PIPELINES, PLATFORMS, PROSPECTS

European Energy Security

NT: Hungary and Slovakia have just signed an agreement to build a new gas pipeline linking the two countries. Last October a new, 100 km gas pipeline was opened with great fanfare, linking Hungary and Romania. Work continues on a pipeline linking Hungary and Croatia. How much longer will it take to build a real Central European gas market, and why is that so important?

ZsH: Let me clarify this: the construction of the interconnector pipeline linking Hungary and Croatia has been finished and is now being tested.

The Central European gas infrastructure was designed to transport gas from the exporter to the wider region on a country by country basis. There are very strong East/West pipeline links but practically no North/South ones. That makes the region vulnerable and dependent on what is basically a single supply route.

As a result, any one country could be threatened by interruption of its main supply link, as we experienced in 2009.

To increase our energy security, we need to change this situation by diversifying sources of energy supplies. This will have obvious benefits for Europe as well.

Eliminating physical bottlenecks between the countries will firstly increase liquidity by ensuring access to the Western European gas market, secondly, it will increase security of supply by creating alternative supply routes and thirdly, it will contribute to increasing competition in the renegotiation of supply contracts which would lead to better prices for customers.

But setting up infrastructure is only the first step in the right direction; enhanced regulatory harmonisation and the creation of common operating rules should follow. This will all be a gradual development; I think it will take a couple of years to create an efficient and liquid regional gas market.

NT: Who actually opposes such North-South links, and why?

ZsH: I haven’t noticed any serious opposition, so far.

NT: Hungary has made the creation of a common EU energy policy one of the aims of its Presidency. How realistic is that, given the tendency of larger EU countries like France, Germany and Italy, to sign bilateral energy agreements with Russia, which often ignore the interests of the smaller states?

ZsH: I’m confident that Brussels has understood the importance of a consistent “one voice” energy policy. Of course there are diverging views and interests, and it will take many years before a common platform can be developed.

I’m rather optimistic about the European Commission’s work. It is now quite obvious to everyone that a stronger Central Europe can make Europe, as a whole, stronger. The new strategic documents, Energy Strategy 2020 and the Communication on the Energy Infrastructure Package place proper emphasis on eliminating the barriers that hinder development of competitive energy markets in Central and Eastern Europe. This proves that the European Commission has become more receptive to the problems of this region.

NT: What are the next steps in the creation of such a policy? How likely is it that they will happen, and what physical, financial or mental obstacles remain?

ZsH: This will be a rather long and slow process. I do believe that until the energy markets of the EU member states converge to create a uniform market structure, it will be difficult to create a common EU energy policy.

Today, major features of the European electricity and gas markets are already decided in Brussels and a central regulatory agency (The Agency for the Cooperation of Energy Regulators) has been established and will be fully operational from this March; these are the very first steps towards a common approach. However, since EU energy markets are at very different stages of development, views and positions will necessarily diverge to a great extent. To give you just one example: until a robust infrastructure platform is in place in Central and Eastern Europe, our number one priority will be to focus on infrastructure. Since the majority of West European countries already have appropriate infrastructure levels, regulatory harmonisation, for example, is a higher priority for them.

Central and Eastern Europe is still in the first phase of development: creating a regional market instead of isolated, illiquid national markets. We have already been working on this process for years and yet many years will pass before we have a proper, competitive regional marketplace. The next phase will be to decrease regional differences across the EU.

NT: The government has introduced so-called crisis taxes on the financial and energy sectors. How necessary are they? How much do they cost your company, MOL, how do they compare with taxes imposed by the previous, Socialist administration, and how long do you believe they will last?

ZsH: MOL has paid considerable taxes in the past and obviously these new regulations and acts of parliament have further increased them. However, I’d like to clear up a slight misunderstanding here. Nowadays, it is a widely-held view that since these sectors are so profitable, such profits need to be tapped. I think this is a very, very mistaken approach. Profit is not a sin – a successful company is not evil. The more efficient MOL is, the more profits it makes and thus the greater the contribution it can make to Hungary and Hungarian society. It’s not just about taxes but also about our role and responsibility as the engine of the economy. This was one of our problems with the so-called Robin Hood tax which penalised companies where efficiency and thus profits were highest. A profit-based tax always punishes efficiency.

Having said that, we agree with this limited tax so long as very necessary structural reforms take place that will make Hungary come out of this crisis stronger than before. If our contribution avoids a deeper crisis it does make some sense.

NT: Will the revenue from the crisis taxes be sensibly spent? The previous government promised reforms, and achieved little. Do you trust the Fidesz government to carry out reforms and where are they most urgent?

ZsH: We believe the government should carry out structural reforms in exchange for extra taxes imposed on companies. Only the next months and years will show the real outcome.

NT: Hungary has been sharply criticised by the EU and by many member states, both for its unusual economic policy, and for its new media law. Is some of that criticism justified? What is the government doing right, and what is it doing wrong?

ZsH: I am not in a position and it is not my job to comment on that.

NT: Only three EU states, Germany, Hungary and Sweden, met their 2010 interim goals for renewable energy for both electricity and transport, according to the European Commission. From your perspective, as head of a massive oil and gas company, how important is the further development of renewable energy in Hungary, and what role will your own company play in that?

ZsH: MOL Group is committed to playing its role in the decarbonisation process. Instead of the controversial first generation biofuels we have decided to focus on research into second generation bio-fuels produced from waste. We have allocated an R & D budget for this purpose; in addition, we are participating in geothermal projects that might be suitable for power generation and heating as well. We are also running several projects inside MOL Group that aim at increasing energy efficiency and rationalising the company’s energy consumption.

Unfortunately, Hungary has rather sparse resources and capabilities with regards to renewable energy. Hungary should definitely fulfil its renewable target commitments but unthought-through increases of these targets could lead to a loss of competitiveness in the Hungarian economy.

NT: Your company MOL evolved away from state ownership in several stages. Today the Fidesz government has a strong etatist policy. It believes in state influence in many areas of life. If the state were to buy a significant portion of shares in MOL, for example the 21% currently held by the Russian company, Surgutneftegas, would that be a good or a bad development, from your perspective?

ZsH: I can imagine that both MOL Group and the Government could benefit from such a business relationship, however it would not change the business strategy of the Company, defined by all its shareholders and the Board of Directors, which is to strengthen MOL Group’s position as a leading international Central and East European oil and gas group with operations in more than 40 countries.

NT: The current political turmoil in the Arab world is pushing up the price of oil once again. What impact will that have on your company, and your country?

ZsH: First we should clarify that Hungary’s oil supply is not in danger; we have a stable, secure supply through other sources.

Regarding the turmoil in the Arab world, MOL Group is not in a position to comment on politically related developments, nor make speculations about oil prices.

With regards to MOL Group’s exploration and production activities in Arab countries, we have introduced precautional security measures.

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