Publication: Eurasia Daily Monitor Volume: 4 Issue: 228

The Hungarian energy company MOL is proposing the unification of gas transmission pipeline systems in Central and Southeastern Europe, within a new and independent regional gas transmission network. The existing systems are nationally owned and operated, mainly under state ownership. MOL is privately owned.

The proposed joint company would operate an integrated Central- and Southeast European pipeline network for gas transmission. Separated from the gas production and retailing operations of the national companies, the new transmission company would be jointly owned and jointly operated.

MOL is inviting the gas companies in Austria, Romania, Bulgaria, Serbia, Croatia, Slovenia, and Bosnia to initial multilateral consultations on the proposed entity. The invitation can be extended to other companies in Central Europe with a view to forming a New Europe Transmission System — NETS. The concept is based on cooperation among equals within a structure that would reflect and harmonize national energy policy objectives: foremost the security of supplies and the financing of infrastructure development. Key to such networking in this part of Europe is the construction of interconnectors among the national systems.

At present, gas markets in Central and Southeastern Europe are characterized by fragmentation along national lines, a lack of interconnections, the dominant role of Russia’s Gazprom as single external supplier, under-financing of infrastructure development, and a lack of incentives for major external financing or non-Russian suppliers.

A jointly owned regional gas transmission entity could operate with significantly improved capital efficiency, compared with the existing national systems, thus enabling their modernization. It would strengthen these countries’ position, individually and as an interconnected group, in negotiations with Russia for gas supplies. And, thanks to interconnections, it would significantly reduce the national systems’ vulnerability to Russian takeover attempts.

Furthermore, such a networked entity could draw on international capital markets and use international public offerings to finance major joint projects, such as the Nabucco pipeline from Azerbaijan and Turkey or liquefied gas transport from Adriatic ports. Thus, crucially, it would help break Gazprom’s monopolistic position in Central and Southeastern Europe. And it would promote competition beneficial to consumers in these countries through the flexibility of an interconnected, market-unifying transmission system.

MOL’s initiative upholds the European Union’s principle of supply solidarity. It is in line with the European Commission’s recent draft directives for unbundling the ownership of gas transmission systems from the ownership of production and distribution assets. The proposed NETS would unbundle the regional transmission systems, pool them into a single corporate framework, and establish a unified code and tariff system for the resulting network. If created, NETS could fend off, or compete successfully against, Gazprom or other Russian companies’ attempts to “privatize” national transmission systems in Central and Southeastern Europe.

The MOL-proposed multilateral interconnection is innovative and ambitious in terms of European policies and practice. Existing cross-border gas transmission companies in Europe are mostly bilateral or trilateral.

MOL has initiated preliminary consultations with the national companies on the NETS concept and proposes starting multilateral negotiations in early 2008 on technical and investment aspects, leading to a proposal for consideration by national decision makers. Those companies are closely linked with the respective governments.

The first stage of negotiations would establish political support through intergovernmental agreements and EU endorsement. The second negotiating stage would set the terms of regulatory support on the national level and in the framework of the EU-backed Southeast Europe (SEE) energy initiative. The third stage would firm up the support of shareholders and/or transmission-system-operating companies in the participating countries.

The proposal envisages that national regulators create a regulatory commission for the proposed NETS. Such a commission would function under SEE, using the latter’s regulatory framework. That regulatory commission would, inter alia, approve a unified entry-exit tariff system and a commercial code of NETS.

Assuming political, regulatory, and shareholder support, it could take one to two years to set a regional gas transmission company. Should the new company become operational by 2010, it could complete the construction of pipeline links to interconnect the national systems by 2012, according to MOL’s projections.

Gas transmission systems in the eight countries currently total 27,000 kilometers of pipeline and serve 68.5 million customers. These figures do not take into account the possible participation of other Central European transmission systems in the proposed NETS. An interconnected network of such scale would be attractive to wholesale gas suppliers other than Gazprom. And it would facilitate access to EU funds and syndicated bank loans for gas transport projects that would connect Central and Southeastern Europe directly with gas suppliers beyond Russian control.

In an initial reaction, the European Commission has welcomed the proposal and agreed with MOL’s view that success of the project would increase investments, enhance security of supply, and open the markets to competition through diversification of the gas supply sources to these countries and a potentially unified European market.

(Dow Jones, Thomson Financial, MTI, Wirtschaftsblatt, December 5-9; MOL, “Regional Cooperation for Gas Supply,” December 2007)