Author: Vladimir Socor, Eurasia Daily Monitor

Gazprom-controlled Kommersant claimed on December 13 that Hungary's MOL energy company has invited Gazprom to join the New Europe Transmission System (NETS), a proposal just launched by MOL to interconnect the gas transmission networks of at least seven Central and South-East European countries within an independently managed and unbundled entity (see EDM, December 10). Moreover, Kommersant's story implied that MOL chairman and CEO Zsolt Hernadi had also discussed routing Gazprom's planned South Stream pipeline -- a rival to the European Union-backed Nabucco project -- through Hungary. Other Russian and international media then picked up Kommersant's account of Hernadi's December 12 talks in Moscow with Gazprom president Alexei Miller.

MOL has refuted that account, pointing out that Russian journalists did not talk to any representative of the company during Hernadi's Moscow visit or in Budapest. The head of MOL simply briefed Miller on the NETS project at Miller's request, during a routine visit that Gazprom initiated on short notice. Miller raised the issue of constructing a section of the South Stream pipeline and storage capacity in Hungary, but MOL does not plan to participate in that project.

Indeed, the NETS project is incompatible with Gazprom's strategy. Gazprom wants to deal with compartmentalized national transmission systems in this region; tries to prevent re-sales of Russian-supplied gas from one country to another in the region; and seeks shared control of distribution networks and storages as part of monopolistic supply deals. However, interconnected transmission systems would enable the countries to re-allocate volumes of gas among each other in the event of supply shortfalls; improve capital efficiency; obtain international financing for system upgrades; and increase the incentives for non-Russian projects, such as Caspian gas via Nabucco or LNG via Adriatic ports, to supply a large regional market unified through interconnections. Moreover, the MOL-proposed unbundling corresponds with draft EU legislation that would bar the vertically integrated Gazprom from taking over national transmission systems.

While MOL has opted for the EU's Nabucco project over Gazprom's South Stream, Hungarian Prime Minister Ferenc Gyurcsany is relapsing into ambiguity by endorsing both of these mutually exclusive projects. On December 7 in Budapest he held talks with the visiting Russian Prime Minister Viktor Zubkov on South Stream and other bilateral projects. The Russians proposed continuing detailed talks in early 2008 (Interfax, December 8).

Gyurcsany announced with satisfaction at the concluding news conference, “Zubkov has promised quite clearly that on the basis of earlier agreements, the Southern [Stream] pipeline would reach Hungary.” The talks included “detailed discussions” on those earlier agreements, Gyurcsany said. He mischaracterized South Stream as a European project, citing Italian Prime Minister Romano Prodi in support of that view. Equating diversification of gas supply sources with diversification of supply routes from the single source Russia, Gyurcsany endorsed both types of diversification and, consequently, both Nabucco and South Stream (Platts Commodity News, December 7; Global Insight Daily Analysis, December 10).

By “earlier agreements,” Zubkov and Gyurcsany meant the July 2006 documents signed by Gazprom and MOL to conduct a feasibility study on prolonging Gazprom's Blue Stream pipeline into Hungary and building gas storage capacity there. A joint entity was then created on a parity basis and registered in Hungary for conducting the feasibility study. Gazprom held out the prospect of building an underground storage site of 10 billion cubic meters capacity alongside the Blue Stream extension pipeline, thus turning Hungary into something of a regional “hub” for gas transmission. The existing Blue Stream's first stage runs on the seabed of the Black Sea from Russia to Turkey. Its prolongation would have run from Turkey to Central Europe, approximately on the same route as the Nabucco pipeline project, nipping the latter in the bud. Meanwhile, Russia played Hungary, Austria, and even Serbia against each other, tempting each of them with the “hub” prospect, ultimately choosing Austria's OMV in May 2007 and reconfirming that choice in November.

The South Stream project has superseded Blue Stream in Gazprom's strategic planning. Launched in partnership with Italy's ENI, South Stream would involve laying a pipeline on the seabed of the Black Sea from Russia to Bulgaria, with two possible continuation options: Bulgaria-Greece-Italy (across the seabed of the Adriatic Sea) and/or Bulgaria-Serbia-Hungary. Ostensibly, construction is to be completed by 2013, at an officially estimated cost of $10 billion, for a capacity of 30 billion cubic meters annually.

This project seems increasingly to entail elements of a political bluff. With Russia's gas output almost stagnant, internal consumption rising, and a crunch anticipated by 2012 and thereafter, Gazprom is unlikely to be able to supply South Stream and the other major existing and projected pipelines simultaneously and anywhere near full capacity. South Stream's route or routes, final destination countries (apart from Italy), and hubs are yet to be determined. Gazprom and ENI are juggling with those options. The project seems partly intended to deter (like Blue Stream until recently) the construction of Nabucco but also the full-scale development of the Turkey-Greece-Italy Interconnector for gas. South Stream targets the same markets.

Hungary depends on Gazprom for approximately 80% of the country's gas consumption (it imported 8.7 billion cubic meters from Russia in 2006).

The Hungarian government seemed to opt conclusively for Nabucco in September, when it hosted a special conference to publicize its choice. However, Zubkov's visit seems to have induced Gyurcsany to consider South Stream again.

MOL is interested in Nabucco, not South Stream. But in order to sustain that interest, and keep the government aboard the project, Brussels and Washington must lead more effectively in lining up the gas volumes and investment funds.

(Kommersant, December 10, 13; Interfax, MTI, December 7-8, 13-14; Magyar Hirlap, December 14)

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