EU IS ALMOST FULL

This summer will go down in history with the abnormal heat wave observed in several regions of the globe. According to scientists, July 2023 was the hottest month in the history of observations. Specialists believe that due to the climate change also provoked by humans such abnormal cases will occur more frequently.

Although the heat wave is increasing the level of gas consumption, pumping it into storage facilities in Europe is in full swing. The pace of operations is noticeably slower than usual for the last five years. However, the target level of 90% has already been reached.

All this is the result of the EU's common efforts to diversify energy resources to get rid of dependence on Russian gas. However, there are countries that cannot do without it, but at the same time are actively working to increase the number of suppliers, expanding cooperation with neighbours and countries in the Caspian region. One of them is Hungary, a small and distinctive country in the heart of Europe with a population of just over 10 million people. While continuing to receive gas from Gazprom, the Hungarian government led by Viktor Orban signed a number of important agreements on gas imports, including from Azerbaijan, during the summer season.

New sources

Russia remains Hungary's main supplier. Even the transition to ruble-denominated payments with EU countries has not embarrassed the country's leadership, and Budapest has no plans to stop the supplies from Russia. It is understandable, as it would hit the national economy hard, which is already feeling the effects of the Russian-Ukrainian war and the EU sanctions against Russia.

In late July, Orban said that Budapest intended to buy an additional 700m cubic metres of gas from Russia. He also criticised the European Commission's plan to reduce gas consumption in the EU member states by 15 percent and said that Hungary's reserves would be enough to survive the winter.

In August, the Russian monopoly Gazprom started the supplies to Hungary of gas in excess of the volumes stipulated in the contract. The gas comes via the Turkish Stream and at the first stage (until the end of August), this will be 2.6 million cubic metres daily. Hungary is now negotiating the schedule for September.

Meanwhile, in line with its diversification policy, the Hungarian government is looking for new energy sources and routes, working with countries such as Azerbaijan, Qatar, Türkiye and Turkmenistan. Budapest states that diversification does not mean replacing one seller with another, "especially if it is a reliable supplier".

Budapest and Doha have already reached a political agreement to buy liquefied natural gas (LNG) from Qatar starting from 2027. The companies of both countries are working out the volumes and routes. "Qatar is the world's largest LNG exporter, but now it has utilised all its capacity of gas. Therefore, we concluded a political agreement according to which we can expect the start of energy supplies from Qatar in 2027. Our commercial companies have already started technical negotiations on the quantity of LNG and the routes through which we will be able to receive liquefied natural gas," Hungarian Minister of Foreign Affairs and External Economic Relations Peter Szijjarto stated.

More specific agreements are already in place with Azerbaijan. First, SOCAR and Hungary's MVM CEEnergy signed a contract for 100 million cubic metres in June 2023. In July, the Hungarian Foreign Minister announced that SOCAR had already started using Hungarian storage facilities. "There is good news: the Azerbaijani energy company SOCAR pumped the first 50 million cubic metres of gas in Hungarian storage facilities in accordance with the contract," P. Szijjarto wrote on Facebook.

The parties then concluded a political agreement for the supply of 1 billion cubic metres of Azerbaijani gas in the following period.

The relevance of the Trans-Caspian Pipeline

Two more important documents on gas exports to Hungary—with Türkiye and Turkmenistan— were signed in August. Turkish Minister of Energy and Natural Resources Alparslan Bayraktar said that the relevant agreement was concluded between Turkish state-owned gas company BOTAŞ and Hungary's MVM CEEnergy. "This is the first time we will export natural gas to a European country that is not our neighbour," Bayraktar said.

Under the terms of the new agreement, Hungary will buy a total of 275 million cubic metres of LNG from Türkiye during the spring and summer of next year. Szijjarto said that the agreement would "further increase the country's role in ensuring Hungary's energy security".

The two sides also agreed to develop co-operation on utilising Türkiye's developed LNG infrastructure and the natural gas storage capacities of both countries as long as they serve common interests.

As to Turkmenistan, a political agreement was signed on gas supplies to Hungary. "The political agreement was concluded. Now it is the turn of companies to continue commercial negotiations," P. Szijjarto said.

The Hungarian minister did not specify the expected volumes to be purchased from Turkmenistan and the delivery route. However, if we recall Szijjarto's statements made in June, it is likely to be the Trans-Caspian Gas Pipeline (TCP). According to the minister, transporting Turkmen gas to Europe will require 300 kilometres of pipeline able to transport 30 billion cubic metres of gas annually, as well as increasing the capacity of pipelines in the Southeast European region.

For Turkmenistan, which has no direct access to the global markets for energy resources, the TCP is the most acceptable route to Europe.

Thanks to its gas reserves, Turkmenistan can be a serious rival to Moscow on the European market. So it is unlikely that Russia agrees to take on the role of a transit country. In the current conditions, with the number of European buyers of Russian gas diminishing considerably for various reasons, this is unacceptable at all.

Last year Iran came up with an idea of creating a gas hub in the Asaluyeh industrial district of Bushehr province on the Persian Gulf coast in cooperation with Russia, Qatar and Turkmenistan. But no time frame for the project has been provided.

So there is only one option left - through Azerbaijan. But it is not that easy. So far, there have been no changes in discussions on the TCP construction project, except for two statements made by the Turkmen Ministry of Foreign Affairs on July 25 and August 12. Ashgabat said that it was ready to continue the dialogue with European partners on the implementation of the TCP project.

"Turkmenistan remains committed to the strategy of diversification of energy flows and expresses its readiness to continue co-operation with European partners on the implementation of the Trans-Caspian pipeline project," Turkmen Foreign Minister Rashid Meredov said.

He noted that the idea of the gas pipeline construction initiated by Turkmenistan was initially considered by Ashgabat "not just as an economically and commercially sound project, but as a key condition for ensuring global energy security and sustainability on the basis of equal consideration of the interests and benefits of energy producers, consumers and transit countries".

In other words, Ashgabat demonstrates determination and has a serious interest in the TCP project. But it is not willing to do the construction of the pipeline alone and is open to discussions. Especially since the project is very costly and is not limited to laying the pipeline from one side of the Caspian Sea to another. It will be necessary to build a new system in Azerbaijan, because the Southern Gas Corridor, even with its twofold expansion, has been designed with Azerbaijani gas in mind.

The willingness of Europeans to spend on this infrastructure is highly questionable, as Europe needs to expand its own gas transport infrastructure. So the TCP project will face serious tests before it is implemented, ever.

Pumping on schedule

Meanwhile, Europe continues pumping gas into storage facilities in preparation for the upcoming autumn-winter season. The pace of operations has noticeably slowed down, but the target level of 90 per cent has already been reached. In general, Europe and most of the European countries with own underground gas storage facilities have so far filled 90 per cent of their reserves and can now pump the volumes selectively. This should leave more product on the market, thereby reducing pressure on prices.

The current storage capacity of the underground facilities is 91.86 per cent, which is 13 percentage points above the average for the same dates over the past five years, Gas Infrastructure Europe states.

"Gas storage in the EU has reached 90% well ahead of schedule. This will help us to be safe this winter. Together we are distancing ourselves off the Russian gas," President of the European Commission Ursula von der Leyen said.

The EU set the goal of filling the facilities by 90 per cent by November 1, 2022 after Russia invaded Ukraine, when energy prices hit record highs. The EU set a course for independence from Russian supplies.

"Filling our storage facilities ahead of schedule means that the EU is well prepared for winter and this will help to further stabilise markets in the coming months," said EC Energy Commissioner Kadri Simson.

The EU believes that this accomplishment was possible because of the abnormally warm winter in the continent and mutual understanding among the EU member states.

Another important decision to secure lower energy prices was the creation of a pan-European platform for gas purchases. Brussels called it an "outstanding success". The benchmark price of electricity in the EU today is less than 40 euros per megawatt hour, many times lower than the triple-digit rates of 2022.

In July, the European Commission (EC) launched a second tender for joint gas purchases by European companies. It covers 15.9bcm of supplies requested by 49 companies for the period from August 2023 to March 2025. LNG accounts for almost half of the combined demand of the second tender. It exceeded the previous demand of 11.6 billion cubic metres. Three more tenders will take place before the end of 2023.

"Given the even higher levels of gas demand, it is clear that European companies are increasingly confident in the effectiveness of the EU energy platform to help them meet their needs. It becomes increasingly recognised in the market and is an effective tool for overcoming the energy crisis," EC Vice-Chairman Maros Sefcovic said.

He called on reliable international suppliers to submit proposals and "seize the opportunity to expand their customer base in the EU and the Energy Community".

The situation with gas prices is also favourable for European consumers. It is now significantly lower in Europe than it was before the war in Ukraine. As of August 23, the spot price in Europe has fallen by 14%. The day-ahead contracts at the TTF hub in the Netherlands closed at $355 per thousand cubic metres.

However, there is a noticeable stable LNG price gap in Asia compared to Europe. In Asia (Japan, South Korea, China and Taiwan) the prices are higher than in north-western Europe.

But this is not a signal for relaxation: shortly before that, the cost of gas on European exchanges exceeded $500 per thousand cubic metres for the first time since mid-June this year. The growth was provoked by news about potential strikes at LNG plants in Australia. This was a clear signal to market participants that the gas price is quite unstable and the situation may change for worse at any moment.