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The Great Gas Business
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The Great Gas Business

February 26, 2015
Heti Válasz, 26 February 2015 – Translation from the original Hungarian Last year the Hungarian government came under heavy attack for allegedly handing to its own ‘circle of friends’ a slice of the country’s gas trade.  

The MET Group found itself in a cross fire of accusations from the opposition, yet it continues to deny having political affiliations despite the fact that one of its shareholders is an entrepreneur with close ties to Fidesz, and another is Gordon Bajnai’s former business partner.

Hungary averted a HUF 1 trillion expense when the ‘chieftain’ himself gave his nod of approval to the rescheduling of the long-term gas supply agreement between Hungary and Russia. That was one of the outcomes of Russian President Vladimir Putyin’s visit to Budapest last Tuesday. So Hungary managed to avoid having to sign a new long-term gas supply agreement with Russia’s Gazprom. But that was not the only reason why the energy talks ended on a positive note for Hungary. The real message was that the age of long-term oil price-linked gas treaties with Russia is coming to an end in Hungary as well. And this removes another hurdle from the way of a more competitive wholesale gas market, paving the way for further utility price cuts. Many market players have lined up at the starting line. Successfully competing alongside state-owned Magyar Villamos Művek (MVM), Első Nemzeti Közműszolgáltató Zrt (First National Public Utility), a new start-up scheduled to go into operation in March, and a number of global corporations (E.On, RWE, Eni, GDF Suez) for several years now, we find the MET Group, a company founded by Hungarians, which has grown into an international trading house.

MET Hungary Zrt has recently become the target of politically motivated attacks. A year ago the Hungarian Socialist Party (MSZP) and more recently Politics Can Be Different (LMP), two opposition parties submitted requests to the authorities to release all the gas business deals signed between MET and the MVM Group since 2011. They said they suspected ‘shady business dealings’ in the background, claiming the MET Group “has close ties” with the governing Fidesz party, which has doled out ‘lucrative’ gas business contracts to MET. And because the owners of MET include people like István Garancsi, owner of the Videoton football club and a personal friend of both Prime Minister Viktor Orbán and MOL CEO Zsolt Hernádi, not to mention György Nagy, former business partner of Gordon Bajnai, there are persistent rumours - despite repeated categorical denials from MET - that MET is part of a new economic powerhouse, sponsored by the government. Although it has recently come forward with a public statement denying such rumours, MET is finding itself in an increasingly difficult situation as the news reports circulating in the media, whether true or false, are being interpreted on all sides based on political affiliation.

At full blast

The story goes back to 2001 when the first Orbán cabinet introduced a new subsidy scheme designed to help more expensive renewable energy sources gain ground. However, the earmarked budget was used not only to aid producers of renewable energy but also natural gas-fuelled power plants generating both electricity and heat. Subsequently, the latter ended up collecting the bulk of the subsidies. That practice ended at the beginning of 2011 when János Lázár, head of the Fidesz parliamentary group at the time, had combined cycle electricity and heat generating power plants dropped from the scheme, as a result of which these producers could no longer provide subsidized heat for the district heating of households and businesses. Determined to prevent a spike of up to 30-40 percent in district heating prices, the government took steps to ensure district heat producers and universal service providers can access natural gas at a discount. This was achieved, among other things, by releasing a certain contingent of the country’s natural gas reserves (585 million cubic meters) from storage facilities so that it could be sold to municipalities and institutions at a low price. To replenish the released gas, the government commissioned MVM to purchase relatively cheaply priced gas on the open market in Western Europe. In support of this mission, state-owned MVM and E.On Földgáz Trade, still in German ownership at the time, were given a chunk of the priorly auctioned supply capacity of the Austro-Hungarian HAG-pipeline through a government decision. In other words, they were made exempt from competition.

From this point onwards, the story being is interpreted in two different ways. The opposition claims MVM’s gas trading arm, MVMP bought gas from MOL Energy Trade Zrt (MET Hungary’s predecessor), imported it by taking advantage of the subsidized access option, then sold it back to MOL Energy Trade Zrt at a modest profit, then the latter re-sold it to end-users at a much higher profit. According to the opposition, that business model was so profitable MET paid its shareholders HUF 55 billion in dividends in 2012, when this could have been retained in state coffers. And that same model has been renewed year after year ever since. It is hardly a coincidence that these allegations were first aired in the media shortly ahead of the general elections last year when unknown sources leaked on the internet the text of the agreements concluded between MVM and MET. Based on the purported connections, some media outlets alleged murky dealings in the background.

Conspiracy theories

The whole affair took an even more curious twist when last Autumn a Swiss and a Romanian newspaper (Tages-Anzeigerés of Zurich and Cotidianul.ro) suggested that Viktor Orbán’s visits to Switzerland might be related to MET. Several Hungarian analysts expressed views that through speculation some unknown people wanted to convey a message; the Americans, for instance, because they are possibly dissatisfied with Hungary’s energy policy and the Hungarian government’s relationship with the Russians.

Then in recent months, MET’s management stepped forward and, based on their statements as well as the accounts of other industry players, a different interpretation of the story started to take shape. MET was established in February 2007 within MOL. The company’s business model was invented by Benjámin Lakatos, who was working for the Hungarian oil company MOL at the time. Today he is the chief executive of the Swiss-based MET Holding AG. His model was built on a changing EU playing field as trading operations were being separated from large infrastructure owners within EU legislation’, he told Figyelő. Suddenly it was worth ‘playing the market’ trading in gas, especially after 2009, when, in the wake of declining demand, the same Russian gas could be imported from Western Europe at lower prices than under long-term agreements with Gazprom. In the light of this development, the HAG pipeline, which was commissioned back in 1997 but was hardly used, suddenly became valuable.

It became a top favourite with traders and FGSZ Földgázszállító Zrt, who owns the supply network, started to sell pipeline access rights at auctions. MET too competed successfully at these auctions and ramped up its Hungarian gas turnover to more than 2 billion cubic meters by 2010-2011. Therefore, they too were negatively impacted by the government decree, adopted in 2011 to tackle the district heating situation, as it gave MVM and an E.On subsidiary a large percentage of the supply quota by skipping competition. But MVM was not content with the HAG capacities it secured either because its natural gas team had not yet been set up, so it was unable to buy or sell, while time was ticking fast. The decree, drafted by Tamás Fellegi, Minister for National Development at the time, was issued in April, i.e. close to the end of the gas year lasting from July to June of every year, and to those who know the industry it was all too clear that the decree was putting the state-owned company in an impossible situation. They suspected an energy power struggle in the background: whilst the pipeline between Slovakia and Hungary (whose test run is under way as we speak) was built by an Olajterv subsidiary owned by MOL, it also meant that MOL’s subsidiary, FGSZ would be squeezed out of operations by companies within the project company’s (MVM) sphere of interest (Magyar Gáz Tranzit Zrt is owned by the Interior Ministry).

Myth of cheap gas

Whatever the reason, MVM had to find a solution because pipeline usage rights incurred a nearly HUF 4 billion bill payable in fees to FGSZ even if MVM did not transport but one drop of gas vie the HAG pipeline. That is why it stared talks with E.On first, then when these fell through, MET emerged as a likely alternative. Thanks to this co-operation, in the first gas year MET was awarded 100% of government contracted HAG-capacity at market price (30 percent of total capacity), i.e. it was granted license to trade 1.3-1.4 billion cubic meters of gas. And the process, i.e. MVMP buys MET’s stock exchange listed gas at market prices, then imports it through the HAG-pipeline, then sells it to MET for re-sale, indeed went down as reported in the press. Only instead of reaping profits that should have otherwise gone into state coffers, the whole scheme was and is about helping out MVM, who would have incurred a loss of HUF 4 billion had MET not signed an agreement with it there and then and had it not paid out billions for those capacities in question, claim our sources. And the scheme was retained in subsequent years because the government decided to extend the term of the decree. ‘It’s not “elegant” to grant pre-emptive rights to selected players to handle the transport capacities of a bottleneck pipeline’, remarks Péter Kaderják, Director of the Regional Energy Research Centre. Allocating capacities without competition does not meet the EU’s approval either, and it is likely that in future market-based solutions will have to take precedence also in Hungary.

In any case, it was convenient for MVM to have a partner who agreed to continue managing capacities MVM had no capacity to handle. By the way, MET indeed had a very successful year in 2012, while the state-owned MVM Group also chalked up a handsome profit of HUF 73 billion. In an interview MET Hungary CEO Gergely Szabó said the HUF 55 billion in dividends was paid on profits not just of a single year, but rather the cumulative profit of several years. It was a case of “technical” dividend payment: it was not wired to the bank accounts of shareholders, rather it went towards building MET’s Swiss headquarters. Doing so was necessary because MET was looking to become a corporation on a European scale, and after July 2013 it started branching out into electricity and crude oil markets. MET has also expanded domestically: it has acquired Dunamenti Erőmű and it is also poised to take over both GDF Suez’s electricity business and part of its free market natural gas portfolio (pending clearance by the competition authority).

Less than 25% of the Group’s total sales of EUR 4 billion last year came from Hungary, and only 7% were generated by deals with the MVM Group, MET has contended. Profits account for an even smaller share, and in 2013-2014 MET actually incurred a big loss on its MVM business, which only goes to show the level of risk inherent in this market and the scheme in question. This is a convoluted story, our source goes on to explain, but perhaps the worst part is having to engage in lengthy debates about the identity of shareholders. The MET Group must maintain a high level of capitalisation, yet it does not want to involve a majority strategic investor who would then want to take control of all aspects of the company’s operations. Whereas nowadays Hungarian private players are starting to become factors to contend with even in the energy sector. If we consider the list of top 100 rich Hungarians, there are hardly any who are not linked to a specific political / economic power group. István Garancsi isn’t alone in this. György Nagy, founder of Wallis and former CEO of Hajdú-Bét, has close business connections with OTP CEO Sándor Csányi and became one of the owners of OT Industries, a company formerly known as  Olajterv via his asset manager. Moreover, Haza és Haladás Közpolitikai Alapítvány, a political think-tank founded by former Prime Minister Gordon Bajnai, rented offices in an Old Buda property (in Seregely street) owned by the same György Nagy. The two billionaires can say one thing in their own ‘defence’: they became shareholders of MET through their companies registered in Cyprus in 2013, when the MVM business was already in decline.

 

(Heti Válasz, Thursday, 26 February, 2015 issue, pp. 29+30+31)