Tag Archives: Slovakia

A bridge too far? Connecting Hungary and Slovakia

The end of summer in Central Europe, marked by cooler temperatures and rain, puts everyone to work on the gas issue. The election of Hungary’s Fidesz, this past spring, also allows us to see the emergence of a new energy policy. One suspects, more overtly diversified than the last administration. However, from what appears to be emerging, Hungary – and Orban, continue to play both sides, with the view that more routes of gas through Hungary the better – or at least until the bill comes due.

In my attempt to come up with a concise analysis, or perceive a significant shift in government policy, what emerges is simply a collection of news stories with high rhetoric and long-term contradictory plans. Although, one area does stand out and this is the efforts by the Hungarian state to buy/cajole/force its way into private energy companies operations (to be discussed elsewhere). And the long-term prognosis of this is continued high energy prices for consumers in Hungary, limited competition and limited efforts to transition to sustainable energy sources. But let me share some of the key stories this past week which make me so confused on where this is all headed.

Rivers of gas flowing to Hungary

Access to gas from the Causcauses and Central Asia could reach Hungary and Austria through the AGRI project (Azerbaijan Georgia Romania Interconnection) which will transport Azeri gas to the shores of Romania via the shores of Georgia via liquefied gas terminals. In some ways this seems more complicated than building a single pipeline connecting Azerbaijan to Europe (but then that is the story of Nabucco isn’t).

If you thought this latest plan (among a group of plans for the southern gas corridor) would be a threat to Nabucco AGRI’s project organizers state there is no competition. “AGRI won’t replace Nabucco, it is complementary to Nabucco,” said Adriean Videanu, Romania’s minister of Economy, Trade and Business Environment. And as they point out in the article “He added the project could be finalized before the Nabucco because there are no political barriers for its completion”.

Apparently Hungary agrees with this assessment, or maybe they privately see Nabucco not going anywhere. Because now Hungary has signed up to the project, as it will be able to use the upgraded gas piplelines between Romania and Hungary to bring in the gas and either store it in Hungary or transport it to Austrian storage.

So to keep score, Hungary now has plans for gas transport from Nabucco, South Stream and AGRI. If there is any indication as to the viability of this latest plan, it is reminiscent of Italian backed proposals to create more modest pipelines transporting Central Asian and Russian gas (ITGI, TAP and White Stream). In addition, if no new infrastructure needs to be built, it will be the cheapest way for Hungary to diversify its supply. Meaning, it must put any cost/benefit analysis of Nabucco and South Stream under even more pressure. But then when you are talking about security of supply emphasis should be on benefits over cost, or should it?

Slovakia – too expensive for MOL

Regional cooperation in gas infrastructure is essential for Hungary’s security of supply. This line of reasoning has prompted MOL to act in the past, proposing NETS to interconnect Southeast Europe, and Orban to call for a North-South gas network in Central Eastern Europe. However, it appears that when it comes down to linking Slovakia to Hungary with a gas pipeline,  cost does outweigh the benefits.

In this story, the head of Slovakia’s gas transmission company, Eustream, CEO Antoine Jourdain, says MOL ain’t fulfilling its promise to connect the two countries. As the story’s opening says,

Hungary’s FGSZ Foldgazszallito, the gas-transmission unit of Hungarian oil and gas company MOL, halted construction of a planned gas pipeline between Slovakia and Hungary.

Jourdain told the newspaper that FGSZ stopped the joint project after conducting a survey whose results suggested that such a cross-border pipeline would not be profitable.

Apparently, MOL never got to the stage to move any dirt. I also understand the profit part (which MOL does do a good job of, while simultaneously building large amounts of interconnectors), what gets me in the story is the mention of rumors.

While [the Slovak paper] quoted unnamed Slovak government sources as saying that Hungarian government pressure could have had a role.

Hmmmm….This is what I’m confused about. If it is the explicit policy of the Hungarian government and MOL to increase North-South gas interconnectors then why would such a project come under pressure from the Hungarian government to be stopped?

First we can believe that that the interest in such a pipeline may not be high to justify the cost, as FGSZ-MOL states. However, from a security of supply perspective it may be a very effective – and needed – connection for Slovakia. Because Slovakia is 100% dependent on Russian imports, and with limited storage capacity (which Hungary has).

One explanation for FGSZ-MOL withholding on building the pipeline is they are waiting for more EU/HU/SK money to be available to build it. It is an essential pipeline for security of supply, so why wouldn’t more money become available. If trading volumes are low on it, compared to the cost of construction, then holding out for a few months may be the right business strategy.

Second Reason – MOL ownership

The second reason – and this just fulfills the attempt at making connections in the weekly stories, is the Hungarian government is actually slowing down this project. The fact that Hungarian Minister of National Development Tamas Fellegy, was in discussions on Aug 27th with Russian first deputy Prime Minister Viktor Zubkov, may hold some link.

Hungary is attempting to regain Surgutneftegas’s 21% holding in MOL. However, as everyone knows Hungary has no money. Therefore, Hungary has to find some leverage, or something to trade for this stake. I would suspect that Hungary would even take neutral activity on the part of Surgutneftegas until Hungary can find the money to purchase the shares. Therefore, is it possible that Hungary is using this interconnector as leverage? Weak, I know. But then the Hungarian bargaining position is also weak.

But this may not be so weak if you consider that Poland is now under EU pressure to cancel the ‘Gazprom Clause,’ as it most likely infringes on the conditions of the Third Energy Package. Contracts with Gazprom generally restrict the reselling of surplus gas to other countries. This has the effect of constricting the formation of regional and EU wide gas markets. Therefore, the EU Commission may take antitrust action against Poland. If Hungary were to build this interconnector, it would fall under a similar situation – since it too is dependent on Russian gas.

Gazprom/Russia would be opposed to a North-South gas pipeline as it reduces their monopolistic and direct connections it has developed with each CEE/SEE country.  They are interested in transmission pipelines and supply countries directly, not feeding into a competitive and robust European gas market. Or rather, a gas market in the CEE/SEE region that is competitive and robust. Western Europe with Russia’s gas allies (France and Germany) and the much lower market concentration, is not something Gazprom believes it can achieve a monopoly over – like in the CEE/SEE region.

Delay, delay…

The non-development of an actual physical gas pipeline compared to agreeing to another distant scheme to bring gas to Hungary stands out. It is all well and good to bring to Hungary some hypothetical frozen gas, from expensive still-to-be constructed terminals, but another to actually build a pipeline 100 km long. Now it is not clear the complete connections here, but regardless, slow movement by the Hungarian government on greater neighborhood cooperation, in actual projects, serves its own purpose as does agreeing to large transit volumes moving through Hungary. The winter heating season may be creeping up on us, but true supply diversification, at this point, looks as unattainable as a snowman in July.