MOL, Gazprom to Build Gas Storage Site in Hungary Independent of South Stream

On March 10 in Moscow, Hungary’s privately-owned MOL oil and gas company signed an agreement with Gazprom Export in Moscow to jointly establish a gas storage company in Hungary. Prime Ministers Vladimir Putin and Ferenc Gyurcsany witnessed the signing. This project is separate from and, in all probability, independent from Gazprom’s South Stream pipeline project, one section of which is planned to traverse Hungary. MOL is not participating in South Stream (Interfax, March 10, 11).

MOL’s Pusztafoldvar natural gas reservoir, a depleted deposit, will be converted into a storage site, with a holding capacity of 1.3 billion cubic meters of gas and a peak withdrawal rate of 15 million cubic meters per day.

The new company will be owned on a 50-50 percent parity basis. A final investment decision is subject to completion of the detailed technical and financial feasibility studies. The start of construction is expected for 2010 and the start of operation by 2013. The project is commercially attractive, given the rising demand for natural gas throughout Europe and insufficiency of storage capacities in parts of Central and Southeastern Europe.

Once this project is realized, gas storage capacities in Hungary will almost reach 7 billion cubic meters (Germany’s E.On Ruhrgas is currently the leader with 3.7 billion cubic meters of storage capacity in Hungary). Gazprom Export intends to book most of Pusztafoldvar’s capacity, although other suppliers should also be able to use it under European Union regulations on third-party access to the gas transport and storage infrastructure.

Located in southeastern Hungary near the borders with Romania and Serbia, the Pusztafoldvar site will be ideally placed to contribute to the supply of all three countries at peak seasonal consumption times as well as in emergency situations. Thus, the new storage will increase the security of gas supplies in the region. Pusztafoldvar is situated in the proximity of Szeged, the terminus of the Szeged-Arad pipeline under construction to link Hungary and Romania by 2012. Hungary is situated at the center of the New Europe Transmission System (NETS), the MOL-initiated project to interconnect gas transmission pipelines of the region’s countries.

After Pusztafoldvar comes on stream, the overall volume will safely exceed Hungary’s own flexibility requirements. This situation will make it possible not only to contribute to neighboring countries’ supply but also to offer gas storage services for neighboring gas markets (MTI, Dow Jones Newswires, MOL press release, March 10; Vilaggazdasag, March 12).

Gazprom Export may well envisage using this Hungarian site for gas volumes that the Russian company is currently storing in Ukraine. While Gazprom’s moves to bypass Ukraine through new export pipelines are widely noted, the other side of that strategy -namely, bypassing Ukraine’s storage site system-has not attracted comparable attention. Gazprom apparently intends to build several new storage sites beyond Ukraine in Central Europe and also to book some existing storage capacities in Central European countries. This intention emerged well before the January 2009 Russia-Ukraine gas conflict but has gained fresh impetus from that clash.

Although the Russian side initiated that conflict to discredit the transit country Ukraine, the merits of the issue and the responsibility for supply cutoffs are, in the final analysis, immaterial to consumer countries in Central and Southeastern Europe. They were the most heavily hit and are exposed to the risk of recurrent cutoffs. They would feel safer if Russian gas were stored on their own territories, subject to EU market laws and regulations, rather than being stored in Ukraine and hostage to conflicts between Russian and Ukrainian parties.

Larger volumes of Russian gas stored in Central Europe would not, per se, increase these countries’ dependence on Russian supplies. The share of Russian gas in the overall national consumption would not increase; and same Russian gas would still reach these countries through Ukrainian pipelines (unless and until Gazprom builds pipelines to circumvent Ukraine). But the storage location would gradually shift from Ukraine into EU territory, if Gazprom’s storage plans move forward.

In Gazprom’s two-pronged strategy to bypass Ukraine, the storage side seems to be moving well ahead of the pipeline prong. Gazprom’s 2007 and 2008 agreements with Austria’s OMV to share the capacity of the Baumgarten storage center near Vienna is one case (unfortunately from an EU supply-security perspective, because that arrangement hurts the Nabucco project). Gazprom is also considering possible storage sites in Slovakia as part of the strategy to bypass Ukraine’s storage system. Building or renting storage capacity is incomparably less expensive than building pipelines. Moreover, new pipelines would presuppose gas volumes dedicated to them.

Gazprom’s most important bypass-Ukraine project, the South Stream pipeline, however, is not supported with any declared volumes of future Russian gas. This situation differs from that of Gazprom’s Nord Stream, which has Russian gas resources earmarked for it from future production (despite question marks about the declared gas volumes and field development time frame).

Also on March 10 in Moscow, Putin and Gyurcsany witnessed the signing of a bilateral agreement to build South Stream’s Hungarian section. Publicly at least, Putin did not identify any Russian gas resources for the South Stream pipeline (Interfax, March 10, 11). The Hungarian government and Hungarian Development Bank are participating with Gazprom in this project. MOL, however, is not; and the business model for the Pusztafoldvar gas storage site does not require the implementation of South Stream. This separation would seem to suggest that Gazprom itself does not necessarily expect South Stream to materialize.