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    South Stream in Hungary: Not Bad (But No Game Changer)



The three potential benefits for Hungary out of South Stream would be security of supply, economic benefits, and a possible increase in diversification, according to András Deák, consultant at the Hungarian Institute of International Affairs.

by: Drew S. Leifheit

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Natural Gas & LNG News, News By Country, Hungary, Pipelines, South Stream Pipeline, Top Stories

South Stream in Hungary: Not Bad (But No Game Changer)

Building the South Stream pipeline indeed has some benefits for Hungary. But, according to András Deák, consultant at the Hungarian Institute of International Affairs, its significance should not be over stated.

“Looking at it, it is a very useful project,” he opined at South Stream: the Evolution of a Pipeline event held last month in Budapest, “but it's not going to bring about a paradigm shift. In Hungary it will not be a 'game changer' in contrast to what will happen in the Balkans, because there it will be a game changer for Serbia, in Bulgaria – but not in Hungary.”

If one considered the potential benefits of South Stream for Hungary, he said there were three aspects: 1) security of supply, 2) economic benefits (possible profitable), and 3) a possible increase in diversification.

Running through those aspects, Mr. Deák explained that every 2 years Hungary had to submit a report to the European Commission on how it was complying with the “Plus 1/Minus 1” principle, which outlined that each EU member state be prepared for the eventuality that at its largest border crossing capability were disrupted for any reason, the country still was able to maintain security of supply.

“For Hungary,” he said, “this means that if we get no gas from Ukraine we can still show that we have sufficient capacities to supply our country,” he said. “In practice, we start adding up the interconnector capacities and say in theory Croatia, Austria and, in the future, Slovakia – that these add up to more than the demand.

“With South Stream,” he continued, “we would certainly be able to show that we comply – so we'd consider the annual capacities that we get from Serbia and say that we do comply with this requirement. Without any particular calculation, gimmickry or trickery we'll be able to comply after the implementation of South Stream.”

He added that he didn't think the rule made much sense for Hungary, because a multitude of events in Ukraine could result in a natural gas disruption. “One is Russia stopping the supply of gas to Europe. That's apocalyptic and there's not much point in preparing for that eventuality, because it's the same probability as an asteroid hitting the earth, or a nuclear disaster,” he said.

The benchmark for gas supply security in Hungary, according to Mr. Deák, was to survive for longer than the Ukrainians. “The scenario is, the Ukrainians will run out of gas and then they will reach an agreement. The idea is to last 3 days longer than Ukraine,” he explained.

Hungary, he recalled, had managed to do that in 2009 and did have response capabilities, especially regarding storage facilities. He commented, “Since 2009 the international situation has not intensified but has improved to some extent: Nord Stream has been constructed and more gas may be supplied through that in the event of a Russia-Ukraine conflict.”

So the international situation had improved to some extent, which had a price, namely that Hungary had to store sufficient volumes of gas in its storage facilities to survive such a conflict. “That cost will be saved once South Stream is complete,” he explained.

“If all four strings of South Stream are in place, certain infrastructural elements in Hungary should be forgotten,” he explained, citing a large portion of the Ukrainian-Hungarian facilities which would be sitting idle.

“Also, some gas transit fees will disappear. Nevertheless, I think that the net benefit will be positive.”

He also noted that for other countries the pipeline went across their entire territory. Of Hungary, he said, “In our case it is more like a corridor – it goes along the southern border of the country, so there isn't much benefit to the existing gas system that we have.”

Moreover, if one compared the significance of these issues in Hungary-Russia bi lateral relations, Mr. Deák said that the EUR 600 million was not such a big deal.

“If we're talking about just one reactor of Hungary's Paks nuclear facility, that's EUR 5 billion or so,” he explained, showing a graph of 10 year payments of provisional gas.

The most exciting element of South Stream for Hungary, according to him, was regulation.

“There are two extremes regulation-wise: one is the Russian position that is 'all the capacity's ours', which is quite a valid standpoint. I'm not really sure why we're telling them we can't accept that.”

He said that if a producer wanted to supply gas, that was their objective. “They don't want to supply competition,” he commented. “They've built most of the pipelines throughout Europe, so if you see how much pipeline has been built in the south and southeastern Europe, it's 95% Russian-built.”

Of course, there was also the other side of the equation.

Mr. Deák stated, “The EU and consumers are justified in saying that this is a very nasty monopolistic attitude and 'the way our regulatory system works is to provide 3rd party access.'

“These are the two extremes and you need to make a compromise,” he added, but what were the options?

For one, how about the arrangement for the Trans Adriatic Pipeline?

He explained, “It's relatively advantageous and is close to what producers tend to want: complete exemptions from 3rd party access in the first stage. But there were all other kinds of conditions imposed like the reverse-flow requirement, for instance.”

Or how about the “classic compromise” in the case of Nord Stream?

“The consortium received a very high percentage of the capacity, whereas the rest needs to be auctioned off and Gazprom may participate in those auctions. So this was to be expected.”

Still, he said the difference between southern and northern Europe was that there was diversity in northern Europe in terms of gas supplies - Dutch, Norwegian gas – whereas southeastern Europe was different. Thus, he explained: “It is unlikely that the EU would take that as a starting point.”

Of domestic politics and South Stream, András Deák concluded: “Hungarian politicians are very lucky because they can pretend that they do not want to choose, because this discussion is between Brussels and the Russian party – they will have to decide.”