Russian Gas: Satisfying Demand in Central Europe (still)

In his appearance at South Stream: the Evolution of a Pipeline in Budapest, Hungary, György Harmati, Strategic Director and Chairman of the Board, South Stream Hungary, said a fundamental part of the Hungarian energy strategy was diversification.

He stated: “Both projects – South Stream and Hungarian – Slovakian interconnector – serve the purpose to diversify import routes and through this increasing the security of supply and reducing the cost and price of imports.”

Mr. Harmati, who is also Strategic Director at MVM, the Hungarian electricity company, pledged to only list the benefits of building South Stream specifically for MVM.

“First of all, we believe that it is a profitable investment. Usually, this alone should be enough to argue for participation. The second reason is that MVM, as the biggest gas importer, biggest gas wholesaler and the biggest gas storage company in Hungary, treats Gazprom as a partner on the Hungarian market.

“If Gazprom would like to build a transit pipeline in Hungary we believe it is natural for a partnership. Thirdly, because it is the declared goal of MVM to become a regional player, such a project is a key part of our strategy and it is an important step towards increasing the weight of MVM on the Central European gas markets.”

It was also important to mention, he said, that given the size and role of MVM in the Hungarian gas market, the company felt it was its responsibility to participate in a project that would determine Hungarian gas import in the future.

“It is an important project for us because we believe that we provide value-added storage services for the countries that South Stream serves,” said Mr. Harmati.

Of Hungarian gas infrastructure, he explained that one of the lines ran north-south while the other in east-west directions.

He commented: “The well established Hungarian transmission system can and will connect in two directions. The storages placed between these lines will serve these two directions. We believe it's not a question of either/or, but that gas will in all directions in the future in Central Europe as it does now in Western Europe.”

Russian natural gas had satisfied most demands in Central Europe, something which would be the case in the future as well, he said.

“Taking into consideration expected levels of domestic production, Hungary and Central Europe will buy Russian gas because we are sure that Russia, and in particular Gazprom, will remain our good partner,” he explained. “And the future gas contract will remain competitive in the long run.”

However, he added, every market and all market players needed to adapt to the changing environment. “Those who fail to do so will simply fall behind. These infrastructure developments are Hungary's answer to the need of this adaptation.

“We will be open and able to buy gas at competitive terms from every direction. And I'm sure that as our suppliers adapt as well they will be overt and, using the new and existing infrastructure, such as the Hungarian interconnectors and storages, they will able to sell and deliver gas anywhere as they feel commercially sound,” explained Mr. Harmati.

The Hungarian-Slovakian interconnector project, he said, would be completed on time as most of the work had already been done and there were few reasons for expecting any delays.

He reported: “We are in discussions with authorities regarding the operational set-up of the future transmission company. It is too early to draw a conclusion yet; we are still investigating a number of options. Traditionally, it is very rare that a newcomer enters the business because of the large investment requirements and the relatively long payback periods of the industry.”

Usually, he said, existing transmission system operators who “knit their spider web further.”

“We asked the question that many people asked: 'Is this good for the business? Is it good for customers?' We haven't just asked these questions, but also proved that a newcomer can enter and can develop a new interconnector that existing transmission companies would not have done, and we believe that this is good for the business and good for customers.

“The European Union also appreciated out courage and granted a EUR 27 million subsidy from the European Energy Programme for Recovery Fund, and the European Investment Bank granted another, EUR 75 million loan to make sure that we can complete the project.”

Still, said Mr. Harmati, MVM's focus was the Hungarian Energy Strategy.

South Stream, he stated, was obviously not yet at that stage, but developments had occurred with the offshore section of the pipeline and in Bulgaria.

MVM, he explained, had acquired 50% of the shares in South Stream Hungary in October 2012.

“Since then, we've laid down the foundation for the project and made everything ready to start the detailed design network, the permitting process and finally the construction of the pipeline.”

The first task, he said, was to build a robust IT infrastructure to serve as the nerve center of the Hungarian section of South Stream. Key staff to run the project had also been hired, while most of the engineering and design work would be outsourced, according to him.

He added, “We will need many experienced engineers for only a limited amount of time. We've run tenders and have already selected the engineering companies that will design the pipeline and prepared the license applications. We've also selected the financial and legal companies who will work on the financing aspect of the project.”

All that work, reported Mr. Harmati, would begin in 2013, while commercial operations would begin in 2017. Construction was expected to start in 2015.

“The plan of the shareholders is to keep a '30% equity/70% debt' financial structure.”

The estimated investment costs of the Hungarian section, according to him, were approximately EUR 700 million, which could be revised once a detailed design was completed.

He admitted: “It will be an obvious question towards us that, after hearing the Russian arguments, 'why is it good for us? Being part of this international project?'”

He recalled that MVM was a traditional power company until 2010, when a new strategy was approved by the company's general assembly.

“This new strategy set a clear target: MVM should not only enter into the gas business, but should become a major player on the market – very much aligned with the energy strategy of our nation that foresees an increasing state participation on the energy market.”

The acquisition of E.ON's natural gas companies in Hungary, he said, had been a significant step towards achieving that target. “After the most critical one-and-a-half months I'm very proud to be able to announce that the integration of these two gas companies has been and is going without any problem, interruption or unpleasant surprise. It's a great comfort that all of our business assumptions seem to have been proven right; however, as we continue our work, and publish the first promising results, even the skeptics might see this transaction in a different light now,” said Mr. Harmati.

He noted the numerous speculations regarding long-term natural gas supply contracts, but admitted not much could be said publicly about it at this stage.

Regarding the transit and storage aspects of natural gas in Hungary, he said: “I would just reassure that both Gazprom and MVM have confirmed their interests in exploring business opportunities in the future that we can have until 2015 and beyond. In other words, we'll do our job – just another 'business as usual' aspect of the Hungarian gas trading company.”