The Strategist

Will Hungary become a new European gas hub?

07/20/2018 - 12:30

Countries of Central and Eastern Europe are debating over the transit of gas from a field discovered in the Black Sea. Hungary believes that the era of the monopoly of Russian Gazprom in the region is over.

A large gas field was discovered in the Romanian part of the Black Sea several years ago. According to preliminary estimates, its reserves reach more than 40 billion cubic meters of gas. This is enough to cover the needs of for Romania more than the next few decades. In addition, the gas can even be exported.

The gas extracted in the Black Sea is planned to be transported to European countries via the new BRUA pipeline, which, according to the original plan, was to link Bulgaria, Romania, Hungary and Austria. The BRUA, which construction is supported by the European Union and the European Bank for Reconstruction and Development (EBRD), will be put into operation in 2019.

At the same time, the project’s implementation is complicated by the fact that the participating states are guided by different, sometimes opposite motives. On the one hand, Western European countries, including Austria, intend to diversify gas supplies and thereby reduce their energy dependence on Russia. They are cooperating with the American company Exxon and the Austrian concern OMV, which are engaged in exploration of deposits in the Black Sea.

In turn, Hungary seeks to take a leading position in the energy sector of Central and South-Eastern Europe. In July 2017, the authorities in Budapest announced that the BRUA gas pipeline would only reach Hungary and would not cross the Austrian border. Earlier it was assumed that the pipeline should end in the Austrian city of Baumgarten, where the most important gas distribution center in Central Europe is located.

Hungary, however, argues that further gas transportation can be carried through the territory of Slovakia. Many experts believe that Budapest is trying to make Vienna a competition and play a key role in the transit of blue fuel to countries such as Slovakia, Serbia, Croatia and Ukraine.

In February 2018, Hungarian Prime Minister Viktor Orban said that the "era of the Russian gas monopoly" is over. According to him, Hungary is going to annually purchase more than 4 billion cubic meters of gas from Romania during 15 years. Thus, already in 2021-22, Romanian gas will provide more than half of Hungary's needs for the import of blue fuel. As a result, Hungary and the whole region as a whole will be in a much more advantageous geostrategic position than before, Orban stressed.

As for Romania, there is still a debate on the topic of negligence and corruption in issuing licenses to gas producing concerns. Previously, appropriate permits could have been obtained relatively cheaply. This means that, in fact, Bucharest voluntarily deprived itself of significant funds.

The legislative amendments approved in early July by the Romanian parliament are expected to change the situation. Under the new rules, which have not yet entered into force, the gas production tax will be 13 percent of its value. In addition, the law provides for a change in the level of taxation of mining companies, depending on changes in market prices, as well as introduction of a tax on additional income of companies.

Meanwhile, Romanian opposition politicians criticized the adopted amendments. In their view, most other gas-producing countries impose much higher duties and taxes on energy concerns.

Be that as it may, Hungarian experts believe that Budapest will continue to play a key role in the dispute over the Black Sea gas. Economist András Deák notes that Hungary will be able to import gas not from Russia for the first time in 60 years. "It would be very silly not to use this opportunity," – said the expert.

At the same time, there is still no understanding of how the government of Orban will be able to guarantee unhindered transit of gas for an acceptable fee through the territory of Hungary, and also whether it will be able to use Romanian gas as a trump card in the course of negotiations with Moscow.

As for Prime Minister Orban's statements on reducing Hungary's dependence on Russian gas, this does not mean a change in his policy. According to Deák, Orban still sympathizes with the Kremlin.

"At the moment, politically speaking, Russia plays a less important role for Orban, because the positions of Angela Merkel have weakened, and Hungary is no longer such an outcast (in the EU) as a couple of years ago," the expert explains. "Hungary is also betting on strengthening relations with the US." At the same time, Budapest does not say goodbye to Moscow yet, but only slightly distances itself."