Benjamin Lakatos: Many underestimate the true economic importance of the European Union

Source: Index.hu

In an exclusive interview with Index, Benjamin Lakatos talked about

• what the energy crisis looked like in Europe
• whether we are over it
• what Europe has to lose in the current period
• why an integrated European gas market is important
• what MET Group can do that no one else can
• and why we need success stories from Eastern Europe

You were last interviewed in Hungary before the coronavirus outbreak. Since then, we have been slowly working our way through a historic energy crisis. How is it possible that Benjamin Lakatos has not spoken to the Hungarian public in the meantime?

I did not give any interviews in Hungary during this period, but there was constant communication from MET Group and our local companies. My visits home are also rare, and the local management does a great job. Although Hungary is a special country for me, it has been more important for the Group to focus on other countries in recent years. In addition, the pandemic was an extraordinary period that brought about a major change within MET, during which we completed system building works that transformed our small business approach to a medium/large enterprise level. This absorbed much of my energy.

Europe almost lost

Already during the pandemic, energy problems were emerging, and an overwhelming crisis ensued. How did you experience this period from the front line?

During the pandemic, we saw natural gas prices of €5/megawatt-hour. Things in the sector were calm and steady. But then, last year, the huge storm arrived that completely shattered the peace and quiet.  Just before the war I felt that our company had reached a stage where I would be able to take a longer holiday. I restructured the company and ceded management rights, I wanted to switch off completely. Then the war started, and it was like a tsunami. The market was completely overturned. Finally, by June last year, things seemed to have stabilized somewhat from an energy point of view - although, looking back, I was probably just keen to have a holiday - and I was able to start taking a break in the summer: I managed to take five weeks off, something I have not done in all the previous years.

When the prices went up, I asked several people if they even understood the amounts we were talking about. Figures in the trillions of euros were bandied about. The increase in electricity and gas prices at European level alone was greater than the total annual GDP of three countries in this region, and that was not even at the peak. I estimated that an economic handicap of such magnitude was developing in Europe that half of the countries would not be able to cope with it in the long term. It was seriously considered that if Europe could not reverse this, the continent would face a dramatic economic disaster.

There may be a deep structural problem behind these prices. If we go back in time a little bit, there were times when prices went below zero. This gives the impression in any trade that there is some kind of a pricing error.

I disagree. This is a real phenomenon, and it's not the first time we've seen it. Where the physical product cannot be stored, or where the cost of doing so is extremely high, a negative price may be normal. It is up to the market players to smooth out these risks. Of course, if this is felt by consumers, then the market is not functioning properly. This would mean that traders and the industry are not doing their job. In the electricity market, with the abundance of renewables that are yet to come, it will be the same. Because when the sun shines, we will produce so much electricity that we will not be able to physically use it. Until we build the technologies to use that excess power for something meaningful, we're going to see negative prices for an hour or two. If it continues any longer than that, it's really a mistake, but overall, negative prices are a penalty for those who go in the wrong direction. Natural gas is a bit different - first, in Europe there are daily settlements and second, it is easier to store gas - although let us not forget that storage has a cost and the price can easily go down to the cost of storage.

When the war broke out, did you immediately know that the era of cheap Eastern energy was over once and for all?

At first everyone was shocked and gasping, then they sat down and started counting. Today, it is much easier for me to answer whether Europe is in trouble or not than it was a year ago, when physical issues were on the agenda. Capacity and infrastructure had to be built, and everyone said it would take three to five years; MET Group, a little more optimistically, envisaged two to three years. By comparison, in Western Europe, the problem of how to have heating and electricity without Russian gas was solved within a year, thanks to a fortunate combination of factors (e.g. a huge decline in consumption and a mild winter). Although it is important to add that Russian gas is still arriving (the volume used to be 150 billion ccm, it is now around 20-30 billion ccm) and at the CEE level the next winter is still an open question: if a cold winter comes, coupled with strong Asian demand, there could be nasty surprises. But if we have an average winter, Europe will not have physical supply problems. That's a sentence everyone would have done anything to hear a year ago.

Europe's competitiveness problems

Do you think that Russian President Vladimir Putin knew that the green transition and the start of diversification would be the last moment when he could blackmail Europe with cutting off gas supplies? Is there an energy aspect to power politics?

There is no causal link between the outbreak of war and the green transition in Europe. Energy is a tool in the great power agenda, important but not that important. The most important question in the price crisis of last year and now is how Europe's competitiveness will evolve.

Can we even talk about Europe being a competitive entity?

Let me be clear on the fact that I'm a great fan of the European Union, but if it can't create a single economic zone, in a hundred years' time it will have no influence on what happens in the world. Sitting on the periphery is always more problematic than real participation in the discourse. If you go beyond the horizon of Europe, the present and the future happen much faster. In the Old World, I feel that we are slowing down and losing relevance, just reacting to what is happening outside.

There is a kind of European weakness, because we Europeans underestimate what the EU can offer in economic terms. And, please, do not interpret this only in the Hungarian context. There are many success stories: the Euro, the right to free movement, but also the common European energy market. The common market for electricity and gas is a huge opportunity and not a problem, but at the same time there are hardly any success stories where Europe has not lost ground, but has been able to grow stronger over the last 10 years. The presence of the TTF gas exchange on the world market is exactly that. Until the crisis, it was used as a reference point by both Asian and US market players. One can argue whether it works well or not, but there is no denying that it is of global relevance. The common energy market must be further developed and all its potential exploited. In the financial markets, for example, a lot of instruments have been invented that have not yet been transferred to the energy market.

This is universal, collective thinking. By contrast, the closer a nation is to the front, the more protectionism and nationalism will crank up. Since the war, the unity is less visible. Our economic aspirations may be constrained by our past.

Protectionism makes you weak in the medium and long term. If I look at it from a European perspective, there is a historical burden, but I don't think it is significantly stronger than outside Europe. I agree that social feelings are important, but they cannot be divorced from economic reality. If a region is economically weak, then there are many more social problems. It is up to economic actors to create the strongest possible European economy. We can create much more value together than apart. So, we need to leave the old baggage and grievances behind - by creating more value, everyone wins. Plus, the other way is scary. And energy is a very important factor in this context. One of our owners, Keppel in Singapore, for example, understands this kind of prioritization and approach very well.

Have relations with Gazprom been severed?

No, we are in contact with them. Obviously the current situation is difficult, war is always bad, 200-300 thousand people have died so far because we are unable to come to an agreement, and there will be half a million families where there is a father or a child missing. There is a price that is simply not acceptable, that should not be paid. Sometimes choosing not to go into battle is what requires real strength. It is often harder and takes a lot more humility to choose compromise. This senseless killing should stop as soon as possible. And we very much hope that after the end of the war we will be able to be present on both the Russian and Ukrainian markets. Obviously, there are preconditions for this, and we always comply with international law.

Price is not everything in gas contracts

Two years ago, the Hungarian government extended its gas contract with Gazprom. If we did not commit ourselves to this extent, and if we were to buy on an exchange basis, would Hungary get cheaper natural gas?

In the countryside we used to say: the farmer is wise after the bargain. I don't even like such questions. We are talking about when to buy euros for a holiday or whether to take out a foreign currency loan, and then we want to evaluate it afterwards whether it was a good idea and what if. Everyone has an opinion about it, but we are really talking about a multi-factor, complicated market. Transactions can be judged at the moment they are concluded. If someone knows the answer to future trends in advance, I will hire them immediately.

In Hungary, the political discourse around gas prices is simply nonsense. Much of the public discourse has nothing to do with the market reality. The political dialogue suggests that nobody wants to understand how the sector works. We ex-post qualify the prices of transactions that have been concluded in the past, which, of course, only applies to a given moment in time. Meanwhile, the world is turning. This is nonsense. I want to emphasize that my comment is about price. Gas trading, by the way, is a profession, just like politics. But the deferred payment mechanism recently agreed by the government is a serious and tangible value. But let me not evaluate political decisions any further than that.

So the rumors are true: Benjamin Lakatos gets upset when only the prices are discussed in a gas contract. How should these contracts be examined then?

I wish someone had asked that question in the last twenty years. Today it is losing its relevance and is only meaningful for long-term LNG (liquefied natural gas) contracts. As an example: when someone buys a car, price is only one of the considerations; others are the equipment, or whether it is diesel or petrol-powered, and so on. Everybody always wants to talk about price, but gas contracts legally describe a financial and legal risk allocation between two parties (such as delivery point, payment term, consumption flexibility, etc.). Those who take on more risk will see this reflected in their price. It is therefore not worth discussing price until the details are clear.

Do you have an opinion on how the government should conduct gas procurement?

It is unfortunate for a company to make statements about politics. In this regard, I would rather stress that the economic impact of the European Union is underestimated in all areas, including energy. This does not only apply to Hungary, in many countries the potential of the EU is not being properly addressed.

From Eastern Europe to the global market

What is the secret of MET Group? Is there a unique factor that makes you different?

It has always been a conscious goal and HR philosophy to find the most talented people. One of my university professors said that in a market that is undeveloped, you shouldn't hire experts in previous technologies because they are hard to rewire in the head, but you should hire very smart and very motivated people. It may be a bit of a bumpy ride in the beginning, but they will learn the industry and do well. That's the kind of people we're looking for, and it's an idea that's integral to our company. And then, once someone has proven themselves professionally, after about three years, you can see how much you can trust them. And, of course, you have to pay people who excel, you have to look after them - this is what we do.

How far can talent and ambition take you in Hungary?

Hungary has a lot of talented people. I can see that young people with enthusiasm and skills are looking elsewhere for their future, but this is a double-edged sword: on one hand, it is good for them to have experience abroad, because it can bring a change of perspective and they can get to know other cultures. The problem occurs if young people don't come back.

How difficult it is to get by on excellent skills alone is a more complicated question. On one hand, there are cultures in the world where it may be easier to get by, but at the same time Hungarian thinking is very unique, we are much less understood elsewhere. We Hungarians still have to work on this. At the same time, if you have the right ability and perseverance, I am sure that you can succeed in Hungary.

Last year, you were ranked the 36th richest person in Hungary by Forbes. Do you have any pride in that?

I'm proud that we were able to do this starting from Eastern Europe, where the company was built. Later on we became successful in Western Europe, but we started from this region, our results developed from here. It is important to have companies in Eastern Europe that are successful in the West. Although we are not alone, we need many more companies like that.

I was brought up to believe that I could do it. For that I am very grateful. I belong to the first generation of the change of regime, who saw what the regime changers were doing, but we just watched them. We just tried to understand the world back then. We could still feel the limits, but we were no longer bumping into them. We had freedom, we could do everything, but we had nothing. And to be successful abroad, you simply have to get over the global caste system. That's what motivated me. Look at who we are, not whether we come from Budapest or Bucharest. I never accepted that you cannot add value globally from Eastern Europe. We did it businesswise, MET Group is now among the top 20 Swiss companies in terms of turnover. So it's not being in the top 100 that gives satisfaction, it's the fact that we managed to get there. Of course, it is difficult to communicate that you are proud of this without causing a backlash.

Do you use the teachings you received from the Franciscans as a child in your daily life?

Of course. In my father’s footsteps, I also went to the Franciscan High School in Esztergom. In the beginning it was difficult to fit into the strict system, but looking back it was one of the best times of my life. It gave me a perspective that I can use for the rest of my life. I have learned a lot about humility, my circle of friends is still connected to that place, and I am still religious.