Hungary and South Stream: What Now?

Hungarian energy expert Attila Holoda, Managing Director of Aurora Energy Ltd., says he's had the feeling for a while that nothing would become of South Stream. His intuition came to fruition on Monday night when Russian President Vladimir Putin announced on a visit to Turkey that the South Stream project was over.

He quips, “The European Union has won in the first round against Gazprom, but I'm waiting for the second round in this fight.”

But, in fact, Mr. Holoda says he also wonders whether the South Stream announcement should be taken at face value.

“It's a typical bluff from the Russian government who are saying 'never mind, we'll go through Turkey and from there we'll have a new connection through Greece and Italy to the European Union.' This new route will not solve the original problem from the EU's Third Energy Package – they are also EU member states so the regulations apply to them.”

It is possible, he believes, that the Russians may have already renewed negotiations regarding South Stream with Hungary, Serbia and Bulgaria, could review the financing and may eventually come back and become accommodating regarding all or part of the EU regulations.

He does not believe that much of anything will happen with the proposed alternative to South Stream in Turkey.

Meanwhile, at home in Hungary, Mr. Holoda, also a former deputy State Secretary for Energy Affairs at the Ministry of National Development, says he has always considered Hungary's support for South Stream an extremely dangerous stance by the Hungarian government.

He explains, “In the last month or so they have demonstrated that they're standing by the Russian construction of South Stream, however they should have had sufficient information about the financial situation of the Russian economy. If the government had had an experienced circle of advisors they could have warned Prime Minister Viktor Orban to review the previously announced policy towards the Russian government and its efforts to be an influential player in both Hungarian and European gas markets.”

With South Stream now an elusive dream, he says that Hungarian energy policy should now be evaluated, and all previously projects involving the increase of cross-border capacities which were stopped or slowed should be reviewed and accelerated to facilitate stable resources to contribute to Hungarian energy supplies. He also opines that the Ukrainian transit system should be revitalized with the support of Russia and the European Union.

Regarding development of conventional and unconventional gas resources in Hungary, Mr. Holoda, who worked in the MOL Group's upstream business for 20 years, says the country's taxation and regulatory regimes need to be rendered more attractive for investors. “There are plenty of opportunities, but the government approach needs to be changed to facilitate unconventionals,” he says.

One interesting aspect of Hungary's energy policy has been the state's purchase of natural gas infrastructure, like the purchase of natural gas storage from E.ON and Hungary's MOL Group, which purportedly would have been of strategic importance to the operation of the South Stream pipeline.

Mr. Holoda comments, “Everybody expected that South Stream could help to keep all the Hungarian gas storage alive, offering more or less a buffer to the Russians on the South Stream route, but actually now the value of Hungarian storage has increased in value and in importance, so if Hungary doesn't have enough connectivity to the Western side of the European gas pipeline network, the Hungarian storage will play a major role in supply security in the next 2-5 years.”

Of overall Hungarian energy policy as devised by the majority Fidesz party, Mr. Holoda says that it's fairly balanced on paper, but there are major discrepancies between what's in writing and the decisions that have been taken by the government and responsible ministries. He comments, “It's not clear, detailed or elaborated and there's too much improvisation on the part of policymakers and officials.”

Meanwhile, András Deák, Senior Research Fellow at the Hungarian Academy of Sciences' Institute of World Economics, observes that Russia announcing its abandonment of South Stream has provided an “out” for the Hungarian government, which now doesn't have to admit defeat.

“They went into a strident conflict with the European Commission on this issue, but now that it's cancelled they don't have to find an exit,” he says.

Of the other South Stream transit countries, he adds: “It's a blow for everyone: Bulgaria and Serbia, who got themselves into a big conflict for nothing.”

However, according to Mr. Deák, this energy project's demise also throws into question the viability of any project financed by the Russians in Hungary, like the building of two new reactors at the Paks nuclear facility.

Finally, according to the latest post from the Hungarian blog Gurulo Hordo ("Rolling Barrel"), written by two analysts from MOL, the news about South Stream was no big surprise, and Hungarian supplies of natural gas are not endangered. While South Stream would have accelerated the squeezing of Ukraine and its transit system out of the picture, Hungary, they note, has an abundance of gas storage.

-Drew Leifheit