Hungarian Politics Torpedoes Nabucco Participation

The analysis of energy policy goes to the heart of a countries political and economic system. The statement by Hungarian Prime Minister, Viktor Orban that MOL, the Hungarian Nabucco gas pipeline partner, was pulling out, can only be seen as a politicization of Nabucco and MOL decision making. It is no secret that Orban has a testy relationship with the European Union. But has he really removed a diversification option from the table? Despite increased regional options Hungary only perpetuates its present day dependence on Russian upstream supplies. Now Orban has thrown the country solely into supporting South Stream - diversifying to more Russian gas does not constitute noticeable diversification.

Hyperbolic statements are not applicable to Hungary - because they are usually true. The country veers daily further and further from democratic and European norms. But here the topic is energy - so I won't deviate. There is no point in covering up the power center of the Hungary. It resides in PM Orban. Regardless of the state involvement in the Nabucco project it is a privately supported initiative with politics secondary. This has always been the selling point - even if politics are tightly woven into the plans. South Stream, the competing Russian backed Southern Corridor project, is primarily a political project - not the other way around. This is regardless if MOL had earlier expressed reservations about the financial viability of Nabucco. Who didn't?

The game to date: partners, politicians and analyst politely argue over the viability of both South Stream and Nabucco, while each country and company hangs on. At the start of 2012, it became clear that the original plan for Nabucco was not viable; a lack of sufficient quantities of gas for the large capacity and the high price of building it, all together did made the project unviable. RWE emerged at this point to state their consideration of other options - besides Nabucco. But in the geopolitical world of gas a few months is a long time. After losing some weight Nabucco has emerged as a viable contender to transport the Azeri gas from the second Shah Deniz field.

Nabucco West, slimmed down from 31 bcm to 16 bcm and is expected to be coupled to a proposed Azeri-Turkish pipeline that has emerged as funnel for the large Shah Deniz gas deposits coming on-line in 2017. The recent exclusion of the competing ITGI pipeline by the Shah Deniz consortium demonstrates the group's willingness to exclude projects that do not appear viable. The criteria of financial and technical viability, even the ability to scale up operations, all weigh in the decision making. Serious considerations that will determine the profitability of the upstream partners. Choosing an ill-defined and non-viable project damages the upstream consortium's profits and future operations.

The positive comments and favorable consideration now given to Nabucco West do not square with MOL's decision to withdraw at this point - over the financial viability of the project. The economics were finally getting ahead of the supply of gas. But really, with $3 billion in profits last year MOL was not able to finance one more year of participation?  The clamoring of new partners to take MOL's position demonstrates the current optimistic commercial potential of the project.

The first public statements about MOL withdrawing came from Hungary's Orban and not from MOL. This indicates the politicization of MOL's (up to this point) efficient and acumen for commercial operations. The Hungarian government now owns a significant part of the company.  It is clear that the operations of MOL have become politicized with the purchase by the Hungarian government in May 2011 of 21.2% of MOL shares from Russia's Surgutneftegaz - which got the shares after purchasing them in 2009 from Austria's OMV (also a partner in Nabucco). The Hungarian state picked up additional shares with the 'nationalization' of private pension fund assets (disclosure - this included my pension). The share holding may not be enough for outright control, but by assumptions of locals, it is enough to influence decisions like Nabucco. The press conference held by MOL's Chairman-CEO Zsolt Hernádi days after Orban's statements justifying pulling out, indicates the politics got ahead of commercial considerations.

But what does Hungary and MOL get out of pulling out of Nabucco? First, there is a commercial consideration for MOL. The company has significant upstream oil operations in Russia - while Syrian operations falter. Certainly, inducements could have been offered by the Russians - that would appear more tempting than continuation in the Nabucco saga.   But Nabucco still may go ahead without MOL, so this may not be that likely - but may be one piece of the puzzle.  

Second, the involvement of Orban and a meeting with Gazprom's CEO Alexey Miller, on April 17th, 2012 and their discussion of South Stream provides strong political overtones. The political and economic need for Hungary to have some friends in the world, as it continues to spare with the EU and member states, over its version of democracy, including how to finance a 'revitalized Hungary', means a political and economic shift to the East may be underway. 

Third, state politics emerge as a viable option as to why MOL decided to withdraw. These may range from favorable gas pricing for Hungary from South Stream (to keep domestic prices low) and financial and political backing for the country as western investors and country's shirk back from the disastrous economic policies of the Orban government. There is no reason to discount that MOL has become entrapped by the circle of state politics. The announcement by Orban of MOL's decision, only indicates who really is in charge.

Michael LaBelle works for the Central European University Business School as a program developer and researcher on issues of innovation, sustainability and entrepreneurship. His research is focused on the European energy market and efforts to move to a post-carbon economy along with energy governance issues. He is a member of the Atlantic Council’s Emerging Leaders in Environmental and Energy Policy. His blog, energyscee.com, is focused on the geopolitics of gas, energy investment and sustainability in Central Eastern Europe.