Are you sure?

Largest energy company in Hungary takes practical approach to Russia

Zoltán Hernádi will not forget the bitterly cold winter of 2006. As chairman of Mol Nyrt, the largest oil and gas company in Hungary that is fast becoming one of biggest energy groups in Central Europe, his main preoccupation was how to supply enough gas to Hungarian homes and industry.

Besides the temperatures slipping below minus 30 degrees, Hungary's next door neighbor, Ukraine, was in the middle of a standoff with Russia over a dispute about gas prices. At one stage, the Russian state-owned energy giant, OAO Gazprom, cut off supplies to Ukraine after Ukraine siphoned off supplies of Russian gas that had been destined for its markets in Europe. The dispute damaged Russia's reputation as a reliable gas supplier to Europe. It also convinced OAO Gazprom that it had to find new transit routes to reduce its dependence on Ukraine as the principal transit of Russian gas to Europe.

In Hungary, a country reliant on Russia for over 85% of its gas supplies and where 90% of households depend on gas, the dispute forced Ferenc Gyurcsány's Socialist government to rethink its energy strategy. MOL and the government agreed two strategies in case of future shortages. One was to increase its storage capacity with the help of Gazprom, even at a time when much of Europe was uneasy about the growing influence of Russia over their energy supplies. The other was to use these new storage facilities to become a hub in Central Europe - an ambitious goal particularly since nearby, Austria was pursuing the same aim.

MOL won the government tender in Hungary last year to build a facility to store 1.2 billion cubic meters, or 42.4 billion cubic feet, of strategic gas reserves. „If our pipeline is missing some gas, I cannot increase the supply from domestic production,” Hernádi said. „That is why storage is so important,” To strengthen its ties with OAO Gazprom, MOL agreed last June to cooperate with the Russian company on the construction of a transnational pipeline as well as an underground gas storage facility in Hungary. The project would extend Gazprom's existing Blue Stream pipeline that already runs under the Black Sea from Russia to Turkey. From Turkey, the new pipeline would run up through Bulgaria, Romania, Serbia into Hungary. „A feasibility study is under way,” Hernádi said. „The idea is that MOL should have a stake in this venture.” He said that the total cost would be between $4 billion and $6 billion.

MOL and Gazprom have also agreed that Russia should build a storage facility holding 10 billion cubic meters of gas. Alexei Miller, Gazprom's CEO, said that the deal would allow Russia more possibilities for long-term gas deliveries to European gas markets. But the European Bank for Reconstruction and Development recently raised concern about the effects of the concentrated ownership of gas production and distribution on competition in the sector. Hernádi asserted that MOL's cooperation with Russia over this extended pipeline would not cause a conflict of interests even though MOL is a member of the consortium building the EU's Nabucco pipeline. The Nabucco pipeline would import gas from Azerbaijan and send it across Turkey, up through Bulgaria, Romania and into Austria, with Austria becoming the energy hub for this part of Europe.

„Nabucco is an old, old project,” Hernádi said. „Nabucco has only one serious problem. It has not started. So who can provide us with a source for gas? Russia came up with the idea of extending the Blue Stream pipeline.” Despite the EU's concerns that Europe is becoming too dependent on Russian gas - over a quarter of the bloc's needs are supplied by Gazprom - Hernádi takes a pragmatic approach to MOL's close cooperation with Russia. „Russia wants to diversify its transit routs and Hungary wants to diversify too,” he said. „Look, Russia is supplying Europe. But it is running into problems with the transit countries. Russia has taken the initiative to extend the Blue Stream. And we are ready to cooperate with them. Why not?” Indeed, over the past seven years, during the time it was being privatized, MOL has looked, not only to Russia, but also to its south-eastern neighbors to realize its ambitions to become a hub for Central European energy. After it started to focus on its oil and gas products, hiking off its other units, it expanded outside Hungary. It first snapped up the Slovak Slovnat gas company for $1 billion. It then bought a stake in INA, Croatia's petroleum and natural gas company. Further into the Balkans, with INA, it acquired the retail network of Energopetrol, a company in Bosnia and Herzegovina. As if by coincidence, Russia's oil and gas companies are active in this region too.

Eastwards, MOL obtained a 22.5% stake in gas exploration in Kazakhstan. It also bought BaiTex, a Russian oil production company, and its oil field in the Urals, as part of MOL's decision to enter the exploration and production sector. „In all, over the past few years, we have invested between $2 billion and $3 billion,” said Hernádi. The investments seem to be paying off. After a very difficult 2000 and 2001, cash flow has improved and refinery product sales have grown. Net profit more than doubled in the Q3 of 2006, rising to Ft 119.53 billion ($589 million), from 56.44 billion a year earlier. (