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New Guest Arrives at Hungary’s Party Thanks to COVID: LNG

The coronavirus has gravely affected the life of businesses and private persons alike, and the energy sector is no exception. Although the focus in recent years was placed mostly on the spread of renewables, it is also worth paying attention to the most recent developments in the Hungarian gas sector where a significant milestone in the diversification of Hungary’s gas supply was passed.

Dr. Daniel Varga,  Attorney at Law, Schoenherr Hetényi Attorneys at Law

In the beginning of September 2020, MVM’s gas trading entity purchased a total of seven billion cubic meters of natural gas from Shell that will be supplied over seven years starting from 2021.

It will come in the form of liquified natural gas via the LNG terminal at Krk Island in Croatia. In order to put this landmark deal into perspective, this means that approximately 1/10 of Hungary’s gas consumption will be covered for seven years from LNG sources that are supplied from sources other than Russia.

Such diversification of Hungary’s gas supply is made possible by the LNG technology, where natural gas is cooled to -1620C at high pressure. In this state, natural gas is liquified and occupies 600 times less space than in its gaseous form.

In addition to its economical use of space, the other advantage of LNG over traditional natural gas is that it can be transported in seagoing and inland vessels without the need for constructing costly pipelines.

These characteristics have enabled LNG to be traded worldwide, allowing countries such as the United States and Qatar to become gas exporters that are now capable of competing with Russia in supplying Europe with natural gas.

In order to receive LNG, regasification terminals are required. There are approximately 30 LNG terminals operating in Europe at present. The new LNG terminal at Krk Island, which is of strategic importance for Hungary, will become operational on January 1. MVM managed to book sufficient capacities in this terminal for the next seven years to cover the gas supplies coming from Shell.

Falling Prices

Before coronavirus hit the global economy, the price of LNG gas supply (including the regasification and transit to Hungary) was remarkably higher than conventional natural gas. However, the joint effect of the economic fallback that followed the coronavirus and a massive global overproduction of natural gas resulted in a massive drop in LNG prices. That allowed MVM to seal a deal and diversify the Hungarian gas supply to an extent never seen before.

Apart from the use of LNG as a gas supply, it must also be noted that LNG in its liquid form may be used as a fuel by seagoing and inland ships as well as heavy-duty motor vehicles (i.e. trucks).

Realizing the potential of LNG as an alternative fuel, Directive 2014/94/EU on the deployment of alternative fuels infrastructure requires member states of the European Union to ensure that, by the end of 2030, an appropriate number of refueling points for LNG are put in place at inland ports.

One of the aims of the directive is that LNG inland ships must be able to freely circulate throughout the TEN-T Core Network, that is the collective of the most important transportation routes in the European Union. The Rhine-Danube corridor is one of the centerpieces of this network, therefore LNG refueling points are expected to pop up along river Danube until 2030.

In addition to inland ships, trucks may also use LNG as an alternative fuel. The directive also instructs member states to ensure that, in case there is demand, an appropriate number of LNG refueling points are put in place for trucks by the end of 2025, at least along the TEN-T Core Network. However, member states may escape this obligation if they can prove that the costs of deployment of such LNG truck refueling points are disproportionate to the benefits.

It is, of course, yet to be seen how many ships and trucks running on LNG will populate the Danube and the main roads of Hungary. However, the arrival of LNG to Hungary is a significant landmark that will diversify both the gas sector and the transportation sector for the benefit of all.