Tag Archives: Russia

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.

 

 

Hungary is a Russian Gas Fuelled Grasshopper Biting Ukraine

This post is also available on Natural Gas Europe. But with a more professional title.

Just as surely winter comes every year, so does the heating season. However, if the justification from Hungary’s TSO, FGSZ is to be believed, they need to stop gas shipments to Ukraine to prepare for this winter. The Hungarian Prime Minister, Viktor Orban appears to be the grasshopper in Aesop’s fable. The Grasshopper and Ant story is about a grasshopper that plays all summer while the ants work – in preparation for winter. Well, in the cartoon version, it only takes the fall leaves to be blowing for the grasshopper to get cold and regret that he didn’t work harder. In our version today, it is the Hungarian government who didn’t work hard enough in the summer. Although on a state radio news broadcast last Friday night, Orban was credited with ensuring the country has enough gas for the winter – the announcer just didn’t mention this was at the expense of Ukraine.

If we can piece together events, on September 25th it was Naftogaz of Ukraine that suddenly found out, through an email from Hungarian TSO FGSZ, the counterpart was halting deliveries to Ukraine. Media reports imply this was after pressure from Gazprom’s head Alexei Miller met with Orban. However, I do not agree. Hungary is on too good of terms to be threatened by Russia – unlike Poland which disrupted flow for a few days after Russian pressure in September.

The reason Russia refrains from threatening Hungary is the Hungarian Prime Minister is at the forefront in Europe arguing against sanctions over Russia’s involvement in Ukraine. In addition, Orban spearheaded and flew in secret to Russia to sign a deal with Putin to expand the existing nuclear power plant. A big win for Russia to get an EU member to sign up to Russian nuclear technology. Hungary has secured a Russian loan to build the plant, despite having no discussions with the Hungarian public or any feasibility studies. Orban is in charge of Hungary’s energy policy – and representing Russia in the EU. He also pushes to restrain Ukrainian western leanings. Pushing for great autonomy for ethnic Hungarians in Ukraine matches Orban’s nationalistic zeal and his regional agenda; autonomy for ethnic Russians also matches Putin’s agenda in Ukraine. Hungary turning off the taps to Ukraine benefits both Russia and Hungary, by keeping Kiev under pressure.

Technically speaking, Hungary halted deliveries to Ukraine to receive significant quantities of western bound Gazprom gas to be stored in Hungary. The history here is on September 16th Hungary’s Development Minister Miklós Seszták received Russian deputy Energy Minister Anatoly Yanovsky. They discussed the ability for Hungary to store gas for Russia, around 500 million cubic meters. This would take 15 – 20 days to transfer into Hungary’s underground storage. In a scenario that gas flows from Russia, traversing Ukraine, are cut off then Gazprom’s gas would be available to European consumers – and to Hungary. Importantly, it helps Hungary because as of September 27th, the storage capacity was at 62%. It is, however, no accident that Hungary’s capacity is this low at the onset of autumn.

In May 2014, at an event hosted by Central European University the issue of Hungary’s ill preparedness was discussed. A now former manager at Hungary’s state owned Hungarian Gas Storage company, stated that the biggest issue facing Hungary was the low reserves and the financing of gas purchases. The reserves then were at 25% capacity. In short, money to buy gas was inhibiting Hungary’s ability to prepare for the coming winter. Therefore, the current low gas levels of 60% should not be seen in isolation. The lack of gas is a result of the lack of stable state finances for the energy sector and Orban’s energy ‘war’ waged against foreign owned energy utilities. The energy sector is now showing the stresses of heavy state ownership. The flooding of gas into the Hungarian system is at best a result of poorly managed state energy assets, at its worst, it is a calculated move against Ukraine.

Since 2010 Orban has put energy assets under state ownership and driven utility prices lower. Now, the utility sector, and particular retail gas companies, are deeply in debt, they are incurring huge losses to pay for the Fidesz government’s more than 25 percent reduction in electricity and gas bills instituted a year ago. The Orban government is now laying out a plan to have ‘non-profit’ utilities. This is hard to see how the sector can shift from horrific losses to a non-profit-chartable-status without increasing consumer costs. The cost reduction and continued nationalization of assets are set to continue.

Mike and HU energy billboard
A billboard proclaiming Hungary winning the energy war against the foreign owned utilities. This is me biking around Lake Balaton – my field research.

The story of Hungary cutting off gas supplies should not be seen as Hungary bending to Russian pressure, rather Russia is helping out Hungary. Central to Orban’s grip on elections is ensuring Hungarian’s feel benefits. Whether this is in the form of retroactively changing mortgage loans between banks and their clients – forcing the banks to payback money in cash, or buying E.ON’s gas storage unit – for energy security reasons – Hungary needs to project power and responsibility over its own fate – and at the same time, deliver cash into the pockets of Hungarians. Russia can help finance and make life more comfortable for Hungarians. Ensuring the Hungarian energy system functions is now dependent on Russian short and long term investments into the country (gas and nuclear).

Hungary needs more gas in its storage in case there is an interruption between Russia and Ukraine. Russia is more than happy to store gas in Hungary, this deal does the following four things to benefit Russia and Hungary: 1) Russia stores gas in Hungary and not in its normal location in Ukraine, giving it European market access and depriving Ukraine of the chance to siphon any off; 2) Previously stored gas was ensured by E.ON Foldgaz Storage, but storage is now owned by the Hungarian state- which lacks the funds to buy large quantities of gas; 3) Hungary boosts its gas reserves with no money down, it only buys from Gazprom if there is an emergency and needs to use it; and 4) Hungary gives the elbow to Ukraine (like it has throughout the entire Ukraine-Russia conflict) but doesn’t inflict significant pain, just cuts off gas for a few weeks proclaiming its own security as more important. Nowhere in this analysis is the assumption that Russia threatened Hungary with a gas cut-off for supplying Ukraine with gas.

Hungary could have – and should have, bought sufficient amounts of gas over the summer. Instead, the country’s leadership were playing with grasshoppers. Back in the spring or early summer the Hungarian government could have struck the same storage deal with the Russians. Instead both Russia and Hungary have waited until the last minute to unroll their ‘technical’ response to Hungary’s low storage capacity. By Russia flooding Hungary’s gas system, Ukraine is deprived of valuable and necessary capacity to help mitigate their looming winter gas shortage. In a generous reading, Hungary is an unprepared neighbor. In a bad reading, Hungary is colluding with Russia to short Ukraine of gas. Let’s hope Hungary is a grasshopper.

EU Needs to Protect Founding Principles: Threats from Russia & Hungary

The time has come for the European Union to morph into a strong international force representing democratic rights and international stability.  Acting softly does not work. The confluence of aggressive Russian tactics to take more territory from Ukraine and Hungary’s rose-tinted glasses on the authoritarian political-economic model of Russia and China – and rejection of EU liberal values, threatens Europe’s founding principles and its territorial integrity.

Peace is threatened on Europe’s edges. It’s time to reach back to the values and wisdom for the founding of the European Union, when it was the joining of the European coal and steel industries, with Germany and France uniting for lasting peace in 1951. Economic dependence would unify the continent and prevent war.

The annexation of Crimea by Russia is now an accepted territorial change.  Russia got it for free because the international community didn’t stand up for Ukraine. Now Russia is expropriating more territory to serve Russian President Putin’s political and nationalistic ambitions. Continual instability on Russia’s fringes can help keep not just his popularity up, but keep Russians together rallying for another war. At this point a victory is necessary for Putin. If annexation of eastern Ukraine is not the ultimate end, then instability and projection of an independent Russian enclave inside Russia will do. Control of Russia’s political system, state apparatus, the media, and clamp down on NGO’s all serve to ensure Putin’s power remains unchallenged, ultimately serving his aggressive foreign and military policy. Manufactured crisis ensures domestic support and keeps institutions and the populace toeing Putin’s line.

Hungary's political-economic model, as perceived by a street artist.
Hungary’s political-economic model, as perceived by a street artist.

In Hungary, the parallels are apparent. Orban has waged his own one-sided war against the EU, IMF, US, NGOs and almost every foreign government. The Orban government is actively inciting irredentism  in Romania.  Instability, created by Hungary, provides the government a platform to ‘represent’ Hungarian interests internationally. The ‘rational’ goes, sins between 1989 and 2010 of liberal economics and communist political maneuvering must be wiped out. However, for most people, this was the democratic period that Hungary had. Nonetheless, democracy, as stated by Orban, doesn’t really work well; now we can watch as Orban consolidates his personal power further by rejigging the whole state institutional structure, and improving upon his (essentially) unlimited authority. In two to three years time we will soon have President Orban to call the leader of the country. Echoing Putin’s back-and-forth between prime minister and president.

Fidesz and Orban have a false mandate. No government can be claimed legitimate when election rules are changed and when the OECD finds the elections unfair. The current two-thirds control in Parliament would not have happened if the elections were fair. Currently, the current local elections are under way, Fidesz wasn’t going to win (or by much), so the rules were changed at the last minute. In a few weeks, they can claim a ‘democratic’ mandate to continue their illiberal and illogical policies of modeling Russia, China and India – and not European countries.

Autocratic leaders are challenging the values and the founding principles for the European Union. For these autocratic leaders nationalism can replace economic growth along with illogical economic and foreign policies. The ‘nation’ also also replaces liberal democratic institutions and individual rights.

The 2008 economic crisis resulted in a delayed and inept EU handling by failing to foster economic cooperation between members states. The current democracy and territorial crisis caused by Putin and Orban, pose a deeper threat to the stability of the EU. Orban and Putin both disparage and dishonor the democratic principles and right for economic freedom: they both reject international stability done through common economic and political values. The expression of the nation is more important than economic growth or individual rights. Instability and security concerns are necessary to project an ‘us’ or ‘other’ mindset. Components needed to maintain unlimited power.

It is now time for the EU to solidify and project its unified strength against aggressive rulers with territorial ambitions and authoritarian power. Not standing up for the founding principles of the EU threatens unleashing the same violent forces the charter was established to contain. The EU must now escalate the cost for Russia to maintain its outpost on Ukrainian territory. Through both economic means, and in human life, through increased military aid to Ukraine to maintain eastern Ukraine. Russia won’t know the EU is serious about territorial integrity until it actively works to keep it. In addition, Hungary may be Russia’s outpost in the EU, but that does not mean the EU must accept or maintain the outpost. Appeasement for authoritarian leaders threatens the political, social and economic founding principles of the EU, and its territorial integrity. The EU needs to act.

 

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.

Street Art: The Russian Mafia State in Hungary

You know all the things I write about on my blog, sometimes I feel I’m a little lost in my own thoughts. But then I came across one of the prolific billboards in my neighborhood before and after the April 6th elections. As you can see from the photos someone else in the neighborhood feels the need to publicly express themselves. I think it is important to deconstruct what the street artist is saying here.

Here in the first photo, taken before the elections, you see the artist is expressing the often used phrase ‘Mafia State’ used to describe how Hungary’s Prime Minister has built a very ‘corporatist’ state. Or rather, the intermingling of state and business.

The word ‘Maffia’ here may also  imply the use of force or coercion if a citizen does not comply with the ruling oligarchs or party line of thinking. While it is normal for the state to use force to enforce order, here we have also a reference to financial means to maintain order. For example, if one is aware of the huge amount of advertising in the Fidesz campaign in Budapest, one may observe other money was used besides that allocated by the state and political parties for financing their campaigns. Also, all the many companies the state has nationalized or bought out over the wishes of its owners, then these could be interpreted as mafia-like actions.

Later, the “Maffia” was painted over.

20140404_170221

However, in the next photo taken on April 10th, after the election, you see the street artist is expressing an even stronger opinion of Hungary’s tie to Russia. Here it is the ‘Russian Mafia’. No doubt this is reference to the many economic and ideological ties the government holds with Russia. The need is now greater than ever for Orban to promote the Russian line in the EU.  The recent Paks deal with the Russians, means Fidesz must serve the Russians. Period.  This leads the artist here to imply Fidesz is a tool of the Russian Mafia State. Often comparisons are drawn between Orban’s governing style and that of Russia’s Putin.  Just today, the government is attacking the Norwegian Fund, as privately financed social activities, which the Hungarian state wants to control. A line out of Putin’s playbook. In our interpretation of the graffiti here, the artist may also be making this statement that Fidesz and Putin are mafia brothers.

20140410_080552 v2

All in all, it is encouraging to see public art work in Budapest which is not all state sanctioned.

Russia Wins the Energy Race and Captures the Crimean Prize

The occupation Ukraine’s Crimea peninsula by unmarked Russian troops brought Russia’s energy dominance over Europe back into headlines. Europe ‘appears’ constrained in a strong response because its reliance on Russian gas. Strong economic sanctions against Russia could start a trade war, with Russian sourced gas spiking in price leading to higher European electricity and heating bills.

"Any advice on dealing with foreign energy investors?"
“So what’s the price for ‘cheap’ energy?”

The debate around potential sanctions is framed as the EU versus Russia. But this is Europe, the inter-factional fighting within Europe actually leads countries allowing Russia to walk away unmolested with the Crimea Peninsula. There is an unreported race in Europe: the energy price war. In each country this plays out differently, for those in the west of Europe it is the result of the high initial cost of shifting towards renewable energy, for those in the east, it is reliance on Russian gas.

Spain, which once offered ‘you can’t loose’ subsidies to anyone hooking up solar panels to the grid have now removed all incentives and are looking for ways to claw back previous financial commitments. From Germany, the Czech Republic to Bulgaria the standard feed-in tariff, which paid a premium on every kilowatt produced, has fallen out of favor due to consumers opening electricity bills and dying of sticker shock. Or so it seems.

The high cost of electricity in Europe is now a constant topic of discussion for European leaders. Europe has a disproportionately high priced gas and electricity system compared to the United States.  Politicians are scrambling to find ways to reduce the bill in Europe. Hungary, in the run-up to next month’s elections, has reduced electricity and gas prices by 25% over the past year. Losses for the energy providers are mounting and investments have significantly dropped. Even in the UK, the idea is floated to freeze electricity bills.

utility investments in Hungary

The energy price war is as much internal as external. The external is the low priced shale gas that has flooded the US power market. Making cleaner burning gas more feasible than coal power stations, and pushing cheap, and easily transportable coal into the European market. As the price of gas has dropped in the US, EU external dependency on imported gas has increased between 2001 and 2011 by almost 20% according to Eurostat’s dependency barometer, with Germany increasing imports by 10%. The global price of gas is relevant for Europe’s economies.

Importantly, the price war is also between Central Eastern European countries like Poland and Hungary against the perceived high priced countries of Germany and France. The drive for shale gas in Poland is an attempt to drop the price to bring the chemical and manufacturing industry from next door Germany. The recent agreement between Hungary and Russia, has Russian Rosatom building two new nuclear blocs is fueled by Hungary’s Prime Minister’s belief that nuclear in Hungary will be cheaper than heavily renewable based electricity in Western Europe. Not even the Russian invasion of the Crimea, which others compare to the Russians stomping out Hungary’s 1956 revolution, has shaken the Prime Minister’s decision – nor his support for Russia and Putin (I don’t strongly agree with this simplified comparison, but honestly, it is really disgusting that Orban doesn’t personally come out with stronger opposition to Russia and Putin’s move – this really exemplifies what kind of person and leader he is.  But I digress).

Any economic sanctions against Russia for invading the Crimea holds the potential for higher gas prices in the European market. Despite recent efforts to diversify away from Russia, the price of gas in the EU is of national economic and political importance. Voters and industry expect the cheapest energy prices possible. Economic stagnation on both sides of the Atlantic forces politicians to look at how they can cut costs, increase economic activity, and compete against each other. Lowering energy prices can be equivalent to lowering taxes, providing an economic wallop. The message is clear, Russia wins the Crimea, but Europe needs Russia’s help to compete against the US – and with each other.

Nothing says energy independence better than Russian nuclear

Energy independence, energy security and security of supply are all tightly connected concepts. Each is different and represents its own strand of knowledge and impacts. The regime of Orban that runs Hungary is dancing again with the Russians over their nuclear prowess. Back in 1999 I helped organize a conference on nuclear power in Hungary. The question then, as now, ‘Will Hungary choose Russia to build a new bloc for their nuclear power station?’ If the country is serious about energy independence, as the leadership claims, then they should not even be considering Russian nuclear power technology. But they are.

Energy is not a rational field, nor is Hungary run by rational people. This week the headline was to import Israeli gas to Hungary. It’s always good to play out the idea of independence but not actually building true independence from the Russians. The public statements by Hungary’s National Development Minister and Deputy Minister for Energy, supporting South Stream – while slamming the Nabucco consortium as high paid (private) consultants, at a recent conference on South Stream reflect the true thinking of the Government. These true feelings combined with the support of re-nationalization of the energy sector all plays into the cosy hands of Russia and the politicization of energy.

Dependency

We can begin to imagine Hungary will buy into another Russian nuclear plant and rely on Russian sourced gas being pumped through the Russian owned South Stream. Orban has stated his goal is to produce 70% of the country’s electricity from nuclear power. The country’s current reliance on Russian gas is near 80% (although this should drop slightly over time). Current electricity production is around 30% from gas. With South Stream, this dependency can be assumed to grow. Even with other diversification projects, the overall ‘normal’ business scenario is an extremely high dependency ratio. Under this scenario future domestic production from wind, solar or biomass is irrelevant, as it remains at niche production levels. Russian nuclear and Russian gas will continue to rule Hungary’s energy system.

The turn away from the EU and Western European energy companies and the embracement of Mother Russia for ‘energy security, security of supply and energy independence’ is no security at all. Once the Russian pipeline and nuclear bloc are built, Hungary will be embarking on another 50 years of dependency on Russia. By this time it will be a century of Russian dominance and dependency! Is this the ‘energy dependence’ talk that has the Orban regime on their high horse over German and French owned utilities?

Energy is politics: Hungary by accepting the subservient role in this relationship will be politically orientated towards Russia. We are only one step removed from the remark, ‘The groundwork is being laid for Hungary to join the Ukraine-Russia energy-economic alliance.’ If Hungary acceptance almost total domination of Russian in its energy supplies than it must toe the Russian line on economic, social and political matters. The EU is now being infiltrated by strong Russian influences on its Eastern borders. The choice is clear: lower gas prices for political and economic commitment to Russia vs. lost political control over domestic EU energy markets. While the EU sees its current satellites spiral back to Russia, the satellites and their revived European values and contribution to Europe are again being lost. Energy is the tip of the iceberg, it is necessary to look deeper and see what total Russian energy dependency means for Hungary, Eastern Europe and for the EU.

The Russian Rock: Re-landscaping CEE energy (in)Dependence

The recent ‘war of independence’ against Western European owned utilities in Central Eastern Europe (CEE) and South East Europe (SEE) sets the stage for re-integration into Russia’s energy sphere – and dependence. A war against electricity, gas and water prices has been raging in Hungary since 2012 while SEE countries have a longer history. The firm rejection throughout the region of privately owned utilities managed by independent regulatory institutions limits capital inflow to upgrade and diversify the region’s energy infrastructure.

Omul de tinichea transfagarashan

Benefiting from the ‘war’ against Western capital is Russia. State owned Gazprom remains the dominant and stable supplier of gas to the region’s state owned firms and centralized energy systems. The CEE (including Poland) and SEE regions reject complex market structures with competition and diversified generation technologies pushed by the EU. Full independence from Russia is no longer sought, rather a ‘safety’ margin to weather a Russian gas storm provides a low cost diversification option. Three historical periods are discussed, with the third marking the re-integration into the Russian fold.

  • Stage one, fully dependent on Russian resources and technology;
  • Stage two, building an energy system semi-independent of Russia;
  • Stage three, ‘(in)Dependence’ on Russia’s energy wealth, the recognition of benefits gained from dependence coinciding with diversification of energy sources.

The CEE and the SEE regions see energy dependence as strategic while allowing for new infrastructure, such as gas interconnectors, shale gas and LNG terminals to rebalance the energy landscape and provide space for energy independence, rebalancing the historical Russian dependence. The term, ‘(in)Dependence’ provides a encapsulating expression of how Russia remains firmly positioned in the CEE/SEE regions’ energy landscape. It is the rock in the region that despite the best efforts of multiple countries, governments and international organizations, Russia remains firmly positioned in the CEE/SEE energy landscape.

Dependence

The Central Eastern European Region, including the Southeast of Europe, is heavily dependent on Russia’s energy resources. This includes gas, oil and nuclear technology. The ability to cement through physical infrastructure and human capital during Communist period established a robust connected system of resources and expertise between the region’s countries and Russia. The headlines hold that gas security is the most contentious issue. But finding a solution to this dependency requires a complex and stable energy investment climate. Since the fall of the Berlin Wall and 2004 and 2007 eastward expansion of the EU, diversification away from Russia for CEE countries was the overall most important headline issue. Despite concerted efforts the region has failed to find alternative sources for Russian gas and remained wedded to Russia. The era of Russian energy dependence can be seen to have evolved over decades under the technical capabilities of the Soviet Union.

We see the impact that this uncoordinated, but regional consistent energy strategy has on the CEE region: Complete reliance on Russian gas and oil imports. After the political winds shifted in 1998 and the region shifted towards Western Europe for political and economic integration these energy links were viewed as high risk entrapping the region into an almost single sided relationship where the terms are dictated from Moscow. The region may have gotten democracy and removed overt economic and political control but the energy infrastructure is a strong reminder that continues the previous political-economic relationship.

Independence

The launching of the energy independence period, away from Russia, began in the mid-1990s.  Privatization of energy assets and the establishment of energy regulators brought private capital into the energy system, transforming the role of the state. Market considerations would help guide and fund development of the national energy system. Technocratic independent regulatory institutions would oversee the region’s energy system.

Privatizations of energy companies, mainly electricity and distributions companies were never very popular, but the politicians making these decisions were aware the state was incapable of funding a renewed energy system able to operate efficiently. Bloated inefficient companies, were typical and unable – or unwilling due to political pressure, to collect from large and small consumers. In Macedonia at the time of privatization there were 500,000 individual court cases filed over fee collection. Large state owned factories paid little or nothing. Other countries mirrored this systemic inefficiency resulting in underfunded and crumbling energy systems. The entire CEE and SEE region made the hard decision to bring in mainly Western European energy companies to fund the renewal of power generation and electricity and gas distribution systems. These important energy assets were privatized, in some countries more than others, but each country, usually with strong encouragement from international organizations, did privatize. Enough to place the energy sector on a market footing.

By the mid-2000s sufficiently robust national and regional markets in electricity and gas were well under development in the CEE and SEE region. Strong market and regulatory elements were integrated into the system. Authority of the energy system typically, on a technical level, transferred from an energy minister to an ‘independent’ energy regulator, who set prices and technical standards. This technocratic system was established to ensure the long-term commitment and investments by private energy companies were secured and the system as a whole was managed to ensure its continual long-term development.

Since the onset of the 2008 financial crisis already strained relations between private energy companies and governments escalated. The underlining truth to the ‘Utility Rebellion’ of the CEE and SEE region is politicians had a hard time letting go.  From price setting, control or influence over cross-border electricity and gas interconnectors politicians have a hard time coming to terms with allowing the energy sector to operate like an open, but regulated, market. Repeated attempts to establish a transparent and unified electricity system in the Southeast of Europe has failed, despite consistent support (and pressure) from international organizations and institutions. In 2013, the tension has spilled over into outright social and political rebellion against private owners. This includes (but not limited to) some headline cases:

  • Albania: In January 2013 the energy regulator took away the license of Czech power company preventing it from operating in the country.
  • Macedonia: Disputes between Austria’s EVN and the Macedonia government over debts and investments are on-going since privatization in 2006.
  • Bulgaria: After years of building tensions, including court cases, between private investors (CEZ, EON, EVN), the spring of 2013 saw public street protests erupt over electricity and gas prices resulting in new elections, along with investigations and regulatory changes in Bulgaria’s energy sector. Although the fury is equally directed at state owned companies as well as privately owned ones.
  • Hungary: What was once a success story of privatization and equal risk levels to Western Europe, changed after the 2010 elections with the new Fidesz government.  Extra taxes on energy companies were introduced after which the energy regulator was sidelined and forced legislated price cuts above 20% in 2013, compounded by a proposed law to be passed before the 2014 elections of utilities becoming non-profit entities. Many privately owned utilities are making losses since 2011 and have slashed investments.

 

Markets and independence

The focus on market transformation contributed to two false assumptions: First, from a Western European perspective, overall EU gas supplies were not significantly exposed to Russian gas interruptions – if they were to occur at all. Russia was a stable supplier not willing to use gas as a political weapon and the governments of the CEE and SEE regions could diversify themselves; second, over time alternative sources could be secured from Europe’s ‘near abroad’. During this age of attempted energy independence, the pro-market perspective and activity created an assumption that the market would induce greater supply security, investments by Western European firms would contribute to greater energy security. However, these assumptions came to a head at the start of 2009.

Supply disruptions, between Russia and the Ukraine, were already regular seasonal events, but in 2009 the crisis cascaded into disruption to EU Member States. This disruption showed, what was already known in the region, diversification away from Russia was important for the energy security and security of supply for the region. It was not the overall EU level of dependence that matter, but the regional dependence. EU institutions woke up, but not until after they coordinated a technical response of sending gas to dried up systems in Bulgaria, Hungary and Serbia. Afterwards, the EU threw greater effort and coordination into helping the region diversify and open up alternative routes of supply for the region. These include interconnectors, expanding gas storage, ensuring reverse flow in pipelines and instituting new procedures and guidelines to ensure a timely coordinated action in case of emergencies. However, much of this diversification is funded by national governments. Key diversification projects include:

  • Polish LNG
  • Poland’s push into shale gas
  • Hungary’s oil and gas group MOL upgraded an oil pipeline to the Adriatic, tying the region into global oil supplies.
  • Bulgaria signed an agreement to import gas from Azerbaijan starting in 2019, completely avoiding Russia by transporting the gas through Turkey and Greece.
  • Bulgaria will build interconnectors with Turkey and Greece.
  • Upgrading gas interconnectors between Hungary and neighboring countries, particularly a new Hungary-Slovak interconnector that begins to establish a north-south gas corridor to Poland.
  • Gas storage investments in Hungary and Austria
  • Western interconnectors to Austria and Germany with reverse flow capability are being built or upgraded.

Missing from these ongoing or completed projects, is the most symbolic project of all, Nabucco. The failed bid to transport Azeri gas to the SEE and CEE regions may turn out to be more politically significant than functionally significant. Existing Soviet era transport pipelines to Russia remain the only large supply route of gas into the region. Regardless of boosted interconnectors, regional LNG access or gas storage, Russia will remain the dominate gas supplier to the entire region, all the additional projects provide a boosted level of energy security and improve security of supply in times of emergency. Nonetheless, if the goal is to ensure operations through a cold winter when the gas is cut off from Russia then the region can weather a Russian storm.

The failure of Nabucco to launch prevents the region from adding the significant alternative capacity, which combined with on-going diversification projects, could reduce further Russian reliance. Nabucco, backed by a consortium of CEE, SEE and Western European companies represented the most symbolic effort for energy independence. It was the battle between competing gas pipelines through Europe’s southern gas corridor: Russia supported South Stream vs. Nabucco. The EU backed Nabucco, had the political-economic edge to deliver more gas while increasing energy security. In the end, the pure commercial decision was taken by the upstream consortium to deliver gas into the Italian market through a competitor private pipeline to Nabucco. The downstream activities in the CEE and SEE region prove themselves just as important as the upstream transit routing decisions, which together influence large scale investments into the region.

Building the Nabucco pipeline through the CEE/SEE region would require decades of commitments from all upstream extraction parties tying them into downstream distribution partners. As outlined above, past relations between the region’s governments and foreign energy investors is turbulent. If Nabucco went ahead the upstream suppliers, extracting in Azerbaijan, would be tied to the political whims in the CEE and SEE region. If the original point is to play Nabucco against the Russians, then the tables could be turned to threaten the extra capacity from the older Russian pipelines to drive prices lower once Nabucco pipes are in the ground. Fixed assets and fixed prices are only as fixed as the political winds.

Current actions of governments throughout the CEE and SEE region demonstrate independent energy regulators are used for window dressing to meet EU requirements. Energy regulators were meant to ensure the long-term investments by energy companies were protected. This has turned out to be false. Under current conditions, the forced price reductions, revoking – or the threat of revoking – licenses and continued disputes over the prices of electricity and gas creates a significant challenge to maintain necessary investment levels, upgrade or prevent a company from financial losses. It is hard to imagine the political rhetoric and actions stopping for upstream suppliers physically locked into the region and with alternative sources of gas for governments to buy.

The original energy newcomers to the region, described above, are now withdrawing – or literally being squeezed out, like in Hungary. In short, the energy investment environment has turned negative, price pressures dominate, and political along with social demands result in an unpredictable market. Despite gas being a global commodity, politically mandated cuts in electricity and gas prices force losses onto distribution companies. Building a multi-billion Euro pipeline through the region begins to weaken under the current domestic and regional conditions energy providers are met with.

The loss of Nabucco should send a clear message, and the politicians of the CEE/SEE should hear it: Market fundamentals, are the basis for investments, not political considerations. Politicians can fight downstream electricity and gas companies for lower prices, argue with Russia over contracted prices, but unless governments are prepared to pay a market price for commodities – thus subsidizing their consumers, energy companies will go elsewhere. Private capital doesn’t finance displays of populism and energy independence that in the long-term undermine both security of supply and energy security.

 (in)Dependence

Today, 2013, we have a new era, of energy (in)Dependence. It represents the limits of infrastructure development, alternative import routes and politically induced market risks. Constant political warfare with private energy companies, in most of the CEE and SEE countries, has resulted in depressed incentives for infrastructure upgrades and price instability. Building a non-Russian transit pipeline into a region of significant market instability requires incentives outweighing these negatives. Each country in the region is proclaiming energy independence, which then (laughably) increases their reliance on Russian gas and increases security of supply risks. Resiliency within national systems is less than in regionally integrated systems. Faltering now on regional integration or preventing foreign capital from entering only underfunds alternative energy solutions which displace Russian gas.

The region’s largest gas projects moving ahead mainly rely on government efforts and financing. Gas storage in Hungary, network interconnectors, Polish LNG terminal and shale gas. While these efforts are able to move the ball down the court towards greater energy security, they do not provide substantial regional upstream diversification. The original intent of privatization of energy companies was to infuse capital into the regions’ energy systems to modernize the infrastructure, governments lacked the money to redevelop the basis of their economies. The question must be asked, does this trend continue, or has energy capital taken flight?

CEE and SEE governments cannot finance a new energy system that excludes market based elements and players. EU institutions are pushing for great market transparency, elimination of state aid, stronger energy regulators, stability in prices for private energy investors, and the interlinking of national and regional markets, thus reducing the room for political interference in energy markets.

There are now a number of attraction for CEE/SEE governments to deal with Russia and maintain its dominate position in the region, and in fact, moving away from Russia now appears more dangerous as the original – and justifiable reasons for energy independence fade. Russia remains a single supplier who is ‘simple’ to deal with. The terms of gas supply are clear, ‘You buy it we deliver it.’ Not the Brussels motto of, ‘If you buy it then here are the competitive conditions that have to be fulfilled, here is the transparency that is expected, and we expect the energy regulator to make well-reasoned opinions based on professional decision making process.’ Politically, that EU garbage only works in Western Europe.

Politically for CEE countries, Moscow can now act as a counterweight against Brussels. Whether this is just symbolic or not, the political elite in the CEE region is learning to balance energy relations between the old foe and the new foe. Finding a common cooperative topic with Russia is also beneficial for on-going relations, if not energy than what? Agriculture or software? There’s nothing that says a serious relationship than building long-term energy ties with Russia. Satisfying the strong neighbor, financially and commercially on energy issues distracts them from other issues.

A cooperative relation also demonstrates that CEE countries can stand by themselves with Russia. The rules of the energy sector may be dominated by Brussels and Western European companies, but the national governments of the CEE region still have an important role to play in their national gas markets and pricing. Bilateral relations are fostered and maintained with energy. While Russian gas, in the age of independence, was viewed as a necessity, in the age of (in)dependence, negotiations demonstrate politicians are in control of their country’s energy assets and a solid relationship exists between old foes/friends. This is contrasted against the assumed friendly relations with Brussels and the EU’s demands for an independent and transparent energy sector with complex rules and limited room for political grandstanding and influence. Russia and Gazprom are more than happy to lend to the showmanship, with the price of gas possibly linked to the temperature of relations between countries. Energy (in)Dependence provides security, simplicity, political capital and limits the need for a more complex energy market to replace Russian sourced gas.

The intertwined concepts of finance and market complexity, for alternatives to Russian gas, provide another reason for energy dependence on Russia. Despite alternative gas supplies, like LNG and shale gas, becoming more available, they will only make a small dent into the domestic or regional gas market. Any alternative to Russian gas requires considerable investments into developing a functioning gas market, including a nationwide network with gas power plants. Failure to incentivize private companies to invest in alternatives to Russian sourced gas (such as shale gas) ensures continued Russian dominance, for example in Poland’s gas market. Poland values energy independence, but not even concerted investments into LNG, shale gas and interconnectors can reduce its heavy reliance on Gazprom. The same applies to all the other countries in the CEE and SEE regions.

Conclusion

The political and economic hurdles for energy independence are too high for the CEE and SEE regions: Building a new energy system, funded by private capital, requires competition and complex market structures with limited political involvement.  Extending dependence on Russia energy resources provides the opportunity to maintain centralized energy systems and using Russia as a counter weight to Brussels non-political energy market schemes.

The collapse of Nabucco represented the failure of an energy independence strategy. A high priced, visionary project that was politically supported but without the political or economic stability required for its long term success. The debate over Nabucco overshadowed the on-the-ground work of building and expanding interconnector capacities, LNG terminals, domestic gas deposits and an overall beefing up of security of supply components. Enough so that supply disruptions, from Russia or transit countries, would have a limited impact. Energy independence can be gained by small hedges against Russian agitation and action. Therefore, (in)Dependence provides a lower cost, economically and politically hedged energy strategy that balances the local politics of the CEE/SEE region and the competing demands of Brussels and Moscow. A classic Central European strategy.

 

Nabucco, and the distant love of Europe

Nine lives or no lives? That is the prospect for Nabucco.

Noise or game changing events: another round of alternative pipeline plans, the re-positioning of political actors, makes another act in the Nabucco opera either more intriguing or increases the restlessness of the audience.

Separate actions inflict little wounds on Nabucco but collective cuts may be eroding the ground underneath. Does the U.S. still fully support Nabucco? What’s the purpose and/or reality of  the new South East Europe Pipeline project?

Will there be any life for Nabucco?

All these questions lead to separate and diverse perspectives of what the future may hold for Nabucco. The doubts begin to settle in as the relationship between EU backers and the governments in the two distant regions move beyond the courting phase of their relationship and seek to build a solid gas link.

Reassessment of relations

There comes points in a long-term relationship where an assessment of what each partner wants…. is it true love, infatuation or is there a true coupling where each partner brings important elements to the relationship? Europe must decide whether it wants to develop the relationship further with the countries of the Caucases and Central Asia. The recent – warning shot – provided by the U.S. State Department Special Envoy for Eurasian Energy, Richard Morningstar should begin to focus attention in Brussels. The ‘misinterpreted’ comments that smaller pipeline projects that are more commercially viable may be better.  While the U.S. embassy rushed out a ‘clarification’ it still states that the sooner a commercially viable pipeline is built the better.

Reality or love

There are always reasons why a relationship will fail over the long term. Particularly when you put two ‘individuals’ together from two different cultures. Maybe now is the right time to review these. What are the worries that prevent countries from the EU to solidify their relation with potential supplier countries for Nabucco?

Financial:  “How are we going to pay for it?”

Distance: “But you are so far, can we really have a long distance relationship?”

Distractions: “What if you find someone else, while I’m away?”

Parental approval: “My mother wouldn’t approve” (i.e. Mother Russia)

“Your father has other plans for you.” (i.e. US wants EU to use shale gas)

Hometown girl: “Maybe you want a girl from home.” (i.e. shale gas)

Like most love story, it is the parents that get in the way. Those guardians that seek to steer their children in the right direction. Mother Russia certainly has a strong interest to insure that the EU is only supplied by Russia. The United States, is attempting to force a gas strategy on Europe – shale gas. The recent Baker Institute Study that projects a drop in European gas dependency from 27% to 13% because of the full utilization of European shale gas, has unfortunately – I believe, influenced US policy to push the EU to delay or stop the Nabucco Pipeline. Therefore comments emerge that discourage investment into Nabucco and encourage switching to a lower capacity pipeline that is commercially viable in the short term.  Pursing the most commercially viable pipeline option today does not provide the long term boost to security of supply nor provide the foundation the EU needs to have gas fill its power plants.

Multilateral and multicultural relations are at the heart of everything the EU does. Also central to the EU is the role of energy – the foundation of the EU rests on energy. Providing the will and reasoned justification for building a robust pipeline that will serve the long term interests and needs of Europe requires significant commitment today. Many of the issues that are meant to derail Nabucco are not strong enough to trump the security of supply implications that expanded gas supplies, that are not controlled by Russia, offer. Just as love can overcome obstacles, the large and abstract notion of security of supply serves as the impetus to take resolute steps to cement a relationship. It is time to stop worrying about what the future in-laws think.

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