Tag Archives: oil

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.

Would Surgut investment in MOL save CEE oil flow?

The question should be asked whether an emerging decline in oil being shipped to  Central Europe could be stopped if Russian investment took place in the region’s refinery sector. And more pointedly, whether Surgutneftegaz’s investment in MOL could save the CEE region from declines in Russian oil shipments. According to this well written analysis from EurActiv.com,

Russia’s growing oil exports to Asia and the Baltic have unsettled European traders and refiners, who fear shortages on the Black Sea and in Central Europe should Russian output stall or decline.


The point that makes this report credible is that the decline is not from a coordinated policy, but one that is emerging gradually over time, due to new supply routes and customer base. While, shifting the supply of Russian energy sources have been threatened in the past, it appears that a coordinated strategy has yet to be implemented. This decline appears to be emerging from the gradual growth, from more localized and less coordinated infrastructure building.

The northern European markets and the Asian markets, with new pipelines and oil terminals coming on line, may reduce the flow of oil through the Druzhba oil pipeline, the article states.While the analysis on EurActiv concentrates on the impact on Poland and Germany and forcing traders in these countries to buy through Baltic ports, there may be a more severe impact on more landlocked countries of Central Europe that are more highly dependent on Druzhba for oil.

The other oil import options open to Slovakia and Hungary are primarily through the existing pipeline connected to  Krk in Croatia. However, a trial of this a few years ago, showed that the oil was more expensive to import than through the Druzhba pipeline which Hungary is (basically) totally dependent on. This make sense even when you consider the lower cost involved in pipelines.

But then we have the obligatory quote concerning the death of Druzhba.

“With the Chinese pipeline due to start any day and the launch of Ust Luga, I’m wondering if we will witness the death of Druzhba. Merkel should call her ‘friend’ Putin to figure out what’s going on,” one trader with a Russian major said.

The slow decline, or rather, slow drying up of Druzhba may occur because of a lack of interest of Russia into the region. While it is unfathomable to think that Russia would let the grapes wither on the vine in Central Europe, forcing them to seek energy resources away from Mother Russia; this may happen through unprepared policies or a lack of foresight into the oil sources necessary for the delivery to Central Europe. Overtime a slow shift may occur.

The fact that Russia/Surgutneftegaz is interested in operating through/with MOL by owning 20% of the company may have secured the region against this slow decline. The involvement in the refinery of the oil produced from Russia adds the value-added and profit level that would maintain Russia’s interest in the region. This does not mean that Russia will pull back ‘purposely’ from the region, but rather if the oil does fetch higher prices through other routes, then a reduction of flow to the region cannot be ruled out.

Hungary and MOL have blocked the investment avenue that Moscow and Surgutneftegas were seeking in the region. There is no doubt that the Russians maintain a strong interest in the CEE/SEE region and for operating more in the refinery sector (and gas is of course always an interest). But reduced oil flows to Hungary and Slovakia will not necessarily increase the countries’ security of supply by forcing them to diversify to a more expensive source. The fact that the pipeline already exists to Croatia adds the necessary security of supply element, expensive oil does not have to be shipped through it to actually improve supply diversity. The higher price to be paid for shipments through Croatia, and the fact that in this one area, Russia has been a reliable supplier, may just mean consumers will have to get used to higher oil prices.

In providing analysis on the CEE/SEE region, I usually try to take a conservative approach. One of my underlining understandings of how energy markets work, and even life, is that sustained change, is usually not brought about by one purposeful action, but smaller actions that culminate into something big. In the case of oil shipments from Russia, through Druzhba, we may, have an uncoordinated and gradual decline. While this allows the region time to prepare, (if anyone notices) it also means this will come at a much higher cost. For Hungarians, the price for blocking Surgutneftegaz may be higher than whatever they now find under the carpet to give to the Russians.

Hungarian ‘national security’ requires MOL toilets

Once again Hungary makes a farce out of its tendering procedures. On the same day that the Budapest Municipal Court ruled that the tender for two commercial radio frequencies was illegal Hungarian politicians called for the examination of the results of a gas tender. The crime: a Hungarian gas company lost. In both cases the foreign company offered better conditions than Hungarian companies.

On December 30, 2009 it was announced that OMV had won a tender to provide fuel to government bodies. This would mean that state owned vehicles would be gassed up at the winning bidder’s petrol stations. OMV was able to underbid MOL by 2-3 ft per litre with an overall saving for the state budget at 100- 150 million Forints a year. The tender’s weighting was 70% price, 20% number of stations and 10% location. There you have it, an open tendering procedure with clear criteria and clear savings to the tax payers.

The problem arises from the fact that OMV is NOT Hungarian, but rather part of the evil empire in Austria. You would have thought Lajos Kossuth himself came back from the grave to stop this insanity of governmental cooperation with an Austrian entity. To add insult to injury there is the history of OMV previous attempt to take over MOL and which is now solely responsible for MOL’s current spat with Surgutneftegas after selling it’s shares to the Russian company. This dispute is not new to Hungary, just typical of it forcing its taxpayers to pay more for their energy then necessary.

Now that the tendering procedure is over, and the benefits to the taxpayer and the concept of EU cross-border commerce have prevailed, Parliament’s National Defence and Law Enforcement Committee will hold hearings on the travesty caused by this tender. Apparently, since OMV does not have ‘national security protection status’ then the Republican Regiment, police, fire fighters and ambulance workers will continue to use MOL’s service stations.

I don’t want to rally against MOL, as they also have clean bathrooms, but it is clear that once again the Fidesz politicians that are calling this ad hoc meeting are opposed to a foreign company winning in a government controlled tender. I really can’t take the view that in this case it is an issue of ‘national security.’ MOL will be able to survive and profit regardless if it wins this tender, and OMV probably won’t be making much money off the gas itself, since margins are so thin. Rather, the profit will probably come from selling candy bars and coffee to the police and fire fighters. Also at the end of the day, a savings of 150 million Forints for the government budget won’t do much to dent Hungary’s debt. It will however, cover for some of the lost revenue generated by not renewing the radio frequency tender to the original foreign owners.

Public tenders are done to foster a transparent playing field for companies where the best price and services are gotten for a lower cost than through backroom deals. The fact that OMV won this tender is no doubt a big coup for them, however more than the savings that it produces it should demonstrate Hungary’s commitment to regional commerce. In the era of open EU borders, a company with a long established presence in Hungary, like OMV, should be seen as a benefit to fair business practices, not a threat to national security. It is beyond belief that somehow OMV would withhold petrol to Hungarian ambulances or its police force. If some Fidesz politicians are believers in buying local –at any cost, then let them use MOL’s toilets. But let’s allow the taxpayers to save some money by peeing on Austrian property – even Kossuth himself would be tempted by that.

Once again Hungary makes a farce out of its tendering procedures. On the same day that the Budapest Municipal Court ruled that the tender for two commercial radio frequencies was illegal Hungarian politicians called for the examination of gas tender that didn’t favour a Hungarian gas company. In both cases the foreign company offered better conditions than Hungarian companies.

On December 30, 2009 it was announced that OMV had won a tender to provide fuel to government bodies. This would mean that state owned vehicles would be gassed up at the winning bidder’s petrol stations. OMV was able to underbid MOL by 2-3 ft per litre with an overall saving for the state budget at 100- 150 million Forints a year. The tender’s weighting was 70% price, 20% number of stations and 10% location. There you have it, an open tendering procedure with clear criteria and clear savings to the tax payers.

The problem arises from the fact that OMV is NOT Hungarian, but rather part of the evil empire in Austria. You would have thought Lajos Kossuth himself came back from the grave to stop this insanity of governmental cooperation with an Austrian entity. To add insult to injury there is the history of OMV previous attempt to take over MOL and which is now solely responsible for MOL’s current spat with Surgutneftegas after selling it’s shares to the Russian company.

Now that the tendering procedure is over, and the benefits to the taxpayer and the concept of EU cross-border commerce have prevailed, Parliament’s National Defence and Law Enforcement Committee will hold hearings on the travesty caused by this tender. Apparently, since OMV does not have ‘national security protection status’ then the Republican Regiment, police, fire fighters and ambulance workers will continue to use MOL’s service stations.

I don’t want to rally against MOL, as they also have clean bathrooms, but it is clear that once again the Fidesz politicians that are calling this ad hoc meeting are opposed to a foreign company winning in a government controlled tender. I really can’t take the view that in this case it is an issue of ‘national security.’ MOL will be able to survive and profit regardless if it wins this tender, and OMV probably won’t be making much money off the gas itself, since margins are so thin. Rather, the profit will probably come from selling candy bars and coffee to the police and fire fighters. Also at the end of the day, a savings of 150 million Forints for the government budget won’t do much to dent Hungary’s debt. It will however, cover for some of the lost revenue generated by not renewing the radio frequency tender to the original foreign owners.

Public tenders are done to foster a transparent playing field for companies where the best price and services are gotten for a lower cost than through backroom deals. The fact that OMV won this tender is no doubt a big coup for them, however more than the savings that it produces it should demonstrate Hungary’s commitment to regional commerce. In the era of open EU borders, a company with a long established presence in Hungary, like OMV, should be seen as a benefit to fair business practices, not a threat to national security. It is beyond belief that somehow OMV would withhold petrol to Hungarian ambulances or its police force. If some Fidesz politicians are believers in buying local –at any cost, then let them use MOL’s toilets. But let’s allow the taxpayers to save some money by pissing on Austrian property – even Kossuth himself would be tempted by that.

News: Reuters analysis of Russia-Belarus dispute

SNAP ANALYSIS-Russia’s oil spat with Belarus via Thomson Reuters

By Chris Baldwin

LONDON, Jan 4 (Reuters) – Russia said on Monday it had resumed oil supplies to refineries in neighbouring Belarus after a brief rupture, but tensions were still simmering.

The following outlines some of the issues at stake. [more…]

Follow link for comments from Michael LaBelle of the Energyscee.com

Watching the Russian & Ukrainian energy dispute with eggnog

The cold Christmas and New Years holiday meant the oil dispute between Russia and the Ukraine was subdued with spicy eggnog.  This year the dispute was not over gas but oil.  Probably the best preparation for this non-crisis was in the form of sitting by the fire and letting it play out.  For both Russia and the Ukraine to repeat their dispute from a year ago would have been akin to shooting their other foot (the first foot being shot last year).

The assurance of security of energy supplies from Russia to Europe, since last years gas dispute, has become an important consideration in EU energy policy.  While there has not been a significant change in energy policy, the awareness exists that further disruption could lead to concrete action from the EU. This would be good news for those in Central Eastern European states who have been trying to make their case that Russia is an unreliable energy partner. The cautiously neutral position of Brussels would have shifted to see Russia (and the Ukraine) as unreliable suppliers. The result would be a greater emphasis on shifting to alternative energy routes and supplies.

For this post-non-crisis discussion the reasons for the initial dispute then must be understood. Is it, as suggested, a political ploy for boosting Ukrainian President Viktor Yushchenko’s reelection bid or was it an actual ‘commercial’ disagreement? The aftermath of the 2009 gas crisis, shows the purely ‘commercial’ dispute between the two countries involved a significant amount of political posturing. Prime Minister Putin came out with his usual verbal assault, “We are ready to deliver, we have a contract, but if any of the transit countries abuse, what can you do?” While the main political contenders in the January 17th presidential elections Prime Minister Yulia Tymoshenko and President Viktor Yushchenko sought to play it up, but as it turns out, resolve the ‘crisis’ right at the deadline with a 30% boost for the Ukraine’s transit fees. Thereby lending a concession for Yushchenko, who can demonstrate his ability to negotiate with Russia.

While the curtain drops on the act, I have to applaud the gamesmanship in creating a non-crisis, or rather elevating a regular serious discussion over commercial activity into the political arena for domestic consumption. In the last few days, we can also see again the replay of the 2009 gas crisis, with the cutting of oil shipments to Belarus. With significant stocks held by Belarus, the question must be raised whether it is a commercial dispute or political dispute. Either way the best approach for Europe may be to sit tight with the eggnog in hand, plans at the ready and action to be taken once an actual security of supply threat materializes. Let’s just hope there is enough eggnog to last.