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Hungary could grow into a gas hub
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Hungary could grow into a gas hub

March 14, 2018
What will the race between supply routes bring, how will the role of natural gas change in energy supply and what kind of role can LNG take up in Hungary? We asked these questions and more from MET Hungary's experts, Director of Retail Sales Márton Szépfy and Director of Pricing Zombor Smaraglay.

Portfolio: We hear a lot these days about new supply routes (Southern Gas Corridor, Turkish Stream, LNG terminals, new sources in the region). Besides an improved security of supply, what other benefits can the diversification of supply routes offer to consumers? Does tougher competition mean lower purchase costs?

Márton Szépfy: As the number of options grow, Hungary’s negotiating position improves as well. The country has the potential to become a central player in the region, or even a transit hub, and its geographical characteristics are also decisive in this context. Up to this point, we have only been discussing alternatives, however, this is a race, and only a single gold medal will be handed out. The alternative route may not even be delivered if another one is completed first.

Nevertheless, if we take a look at the gas supply system of Western Europe and our region, we can see that even if all pipelines and cross-border capacities aimed at improving Central Eastern Europe’s gas supply were built, the Western European network would still be significantly more complex, structured and balanced. Ukraine seeks to reduce its exposure because of its conflict with Russia, and it buys natural gas from the West; price competition among supplies through Poland, Slovakia and Hungary is continuous. So the answer to the question is yes, tougher competition results in lower costs. Accordingly, while it is worth to be a transit country because of transit fees, these alternatives improve the security of supply as well.

There is growing criticism that the EU should stop funding fossil energy resources and developments promoting the use of these resources. Although natural gas is the least polluting fossil energy resource, the question has already been arisen as to how long its role can be maintained in energy supply.

Zombor Smaraglay: Gas-fired power plants play a crucial role in balancing power grids, and this is unlikely to change in the coming years. Moreover, this role is expected to further evolve with renewable resources gaining ground, because, for example, it is very hard to influence the production of a wind turbine in terms of quantity and time. The nuclear power-coal/lignite-natural gas energy mix schemes, which were in use before renewables appeared, were quite easy to plan, because production depended on consumption, however, more recently, in addition to consumption, production volumes are shifting as well. Not to mention the growing number of small-scale, mainly photovoltaic power stations installed on residential buildings, which make the situation even more complex.

Until we can store electricity, we will continue to need uninterrupted and flexible production. Until we can replace this practice with alternative methods, natural gas will have a key role. Although many people are working on the development of battery-powered household energy storage technology, this solution - and not only in Hungary - is still very rare for the time being. So we have to stick with power plants. Criticism over the environmental effects of gas extraction is valid in certain respects, however, the activity is regulated and remains by far the purest non-renewable energy source. In the Netherlands, for example, production at the Groningen field will be reduced by 2bn cubic metres per year in 2018 and another 4bn cubic metres per year in 2019 because of the earthquakes experienced in the area, demonstrating that the field is not environmentally safe. The Rough gas storage facility in the UK was also shut down last year because of environmental reasons.

How important is LNG, liquefied natural gas, for Europe’s security of supply?

Z. S.: Europe is basically a net importer, therefore the issue of LNG supply is of particular importance. Besides production in the North Sea and Russian gas, the presence of LNG obviously adds colour to Europe’s import mix, and offers a real alternative in certain regions. This is the reason why European price levels have an increasing importance in the pricing of LNG cargoes: since Europe is always a valid option for selling LNG shipments, the world may prone to establish prices accordingly. For instance, Spain does not have a gas storage facility, but it does have an LNG terminal and it often balances gas demand for weeks in winter by using the LNG shipments arriving at the terminals. And since LNG creates a physical link between continents, separate gas markets are globalising and integrating - although this is a long process.

Russian sources often declare that when it comes to price and availability, LNG will never be able to compete with Russian gas distributed through pipelines.

Z. S.: LNG is burdened with significant extra costs that are not relevant for gas pipelines: it is not cheap to transport, for example because it must be stored below 162 degrees during transport to ensure that it remains liquefied. However, when the US gas price is about a quarter of the European, saying that it will never be competitive is, in my opinion, rushing to conclusions - the product will ultimately be priced by the market. The extent to which the role of LNG in actual supplies can range is still uncertain today. Even though the arrival of LNG shipments have already resulted in price drops, market players mainly set LNG prices based on market prices and not on costs. Although LNG can already affect prices in Europe, it is still not a viable option in many countries.

When could LNG become a product in Hungary that is able to substantially depress prices?

M. Sz.: LNG is already available in Hungary in a certain form, which is the so-called small-scale LNG. Imagine a small storage capacity and a regasification plant that together guarantee uninterrupted natural gas supply. Where LNG has a more established market, like in Spain, this is common practice, however, due to technology development and the LNG terminals planned and already installed in the region, the situation is becoming more and more exciting in Hungary as well. Factories and industrial facilities for which security of supply is of utmost importance, because they want to ensure that they do not have to stall even for one or two days, also maintain alternative resources enabling them to make up for the shortcomings in gas supply. It is not unusual today that a pharmaceutical plant for example stores natural gas in three or four cooling tanks located in its premises, ready for industrial use.

LNG allows the optimisation of system usage during cold winter weather, as stored LNG can be used to meet demand spikes - this is called peak shaving - in return for a one-time development cost. Peak shaving can be applied by companies with optimised supply capacities (used to reduce costs) instead of over-secured capacities. Therefore, consumption peaks, which tend to be extremely expensive, can be handled, as everyday demand is supplied from standard system capacities, while extra consumption can be covered from small-scale LNG storage tanks. This solution is now affordable to average industrial users as well due to swift technological development. Of course, if there is no winter, the fix cost of storing LNG reduces profitability, however, its is a flexible solution as there is no need to store stocks all year round. In case of large industrial consumers, which see security of supply as a priority, the expenses of storing LNG are dwarfed by daily production loss, so they agree to extra costs.

About Hungary’s distribution system

Hungary’s national gas distribution system would easily be able to supply an annual demand more than twice the size of the current consumption, in fact, it was originally designed to do so. The investment was performed when the growth of gas consumption was linear. This is why Hungary has a natural gas reserve capacity that is not justified by current consumption levels. The system would be able to handle an annual consumption of 15bn cubic metres, but it has never had to (peak consumption was around 14bn cubic metres), while the current consumption in Hungary is around 8-10bn cubic metres per year. While consumption was on an upward trend until 2008, the financial crisis caused a significant downturn and it was only two years ago that consumption started to expand.

This article was sponsored by MET Hungary.