Gas Imports: A Matter of Choices (or Not)

Minister of Foreign Affairs and Trade Péter Szijjártó (center left) and PSD party leader Liviu Dragnea (opposite) in face-to-face talks in February 2018.

Next year several uncertainties may arise in the region, he said. Starting with 2020, it will be uncertain if Central Europe will receive gas from Russia via Ukraine, therefore new solutions and new transport routes must be searched. But Hungary is prepared for the new energy security challenges, Szijjártó added.  

But with so many uncertainties, how can any country be prepared? For now, one thing is sure: Hungary has an agreement with Russia for gas supply in 2020. What comes after that is hard to predict.

In Belgrade, Szijjártó briefly also referred to “the economic decision of an American and an Austrian company regarding the extraction of gas found in Romania”. This decision has long been delayed and if this will not happen, Hungary “will have no other choice but to concentrate on constructing a gas transport route in the south, where Russian gas will be imported to the region via Turkey, Bulgaria and Serbia”.

Although he did not specifically name the pipeline he referred to, Turkish Stream, as it is known, has very important geopolitical significance.

Hungary is highly dependent on gas imports. In the 1980s and early 1990s, the transport infrastructure only connected with Russia, which meant that the one option for Hungary was to purchase gas from its giant near neighbor.

This was a very convenient negotiating position for Moscow, and it used it accordingly: the last long-term gas import agreement between Hungary and Russia lasted for 20 years and terminated in 2015.

Meanwhile, new pipelines were built, which could provide an alternative to the Russian import. This has significantly improved Hungary’s negotiation position, with Budapest now able to secure short-term, annual import agreements with Russia, which the Hungarian government has been successfully pursuing since 2015.

It was not just new pipelines that were constructed, however; new players also entered the international gas market, notably the United States.

Washington has two main goals on the gas market: on one hand, to sell its shale gas surplus and on the other, to reduce the dependence (“overreliance”, in U.S. diplomatic terminology) of European countries of Russian gas and thus the opportunity for Moscow to exert political pressure.

Catch 22

The easiest means of achieving this would be to transport liquified natural gas to a purpose built terminal in Croatia, from which European countries could cover their internal market needs. But there is a Catch 22 situation here: Croatia will only launch the terminal if European countries commit to buying gas from it, while Hungary says it would be more expensive compared to the current Russian import prices.

Some sort of a compromise arose in April this year, with minister Szijjártó stating that Hungary would purchase a 25% share in the Croatian LNG terminal, adding that “acquiring a share in the ownership of an LNG terminal is a strategic issue, but Hungary does not accept the linking of the two”, that is, the commitment to purchase gas in exchange for a share in the terminal.

However, the reluctance of Hungary in this matter is not seen well by the United States, a fact that has been communicated both during meetings between Secretary of Energy Rick Perry and Szijjártó, and during the official visit of Secretary of State Mike Pompeo to Budapest earlier this year.

There is also another issue, the extraction of gas in Romania, more exactly from beneath the Black Sea. The gas reserves here are huge, but extracting it is expensive and the returns are long-term. Two companies are eyeing this project, America’s ExxonMobil and Rompetrol, owned by OMV (Austria).

Romania is in a much better position than Hungary, as it is able to cover 90% of its consumption from internal production. That means much of the gas extracted from the Black Sea reserves could be exported. All seemed ready for launch until November last year, when the then leader of the ruling PSD (Social-Democrats) party, Liviu Dragnea, presented a new law, dubbed the Offshore Bill, which would significantly reduce the profits of the companies extracting the gas.

That brought the project to a halt. This was bad news for Hungary, since Szijjártó had triumphantly announced back in February a “historic step forward for Hungary’s energy security”, in a deal reached with Romania. The parties agreed that Hungary would import 4.4 billion cubic meters of the gas extracted by ExxonMobil and OMV, starting in 2020, provided that the technical conditions were in place.

But those technical conditions are currently stalled and there is no sign that this will change soon, while the Hungarian government is growing impatient.

Environmental Change

“ExxonMobil can change the European energy supply. But the American company has to decide now about the investment. If this will not happen by September, than I will be forced to sign a new long-term agreement with Russia,” Szijjártó said recently.

Exxon reacted rapidly, saying that such a decision would require “competitive and stable fiscal terms [...] for the duration of our concession agreement”. The reference to the Offshore Bill was obvious, which meant that everyone was expecting a change in the approach to this issue from the Romanian government.

But the Romanian government has itself suffered a major setback. PSD experienced a dramatic defeat in May’s European Parliamentary elections and the next day, May 27, the High Court announced an appeal decision in a corruption case against the PSD’s Dragnea, which resulted in his immediate imprisonment. This, combined with the election defeat, has impacted the party heavily and it is unlikely that it will deal with the Offshore Bill any time soon.

So, it seems unlikely that Hungary will import gas from the LNG terminal in Croatia, because it is unwilling to, and from Romania, because it cannot. In this case Hungary will probably strike a new long-term deal with Russia to import gas via Turkish Stream, as Szijjártó indicated in Belgrade.

However, this would represent a major conflict of interests with the United States (which Budapest has tried very hard to avoid so far).

When Szijjártó met Perry last November, the State Department issued a statement stressing “the importance of Central Europe diversifying its energy import sources to avoid overreliance on any single country. Secretary Perry also emphasized the United States’ opposition to both the Nord Stream II and the multi-line Turkish Stream natural gas pipelines – both of which would extend and deepen Russia’s energy dominance in the region – and the desire to continue to strengthen the U.S.-Hungary relationship.”