Hungary renews its vows [NGW Magazine]
Hungary has been hunting alternative natural gas sources in recent years as it eyes the end of its long-term contract with Russia. However, with the options drying up, undersized or delayed, Budapest now says it’s ready to launch talks with Gazprom on a new agreement.
“As Hungary has a vested interest in long-term, predictable and reliable cooperation with Gazprom, it is prepared to launch talks on a new long-term gas supply agreement,” the foreign minister Peter Szijjarto said December 2.
The contract that Hungary signed with Gazprom in 1995 actually only ran for 20 years. However, keen to keep the prime minister Viktor Orban’s Fidesz government amongst its closest EU allies, Moscow waived the take-or-pay clauses and has used the saved volumes to continue deliveries over the past four years.
This left-over contracted gas is understood to have run out in late 2019. Hungary announced in June it had signed a deal with Gazprom that will cover necessary imports for 2020. Now it is looking to 2021 and beyond, with suggestions a contract for around 4bn m³/yr is under discussion.
Budapest continues to insist that it would like to diversify its gas supply options.
"Now we source from Russia a lot, but we would like to source from elsewhere too," Orban said at a press conference during a visit by Russia’s president Vladimir Putin to Budapest in late October. However, Hungary has struggled to nail down its alternative options and is now running out of time.
“We consume around 10bn m3/yr with 8bn m3 of it imported. That wouldn’t be easy to cover via the current hubs,” says Andreas Deak, a Budapest-based energy analyst.
Reliance
While the shortage of alternatives supplies for the meantime is clearly a factor, Orban appears to be comfortable depending on Moscow for his country’s energy needs anyway.
The Hungarian prime minister has overseen a raft of deals deepening Russia’s role in the sector. His meeting with Putin in October was the latest in a long series, unlike many other EU member states which have kept Moscow at arm’s length since the 2014 annexation of Crimea. While Hungary has not blocked the EU’s sanctions against Russia, Orban has repeatedly criticised them.
Szijjarto twice travelled to Russia in October for talks with Gazprom and welcomed the Russian company’s chairman Viktor Zubkov in December. He has also been in regular contact with Russian state nuclear agency Rosatom, which is expanding Hungary’s Paks nuclear plant.
The head of the prime minister’s office, Gergely Gulyas, said in late October that Hungary must expand its business ties with Russia because it “is entirely dependent on Russian gas.”
Gazprom supplied 7.6bn m3 of gas to Hungary in 2018, an increase of 9.3% from 2017. In the first ten months of 2019 the Russian company sent an estimated 9.3bn m3. Although efforts to fill Hungary’s large storage facilities – owing to the uncertainty surrounding a transit deal with Ukraine – helped drive the 22% increase year on year, Gazprom’s crucial role in supplying Hungary’s 9.6bn m3 demand that year is unquestionable.
Analysts say it makes sense for Hungary to pursue a new long-term contract given that it will remain dependent on Russian gas for the foreseeable future.
“Hungary will remain reliant on Russian gas in the short term,” says Tamas Pletser, an energy market analyst at Erste Bank’s Hungarian unit, “but does it need a long-term contract? That only makes sense if it’s on very good terms.”
The gossip mill suggests that is exactly what Hungary hopes to achieve. The reason Budapest is ready to move now is to try to take advantage of Russian concerns over market share in Europe, as LNG poses rising competition.
“The Russians can’t go crazy on pricing in these contract talks,” says Deak. “It understands that this is the point at which LNG struggles to compete.”
Alternatives
On the other hand, the heavy dependence on Russia weakens Budapest’s hand in talks over terms on a new contract, and the buyer has struggled in its pursuit of the alternative sources that would have raised its leverage.
“Hungary is still searching for alternative sources,” says Pletser, “but life is complicated and progress has been very slow.”
A year ago, excitement was building in Budapest as Romanian Black Sea gas reserves, estimated at up to 200bn m3, were earmarked as a solution that could both alleviate Hungary’s heavy dependence on Russia and help boost its ambitions of building its role in the region.
Hungary was quick to try to lunge for the Romanian coast’s riches. Hungarian companies were reported in 2018 to have booked the entire 4.4bn m3/yr capacity of the EU-backed Bulgaria-Romania-Ukraine-Austria (BRUA) pipeline that would carry Black Sea gas out of Romania.
However, hope has evaporated somewhat in recent months, with projects in the Black Sea dogged by Romania’s tricky political landscape.
Neptun, a joint venture of ExxonMobil and Austria’s OMV that is expected to require investment of up to €5bn, is the lead project on the Romanian shelf. However, the two companies have long complained that a final investment decision is held back by Bucharest’s failure to deliver a reasonable tax regime for off-shore production. The US giant is now seeking a buyer for its stake in the project as it leaves Europe’s upstream.
At the other end of BRUA, the Orban regime has provoked testy relations with many of its neighbours, and Romania in particular, with nationalist exhortations to regional diasporas. Budapest’s refusal to extend BRUA to carry the gas to Austria’s Baumgarten hub sparked harsh words from Bucharest, and has irked the Neptun investors.
All of which suggests it will be some time yet before Hungary can expect a steady flow of gas from Romania. Pletser suggests Black Sea gas is unlikely to arrive in Hungary until 2024 at the earliest.
However, Romania remains the main hope for Budapest’s drive to secure alternative supplies. “With the potential of around 4bn m3 to come from Romania to add to a new Russian contract, that would be a very healthy import portfolio,” asserts Deak.
Still, Hungary could also top up supplies with LNG flows from the south. Budapest has been discussing the potential to buy gas from a terminal being developed on the Croatian island of Krk for some time. Talks have recently focused on the construction of a compressor station to pump gas north to Hungary, but it is far from certain if an agreement will follow.
Even if the two countries, which have been mired in a bad-tempered spat over control of Croatian oil and gas utility INA for years, do finally manage to come to an agreement, it’s unclear how much of an impact LNG could have in Hungary. Although the EU-funded project should meet Hungary’s schedule better than Romanian Black Sea gas, its capacity will be limited to just 2.6bn m3/yr, and the gas is being eyed by others.
“The Krk terminal should be ready in 2021,” says Pletser, “but it won’t offer enough flow to make a real impact on Hungarian supplies.”
On top of that, pricing could yet cut the route to Hungary altogether. Budapest’s uncertain approach to financial involvement in the project is due to Croatia playing hardball, according to the Hungarian analysts. There is also speculation that opposition from Russia may have had an effect.
“There’s still lots of uncertainty over Krk,” adds Pletser. “The delivery terms are still unclear and Croatia is asking for very high pricing.”
“LNG will simply be too expensive for Hungary, even if we wanted to buy it,” says Deak.
There are other irons in the fire. Hungary continues to produce blueprints to extend its links to the south. Hungary-Slovenia Interconnector, which would offer 2bn m³/yr of bi-directional capacity via Slovenia to Italy, has now secured ‘project of common interest’ status from the European Union and is under assessment.
Other potential alternatives being eyed include gas from Western markets arriving via an interconnector to Slovakia and even Azeri supplies from the east. Plans for an interconnector between Slovakia and Poland could offer Hungary an option to tap Poland’s LNG terminal on the Baltic Sea from 2021. “Hungary should have many options in five years’ time or so,” predicts Pletser.
Hub ambitions
The ambiguity regarding a gas transit agreement between Russia and Ukraine has hung over the calculations of every player in the central and eastern European (CEE) region in recent years. Hungary is no exception. Budapest has leveraged the uncertainty to push not only its efforts to diversify but also to raise its regional profile.
As widely forecast, with the Ukrainian mainline route carrying Russian gas into CEE about to dry up as 2019 ended, Moscow and Kyiv sealed a last minute deal. The pair signed a five-year transit agreement, Ukrainian utility Naftogaz confirmed late on December 30. Under the deal, at least 65bn m3 of Russian gas will be routed through Ukraine in 2020.
The news was welcomed with a sign of relief by regional leaders. Slovakia’s prime minister Peter Pellegrini tweeted: “I welcome the new gas transit agreement between Ukraine and Russia. This brings more security and predictability to gas supplies to central Europe.”
However, the deal also leaves room for challengers seeking to use the Ukraine crisis to win an alternative regional role, such as Hungary.
Potential future disagreements over the resumption of Russian gas supplies to Naftogaz or Ukrainian lawsuits over assets in Crimea mean uncertainty persists. Meanwhile, the minimum volume that Ukraine will transit will fall to 40bn m3/yr in 2021-2024, because Gazprom plans to switch the gas flows it sends to south-eastern Europe (SEE) from Ukraine to TurkStream and Nord Stream 2, which is likely to be operational late 2020-early 2021.
The first 15.75bn m3/yr string of the pipeline linking Russia and Turkey across the Black Sea was officially launched on January 8. A second line of the same capacity is set to run through Bulgaria, North Macedonia and Serbia, before terminating in Hungary.
Hungarian government officials have pushed hard to secure the country’s spot as an end point. “TurkStream is a priority. The sooner we can join the better,” Orban told Putin in October.
However, alongside senior managers at partially-state-owned oil and gas giant MOL, the government insists that Hungary harbours no ambition of turning itself into a gas hub.
“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.
However, others are less circumspect. “The country has the potential to become a central player in the region, or even a transit hub,” said Marton Szepfy of MET, an energy trader speculated to feature Fidesz officials among its owners. “[T]his is a race, and only a single gold medal will be handed out.”
On top of the Hungarian government’s efforts to control potential new gas flows into southeast Europe, it’s hard not to see Budapest’s determination to lure TurkStream as a further sign that it is striving for that medal, admit analysts.
Hosting the pipeline will offer Hungary an opportunity to further utilise the network of interconnectors with its neighbours that it is developing. The country’s large storage facilities, at around 6bn m3 the second largest in the EU, should also benefit.
Pletser suggests that thanks to this infrastructure, Russia also sees Hungary as a potential hub. Indeed, as the year-end deadline for the agreement with Ukraine approached, Gazprom was busy pumping around 1bn m3 of gas into the country’s storage tanks as insurance against potential interruptions for its main export route to Europe this winter.
Deepening relations
Deepening relations with Russia with a new long-term contract could help Hungary secure that regional role and many suggest now is the ideal time for Budapest to strike. With LNG and alternative suppliers providing increasing competition, Russia is keen to secure market share in its biggest and most strategically important territory.
Officials in Budapest have appeared keen to stress to Moscow that Hungary is committed in that regard.
Speaking after his meeting with Zubkov, Szijjarto stressed Gazprom’s leading role in supplying gas to Hungary will persist in the wake of future infrastructure projects in the region.
Meanwhile, on top of the interconnectors Hungary is pushing around its borders, powered by EU funding, it has an agreement in place that will see Gazprom develop its domestic gas transmission system.
That is the kind of arrangement that alarms Western officials, but Orban has long believed he can get better results by befriending autocrats from the east as an alternative to EU funds and the inconvenient demands for democracy and transparency that come attached thereto.
Around a week after his meeting with Putin, the Hungarian PM welcomed Turkish president Recep Tayyip Erdogan to Budapest and told reporters of his confidence that TurkStream will not only arrive in Hungary, but that gas will start flowing by 2021.
Meanwhile, Orban is happy to test the patience of Western powers. Hungary has done little to support their efforts to bring Ukraine closer. It has been blocking meetings between Nato and Ukraine since 2017.
Gulyas reiterated that Hungary will not support Ukraine’s Nato membership unless Kiev scraps an education law that Budapest says is prejudiced against the ethnic Hungarian community that lives in western Ukraine.
US officials have suggested that Washington is disappointed with Orban’s geopolitical stance. Meanwhile, the Trump White House has warned Hungary against deepening its energy dependence on Russia, noting it could instead buy US LNG instead.
Russia’s involvement in Hungary’s nuclear expansion is also a bone of contention for Trump’s administration. It is pushing the states at the east end of the EU that plan new nuclear capacity to plump for US suppliers for that also.
Agreed in 2014, the project to add two units to Hungary’s only nuclear power plant, Paks, was struck as Orban’s government was busy nationalising much of Hungary’s energy industry, including the main gas importer.
However, reports have suggested problems at Paks 2, which is being powered by a €10bn loan from Moscow. Rosatom, leading the project, is reportedly struggling to work with local contractors, which has angered the Kremlin.
The depth of the problems are unclear, the project having been made a strategic issue with information restricted to the public for decades, but Orban appears to have smoothed things over for the meantime in his regular meetings with Putin.
Gulyas said in October that the upgrade of the plant is crucial for climate protection and targeting carbon neutrality. The terms of a new gas contract between the pair are unlikely to be much more transparent.