Benjamin Lakatos: A European energy bank would solve many problems

Original article in Hungarian: Mfor.hu

Since the energy crisis of 2022, security of energy supply has been a recurring issue. Often, contradictory claims are made, which does not make it easy for the layman to see the situation clearly. Is it really that complex, or are these pieces of information more in the realm of political spin from a market insider’s perspective?

It is true that the world is full of claims, but often with very little substance behind them. In this area, too, we are at a point where information that is sometimes confusing even for experts is appearing. I too, on hearing a news story, have to take a deep breath and then read our own analysis, examine and evaluate the information in the light of that analysis. Let me be a little self-critical here: not only politicians, but also our profession could communicate more clearly and transparently. This is not a Hungarian specificity, but a Europe-wide one, based on what we have seen in the European Union. We see it well, because MET is now present in 17 countries, so we are looking at it from a European perspective.

On security of supply, it is worth pointing out that the European Union produces 10% of its own gas at the moment. It's worth examining to see if there are any other strategically important commodities where 90% of the volume used has to be bought from somewhere abroad. This is compounded by the fact that we now live in a turbulent world, where predictability is often lacking. On this basis, there is a security of supply element and a price element in the gas and energy market. After 2022, Europe has made great strides, so until the next news that confuses the public and professionals, there is nothing to fear, no security of supply problem for Europe.

What steps were needed and what factors should you be concerned about?

This is the result of a combination of several measures and impacts, which together have created a new situation. An important element of this is the clear reduction in gas consumption in recent years. This is partly due to the fact that security of supply was called into question during the 2022 crisis, but price rises also played an important role. Storage rules have changed, and many new LNG terminals have been built, all of which have played a big role in securing supply. But the increase in average temperatures over the past few winters has also been a big help - it is less well known that a one-degree Celsius increase can lead to a reduction in gas consumption of up to 10 percent.

In addition, it should be stressed that the EU has taken a huge step towards a single gas and energy market. Little is said about it, but its importance is comparable to the creation of the Euro, in that the TTF price quotation has become a global reference. Of course, in an emergency situation, individual governments try to find local solutions, but a very positive process has started, with the change in regulation, the development and interconnection of pipelines, and with the creation of the European gas exchange, the TTF.

As for the risks, of course there are risks. The Ukrainian transit shutdown at the beginning of the year might have seemed like such a thing, but it had much less impact on the European market than the temperature change, for example. As far as I can see, as long as the existing infrastructure is not damaged and the existing transport routes are operational, including of course the Turkish Stream pipeline, there is no significant physical supply problem.

As you mentioned, price is a key issue in the market, as well as physical supply. Can we be reassured in this regard too?

Unfortunately, no. Providing physical supply does not automatically mean that all the problems are solved, because there is also a serious financial issue. Although this only became really apparent in 2022, European gas prices have been significantly higher than those in the US or Asia for a long time. And this has serious consequences: look at the fact that since 2007-2008, nominal GDP in Europe has grown by roughly 36%, while in the US it has doubled. I'm not saying that this was only due to energy price differentials, but they also played a major role. But it's also worth noting that the EU paid $8,000 billion for imported energy during this period, a bill equivalent to 2-3% of EU GDP each year. Not surprisingly, the EU's competitiveness has deteriorated significantly over the past two decades. It is no coincidence that energy policy is also a key topic in the Draghi report, which analyses the issue. So, Europe is not going in the right direction, and it is important that it becomes economically stronger. We believe in a strong EU, and we are working towards this.

Could green energy be the solution? In recent years, MET has also taken major steps in this direction, acquiring several solar and wind farms.

We have previously stressed the need to move cautiously in the energy market. So we think it would be a mistake to throw away the existing well-developed gas market infrastructure, which can be used efficiently over the next twenty years without major costs. This is the spirit in which we are building MET, as we are interested in all assets that are meant to store, transport or consume gas. That's why we bought a gas storage facility in Germany, for example. We believe the gas industry will be with us for another 15-20 years, and the good news is that we are now seeing this hypothesis confirmed in the market. It is important that in our business processes we see natural gas as a financial product. Financial instruments, options, play a very important role, allowing us to make a profit - sometimes a very small one - on each unit of gas or electricity. This makes our activity much less risky than simply speculating. It's a bit like rock climbing, where there are tools to get higher and higher by managing the risks.

A pragmatic green transition is needed in parallel with an efficient gas market. I don't believe that green energy should be favoured without consideration, whatever the cost. Even the richest countries cannot finance this, and it is not by chance that there are competitiveness problems mentioned above. We absolutely believe in green energy, which is why we buy and develop solar and wind farms.

We see business opportunities not only in power generation, but also in industrial-scale battery storage, for example. MET Group was the first in Hungary to install such a device at the Dunamenti Power Plant. We are also active in Western Europe, with energy storage projects in six to seven countries, and in the French market, for example, we could have an 8 percent market share by the end of this year. In summary, we also believe that the future is in renewable energy, and it is no coincidence that we now use more than 50% of our CAPEX in this area, but we must not lose sight of efficiency and competitiveness.

Isn't it a contradiction that Europe is not competitive because of more expensive gas, while green energy is still expensive, so it is not a short-term solution either? What could be the breakout point then?

The opportunities are very wide-ranging, there are many possible directions and a lot of developments. Which of these will become established and spread in the market, I cannot say. It is clear that the best way to meet growing energy demand is through technological improvements. Of course, this can also be a development that leads to lower consumption, as is the case for buildings or transport.

But I don't believe that it is possible to achieve a lasting shift away from comfort and consumption. History shows that in the long run, self-limitation has never solved problems. I don't think that will be the case now either, but we will be able to use technology to manage the growing energy demand. I believe, by the way, that in the very long term we will move to an exclusively electricity-based energy supply.

In recent years, as prices have made the energy market more visible to consumers, politicians have become more vocal on these issues, not only in Hungary but in the EU and the US as well. From the outside, everyone wants lower prices, but historical experience shows that state intervention often limits competition. How do you see the measures working?

It is certainly useful to separate Europe from other parts of the world, America or Asia. Competition is much fiercer in these markets. We are interested in the US through some projects, there is a huge market competition there, and we are still a long way from having the same in Europe. The situation is similar in Asia, although the main driver there is the replacement of highly polluting energy sources such as oil and coal with a cleaner solution. As a result, gas consumption is increasing very rapidly, which is also generating huge competition there. We are experiencing this through our interest in Singapore, although it's easier to have a local partner there to help us, one of our shareholders (Keppel Infrastructure - ed.).

Political interventions can be controversial, because it is natural that when a crisis arises, the government of the country concerned will try to resolve it quickly. The problem is that this often leads to haste, and while one problem is solved, three others are created, some of which occur later and some of which occur in another country. At the same time, it would be in Europe's interest to make the market as unified as possible, so solutions that take into account the situation in other member states would be needed. As a competing company, we of course believe that it should be up to the states or the EU to develop, monitor and enforce the rules. If there is more predictable regulation, with no insurmountable barriers to market entry, it will increase competition and help drive down prices, which would be in the interest of politicians as well. On a sidenote, usually in the countries where we are present and successful, competition increases and prices decrease.

But I'll tell you something else, which MET Group has already talked about on some occasions: we need a European energy bank. Because it has become a huge market, without the financial infrastructure that banks have to back it up, where there can be problems, where some banks can fail, but at the end of the line there is the central bank, which provides guarantees and security for all market players. Such an institution would be particularly important at a time of crisis, as it would maintain confidence and liquidity. We prepared a case study of the price explosion in 2022, which found that if we had had an institutional framework like the financial markets do in place, 50-60% of the price increase could have been avoided. To a lesser extent this was a supply problem, but a much bigger problem was the faltering of confidence and liquidity.

How do you see the shock of 2022 having any positive outcome? Have politicians or market players learned from this?

I see that everyone learns from it. But it is important to stress that in many ways the gas market as it is now is something completely new. Even at the beginning of my career, it was still possible to interpret processes regionally, country by country. In the EU, a new market has opened up through so-called unbundling (when network operation is separated from energy production and trade). Before that there was no single gas market, there were no exchanges, there were no clearing systems, there was nothing. At the time of the crisis, there was little experience, there were many gaps, and in a situation like this we were in for a huge shock.

How much of a problem is it, how much does it limit competition, that even in Western Europe there are still so many state-owned companies in the energy market?

I would say that I don't think it helps. The number one objective must clearly be security of supply, so that no one freezes in winter. Whether this should be done by market operators or by some other means, we see different examples in the EU. My view is that the state is not a good owner of anything in the competitive sector. I think it should be the state's job to make and enforce the rules. I understand, of course, that there is a certain distrust, because it is assumed that the top priority of a market company is to make a profit and not to provide a steady supply. But with this in mind, it is also possible to create a set of rules within which competition would be possible, which would ultimately be good for the state as well, as it would result in lower prices.

There is still a long way to go to what we consider to be the optimum situation, but in the last year and a half we have made great progress in this area. Today, the European Commission and most governments are realising that energy is also an important financial and competitiveness issue: the fact that Europe is now paying more for the energy it needs to run its economy could clearly undermine European competitiveness.

The need to simplify the whole playing field has finally been expressed, and this is now a concept that the experts have started to work on. There are many aspects to this, I'll give you an example. MET Group has more than 100 different trading licences, which allow us to be present in the electricity and gas markets of each EU country. If I were to look at it from our point of view, I would say that it is good because we have already got them, but for others who are starting out, it is a serious barrier to entry. So at a systemic level this is obviously not good, why do we need so many licences? Unfortunately, many examples could be given. Of course, while simplifying operation and increasing competition, we must not forget about security of supply.

Speaking of security of supply. MET has been in the international press a number of times this year, as the company has been credited with helping to restore gas supplies to Moldova, which was left without gas during one of the coldest winters following the shutdown of the Ukrainian pipeline. How was this achieved?

This is a very shocking story, as suddenly 350,000 people were left without service at the beginning of January. Of course there was a business side to the issue, but there was also a humanitarian side. When the world was confronted with this situation, the European Union and Russia started working on a solution, and gas was delivered through Ukraine and Moldova. I am glad that the MET Group was able to participate in this and, in fact, thanks to MET's diversified international gas market positions, we were almost uniquely able to do this, to make sure that the gas got there, and we are proud of that. Beyond humanitarian aid, it was also a professional challenge. MET Group is moving forward with its own agenda.

However, we also see that the war in Ukraine is seen by the majority as a black and white issue, while the problem is much more complex. We also fully condemn war and military aggression, and it is a great tragedy that hundreds of thousands of people have died in the fighting. At the same time, we believe that maintaining channels for diplomatic, trade and cultural relations can help to promote long-term stability. This is not necessarily an accepted position in Western Europe, but we tell all our partners that we are a Swiss company and we comply with all international sanctions and rules. And if there may be Cold War era borders established, we want to operate in the Western half of the world.

The Hungarian government often takes a more extreme position – seen from the West – than your pragmatic position. Does the fact that the Hungarian Minister of Energy, Csaba Lantos, was formerly one of the leaders of MET pose any problems for MET?

There was a precedent for me getting this question. Fortunately, I have known Csaba Lantos for a very long time and I consider him to be a well-meaning, excellent person; he joined our board in the previous era, so I had no problem explaining the situation. However, with his appointment as Minister, Csaba Lantos' position on the board of MET Holding AG was terminated, as it would have been incompatible with his role in government. And all our partners understand that MET Group is a private company based in Switzerland and has nothing to do with the Hungarian government.

Whether we look at the economy in general or the energy market, Germany is a key player for the future of Europe. MET is also present there. How do they see the market from the inside? This is perhaps where the sharpest turnaround took place, and Germany was able to get off the Russian gas with surprising speed.

According to some opinions, the biggest problem for Europe is that Germany cannot find an answer to its energy competitiveness issue, as the loss of cheap Russian gas is a huge problem. In fact, this is the other main problem for the country, alongside the problems in the automotive industry. On the other hand, they have achieved some really impressive results, as the industry generally predicted a three-year transition, but it was achieved in just one year. MET Group has also played a small part in this, as our company, along with Total, has taken on the financing of the only LNG terminal built without state financing. We are proud of this project, even if it is challenging at the moment. Because while in 2022 the main focus was on a quick solution, now the priority is to provide an economical supply.

While there is still plenty of room for improvement in Germany's competitiveness, there are also major changes ahead. I used to joke that the German state is the biggest gas player in Europe today, as it nationalised several companies in 2022, saving them from bankruptcy. However, sooner or later they will be privatised, which will certainly mean major changes.

Speaking of LNG, you entered the Singapore market in the same spirit, but a tanker capable of carrying LNG is also in the pipeline. Is this the area that MET sees as the future for the gas market?

The LNG market is for the big boys, we are a very small player compared to them. On the other hand, the role of LNG in the global gas market is expected to be very significant. This is particularly true in Asia, where it is already replacing much more polluting energy sources. As far as the ship purchase and the presence in Singapore is concerned, one of our owners, the Keppel Group, has an important role to play in this, as they have local knowledge and, as they were originally involved in shipbuilding, they were able to help with the tanker purchase.

While the role of LNG will grow globally, it may come as a surprise to hear me say that we no longer need new terminals in Europe. When completed, the projects underway will cover the continent's energy needs. And from a supply perspective, America will be exciting, where there have already been huge developments under the Biden administration, and this could get a further boost with Trump's inauguration.

As with LNG, entering the residential market seems like a big step. What motivated the company to do this with an acquisition in Belgium?

The so-called retail market launch was a very old plan, 10-15 years old. The difficulty here is that while we had built an excellent team to manage financial instruments, such as options or risks, which are important in trading, we did not have the knowledge in the retail area. We have tried in some countries in a similar area, supplying micro and small businesses, but we have not been very successful. With the Belgian acquisition, we have also acquired the founding owners, who will hopefully bring know-how that we can leverage in other markets.

It is important to emphasise that we are looking for opportunities - and this is the primary consideration in acquisitions and investments - where we can sell electricity and gas at the end of the process, using our existing knowledge and competitive advantage. Our acquisitions, whether solar farms, retail markets or fertiliser factories, are subject to this.