Europe has taken a giant step towards pragmatism, now Germany faces a huge decision

Original article in Hungarian: Portfolio.hu

Portfolio: Two months into a new presidential administration in the United States, Donald Trump has repeatedly used the slogan "drill baby drill" to describe his energy policy during the campaign. How does this affect the prospects for US LNG exports to Europe, and how does it affect MET Group, given that you admitted in our interview last year that the supply deal with Commonwealth LNG was stalled by the Biden administration's decision, and then you signed an LNG purchase agreement with Shell last summer?

Benjamin Lakatos: It is less well known in Hungary, but we were the only European energy company to submit a letter of opinion to the congressional hearing last year before the US elections, and we are very proud of this. In it, we struck a pragmatic European tone, and our main message was that the more gas production and new LNG terminals America has, the better for Europe, so we as a European market player would support these developments.

Our position at the time had quite a positive resonance in the United States. Because of this and other personal discussions, I now say that we exist in the minds of US LNG producers, so they know who MET Group is. This is also important because the US energy market is very competitive compared to the European one, and therefore we need to be even more sensible.

With all this in mind, what do you expect in terms of business opportunities in the US gas market?

I'm really enjoying the situation because competition defines almost everything there, and the new presidential administration is a definite boost to the whole industry. This is also good because America is suffering from the same thing that Europe is suffering from, that new projects are very slow to come to fruition because of the regulatory environment. The acceleration of the licensing framework, combined with the US entrepreneurial approach, will create rapid growth in extraction and export opportunities.

Where MET Group will play a role in this is not yet fully clear, and we are in discussions with several market players. We also do not rule out buying additional quantities of LNG. The main objective of our negotiations is to secure further long-term gas supplies, but this also depends on the direction the European Union takes on this issue.

What direction do you see it taking?

What I see happening in Europe is a complete rethinking of the larger systems, which in the energy sector means – much to my approval – less bureaucracy and a more pragmatic approach to an otherwise very good and important process that is the green transition.

This is the positive reading of what is happening now. The negative reading is that we have ordered our new LNG vessel from China, and one of the US efforts is to make those who have Chinese-built ships pay a million and a half dollars per berth. It's not a law yet, it's just a concept; it's at about the same stage as the tariff waivers were at the beginning. So, on the one hand, we are very happy and we see our role as a European player in the US gas boom and hopefully we can play an even bigger part in it. On the other hand, increasing geopolitical unpredictability makes maneuvering a little more difficult.

How might the Russian-Ukrainian ceasefire and then peace agreement change this?

I am very hopeful that a peace agreement will be reached, which I expect will make it easier for European energy market players to operate. But in the meantime, another geopolitical change is taking place, which will affect the world through tariffs and the US-China relationship, and it is difficult to see this clearly at the moment. Not only the European Union, we also need to be very sensible about the steps we take, see the example mentioned above.

The volume of US LNG exports to Europe will also depend in part on the European Union's actions, for example in further reducing or blocking Russian pipeline gas and LNG. What is your view: can Russian gas return to Europe, and in what form, if any?

It is worth starting with the issue of security of supply: if the Turkish Stream pipelines fail, there could be a security of supply problem in our region and to the South-East from us. To put it simply, at the level of the European Union, we can say that there is no security of gas supply issue as long as LNG is coming and these pipelines are operational. The latter cannot be taken for granted, because we see that there are occasional military attacks in certain areas, for example on compressor stations that feed the pipelines.

It is not clear to us what will happen in this area, but what is certain is that if something were to happen to these pipelines, it would pose a serious security of supply challenge for the region. In addition, a lot obviously depends on projects that are still in the planning or implementation phase, such as conventional LNG terminals in Greece or elsewhere in the region. Furthermore, I don't see any security of supply risk at European level, so it's a price or competitiveness issue.

What do you mean?

That it all depends on how much money each Member State can spend on buying energy from outside of Europe. This is a very important issue, and my main message, and I am not alone in this, is that Europe is losing competitiveness at a terrifying rate. In order to stop this, action is needed in the three to five most important areas, and one of these is energy, so the whole European energy regulation should be simplified. If we don't solve this, Europe will have no chance of having a say in the future of the world in 50 years' time.

So, Europe does need to address the question of price, how much money is flowing to other continents. The good news is that there is a clear move in this direction in the new regulatory plans in Brussels, which will also have an impact on the energy policies of nation states.

The biggest question among member states now is what happens in Germany, the EU's biggest economy, which has lost one of its most important pillars: cheap energy, with the blowing up of the Nord Stream pipeline. Coalition negotiations are now underway, and it matters a lot who will take over the energy ministry in these negotiations. What Germany does on this energy issue will, in my view, be of crucial importance for Europe as a whole. What is certain is that the country must find an answer to how it can provide competitive energy for its own industry.

Based on last year, I see that Europe has made a huge leap forward towards pragmatism, and the alarm bells that I also sounded during last year's interview seem to have been heard. We believe in a strong Europe, and that is what we are striving for.

So are you now optimistic about Europe's competitiveness?

Now we need to think about what the solution is. I also addressed myself and my company with the message that we are past the first round, we don't need to convince anyone of the extent of the problems and the need to act, but what should we focus on? What message should we send to people about what our industry, for example, should be doing?

And what is your answer?

We are still thinking about it: we have ideas, but we don't have fully developed answers. What is certain is that there is no single solution that will solve all challenges in one go. We need to think in terms of several components: innovation, on one hand, and the fact that the green transition should not be thrown away, but should be implemented in such a way that it puts the European Union in a better economic position in the longer term.

And a third component may be that the energy industry also needs to make much more effort. Simplifying and making the energy policies more predictable so that we can compete more effectively can help a lot. This will force a price reduction on its own, and then, in a more predictable framework, the industry will not be able to say that we are not making progress because of regulators and other external reasons. So, I think it's time for everyone to do their own homework and through that, the industry can do a lot to achieve the big goals.

Has the action started or are we still at the talking stage?

For the last ten years, the actors have been talking about the steps that need to be taken, but have not acted. But one thing is certain now: things are starting to happen at a frightening speed, and you need to be sharp to understand exactly where all the changes are heading.

For instance, we only have to watch the US communication and practical steps to end the war between Russia and Ukraine. Turning to Nord Stream, in recent weeks it has been suggested that US actors could be involved in its rehabilitation and even become owners of the scheme. What do you think, is it possible for US players to enter the pipeline rehabilitation and even ownership, and is MET Group thinking of getting involved in some way?

It is worth approaching such rumours in the energy industry with caution, because we have seen everything and their opposite here. I prefer facts. I think that the restoration of the Nord Stream pipelines and supplies is a question of political will. The fate of this pipeline must be decided in Washington, Berlin and Moscow. Obviously, there are financial and technical issues, but political will is paramount. At MET Group, we understand what can and cannot be done with pipelines.

Can the blown-up lines be technically restored?

Of the four pipes, one is operational, and the other three are thought by some experts to be repairable, so they can be drained and welded. But, I repeat: the issue of Nord Stream 2 is primarily a political one, which means that it has to be decided whether to say yes or no.

What do you think will happen?

I don't know. If any of the parties involved do not want to restore the pipeline, it will not be easy to restart it. If everyone wants a recovery, a diversified ownership structure with a mix of public and private companies could help long-term security of supply.

Would MET also join the owners?

This transaction is not in the MET Group's league.

However, it was in MET’s league for supplying gas during this winter's severe humanitarian crisis in the Transnistrian region of Moldova. In our interview a year ago, you pointed out that the loss of transit from Ukraine could cause such a crisis in the winter, so unfortunately your prediction came true. How did MET get involved in Moldova's gas supply and what are the prospects?

Before I answer that, let me underline that I was very pleased and proud to be involved because it shows what the MET Group is capable of. In the interview last year, I warned that it would be difficult to organise the reverse flow of gas to Ukraine and the neighbouring countries, and unfortunately it has been, during perhaps the coldest two weeks of the year when there was no gas supply to 350,000 people in the region.

There was a very serious discussion on the MET Board on how to move forward on this issue, as it was costing a lot of people their heating. We have been able to play a neutral, middle-ground, pragmatic role in which we have not slipped too much into either the Western or the Eastern sphere, but we have done a very difficult job while doing business as well. It may even allow us to move the future of energy supply for the whole region forward by the way we go about it. It is important to add that this was not solved by the MET Group alone, but also with important assistance from the Ukrainian system operator.

What kind of gas has been delivered to Moldova?

There's always a debate about this kind of gas, that kind of gas, etc. I say to that: all gas is the kind of gas, where it comes from, the last country it left. Because you can turn off the tap there. So it makes no difference where the gas was produced. The gas originates from the last country it left because it can block its transport.

So, from that point of view, we are talking about Ukrainian gas. How did MET come into the picture?

The first step was to agree with the Ukrainian gas supplier to deliver this gas. Ukraine therefore had to actively support the success of the delivery. We did this and then issued a joint statement with the Ukrainian system operator.

What message do you want to send to market players?

Our basic message is that MET Group is moving forward with its own agenda. We are a company based in Europe, we are headquartered in Switzerland, so if there was an iron curtain here again, we would be part of the Western world. We have told that to many people. While fully respecting international sanctions, we believe that preserving channels for cultural and trade relations can help promote long-term stability while reducing energy costs for all. I don't think it's realistic to think of any nation as not existing.

You mentioned sanctions and the importance of compliance. How much will the US sanctions against Gazprombank affect MET Group, how difficult will it make life, and will it be able to make the payments for the gas purchases?

We are not affected by it.

MET recently announced that it has acquired a 68.5 percent stake in Belgium-based Mega Group International, bringing the group into the Belgian and Dutch retail markets. What is the underlying strategy, given that MET Group has entered the French, German, Italian and Spanish retail segments in recent years? Is the company moving from wholesale to retail?

First of all, I am very excited about the acquisition and I am very happy about it. Although we have not yet closed the deal, we hope to do so within a month or two. I am excited because this is not a one-off opportunity-driven transaction, but we have always wanted to get into this residential/retail segment. There is a very conscious, very long-established strategic direction for the company, and we have tried many times to enter, but so far we have failed. But now it has worked.

We are good at risk management and position integration. Retail, on the other hand, is about customer retention rates, supply channels and their costs, so it requires a completely different mindset. It also means new positions for our trading team. This is good, because our value is usually realised through portfolio optimisation, which allows us to further increase profitability.

In the past we have tried a lot in Hungary and other countries as well to enter the retail market segment through partnerships, but for various reasons we never succeeded. Now, behind Mega Group International, there is a successful entrepreneurial couple with young, agile management who have built a retail company from scratch. It’s fascinating because of the synergies – what we excel at, they’re not doing, and what they’re doing is something we’ve wanted to do our entire lives. It could even lead to the possibility of learning retail skills and transferring them to some of our neighbouring Western European countries. If it succeeds, you will see me very happy and smiling in, say, three years' time.

Moving from West to East, MET Group is also looking to establish a foothold in the Baltic region, having announced nearly a year ago its intention to acquire a majority stake in the Lithuanian-based Achema Group and enter the fertiliser market. However, in recent months we have heard less about this story. What is the situation here and what are the prospects?

Almost a year ago, we held a press conference to make clear our intention to buy this company. However, under Lithuanian law, all small shareholders have pre-emption rights, and after a lengthy transition, one small shareholder believed that it had not been able to properly exercise its pre-emption rights and challenged the controlling shareholder on the implementation of its plans. The two litigants are now in the Lithuanian court, as reported by the Lithuanian press as well.

We have continued to work throughout this period and we are at the end of the corporate due diligence process, but it is clear that until the existing shareholders can come to a legal agreement on the exercise of pre-emption rights, we cannot move forward. That said, I confirm what we have told the Lithuanian press that we remain interested in the company, but we will have to wait and see what the parties come to on this issue.

In the field of energy storage projects, MET Group seems to be taking action rather than waiting, as several announcements show. This is understandable, as we see across Europe that as the sun comes up, with solar capacity increasing, hourly prices in the electricity markets the next day fall, increasingly more often into negative territory. But as soon as the sun goes down, especially in our region, the market prices jump very high. This obviously points out the importance of gas-fired power plants and flexible capacity, but also to the fact that the market return of a solar power plant without PPA or a combination of energy storage is highly questionable. How do you see this process? Given that the expected increase in energy storage capacity at European level will continue to lag behind the further increase in daytime capacity in the coming years, this problem will only get worse. Is it to be expected that the cannibalisation effect will slow down the further deployment of renewables, and will this slow down the green transition?

Absolutely, yes, but it has to be looked at on a country-by-country basis. There are countries, such as Spain, where cannibalisation is more advanced and on a huge scale. I would add, however, that this may not be a problem. That's a problem for operators, because it's a little bit harder to make money and you have to be a little bit more creative, you have to work a little bit harder. You cannot blame the market and, through it, the market price. I think the price is a market message, and there could be an outcome that overall electricity prices in Spain will be lower.

So I think that the cannibalisation effect per se is not a problem, and I completely agree with the statement that it slows down the green transition, but I don't think it's a problem. I think the main problem with our previous green transition philosophy was that we always picked certain areas and pushed them: solar and hydrogen, for example. Because of this, we were like an 18-year-old kid who only works out with one arm and then the balance is constantly upset.

Such a price signal is precisely what makes operators take notice: when the sun is shining, electricity is very cheap, and no problem, they should react by installing energy storage. That is why we have started to install such systems, and with the mass implementation of these and other balancing alternatives, we will see that the huge market price fluctuations will be smoothed out.

There are countries where what I have said so far is not entirely true, because there is little renewable capacity. Thus, over- or underproduction must be balanced regionally. The market price is the right mechanism to stimulate this, not constant regulatory intervention. The market is responding, we are doing the same, and that is why we are not so much building renewables in France and Spain but rather investing in energy storage.

One of our most important tasks today is to do this as quickly as possible, because others will probably calculate what we have calculated. Obviously, competition will increase and we will get to the point where there will be too much capacity in this area, which will also be fine. I just don't like it when it's overturned by regulation, because it's like changing the rules of a football game at half-time.

Do you still agree with one of the key messages from our interview a year ago? In simple terms, it was that the green transition will happen, but it will probably be 10 to 15 years slower than most people think, and that is why gas will have a longer role to play; there is no other way, it has to be done, and the optimal scale has to be found.

Yes, I still agree with this message. What has changed from our previous interview is that last year it was a unique set of messages. I think it's mainstream now. After the Draghi report, the new Affordable Energy Action Plan in Brussels, the focus on competitiveness issues are all very good, but there is not enough money to move too fast.

So the problem has been identified, which is great, but we must continue to be very careful that in this huge geopolitical turbulence the European Union tries to move in a balanced way, because as I stressed last year, the European Union imports 90% of its gas, which is a huge exposure. To cover this, it makes sense to use what we already have: we will not be demolishing the pipelines that have already been laid, so to serve 90% of imports, it makes sense to use the existing infrastructure. And the objectives for investing the new funds should be identified as quickly as possible, within ten years, so that within the foreseeable future, Europe has to develop an energy infrastructure framework that can both ensure competitiveness in global markets and guarantee security of supply.

Security of supply also means independence, and in recent years we have learned in Europe what happens when we overexpose ourselves in this area. So new solutions must also take diversification into account, and it is the combination of these that will deliver the desired results. This brings us back to what we were talking about before: the tough decision facing the German government. Because the move towards a solution will start in Germany, as size matters in this area, and we know that the German economy is the largest in Europe.