Hungary to acquire stake in one of the world's largest natural gas fields, but there are pitfalls

A historic agreement has been reached by Hungary and Azerbaijan about Hungary's purchase of a stake in one of the world's largest natural gas fields, which will add a new dimension to the country's supply security, Foreign Minister Péter Szijjártó said in Baku on 5 June.

While trying to find out more about the project, we came across network messages in a foreign language (presumably Azerbaijani), but as we learned, this is not necessarily related to the announcement, as a major energy forum is taking place in Baku. We'll examine the details of the recent announcement in a moment, but let us begin with a few questions, as the experts we spoke with all brought up some fascinating points.

• OK, it's not Russia, but is Azerbaijan a better partner?
• It may be a worthwhile investment commercially, but how does the remote gas that would have to be brought here improve supply security? Besides, the extraction of this field will not be easy from a technological point of view.
• Sanctioned countries, including Russia and Iran are also involved in this project. Doesn’t this have the potential to create problems again?

The annual production of the Shah Deniz field covered by the agreement is close to 30 billion cubic meters, and a significant proportion of the gas produced could be transported to Europe via the so-called Southern Gas Corridor.

Among the experts we spoke with, one saw the Hungarian move as less risky, given that the project is actually led by the British, but he also called for calm, arguing that there is still no information about the price or the share, nor about who Hungary would be buying shares from. So, based on what we know so far, the newly announced deal could be serious, but it could also be symbolic, and it certainly carries risks that the government's communications have not publicized.

Missing details

At a joint press conference with his Azerbaijani counterpart Ceyhun Bayramov, Foreign Minister Péter Szijjártó called the agreement historic, and said that it would take Hungary to a new, much higher level in the global energy market.

According to the statement, the agreement puts the security of Hungary's natural gas supply in a completely new dimension. In practice, we will own a significant part of the gas we need. Szijjártó said that the strategic partnership between the two countries will provide Hungary with a huge competitive advantage and at the same time considerable security, as Azerbaijan has become an extremely important player in our country's energy supply.

The ministry's statement then proceeded to praise the two countries' joint businesses:

• This year was the first time that Hungary bought natural gas from Azerbaijan in the amount of 50 million cubic meters (no need to overestimate this, this amount covers approximately 1-2 days of the country's winter consumption);
• Before July, a joint venture between Azerbaijan, Georgia, Romania and Hungary will be set up, which will deliver green energy from the Caspian region to Central Europe.
• The statement also said that MOLs investments in Azerbaijan had reached two billion dollars, making the Hungarian company the third biggest owner of the biggest offshore oil field in the country.

Dreams and reality

The concept of Azerbaijani green energy should not be taken too seriously right now, as it does not seem to be a very realistic solution, but acquiring ownership in a hydrocarbon field is a different, more specific and tangible announcement.

It is quite funny, however, that TASZSZ, the Russian news agency misunderstood Szijjártó's statement, and listed MOL as a partner in the venture. So at first many experts thought that the Hungarian giant was also involved in the project, but as we have heard, this is a misconception. On the corporate side, it is the state-owned MVM and not MOL that will be involved in the cooperation.

Azerbaijan's Shah Deniz project was once a British-Norwegian (BP-Statoil) idea, and a large pipeline (Nabucco) would have brought Azerbaijani gas to the West with no involvement of the Russians. But Gazprom defended itself cleverly, first casting doubt on the pipeline project with an alternative idea (South Stream) and then virtually rendering it impossible.

Nabucco would have been a great achievement though, because the pipeline would have been a public infrastructure in line with Western European and American regulations, similar to a motorway where the interests of all market players are taken into account. Imagine the idea like a network of toll motorways from which no car is excluded. You can drive onto it (load gas), drive off it (take gas out), with nobody possessing exclusive rights to it. Nabucco would have linked a producing region with a consuming region based on the same principle, but as we said, the idea has died.

In contrast, the Russian concept is to have most gas infrastructure go from a dedicated source to a dedicated consumer. In this model, it was not the South Stream but rather the Nord Stream and Turkish Stream projects that were eventually expanded and implemented, the latter largely covering the same geographical area that the South Stream was originally intended to cover. Here too, the idea is that Gazprom's fields are connected by Gazprom's pipeline towards Gazprom's customers, there is no separation of roles. (To take an example from another sector, McDonald's restaurants only sell McDonald's burgers, Burger King isn't allowed in to sell its own.)

There are risks

One of our sources, a Hungarian gas industry expert, told us that such an announcement was to be expected ("it was not by chance that we have been cozying up to the Azerbaijanis so much, we even let their axe murderer walk free"). Naturally, Hungary becoming involved in the story has no revolutionizing effect on the European gas sector. At the most, it puts the Hungarian sector in a new position.

But the question remains: if there is gas a few thousand kilometers away, how do we use it? It still has to get to Hungary somehow. The idea of the Southern Gas Corridor is an existing one, but we are not yet at the stage where we can just open the tap a bit more if we want to bring more gas from Azerbaijan into the EU. The Southern Gas Corridor, along with the alternative ideas of the Vertical Corridor and the Solidarity Ring are all big European projects that circumvent Russia (and partly Ukraine).

What Péter Szijjártó was referring to is a project connecting three pipeline systems: the one in the South Caucasus, the Trans Adriatic and the Trans Anatolian one (i.e. on a country-by-country basis, Azerbaijan with Georgia, Turkey, Greece, Albania and Italy). As one expert put it, some of these countries are quite colorful, i.e. risky, meaning that getting gas to the EU through countries that accept EU regulations is not easy. In any case, some elements of the pipeline system are already in place, but it is not fully completed and the existing capacity is limited.

Naturally, the Hungarian resource in Azerbaijan can also be seen as a way of getting something from the field, and then swapping the specific gas molecules without having to bring them to Hungary. If we are entitled to 5 percent of the 30 billion cubic meters, then we can say that we for sure have 1.5 billion cubic meters of gas a year, even if it is not at all likely that the heating of Hungarian homes will be covered by the very molecule that was extracted in Azerbaijan.

The Shah Deniz is not an easy project from a technological point of view either, because extracting gas from a depth of 6 kilometers is harder than doing it from the more typical 2-3 kilometers. A further question is whether there could be political risks around Shah Deniz in the future. Azerbaijan itself (an authoritarian state that sometimes clashes strongly with mainline EU policies) could pose such a risk, but so could the project itself. It has several key players, some of whom are indeed investors accepted in the West, such as the British BP (they are also the ones operating the pipeline), but Russia's Lukoil, Azerbaijan's SOCAR, the Iranian NIOC, and the Turkish TPAO are also involved. At the same time, the Norwegians and the Italians have already pulled out.

While it is clear that friendships with Azeri, Turkish, Russian and Iranian partners are part of Hungarian foreign policy, only time will tell whether it is as easy to do business with them in everyday life as it is to chat at the ceremonial dinners.

Update: Since the publication of our article, two more important details have been announced on the Facebook page of the Ministry of Energy: the size of the stake and the seller. According to this,

MVM Group has entered into an agreement with Azerbaijan's state-owned Southern Gas Corridor CJSC (SGC) about the acquisition of a 5 percent stake in Azerbaijan's Shah Deniz offshore natural gas and condensate field production-sharing agreement.