Gas Imports: Levers and Pressure Points

Energy Trade

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The Budapest Business Journal looks at why the year 2020 seems to hold such importance in negotiations to secure Hungary’s long-term gas supply.

Pipeline laying.

Hungarian Minister of Foreign Affairs and Trade Péter Szijjártó seems to grab every occasion to draw a menacing picture about the Russian gas supply after 2020.  

In early June he spoke in Belgrade about the “uncertainties” floating around receiving Russian gas via Ukraine, pointing to a situation where Hungary will have “no other choice” but to sign a long-term agreement with Russia on gas imports.

Shortly after, in St. Petersburg, Szijjártó again “drew attention to the uncertainty factor relating to the fact that there is still no valid transit agreement between Russia and Ukraine concerning the transport of natural gas”, as he was quoted in an official statement released by the Hungarian government.

He added that he had signed new agreements with Russia, by which “the quantity of gas required for the operation of Hungarian industry and the heating of homes and houses for 2020 is at our disposal”.

So 2020 is seen (or at least, communicated) by the Hungarian government as being a major turning point, when everything may collapse on the European gas market, although Budapest will stand firm, doing what needs to be done for “heating the homes and houses”. But is the situation really that critical?

The close of this year will mark the end of a ten-year agreement between Ukraine and Russia. This agreement ensured that European countries could receive Russian gas via Ukraine. This also represented a vital source of income for Ukraine, an annual USD 3 billion, roughly 3% of the country’s GDP.

Leverage

Moscow is aware of what a huge blow it would be to the Ukrainian economy if the deal is not renewed, and with the significant deterioration of bilateral relations since 2014, this would represent convenient leverage for Moscow against Kiev.

There are signs of mounting pressure, with several rounds of negotiations on renewing the contract having failed. By keeping the issue of the gas transit in limbo, Russia is able to pressurize other countries, too: Sign a long-term agreement with us now and we’ll give you a good price. If not, who knows what comes next year is the implied theat.

To add more weight, Russia, in an international cooperation, has started the construction of a new pipeline, dubbed North Stream II, which would allow Germany to receive Russian gas bypassing Ukraine. From this angle, Szijjártó may rightfully say that if no other gas import alternative arises, he will have to sign such a long-term agreement with Russia. However, as always in international negotiations, things are more complicated than that.

Russia is not able to play quite as freely with the threat of closing the pipes as it seems. The gas exports through Ukraine amount to an annual 65 billion cubic meters and it is not simple to handle such a loss. Russia’s Deputy Foreign Minister, Aleksander Pankin, recently said that his country’s government will not stop gas deliveries to Europe through Ukraine from 2020.

“No one has ever made an announcement that we will refuse. For us, it would be deadly and irrational.” This, however, does not mean that Gazprom (i.e. Russia) would accept any kind of ultimatum from Naftogaz (i.e. Ukraine), he added.

While this seems a return to the stalemate situation, Pankin also said he hopes that trilateral negotiations between Russia, Ukraine and the European Union would begin during the second half of 2019.

No Hurry

Apparently, Russia does not need be too hasty in finalizing these negotiations. One if its largest export markets, Germany, looks secured through North Stream II, a 1,200 km-long pipeline running beneath the Baltic Sea, with a capacity of 55 cubic meters.

Meetings at the highest level paved the way for the agreement, culminating with the summit less than a year ago between Chancellor Angela Merkel and President Vladimir Putin. The initial plans for completing North Stream II were set for 2020, but in the meantime, Denmark has refused to grant approval for laying the pipe on its territory, citing environmental damage concerns.

There is also another issue, perhaps more difficult: the position of the United States in this matter.

The Trump administration has clearly stated, through various channels, its opposition to North Stream II. U.S. Vice President Mike Pence insisted Germany would become “literally a captive of Russia”; Secretary of State Mike Pompeo warned the Kremlin uses energy “as a lever of pressure on Europe”. President Donald Trump himself warned that “Germany is making a tremendous mistake” and he envisaged sanctions against companies participating to the project.

The project has already cost of USD 10 bln with about 1,000 km of pipeline laid down. While the sanctions are not likely to shake European companies too much, the effects of political clashes between Germany (and ultimately the EU) and the United States may be far more damaging in the long term.

Pipelines (Plural)

To make things even more complicated, there are more gas transport projects in play apart from North Stream II.

One of these is BRUA, an acronym for a cooperation between Bulgaria, Romania, Hungary and Austria for extracting and transporting gas from the Black Sea (and, in the long-term, also from the Caspian Sea) to Central Europe. The other is TurkStream, another route for Russian gas, this time via a Southern region, first to Turkey, then via Bulgaria and Serbia, to Hungary.

Initially, Hungary backed BRUA, but last year it withdrew its support, invoking high costs. However, TurkStream could be a route Hungary might use for importing Russian gas, should the trilateral talks for the Ukraine transit route fail and Budapest ultimately signs a long-term deal with Moscow.

But TurkStream has been as heavily rejected by the United States as North Stream II (the source of the Gas, Russia, is the same, after all).

Hungary insists it must have the last say in matters concerning its energy security, as Péter Szijjártó has stated on several occasions. That said, uncertainties remain, as Szijjártó has also pointed out.

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