Hungary’s gas flirtation (Part 2): Pipelines and hubs [NGW Magazine]
Gazprom’s ambition to circumvent Ukraine’s gas transit system throws the jigsaw pieces in the air. It threatens to halt the largest established route for delivering Russian gas to Europe, while a definitive alternative is yet to be confirmed. Nowhere is this more apparent than in southeast Europe, a region heavily dependent on Russian gas and poorly integrated with EU networks.
“The EU internal gas market is functioning well: market liquidity has been improving, competition at the wholesale level is intense, and wholesale prices are converging,” note analysts at the Budapest-based Regional Centre for Energy Policy Research (REKK). “However, in the central and southeast Europe market, inefficiencies are still observable due to missing infrastructure, source dependency and distortive tariffs at certain borders,” they add.
In light of the shifting landscape, it seems Hungary is keen to challenge Baumgarten’s role as the sole regional hub.
“The country has the potential to become a central player in the region, or even a transit hub,” Marton Szepfy of MET, an energy trader speculated to feature Fidesz officials among its owners, said last year. “[T]his is a race, and only a single gold medal will be handed out.”
However, other industry figures, as well as state officials, say there’s no interest in such a race: it simply wants to raise its leverage as its long-term supply contract with Gazprom expires in 2020, they insist.
Bulking up
Yet Hungary’s foreign and trade minister Peter Szijjarto continues to claim more potential sources. The latest target is discoveries announced in the Caspian. “Hungary has an interest in sharing in Azerbaijan’s increased natural gas production from 2021, and in gas shipments destined for Europe,” he said in early April as he signed an agreement on an energy working group with his counterpart in Baku.
Calling the ongoing dispute over flows through Ukraine a “particularly serious challenge” for the region, Szijjarto noted that three new gas fields have been discovered in Azerbaijan, each with reserves of over 500bn m3. He also claimed preparations have now begun for increasing the capacity of the TransAnatolian Pipeline (Tanap), which carries gas from the giant Shah Deniz field into Turkey and southern Europe, from 16bn m3/yr to 31bn m³/yr.
“This opens the opportunity for larger quantities of gas to arrive in the region, with relation to which no contract has yet been signed,” the Hungarian foreign minister added.
Around the same time, it was reported that Hungary is ready to make another U-turn on Croatia’s proposed LNG terminal. Officials in Zagreb claimed Budapest is ready to buy a 25% stake in the terminal planned on the island of Krk.
There was no contradiction from Hungary, which has mulled involvement in the stuttering project for some time but regularly baulked at pricing and a lack of confirmed demand. Project company LNG Croatia failed in a second open season late last year to secure the 1.5mn m3/yr in binding bids needed to make the project profitable. Hungarian companies bid for just 300mn m3/yr in non-binding capacity.
Regardless, LNG Croatia took a final investment decision on the 2.6bn m3/yr terminal in February, following a government decision to allocate €100mn ($112mn) to the project. EU funds will provide a further €101mn of the €234mn investment.
Hungary’s latest about-face may be linked to lobbying from the US, which is keen to serve Krk with LNG, suggest analysts. Or perhaps reflects Russia’s own apparent reversal of its previous opposition to the project. Or it may be just Hungary’s own gambit to secure as many sources as possible to bulk up its own role in the region.
A straight race
Officials from the government and energy giant MOL staunchly reject any suggestion that Hungary harbours hub ambitions.
“It’s a kind of a trend in the region to believe that all the countries want to be a hub, but we don’t have such ambitions,” Pal Sagvari, head of the energy department at the Hungarian foreign affairs ministry told NGW last year.
He suggests that the grand claims are simply the result of his bosses sometimes getting carried away: “We’ve had the feeling in the past that there was a little too much public talk,” he admitted.
There are two general justifications used to support the denials. In the first instance, it depends on the definition of a gas hub. Hungarian infrastructure simply would not be able to handle the volumes necessary to qualify, officials insist.
“Hungary will never become a gas hub. You need gas flows of at least 40bn m³-50bn m³/yr to be a gas hub,” Kristof Terhes, CEO of FGSZ - one of Hungary’s twin transmission system operators (TSO), told local media in 2018.
The second line of reasoning is that the industry, not politicians, will dictate what will happen.
“It depends on where the players decide the offtake points should be,” says a source at MOL, Hungary’s dominant oil and gas company which controls FGSZ. “These are commercial, not political, decisions.”
But others suggest that is more than a little idealistic. “There’s clear competition between Hungary and Austria for these new gas flows,” says Tamas Pletser, an energy analyst at Erste Bank’s Hungarian unit. “It’s a straight race.”
Baumgarten sits at the centre of the network for the entire central and eastern European region. However, cross border interconnections are more developed to the north, and Germany, Norway and LNG more easily available than in the south. The flows of Russian gas through Ukraine’s network mean a south-eastern hub has never developed.
But with that route drying up, the opportunity is clearly there. “Austria has the infrastructure,” says Pletser, “but Hungary has the geographic position and storage capacity.”
Hungary hosts Europe’s second-largest gas storage facilities, at over 6bn m3. With domestic demand around 9bn m3, the country clearly has plenty of spare capacity, and it makes sense to seek to put it into service.
The past few years have been spent developing cross-border links around the neighbourhood, with the help of EU funding. More are planned, with an interconnector with Slovenia on the cards.
Work is already ongoing to expand the capacity of links to Romania to 4.4bn m3/yr as part of the EU-funded BRUA project, planned to carry gas from developing Black Sea fields to Baumgarten. However, in 2017 Hungary surprised its partners as it announced it would not push the route through to Austria.
Sagvari insisted that Hungary “fully supports” BRUA, but added that the government cannot help it if FGSZ has decided on a different course. The TSO claims that building capacity to Austria is unnecessary, and has announced HUSKAT, which would route the Romanian gas via the Hungary-Slovakia interconnector – launched in 2015 but unused – and then across Slovakia to Baumgarten. FGSZ is in the process of buying the Hungarian section of the cross-border link.
This route switch “would allow the Hungarian government to move closer to its ambition of becoming a gas hub,” suggest analysts Nolan Theisen and John Szabo writing for the Atlantic Council, the Washington D.C.-based think tank. “This would carve out a greater role for incumbent energy (trading) champions, which generally have close ties to the government,” they added, “since HUSKAT capacity would be less than what was bid for [the Hungary-Austria section of BRUA].”
Using HUSKAT would limit the flows heading out of Hungary, agreed Sagvari. “It would not be ideal if everything goes to Austria,” he said. Budapest wants some of the gas to stay in Hungary, but only,” he said, “to raise competition with Russian gas on the domestic market”.
But Theisen and Szabo are clearly sceptical that it’s a simple domestic story. “Hungarian traders would be granted the opportunity to re-route excess Black Sea gas to neighbours like Ukraine, Serbia, and Slovenia at higher prices,” they assert. Romania’s offshore gas reserves are estimated at 200bn m3.
The EU Agency for the Co-operation of Energy Regulators (Acer) also appears wary. In April the watchdog ordered FGSZ to launch a new non-binding auction on the Hungary-Austria route. Should the likes of US major ExxonMobil and Austria’s OMV, who are developing the Neptun field in the Black Sea – its reserves are estimated at 42bn - 84bn m3 – decide they could take on that capacity as well as HUSKAT – the binding deadline on which passed at the end of March – then under EU regulations, FGSZ will be obliged to build.
“The EU order that Hungary must test capacity demand on the link to Austria is just another part of this game, which is as much political as technical and economic,” said Pletser.
Russian gas or freedom gas
Hungary’s claim that it’s simply seeking leverage ahead of its upcoming negotiations with Russia would hold more water if Budapest was not so keenly working to plug itself into TurkStream.
Leading the charge as ever is Szijjarto, who has called on the EU not to block its progress. With his usual optimism, the foreign minister predicted in March that Hungary could receive its first supplies from TurkStream by 2021.
Rising exports to Hungary in 2018 “proves the importance of Gazprom’s plans to construct the TurkStream gas pipeline,” the Russian giant’s deputy CEO Elena Burmistrova told a conference in Budapest last December.
She also noted that Gazprom “signed a memorandum of understanding to continue long-term co-operation in gas supplies” with Hungary’s main importer – state-owned Hungarian Gas Trade – in 2017. A roadmap to develop Hungary’s gas transmission system was signed between with the ministry of foreign affairs the same year, she added.
The source from MOL suggested that despite the claims from officials, Hungary really has very little leverage.
Budapest has no choice but to play ball on TurkStream; “the worst thing in the world,” he said, “is to be left off the route of a new regional pipeline.” With Nord Stream 2 also on the way, “all the interconnections that have been built up by the EU will now be filled with Russian gas,” he predicted.
But not if Donald Trump can help it. Sitting behind the confusion in Hungary is the wider geopolitical struggle between the US and Russia.
The US is pushing hard to boost LNG exports to Europe. Touting “Freedom Gas,” US energy secretary Rick Perry said in Brussels on May 1 that the “the US is again delivering a form of freedom to the European continent … [but] rather than in the form of young American soldiers, it’s in the form of liquefied natural gas.”
Perry stated that the US is delivering “the opportunity for Europe to have a very substantial supportive alternative to Russian gas.” Administration officials said they hope to deliver 8bn m³ to the continent over the next 12 months.
Central and southeastern Europe is the frontline of this fight. The region has featured on the travel itineraries of several high-level US officials in recent months. Secretary of state Mike Pompeo warned Orban earlier this year against deepening energy ties with Russia, a reference not only to gas but also Hungary’s deal with Moscow on the funding and construction of the Paks II nuclear plant.
However, southeast European states have long sought to play both sides of the US-Russia geopolitical rivalry. Bulgaria, wholly dependent on Russian gas, is a keen Russian partner but on April 29 hinted that it could also start buying US LNG, if the pricing is right.
Orban is following the same blueprint, and with the Trump administration continuing its efforts to counter the growing influence from the east in the region, it looks to be gaining traction. After being ignored for more than two years the Hungarian prime minister, Trump’s first fan in Europe, finally received an invite to the White House in May.
“Hungary has always tried to play both sides,” said Pletser. “Orban has been very close to Putin in recent years of course, but the US is very keen on Croatia’s LNG terminal and Romanian Black Sea gas.”
Hungarian gas industry sources wave away any suggestion that such “political talk” could stoke hub ambitions. It will lead nowhere they claim. The market players will decide the outcome based on economics, not politics.
But the Erste analyst insisted it’s impossible to split the two, especially in Hungary, where “the government has its own special interests in gas,” via friendly oligarchs.
“I’ve covered oil and gas for over 20 years,” he said. “The first thing I look at when I start to cover a new company is not its reserves but the politics.”