 2010 is to take money from foreign and domestic energy companies to reduce household’s energy bills by 25 percent. I’ve outlined how unsustainable this is before. The drop in oil and gas prices over the past few months, has seen households in Bulgaria pay less for their gas, but the same has not happened to Hungarian households. Essentially, either the financial losses in the system are being paid off, or the money goes into the ether.

Under the Orban government, over the long-term, Hungarian households are no better off than the foreign energy companies. The dramatic reduction in investments into the energy sector means fixing things as they break will cost more money. In addition, there is almost no money to invest into energy efficiency. If a large number of Hungarian households have trouble paying their energy bills – and this is the rational used for nationalization and reducing bills 25 percent – then they don’t have money to invest in energy efficiency which will reduce their bills more than 25 percent. Thus over the long term, Hungarian households will  pay more for an energy system with spot repairs and for leaky windows and walls.

Demonstrating the common perception in Hungary of corruption at the highest levels, the government is reallocating EU funds of HUF 309 billion meant for energy efficiency measures in 50,000 homes. The money will now be used only in public buildings. In my opinion this is an attempt to satisfy the EU’s energy efficiency directive. This stipulates that governments must renovate three percent of the buildings they own per year. Just like other large scale projects in Hungary (notably LED street lighting by Orban’s son-in-law), these government controlled projects are susceptible to corrupt tendering practices. Or in the eyes of the government, they can meet the EU energy efficiency directive while also channeling money to selected companies. They also do not need to finance this three percent goal from the state budget.

Just like the government of the Soviet Union, both Russia and Hungary place supply side energy economics ahead of demand side efficiency measures. Even if these measures cripple and stunt the economic growth of each country. Supply side measures are only short term building projects pumping out more and more natural and financial resources. Only the companies and individuals vested into building the infrastructure and selling energy resources make money. The financial resources of households are degraded over the long term because they must pay more for emergency repairs and inefficient homes.

Hungarian gas bills represent a simple wealth transfer to Gazprom and both the Russian and Hungarian governments: Twenty-percent of every gas bills goes to pay Hungarian VAT (this is higher than in 2008 – and even higher than Norway’s VAT), around 70% of householders bill payments go to the (mostly) Russian entities that sell the gas, including Gazprom Export. Thus, Hungarian households do a wealth transfer to Russia and to Hungarian government approved entities involved in the gas business. Only a small percentage of the bill actually covers the network costs – which the government waged the war against foreign utilities over. The increase in corruption in Hungary and the endemic corruption levels in Russia means Hungarian households are forced to pay for energy services that may also be involved in corruption. The costly expansion of Paks II, also fits into this narrative. If investments into energy efficiency (both electricity and gas) were carried out households could reduce this wealth transfer to Russia and the Hungarian government.

Source: European Commission, 'Energy prices and costs in Europe' 2014, https://ec.europa.eu/energy/en/publications/energy-prices-and-costs-europe
Source: European Commission, ‘Energy prices and costs in Europe’ 2014, https://ec.europa.eu/energy/en/publications/energy-prices-and-costs-europe

The original push for energy conservation by Gorbachev in the mid-1980’s was also a push for increase resources to benefit consumer goods and the lifestyles of Soviet citizens.  In the end, the financial resources went into expanding the energy sector to underpin an inefficient industrial sector. Immediate cash was the main concern. This is the same concern that underpins the operations of Hungary and Russia – thus they maintain a supply side energy system with high taxes. It would be useful if Putin and Orban spoke together about improving the lives of their citizens through energy efficiency efforts – and not expanding the profits of Gazprom and intermediaries involved in the gas business or large government projects meant expand energy production (Paks) or steering energy efficiency contracts to approved companies.  Hungarian household should not subsidize the supply side energy interests in Russia and Hungary. It would also help if Putin and Orban stopped acting like members of the Politburo in 1985.

Additional sources:

European Commission. “Energy Prices and Costs in Europe,” 2014. https://ec.europa.eu/energy/en/publications/energy-prices-and-costs-europe.
Gustafson, Thane. Crisis amid Plenty: The Politics of Soviet Energy under Brezhnev and Gorbachev. A Rand Corporation Research Study. Princeton, N.J: Princeton University Press, 1989.

Energy Dependence: Politically cheaper than energy independence

The Soviet Union embedded into the landscape and economies of Central and Eastern Europe a system of technological and resource dependence. Political and social benefit derived from this energy system. Politicians still continue to benefit from this arrangement. This system fails to reflect current political arrangements and technological advances. Failure to build an energy system that is technologically and resource independent of Russia maintains the political and social ties established during Communism.

The centralized system created a continental oil and gas pipeline network to deliver the natural resources of the Russian heartland and Central Asia to the ‘satellite’ countries in Europe. Replication of this networked approach also extended to nuclear power through scientific knowledge and components. To create sufficient political independence a new energy system needs to be built. This includes a new gas networks and new electricity generation technology – all non-Russian sourced. Failure to build an alternative system maintains the historical status quo.

Picture of a young Communist worker building the foundation of Hungary's future energy system
Picture of a young Communist worker building the foundation of Hungary’s future energy system [Also, the Hungarian text on the side lauds the brotherly friendship of the Soviet Union and Hungary – I’m working on a translation]

The old- new energy system

The Soviet energy legacy was handed off to the Russian state which posses three key energy resources and technologies: 1) Oil, a global commodity that is easily shipped, and holds limited pricing differences. 2) Gas, relies on transit pipelines, industrial and household infrastructure and is susceptible to supply interruptions and monopolistic pricing, without sufficient storage or alternative supply routes. 3) Nuclear, rests on technological knowledge, spare parts, fuel processing and storage; technological lock-in occurs creating high switching costs.

Breaking the energy dependence network established by the Soviet Union requires Eastern Europe to establish a new regime of energy independence. This is done in two ways: First, alternative supplies of resource are required. This means building alternative delivery systems for resources currently delivered by Russia. New gas transit pipelines bringing non-Russian sourced gas will deleverage the region from energy dependency. Second, alternative technologies offer the ability to reduce long-term dependency. Nuclear power affects two generations of citizens, the high sunk costs prevent present and future political and social independence. Adding more energy alternatives rather than subtracting old infrastructure, over time, brings about greater energy independence.

The cost of energy (in)dependence

Resource independence holds two approaches. Poland pursues and energy independence strategy opposite Hungary and Bulgaria. Both are influenced by the cost of resources. For Poland, domestic and imported coal provide 90% of the countries electricity generation. Imported Russian gas is important for industry and cogeneration of electricity and heat. LNG now provides an alternative source of gas – but at a higher cost. The true cost of coal is not reflected in its market price. Environmental and health costs are not priced into the energy security argument for continuation of coal. Therefore, the cost of resource independence does come at a price.

Hungary and Bulgaria, in contrasts, seeks to maintain and increase their use of Russian gas. Alternative supply routes are sought through interconnectors to Slovakia and Romania. With the expansion of interconnectors, Western European gas can now reach the CEE region and act as a limited bargaining lever for lower prices. Nonetheless, both countries are slow to build and open up existing pipeline capacity to neighboring countries. The limited steps taken for infrastructure and market diversification prolong their resource dependence.

Resource dependence extends to upstream diversification. Both countries see Russian sourced gas, via Turkey as a ‘true’ route of energy diversification. Both countries are heavily dependent on Russian gas and use gas a political measure of their political devotion to Russia. Gas transit fees can help offset politically controlled gas pricing for consumers. The financial losses incurred by Bulgaria’s NEK are equal to the transit payments of Russian gas flowing to Greece. Hungary’s support for South Stream and Turk-Stream only excludes Ukraine, they do not break Russian resource dependency. Annual gas contract negotiations are always framed by the Prime Ministers of Hungary and Bulgaria as diplomatic successes and servility to Russia.

Technological dependence in Hungary and Bulgaria are present in the form of nuclear power. Poland rejected the Soviet offer for nuclear power in the 1980s.
The built facilities in each country provide ‘cheap’ electricity at a price consumers in both countries can afford. The centralized and state owned facilities enable the state to actively manage and influence the energy system in both countries. Low priced electricity can be supplied to households. Bulgaria was in talks with Russia to build another nuclear power plant at Belene (more on this elsewhere) but ultimately backed out of the deal during the financial crisis as demand plummeted. Hungary, after Prime Minister flew in secret to Russia, signed a (secret) deal to expand Paks nuclear power plant. Hungary is now technologically dependent on Russia for another 40 – 50 years.

Hungary’s dependence on Russia, while masked by the technological dependence is also financial. As an interviewee in Bulgaria pointed out, the Russians have the whole package that no other company or country can compete with. They provide the financing, the technology and the fuel – they are the Amazon.com of nuclear power. Competing on these terms is almost impossible for other countries. Thus, if a country is serious about nuclear power, the Russian offer – particularly if you are a cost conscious country – is very appealing. If a country is open to non-centralized generation sources and able to finance its own energy system, then they will probably not choose nuclear power (this is a general statement and needs more support elsewhere).

Concluding Energy Dependence

For our discussion, I discounted the full environmental cost of nuclear and coal (including waste storage and CO2 emissions). Avoiding the environmental discussion (for the moment) enables engagement with the political prioritization of energy security and energy prices. Energy independence is not provided when the energy system is based on the old political-economic order. The Communist system linked the energy resources of Russia and Central Asia to the Communist satellite countries of Central and Eastern Europe. This system is perpetuated in Hungary and Bulgaria.

The overriding cost consciousness of governments and consumers results in continuation of the energy system. Investment continuity, just as private investors demand it, is provided to Russia through political agreements. Continuation of resource and technology dependency ensures Russia stays politically and economically connected to new EU member states. There is an inherent contradiction between neoliberal market requirements of the EU and the secret and centrally controlled monopolistic structure of the Russian energy system. So far, Bulgaria and Hungary accept this contradiction, while Poland strives for self-sufficiency from both systems.

Russia and Mackinder’s reach into CEE Gas Markets

The Magyar came next, and by incessant raiding from his steppe base in Hungary increased the significance of the Austrian outpost, so drawing the political focus of Germany eastward to the margin of the realm.

H.J.Mackinder 1904

Projecting Power from the Gas Heartland
What provides the best strategic advantage: Mobility upon the ocean or mobility across the stepped lands of Eurasia? The question was examined by Joseph MacKinder in 1904 before the calamities of the 20th century. Applying MacKinder’s treaties to Europe’s energy landscape of today provides important insights into sphere’s of influence. Today, we can draw on MacKinder and apply the sea vs. land argument for control and influence in Central and Southeast Europe.

In this post I will update a single key underpinnings of Mackinder’s consideration of spheres of influence, drawing from the concept of controlling the resources of the Euroasian landmass (Russia) compared to European counties with access (and control) of the seas. I do not address the historical role and influence of Mackinder’s writings. Reflecting on MacKinder is important because it serves as an important vehicle to understand current debates around Russia’s involvement in Central and Southeast Europe. By updating and re-positioning gas within Mackinder’s framework an assessment of the position of countries between Russia and Western European countries demonstrates important political and economic considerations in the price of gas. In this analysis I’m largely referring to EU member states Poland, Slovakia, Hungary, Romania, Bulgaria.

Historical Reflection

Thus marginal ocean-fed commerce… form[s] a zone of penetration round the continents, whose inner limit is roughly marked by the line along which the cost of four handlings, the oceanic freight, and the railway freight from the neighbouring coast, is equivalent to the cost of two handlings and the continental railway freight.

–H.J.Mackinder 1904

If we update this cost of handling – not freight – but natural resources, such as natural gas, oil and even nuclear fuelrods, we begin to see that the past price of freight is still relevant for our discussion. The zone of penetration of ocean freight benefits those countries in Western Europe. While the countries in Central Eastern Europe receive lower priced gas piped across the continent from Russia. While countries in Northern Europe benefit from the piped gas from the North Sea – acting as a ‘land’ source for their energy needs – however, bringing that same gas to much of Central Eastern Europe is constrained by continental infrastructure and increased cost competition for network access in mainland Europe.

Price Differences

The price differentials are first evident in the border prices for networked gas between markets. Hungary’s estimated Russian border price for gas imports for June – August 2014 are at 22.18 Euro/MWh, while the better interconnected network of Germany has a hub price of 18.33 Euro/MWh. While Bulgaria shells out 28.12 Euro/MWh for almost total reliance on Russian gas.

Source: Market Observatory for Energy DG Energy, https://ec.europa.eu/energy/sites/ener/files/documents/quarterly-gas_q3_2014_final_0.pdf, pg 26
Source: Market Observatory for Energy DG Energy, https://ec.europa.eu/energy/sites/ener/files/documents/quarterly-gas_q3_2014_final_0.pdf, pg 26

LNG is the seabased routing of natural resources. LNG cannot compete against European and Russian sourced gas for Central Eastern Europe. And here I’ll keep my analysis at a pan-European level to demonstrate even with liquid Western European markets, Russia hold significant competitive advantage. In a direct comparison against global gas prices, Russian gas prices historically come out competitive. In the chart below, the main lines to observe are the Europe Oil Indexed Contracts [after concessions (BAFA)] these include Russian contracted gas, NBP which is a basket of gas prices (including Norwegian gas). Even US exported gas, represented by the Henry Hub price, needs to be doubled for US LNG export.

Source: “Reducing European Depedence on Russian Gas: Distinguishing Natural Gas Security from Geopolitics.” The Oxford Institute for Energy Studies, October 2014. [http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/10/NG-92.pdf.] pg 31
Source: “Reducing European Depedence on Russian Gas: Distinguishing Natural Gas Security from Geopolitics.” The Oxford Institute for Energy Studies, October 2014. [http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/10/NG-92.pdf.] pg 31
The regional price for cooperative regimes, we see that deals can be struck. In February 2015, on a to Hungary Putin gave the cooperative Hungarian Prime Minister, Viktor Orban a discount for his friendly attitude towards Russia. In renegotiating a gas import contract Budapest achieved a price of $260 tcm (thousand cubic meters) as compared to a European average of $270 tcm. Similar price adjustments, reflecting changes in international gas and oil prices, were also achieved for Austria earlier in 2015 and Bulgaria in 2012. The takeaway is Russia is competitive and willing to adjust to international shifts in gas and oil prices.

Adjusting wholesale gas prices is essential for influencing the political landscape in Central Europe. Household gas prices are politically important in the region. I discussed above the competitive wholesale market prices in Europe, but divergence is strongly apparent at the household level. Politically, this is where results are achieved for politicians.

The map below shows the price difference for households. Ultimately, as discussed elsewhere on this blog and in other writings by myself, it is the consumer price that helps direct political control and strategy in the energy sector. In the pricing map we have a clear division between those countries reliant on Russian piped gas for consumer prices and those reliant on sea based sources – even underwater pipelines from the North Sea and from Russia (Nord Stream).

Source: Market Observatory for Energy DG Energy, https://ec.europa.eu/energy/sites/ener/files/documents/quarterly-gas_q3_2014_final_0.pdf, pg 30
Source: Market Observatory for Energy DG Energy, https://ec.europa.eu/energy/sites/ener/files/documents/quarterly-gas_q3_2014_final_0.pdf, pg 30

When we draw in this information, and the map (above) represents a clear division between how energy markets and geopolitical influence can be exerted. The household price of gas is significantly different in Central Eastern Europe and proportionally lower than the wholesale price difference. In this ‘flash’ analysis I won’t average out the household price difference between the two regions, but eyeballing it there is a clear difference – particularly if the information on the higher wholesale price, European averaged gas price are contrasted with the lower household price. In my opinion there is a significant story of why these price differences exist.

Nonetheless, for our discussion here this gets to the heart of our MacKinder hypothesis. That control of the heartland – the pivot region (Euroasia), the “vast area of Euro-Asia which is inaccessable to ships… and is to-today about to be covered with a network of railways….[with conditions of] mobility of military and economic power…” lends itself to a comparison of gas pipelines, LNG, market structures and geopolitical influence. Events in Ukraine underscore the military might, while differential in household gas pricing underscore the economic might of today’s Russia.

Objections

Objections to both a MacKinder view and regional pricing differential views, I believe would have two points. First, they would say that the underdeveloped interconnector network lends itself to isolated markets. A Gazprom position, is that Central European isolated markets consume less gas and therefore are more costly to service, price adjustments just represent market trends. Second, both the break-up of the Soviet Union and the loss of Ukraine of Russia actually weakens the application of MacKinder and the Pivot region. My response to both of these arguments is that if gas prices are non-political then household gas prices would reflect the wholesale market price. However, the dramatic difference between EU household prices indicates elements of political and manipulated economic interests.

Conclusion

Pricing differences between EU member states falls along an important geopolitical fault line. Control of the Eurasian continental heartland and the natural resources, delivered via pipeline, provides a competitive pricing advantage over LNG and even delivery from more volatile regions like North Africa or from politically contentious and higher priced technologies like hydraulic fracturing. Continued reliance and even promotion of options to increase Russian gas into the SEE and CEE regions underscore the political importance Russia holds in securing and dominating these gas markets. As long as household energy prices are a dominant political issue, Russia will continue to hold sway in the regions’ energy markets by projecting its power through political leverage.

Key Sources:
Mackinder, H. J. “The Geographical Pivot of History (1904).” Geographical Journal 170, no. 4 (December 2004): 298–321. doi:10.1111/j.0016-7398.2004.00132.x.

Market Observatory for Energy DG Energy. Quarterly Report on European Gas Markets. European Commission, Directorate-General for Energy, 2014. [https://ec.europa.eu/energy/sites/ener/files/documents/quarterly-gas_q3_2014_final_0.pdf.]

“Reducing European Depedence on Russian Gas: Distinguishing Natural Gas Security from Geopolitics.” The Oxford Institute for Energy Studies, October 2014. [http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/10/NG-92.pdf.]

Euro Energy Czar: Does West Europe finally get it?

The apparent creation of an energy czar for the European Union signals a harder line against Russia. A move from the days when Germany’s Chancellor, Gerhard Schroder moved from the chancellor’s chair to a Gazprom chair – represented the ‘tight’ relationship between Germany and Russia. Akin to marriages  between European monarchies. (I’ll leave it to you to develop the image of Schroder marrying into a Russian oligarch family.)

The revitalization of the eastern European countries is now represented by the appointment of Prime Minister Donald Tusk of Poland to lead the other European leaders in the EU Council of Europe. Tusk earlier this year championed a call for an EU gas union that was widely acceptable as a great idea – and has pushed forward the long simmering discussion of a closer EU energy union.  In 2010 former European Commission President Jacques Delors and Polish MEP Jerzy Buzek, floated the idea to build an EU energy community – drawing from the founding structure in the European Coal and Steel Community.

It is now the Polish contingent that is pushing for a ‘high official’ to coordinate all external energy policy.  The EU Parliament’s Foreign Affairs Committee overwhelming adopted the proposal to create an energy czar to represent a common EU energy position in the foreign policy realm. Adopting a common energy foreign energy strategy and representation – no matter how muddled by diplomatic niceties, is stepping in the right direction to address the tremendous energy security gulf between ‘old’ member states and the states joining since 2004.

As I’ve written before, there is a huge gap between the development of the energy systems in the west and east. Both financially the western EU members are able to invest and upgrade their energy systems, while the east are stuck attempting to keep prices extremely low, with limited upgrades throughout the system. This applies to rolling-out more energy efficiency measures and renewable energy. The east becomes stuck in this pipeline dependency. Unable  – and in some cases – unwilling to finance their way to a new energy system.

Independence from Russia is a nice dream, but energy is the way Russia projects its power. For some politicians, like Hungary’s Prime Minister Orban, staying within the Russian sphere of influence holds financial and political benefits. For the Poles, they gain politically moving away but are so wedded to the Russian gas system, and reject significant upgrading to their energy system, such as getting off the carbon road, that they remain tied.

An EU energy Czar able to counter the Czar of Russia (Putin) must be given legitimacy from EU members.This means both the Germans and the Hungarians – much line up with the Poles and seek greater independence from Russia. However, as the building of the South Stream pipelines shows, Hungary and Bulgaria are willing to move forward with Russia on the pipeline despite strong resistance from Brussels. Unilateral agreements and development projects – at the expense of the overall long term EU energy security – will fail to elevate the Czar to a meaningful position.  European countries must line up, and even lend some sovereignty to an EU high representative for energy. The foundation of the EU is based on coordination of energy and industry, let’s ensure this remains central to keeping Europe strong.

 

 

Inter-European Gas Wars: Europe’s pursuit of Energy-cide

Also published on Natural Gas Europe.

There is a gas race in Europe. This rivals the well reported US – Europe gas price difference, due to cheap US shale gas and high European imported gas prices. In an attempt to compete against the US European industry just got handed a price break in the form of lower support payments for the renewable energy sector. However, European countries also compete against each other over the price of electricity, a race to the bottom, or rather Energy-cide: the destruction of sovereignty in the pursuit of lower energy prices.

This price war also forces countries to develop strategies to keep electricity prices low. An example is Hungary’s deal with the Russians for a ‘low’ cost nuclear power plant. This inter-European energy price war holds significant long-term political and economic costs, which can hobble Europe’s competitiveness and political independence.

nuclear

The result of this inter-European price war is Russia captures the Crimean prize by understanding how the game is played. The limp EU financial sanctions to hold Russia in-check are framed as the EU punishing Russia. But this is Europe, the ‘unified’ EU action mask the inter-country price wars raging between member states. In each region this plays out differently, for those in the west of Europe (old member states) it is the result of the high initial cost of shifting towards renewable energy and the impact on industry; for those in the east (new member states), it is reliance on Russian gas and householders proportionally high utility bills.

The impact of this price war can be seen playing out in Berlin and Brussels in April, 2014. First the German government approved amendments to its renewable energy law, lowering the cost of German industry financing for renewable energy. Second, the European Commission voted to reduce payments energy intensive industry make to fund the renewable energy shift. The pressure is now intense in Western Europe to reign in energy prices and the real and potential threat of industry flight to the United States. The US, and its cheap shale gas, is held up as a magnet sucking European jobs. Europe feels the coming climate change apocalypse, just as much as a faltering economy, Russian tanks in the Crimea are simply less threatening. But this is a Brussels’ view of the world, in the east the people and politicians feel the heat from Russia.

The Hungarian government continuously lobbies against sanctions on Russia for the violation of Ukrainian sovereignty. With Hungary dependent on Russia for gas and nuclear power, its current charade of low energy prices can only be maintained by the wishes of Russia. The Hungarian government secretly inked an agreement with Russia to take a 10 billion euro loan to build two new reactors. Despite no social or political debate, the overriding excuse for such a deal by Hungary’s Prime Minister was lower energy prices – even if the numbers show a doubling of electricity prices. He envisions to have Europe’s most competitive electricity cost for industry and be more competitive than the Czech Republic or Germany. Hungary will be a manufacturing powerhouse fuelled by cheap Russian nuclear power. In return, the Russian’s hold over Hungary a huge mountain of debt which they’ll use to manipulate Hungary’s foreign and domestic policies.

Other countries in Eastern Europe are the same, Bulgaria has been plagued with violent riots over electricity and gas bills. The country’s seven member energy and water regulatory commission had 17 different members and six different chairman in 2013. Poland has lost an environmental minister due to bungling the country’s shale gas ‘revolution’ – it still awaits a commercially viable well. Each country in Eastern Europe has the stated aim of having the cheapest gas and electricity and literally being a regional powerhouse. Each country wants to compete and attract industry from Western Europe. Poland wants chemical manufactures from Germany. Hungary wants auto manufacturers to set up shop. It is a continental race to the bottom.

Russia benefits in spades from intra-European conflict over energy prices while the continent as a whole attempts, by any means, to close the price gap with the US. In 2012, the German border price for gas was four times higher than the US Henry Hub price (even if this is a flawed comparison, it is often made as an excuse for needing lower EU energy prices). To close the price gap, somehow the solution is more Russian gas. Russia’s South Stream pipeline project will avoid Ukraine and deliver the same gas to Europe, without Ukrainian interference. The pipe will traverses the Black Sea, landing in Bulgaria and connecting Serbia, Hungary and Austria. When the going got tough over a year ago for South Stream’s competitor, Nabucco, which would bring non-Russian gas to these same countries, both the United States and the EU failed to step up to ensure its success. The project offered to diversify Eastern Europe’s gas supply. Instead the EU accepted another gas pipeline to Italy – a long running ally of Russia and thus acceptable to both those in Brussels and in Moscow.

nabucco and gazprom v4

The evolving gas map keeps the east boxed in: South Stream and Nord Stream. There is almost zero western support for diversification, the result is high prices and Russian dependency with low security of supply.  But is this paranoia? Not when the German partner of South Stream remarks over EU blocked talks with Russia, “If anything, the approval procedures should be accelerated, not delayed,” said Rainer Seele the Chief Executive of Wintershall.

Should the only means of leverage Ukraine holds over Russia be sped up? Just so Ukraine can be eaten faster by Russia? Hungary’s Orban signs secret deals with Russians because he knows he needs to compete against the west on price, Berlin or Paris aren’t going to send cheaper electricity or gas to the east.

The true price masters are the Russians. They see this intra-EU country price competition. They see political leaders hanging by economic-popularity threads, industry bent over a Russian pipeline – sucking gas, Bulgarians protesting over prices and burning utilities’ cars, while Viktor Orban proclaims an energy price war against Brussels while furtively flying off to Moscow. Even the ‘green’ German consumer demands cheaper electricity. Industry perception of the energy system as a whole matters, even if Russian gas is marginal in Western Europe. The closure of German nuclear was perceived as a blow against German industry, another blow is unwelcomed.

The Russians hear from European industrial and political leaders, “take the Crimea, but just help us compete against our European neighbors and America.” Energy-cide, the destruction of sovereignty in the pursuit of lower energy prices. Russia is the cat and Europe is the mouse. Russia eats part of Ukraine, while Russia also politically binds the Bulgarians, Hungarians and Germans over gas prices. Unless Europe stops its Walmart-like energy price race to the bottom, and shores up energy diversification routes for Eastern Europe, Russia will continue to be the top consumer.

Cut Orban off at the Soup Kitchen: Suspend EU Funds

The suspension of EU structural funds to Hungary should happen on Monday, March 11, 2013. This is if the Hungarian Parliament approves the fourth round of revisions to the Hungarian Constitution. Actually, it should happen anyway, as there is no real difference in the state of affairs today and what it will be Monday. But deadlines are useful and it seems that Brussels and the rest of the world woke up again to what is happening in Hungary. My argument for suspension of funds is focused on the role of state institutions. High quality and non-politicized state institutions must ensure the transparent spending of EU money. If these do not exist, the state is open to corruption.

I wrote before about Prime Minister Viktor Orban’s distaste of state institutions that are professional and align with common EU norms. With the placement of former Economics Minister Matolcsy to head the Central Bank and the demotion of two deputy governors, and the expected gutting of staff from the Bank, along with the finalization of the stacking of the Constitutional Court and planned retirement of the remaining hold-outs of non-regime judges, the institutionalization of regime supporters is almost complete. My call for suspension of EU funds rests on the need to remove the financial support of the consolidated Hungarian state under the Orban regime. If Orban’s and Matolcsy’s economic policies are such a success then they should stand on their own two feet. The longer the game of calling Hungary a democracy only perpetuates the regime resulting in the long term decline of the country’s professionally organized institutions and the rule of law. The door of the country is now open to ingraining corruption even deeper and allowing special groups to control whole sectors of the economy – including energy.

The Bulgarization of Hungary

The best example to give is a meeting I attended about six years ago in Athens with South East European countries. It was a technical working committee and most of those in attendance had the authority to agree to changes in how their electricity systems were operated. The only one that couldn’t do anything was the high ranking delegation from Bulgaria. They either sat there and opposed everything or said they didn’t have the authority. The problems with Bulgaria’s energy system are showing themselves from frequent black-outs due to lack of investment to protests erupting over the electricity bills. Snap elections are now underway. Representative of the problems in Bulgaria was the selling of cheap electricity abroad while Bulgarians were forced to buy expensive generation. The long fight between Brussels and Sophia over organized crime in the country – and the failure of Bulgaria to tackle it, demonstrates what can happen when  gutted and powerless state institutions exists and crime/special interests control the state.

I was a co-author of a study in 2009 on the privatization of the state owned electricity distribution companies in Bulgaria. It turns out that the privatization process or the new private owners were not the source of the problem. Rather the shifting politicized regulatory environment and the actions, or rather in-actions, by state owned energy companies is the source of much of the problems. Thus the fault lies with the state – demonstrating the importance of effective state institutions, with a professional work force to oversee the energy system.

Hungary's future 'regional' cash cow - maybe a little too fat to make it out of the country
Hungary’s all purpose state vehicle. From pipelines to mobile phone operators. The cow should be the symbol of the Orban regime. From milking private companies to producing milk for the Hungarian nation.

Economic Corruption 

One of the biggest complaints since the fall of the Communist regimes was how leaders of state owned companies financially benefited from the privatization of their units. The Hungarian economy is becoming more state owned, centralized and controlled by political connections by the day. Certain companies are ‘lucky’ enough to continually win government tenders while tenders that should be public are placed behind the curtain of state security (like a swimming pool or a parking garage) thus allowing certain firms connected to the government to be selected. At the same time, the Hungarian economy falters due to the lack of investment by established international firms. The cracks in Hungary are now appearing for organized crime and ‘opportunistic’ individuals to begin their investment cycle in Hungary.

The great thing about living in a failing state is I can watch it unfold and talk to people that are adjusting real-time to the economic and social changes. A few months ago I was in the gym and a business executive told me now was the time to begin investments in the country because when the regime falls then it will pay to be in the right position to pick up the pieces. His business, from what I know of it, is fairly legitimate. However, (representative of my movement between locker rooms and conference rooms) I recently met someone and his comments and interests in Hungary put me on guard. His business could be questioned as legitimate or not. Hungary for him was viewed as a great opportunity. He has money and wants to invest in Hungarian projects where most established players are pulling out and where any investment outcome is questionable or offers returns only in the far distant future. I question his motives for investing in Hungary and I view it as representative of broader interests in the country by ‘non-transparent’ businesses.

Once the dots are connected, a failing state, teetering on economic collapse, controlling special interests, Putinized democratic elections and state institutions that are under the direct control of politicians where professional decision making is given over to political and personal interests, then the recipe is set for Hungary to become a country ripe for economic corruption and pillage. Long term investments by established and stable national and international companies are replaced by white elephant investments given to government selected firms. EU subsidies are directed to political and economic allies (such as the recent agricultural land give away to connected individuals over local farmers). Hungarian nationalism is used as an excuse to ensure selected firms and individuals profit for their loyalty to the government. In this environment it won’t matter the character references of individuals or companies – if they support the regime then they are friends of the regime.

EU scapegoats – or Orban at the soup kitchen

The decision for the EU is simple. Does the European Parliament and the European Commission want to support the long term gutting of state institutions in Hungary? Certainly democracy and the right to vote is important, but the Orban regime can play soft with what democracy is in Hungary – values can be debated. Professional and institutional competence are inherent to the EU structure. Orban and everyone else may hate the bureaucrats in Brussels, but it is these bureaucrats in both Brussels and Budapest that disburse the funds and underline the democratic order. If funds could be suspended for Bulgaria and Romania over this point then they should be suspended for Hungary.

The suspension of funds for Hungary would drive the country into a greater recession, Orban will lash out at Brussels and blame the collapse of the Hungarian economy on the EU. But why should the EU fund a regime that doesn’t believe in democratic principles and effective, independent state institutions. These are the pillars of the EU. In a country where the rule of law is politicized businesses and EU funds cannot be spent effectively. Control over the Central Bank is only the most recent case of politicization. The longer the Orban regime stays, the less professional and more corrupt state organs become.(The greater the juiciest pieces will be picked over at the time of collapse). As economic decline takes hold (as it already is) the more desperate people will become to stay in their jobs and accept corrupt practices. Passivity and acceptance allows the erosion of democracy. It appears now, only the EU has the power to say no to Orban. And they should say no to his outstretched hand. If begging and homelessness is now illegal – according to Monday’s  constitutional revisions, Orban should be turned away from the soup kitchen.

Russia and the EU: Playing Russian energy roulette in Europe

From the movie Casablanca:

Rick’s Cafe – when Captain Renault decides to shut down the establishment.

Rick: How can you close me up? On what grounds?

Captain Renault: I’m shocked, shocked to find that gambling is going on in here.

[A casino worker gives Renault a wad of money.]

Casino Worker: Your winnings, sir.

Captain Renault: [Quietly] Oh, thank you very much. [Loudly] Everybody out at once.

http://youtu.be/kvE-KVCbvow

Thus the anti-monopoly raids on Gazprom offices across the European Union in September 2011 appear to have set off a rocky period between Captain Renault and Rick Russia and the EU. [See my interview in the Prague Post on this issue]

The response by Russia is President Medvedev was to ask Gazprom and the Energy Ministry how to operate under the EU’s 2009 Third Energy Package. The stipulations in the Package requires, “Companies to sell or spin off their transmission businesses, require them to hand grid management over to an independent operator or oblige them to make the unit more independent through internal action.” There are two things that are odd about this. First, it is now 2011, the package was passed over 2 years ago. Did Medvedev just get to the memo from 2009 ? (and I thought I was behind on my emails) Second, there really is no need to worry about this requirement. The Germans in negotiating the package, managed to water down the unbundling requirement thus protecting their companies, and Gazprom at the same time. Some would say these were not unconnected.

‘Independence’ is a loose term. Making a company’s transmission unit “more independent through internal action,” places little demand to have a fully functioning business that makes independent decisions on network operations. The purpose of having an independent transmission company is to prompt competition by having multiple companies buying and selling gas through a network that does not discriminate between suppliers and buyers.

However, for Gazprom there is little to worry about. Even if Gazprom spins off its transmission business in the EU there is no way to ensure it is independent. If Hungary could never find out who owned RosGas that purchased Emfesz, or Surgutneftegaz that bought the MOL shares, then the continued obscure structure of Russian companies – or appointed board members that stick to the wishes of Gazprom, will result in limited independent action by a gas transmission company from Russia. Even in the US, this type of requirement is hard to police.

The true reason for the sudden rocky period, may be the additional pressure that is building on Russia for the proposed requirement that the EU Commission know the conditions for existing and new bilateratel gas agreements  between a Member State and a third country. This will see the EU insert itself into the contract negotiations between Gazprom/Russia and Member States.

If there is one thing Rick doesn’t want, it is for Captain Renault climbing into bed with him and his past lover, Yvonne.

Let's keep the EU out of our relationship

Baking the Baker study in a European gas oven

Following my earlier post about the report from the James A. Baker III Institute for Public Policy at Rice University on shale gas and the impact on European energy geopolitics, I wrote a longer piece for Natural Gas for Europe. It can be found here. Below is the introduction to the lengthy piece.

The potential of shale gas to alter the geopolitical landscape of energy is becoming too delicious to ignore. The recent report by researchers from the James A. Baker III Institute for Public Policy at Rice University determines that Russia will become a shriveled supplier to the European market by 2040. According to the report, Russian exports will only comprise 13% of the European gas mix, compared to 27% in 2009. The dramatic impact, as determined by the researchers, will be the scrapping of South Stream and altering supply sources for Nabucco. Europe will thwart Russia’s energy weapon by utilizing the increased liquidity in the European and global gas markets. The findings suggest that the overall impact on Europe, of exploited shale gas plays, will be a more independent continent with a reorientation towards the foreign policies of the United States. However, this perspective overlooks fundamental realities about the geopolitics of gas in Central and Eastern Europe and how US foreign policy should respond.

For the rest of the analysis please visit here at Natural Gas for Europe.

The Emergence of an EU Gas Strategy?

The emergence of an effective European gas strategy may be close to being realized. After years of deliberation and allowing private companies and member states to take the lead, the ‘new’ EU Commissioner for  Energy Günther Oettinger appears to be butting the heads of companies and governments. This strategy appears in three areas 1) pursuing third country clauses which denies the right to re-export Gazprom supplied gas to other member states (Poland-Gazprom), 2) political support behind the North-South gas corridor in Central Eastern Europe, and 3) most significantly of all, the effort to get European companies cooperating on the southern gas corridor traversing Turkey.

Commissioner Oettinger, when he joined the Commission, was derided as a vanilla kind of guy, even the US in cables released by Wikileaks describes him as  bland. Well, the thing with vanilla is it just takes a little chocolate to liven it up (ok, I couldn’t think of a better comparison than that). He may be a boring guy (according to these reports) but he may be emerging as an effective and pointed leader that can bridge the fundamental divide in the energy sector. Openly stating, “South Stream can, in the long term, be considered a rival to the Nabucco project,” Unifying the strategies and actions of the political establishment with the capital investments of the private companies. This is absolutely essential if Europe is going to diversify its gas sources, through private effort.

There are two notable events that demonstrate this effort of realizing the southern corridor. The recent Oettinger’s statement telling the project companies to get moving  and encouraging  cooperation between the two consortia that comprise Nabucco and ITGI. A gradual and sustained investment approach – without Russian involvement, appears to be emerging as the solution for transporting Central Asian and gas from the Caucuses to Europe. This approach is absolutely essential if the Commission and member states want to exclude Russian participation in the pipeline from this region.

Russia and Gazprom has been pressuring the Commission and member states to grant South Stream priority status, so that it can have access to lower financing cost and receive similar backing as Nord Stream. The lack of it to date, is indicative that the EU wants a non-Russian gas pipeline project.

In June 2010, the Russians announced that EDF would be joining their consortium, only a memorandum of understanding was signed, full partnership still has not happened. The Russian strategy is to come out with frequent political agreements and big statements to demonstrate that their project is moving ahead and is in step with Nabucco. However, if the merger with ITGI and a less ambitious and lower cost Nabucco emerges (at least in the short term), it will have a very hard time to keep up with the European backed project. Financing, access to gas (non-Russian) and continued commitment by member countries (i.e. state owned energy firms) will all work to drag South Stream into the morose of pipeline project graveyard.

In the end it may be a slow death for South Stream because it is not in the financial interest of member states to participate in two large pipeline projects. Essentially what countries have done, is to hedge their bets on which pipeline is built first. This has also allowed them to maintain good relations with Russia – but the day of reckoning has to come sometime. If all South Stream does is redirect Ukrainian transiting gas thorough the southern corridor, it will be a very expensive detour.

The EU energy strategy launched in 2009, and outlined in the second strategic energy review, along with the events and the awakening of the January 2009 Russia-Ukraine gas dispute, have all played a part in seeking ways to increase  Eastern Europe’s security of gas supply. LNG is a viable option. It remains to be seen if the CEE/SEE region can support all the planned projects on the table. These include 3 to 4 LNG facilities plus, Nabucco along with existing gas pipleline routes – in addition to large planned capacity of South Stream. In the Southern Gas Corridor survey conducted in November and December 2010 by this blog, respondents stated that the most favorable configuration would be Nabucco and two LNG facilities (I’m still working to get all the results out – sorry for the delay)

(source: Limax Energy Consulting/energyscee.com)

The ability to bridge the political and corporate divide in realizing energy projects is a main component to successful energy policy. Whether this is the promotion of competitive markets, or the effort to reduce carbon emissions, in the mix of the energy sector public-private cooperation is essential for increasing energy security of supply. The efforts of Commissioner Oettinger, go far in walking the fine line of working both within the legal parameters of his institution, and the more informal role of prompting, even egging on, the private sector to do more. Europe’s ability to diversify its gas supply rests on this cooperative relationship. It is nice to see the many components of Europe’s energy strategy fall in line. Now, let’s just wait for the next big announcement from Gazprom and how they plan to match Nabucco’s slimming down. Maybe after hibernating all winter the Russian bear will also shed a few pounds.

[postscript: after writing this the Nabucco consortium came out and flatly denied any cooperation with ITGI – from what I understand, even on the Nabucco side, there remains room for cooperation, so this shouldn’t be written off just yet]

Absorbing the cold and not EU money

“Designing a policy without ensuring the necessary finances for its implementation, however, is akin to setting out naked for a polar expedition.”

Ready for Global Warming

Just picture that. You got your sled, you got your chocolate you even have your fury boot and mittens on. But you got no hat, no coat and no pants. This is the picture that CEE Bankwatch Network and Friends of the Earth Europe provide us with their study on the failure of New Member States to absorb funding for renewable energy and energy efficiency. You may have some comforts, but you are going to get cold. The graph below describes the significant deficient in absorption.

I recently interviewed some people concerning energy efficiency for a project that I’m working on. The ability to effectively finance energy efficiency projects was a top concern of theirs. This included coming up with schemes for banks to increase their lending and for governments to institute effective policies.

The results of this study indicate the severity of the problem to effectively find ways to manage already existing, or matching, money for projects. It doesn’t appear to be just finding the funding sources, according to this study, the funding is there. In order for these programs to be effective the institutional capacity must be there.

Graph from Bankwatch and Friends of the Earth
Souce: CEE Bankwatch Network and Friends of the Earth

Overall, the study provides a nice assessment of the barriers existing in each country. And according to them, when you get down to the reasons, climate mitigation projects are not seen as a priority.

I think this explanation is too broad to be accurate. Maybe a better core reason, or explanation, is that energy efficiency isn’t as appealing as other projects, or energy subsidies that can be handed out. The concentration by policy makers has been on supply side ‘greening’ while little has been done for demand side ‘greening’. For anyone looking at the numbers and the payback of energy efficient technologies it is profitable. Therefore simple economics are not the reason for the failure to institute widespread programs. We can only hope the politicians and heads of institutions don’t wait too long before bringing us the clothes so we don’t have to stand around naked.