Tag Archives: Surgutneftgas

Hungary to follow Tajik model: Forced donations for Surgut/MOL shares

The question extending back to last spring’s election that brought Fidesz to power, is how will they find the money to buy Surgutneftegaz’s 22% shareholding in MOL. Well, since my analysis has been spot on, that nothing is going to happen, because the Hungarians have the Russians pinned.  It now seems the Hungarians are becoming increasingly embarrassed by their strong position over their former rulers – as they are increasingly trying to find ways to let the Russians save face – I have a solution.

I need to preface my solution with a warning, that this wouldn’t work in most democratic countries. But recent legislation by Hungary’s government from killing the independent budget council, changing the constitutions to limit the constitutional court, taking all the pension fund money, passing highly questionable media legislation, placing a huge  revenue tax on utilities, telecoms and retail companies (regardless if they make a profit and from previous year’s filings) and of course passing a 98% tax retroactive 5 years on state bonuses. Indicates that my suggestion just may work.

From these actions a basic statement can be formulated: Hungary right now may become the first post-soviet country to pursue alternative democratic measures. That is, in Chinese, there are different democratic models that can be used by the state. Hungary, it can be said, is embarking not just on an ‘unusual economic experiment’, as Prime Minister Orban and others in his cabinet have said, but they are also starting an experiment in representational democracy.

Due to these existing conditions, my suggestion to solving the MOL/Hungary -Surgutneftegaz/Russia situation is all the more applicable.

Recently, I have been involved in separate projects that have allowed me to study the energy sector in Central Asia. It really is fascinating – while at the same time sad when you consider the actions of the political leadership and the impact their decisions have on the economically starved citizens (I won’t yet draw parallels with Hungary here). It is through this research that I found the following solution to funding a hyrdopower project in Tajikistan.

Tajikistan is seeking to complete its unfinished 3,600-megawatt Vakhsh River Rogun hydroelectric dam, begun in 1976. In December [2009] the Tajik government issued Rogun stock and made it compulsory for citizens to purchase nearly $700 worth of shares, a sum exceeding most Tajiks’ annual income, in order to collect $600 million for construction to continue. After IMF Tajikistan mission head Axel Schimmelpfennig stated that the mandatory forced donations would destabilize the Tajik economy and that returns would be “negligible,” Tajik President Emomali Rakhmon suspended the campaign on 12 April as his administration negotiated with the IMF (Central Asia-Caucasus Institute)

Now it remains to be seen where Hungary could get the money to buy out the MOL shares from Surgutneftegaz. Particularly since funding is becoming more expensive for Hungary – with the constant downgrading and negative outlooks by ratings agencies a further indication of funding access in the future. Therefore, how best to finance a purchase of MOL shares valued at more than EUR 1.4 billion (the price paid by Surgut to OMV)? And since it has been stated by Hungary’s leadership that ownership in MOL (and other energy companies) is connected to national security than what better way of financing the purchase then to force Hungarians to pay for it themselves?!

With Hungarians increasing their savings (no doubt related to uncertain times), it only becomes a matter of time before the government taps into this pile of money to finance current operations – or to ‘ensure the security of the country’s energy supply’.  MOL will then have to wonder whether it is better to have the Russians as a shareholder or the unpredictable Hungarian government.

If this scenario does play out then we can only hope it ends up like the Tajik experience, with the IMF/EU stepping in to stabilize the Hungarian economy and putting the kabash on the further ‘reallocation’ of money for energy projects. Or maybe we can look forward to a third ‘special’ tax on the energy sector….

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.

SCEE Weekly News Review

The quick turn around by the Bulgarian government to support at least one Russian/Bulgarian project was displayed fully on Saturday Nov. 13, 2010. The prime ministers of Russia and Bulgaria Vladamir Putin and Boiko Borisov sat down and agreed to establish South Stream Bulgaria AD to develop the Bulgarian section of the pipeline. Gazprom and the Bulgarian Energy Holding (BEH) will be the main principles in this project. However, as reported by novinite.com in the Russian press, this means little.

“The establishment of a joint company in general does not make the destiny of real construction clearer. This would happen only when an investment decision is made, but the perspectives here are very difficult to forecast,” expert Mihail Krutin points out cited by “Nezavisimaya Gazeta.”

Of course finally getting the Borisov government to agree to a project with Russia didn’t have any impact on current Russian gas prices for Bulgaria. According to novinite.com the Bulgarian PM stated after the Russian PM left town that they would be getting lower gas prices – contradicting Putin’s assertion that these things are not connected.

And finally, according to publics.bg, the visit also produced statements that technical progress is still being made in building Belene NPP and other partners will be joining the project. At a Climate Strategies conference in Budapest this week and the 5th Energy Forum last week, it is clear that despite widespread energy industry perspectives on the future growth of nuclear power (excluding German and Austrian perspectives that were vocalized at the Climate Strategies conference), financing and ownership structures still remain key hurdles to building nuclear power. And Belene is turning out to be the poster child for the difficulty of building nuclear power.

In other Russian interest related news, the Hungarians prove again they have Surgetneftegaz pinned to the mat. According to Portfolio.hu,the Metropolitan High Court of Appeal supported the earlier ruling of a lower court that the MOL was right to bar Surget from being listed in the share registry. Outside this narrow legal ruling, this is also connected to the Hungarian Energy Office not approving participation of Surget in MOL due to it not clarifying the companies ownership structure. Well, the only joke that can come from this ruling is that even if Surgut was now listed as a full owner of MOL, the Hungarian government would no doubt come up with a special tax to apply to Surget.

And in broader EU news, and something that will need to be followed up on in separate post, Bloomberg reports that the EU Commission outlined its energy infrastructure priorities for the next two decades. But specific projects won’t be identified until 2012. So maybe I have two years to write that post.

And finally, not only did the Bulgarian visit have energy as a central focus, but it just may set off a new round of democracy in Russia. Apparently, you can now vote and suggest a name for the dog that PM Borisov gave to PM Putin.



Hungary/MOL Officially Pins Russia/Surgut

A pin, or fall, is a victory condition in various forms of wrestling that is met by holding an opponent’s shoulders or scapulae (shoulder blades) on the wrestling mat for a prescribed period of time. (Wikipedia)

In a move that the sporty Putin must appreciate, Hungary and MOL, have been judged to have pinned the likes of the (rumored) Kremlin backed Surgutneftegaz. The judges can be seen to be the international financial analysts, and myself.


“While we cannot rule out talks between Surgut and the Hungarian government continuing behind the scenes, we doubt the buyout will take place in the near term,” commented Olena Kyrylenko, analyst at KBC Securities, on Thursday. (Portfolio.hu)

Due to the tight shareholder conditions imposed by MOL and the Hungarian Energy Office and Parliament, the concerted strategy has resulted in Surgut stuck with its 21.2% stake in MOL. The Hungarian government lacks the money to retrieve the stock for Hungarian pride security of supply.  So now that they have proven that Surgut can’t really do anything with its shareholdings, Hungary can sit back and see if anything comes up they can either barter off, or raise the money to buy it outright. And for this I’m not making any prediction as to “how long the prescribed period of time” is that Hungary will be holding Surgut to the mat. Either way, they’ll probably be in this tight position for awhile. As Hungary lacks the financial resources until at least 2013! Enjoy the mat.


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.

Emfesz’s CEO get’s Scooby-doo-ed.

If it wasn’t for those darn kids he would have gotten away with it. It is reported that CEO István Góczi of Emfesz was arrested by Hungarian authorities for embezzlement. According to this article it was Góczi who used the power of attorney to sell Emfesz to RosGas. But one can never know for certain in this murky game of Russian/Ukrainian/Hungarian gas.

It also wouldn’t be the first arrest in relation to Emfesz, if this report is to be believed,

In January 2008 [Semen] Mogilevich was arrested in Moscow on charges of aiding and abetting a tax evasion scheme, but many observers believed this was false and that his arrest was directly linked to a struggle between Firtash and Gazprom over the control of Emfesz. According to informed sources, prior to his arrest Mogilevich disclosed that Gazprom was determined to take over Emfesz and that he had played a role in this plot.

What is clear is that Dmitry Firtash lost (temporarily?) a profitable Hungarian company from his holding company Group DF to RosGas, which is suspected of being tied to Gazprom, although the latter denies this.

Now the question comes up as to whether you dear reader believe in coincidences. The arrest occurred on November 11th, the day before MOL and Surgutneftgas appear in a Budapest court to go over their differences. MOL is resisting registering Surgutneftgas as a shareholder, as it is not approved by the Hungarian Energy Office.

Now, if the Hungarians wanted to send a message to the owners of Emfesz and Surgutneftgas then this would be a pretty strong message. From the arrest then this may be a signal to back off. But that is only if you believe in coincidence. Either way, just like those darn kids in Scooby Doo, it looks like the Hungarian authorities found some Scooby snacks and decided to take action against a specter.

scooby-doo-tv-02