Oil and Gas Industry

An Expert's View about Renewable Energy in Hungary

Last updated: 31 Aug 2011

The three key issues of the Hungarian energy policy are security of supply, competitiveness, and sustainability. Hungary relies on imports, mainly from Russia, for almost 80 percent of the country`s energy needs, including natural gas, oil, carbon, and uranium. Hungary is now moving towards opportunities for source diversification and finding new transport routes, which will help reduce its dependence on energy imports. The newly released National Energy Strategy also aims to enhance state control over the crude oil and gas sectors, influencing the pricing of the retail gas market as well.
The European Union has set the goal of a fully functioning, transparent and integrated internal energy market. More concretely, EU leaders talk of the internal gas and electricity market being completed by 2014. In order to reach this, major efforts are needed to modernize and expand Europe's energy infrastructure as well as to interconnect markets across borders. There is even talk of solidarity between member states becoming "operational". Importantly, leaders work to adopt a concrete commitment that no "EU member state should remain an energy island after 2015 or see its energy security jeopardized by lack of the appropriate connections". Still, little is said as to how the EU will pay for alternative supply/transit routes and where sources of energy will materialize. (Source: Europolitics, February 1. 2011, Section No. 4131)

Market Demand
Hungary relies heavily on Russia for its oil and gas, although MOL and several foreign firms conduct some relatively small-scale exploration and production. As regional pipeline connections are missing / weak, the CEE region is dependent on Russia both for supply and transport, resulting in an increasing gap in gas pricing between the CEE and Western Europe. Hungary is unique in the EU in that it uses more natural gas than oil.

1. Nabucco Pipeline
Nabucco represents the construction of a complete new gas pipeline system, which will bypass Russia and Ukraine. The project is seen as a key element of western strategy to cut Europe’s dependence on Russian energy supplies. It will connect the Caspian region, Middle East and Egypt via Turkey, Bulgaria, Romania, and Hungary and Austria. The members of the Nabucco consortium are OMV, Mol Plc, Transgaz, Bulgargaz, Botas and the German RWE, holding each 16.67 percent of the shares.
The pipeline length will be approximately 3,300 km, starting at the Georgian/Turkish and/or Iranian/Turkish border respectively, leading to Baumgarten in Austria. The pipeline is expected to have an annual capacity of 31bn cubic meters of gas. Although there have been many delays in the project, Nabucco is expected to begin construction by 2013, and have first gas flow by 2017.
The project has suffered a deadlock over the past few years because of a “catch 22” situation: Banks are not willing to finance the project until input gas is secured, while potential input nations are reluctant to commit to supplying gas until they are convinced the infrastructure will be in place. Also, competing plans from Russia to build the South Stream pipeline have posed a threat to Nabucco.
In June 2011, the transport and energy ministers of Austria, Bulgaria, Romania, Hungary and Turkey signed project support agreements for the construction of the Nabucco gas pipeline. The bilateral agreements mean that the legal framework of the project has been finalized.
EU officials say 2011 is the make-or-break year for the project: Nabucco was originally budgeted at EUR 7.9 billion (USD 11.1 billion), but according to an internal study by the British oil company BP, it may cost EUR 14 or USD 19.6 billion to finish the pipeline. That threatens to make the venture unprofitable.

2. South Stream Pipeline
South Stream is widely seen as the rival to the Nabucco Project. In order to strengthen natural gas source and supply security, the Hungarian government supports both pipeline projects. South Stream is a proposed gas pipeline to transport Russian natural gas to Italy and Austria, bypassing Ukraine. The design capacity is 63 billion cubic meters per annum, the total length of the planned offshore pipeline section is 923 kilometers and its onshore section will be 1,600 to 2,540 kilometers, depending on the route. The first gas supplies are scheduled for late 2015. The pipeline would be built and operated by several project companies. The main project company is South Stream AG, which is owned by Gazprom (Russia), Eni (Italy) and EDF (France). The Hungarian section will be built and operated by the equally owned joint venture between Gazprom and the state-owned Hungarian Development Bank (MFB). The whole capacity of the pipeline is going to be Gazprom`s.
At the pre-investment stage of the project a number of optional gas pipeline routes are being addressed including onshore sections crossing a number of European countries as well as offshore gas pipelines running via the Black and Adriatic Seas. Besides, it is projected to expand the existing and construct new gas transmission capacities in Russia in order to provide South Stream with a sufficient amount of natural gas. Gazprom is examining three possible routes to Italy: one crossing Bulgaria, Serbia, Hungary and Austria; another through Bulgaria, Serbia, Hungary and Slovenia; and a third via Bulgaria and Greece.

3. Exploration in Hungary
Oil Production, which is distributed over 6 production sites, covers 17% of the country`s needs. Hungary also produces significant quantities of natural gas, although production is falling slightly. (Source: Enerdata, Hungary Energy Report, June 2011)
Big hopes have been placed on unconventional gas as well: Falcon Oil, MOL and ExxonMobil worked jointly to explore the Makó gas fields in the southeast of Hungary. The fields are believed to hold 340 billion cubic meters of gas, of which 30% can be explored, according to estimates. Unconventional technologies will be required to explore the gas in the field. Based on the disappointing results of the test drillings, ExxonMobil and MOL decided to exit the project in February 2010 and Falcon became sole operator of the contract area. Falcon is now seeking alternative strategic partners.

4. Regional Connections and North-South Connection of regional networks
The interconnection of markets is a top EU priority.
As part of the EU-supported North-South connection of regional networks, the Hungarian and Slovakian states are receiving an allocation of about EUR 30 m from the European Commission for the interconnection of the Hungarian and Slovakian natural gas pipelines. (Source: MTI, 17th Nov, 2010/ BBC Monitoring, 28th Jan 2011)
In the East-West direction, Hungary has an existing connection with Romania through the Arad-Szeged pipeline, but this is only used for imports of gas into Romania. Legal and regulatory changes will be necessary before exports can start. (Source: Mediafax, 15 May, 2011)

5. Liquid Natural Gas
“LNG is natural gas that has been cooled to about minus 260 degrees Fahrenheit for shipment and/or storage as a liquid. The volume of the gas in its liquid state is about 600 times less than in its gaseous form. In this compact form, natural gas can be shipped in special tankers to receiving terminals {…} {where} the LNG is returned to a gaseous form and transported by pipeline to distribution companies, industrial consumers, and power plants.” (Source: US Energy Information Administration, December 11, 2009)
The AGRI project is to build a pipeline connecting Azerbaijan with Romania and Hungary, passing through Georgia transporting liquid natural gas (LNG). Regarding the agreement, the feasibility study is planned to be finalized till April 1, 2012 and will cost EUR 2b - 5b (it will depend on the gas transported), and the construction of elements will take 1-2 years. (Source: Euclid Infotech, Febr 17, 2011)
In 2009 the Croatian Plinacro (national gas operator) and the Hungarian MOL subsidiary FGSZ Zrt. have agreed on a EUR 395 project to link Városföld (Hungary) and Slobodica (Croatia). Plinacro has started to transport gas through the new pipeline on 3rd August. It is 290 kilometers long (174 miles) and has an annual capacity of 6.5 billion m3. (Source: HAC August 5th, 2011/ AFP Headline, August 3rd, 2011)

6. Strategic stockpiling of natural gas in underground storage.
The current storage capacity is 4.93 bcm/year (Source: Enerdata, Hungary Energy Report, June 2011) and the law prescribes a minimum of 1.2 bcm gas as strategic reserve.

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Posted: 30 August 2011, last updated 31 August 2011