HUNGARY WELL-POSITIONED TO WEATHER RUSSIA-UKRAINE

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000010 SENSITIVE SIPDIS DEPARTMENT FOR EUR/FO JGARBER AND MBRYZA, EUR/CE, EUR/RUS, EUR/ERA, EEB/FO, PLEASE PASS TO NSC ASTERLING E.O. 12958: DECL: 01/06/2019 TAGS: ENRG ECON EPET PGOV HU SR BH MK SUBJECT: HUNGARY WELL-POSITIONED TO WEATHER RUSSIA-UKRAINE GAS DISPUTE REF: BELGRADE 1333 Classified By: Pol/Econ Counselor Eric V. Gaudiosi, reasons 1.4 (b),(d) ¶1. (SBU) SUMMARY: On Monday, January 5, Hungary joined the ranks of Central European countries experiencing disrupted supplies of Russian natural gas as a result of the ongoing Russia-Ukraine dispute. Hungary's significant stored gas reserves should ensure that gas continues flowing without interruption to domestic consumers as well as to Balkan consumers further downstream. Severely cold weather or a significant further reduction in gas imports, however, could force Hungarian authorities to ration gas to domestic consumers, and probably to foreign consumers as well. END SUMMARY. GAS SUPPLY CUTS REACH HUNGARY ¶2. (SBU) Ukraine notified Hungary on Monday afternoon, January 5, that it would reduce transfers of Russian gas by about 21 percent to 30 million cubic meters per day (mcm/d) and followed through by early evening. Until Monday, Hungary had been receiving its contracted amount of natural gas amid the ongoing dispute between Russia and Ukraine and the resulting disruption of gas supplies to several neighboring countries. Hungarian oil and gas giant MOL's gas transmission division reported a small drop in pipeline pressure over the weekend, but gas deliveries continued at 37 mcm/d following warning last Friday from the Ukrainian side that volumes could drop by 5 mcm/d. STORED GAS SHOULD SUFFICE ¶3. (SBU) Klaus Hammer, Chairman of E.On Foldgaz, Hungary's largest natural gas wholesaler and sole gas storage operator, assures us that with commercial storage facilities filled to about 3.1 bcm, roughly 90 percent of capacity, Hungary is well-prepared to endure a supply disruption. (Note: In addition to this, the GoH currently has 500 mcm in strategic storage. End note.) During the winter months, E.On typically supplies up to half of Hungary's 65-85 mcm daily gas consumption from stored gas, with the other half cming from imports via Ukraine and domestic production. Daily consumption currently ranges between 65-75 mcm, rising by 3-4 mcm for every one-degree Celsius drop in the temperature. According to Hammer, Hungary plans to offset the current shortfall with an increase in domestic gas production, from 18 to 22 mcm/d and to cover the remainder with stored gas. E.On is able to withdraw up to 51 mcm/d from storage. ¶4. (SBU) If the temperature drops significantly or supplies are cut further, more extreme steps could become necessary. According to Hammer, if gas imports were to fall below about 20 mcm/d and temperatures remained below -5 degrees Celsius (23 degrees Fahrenheit),E.On would need to suspend gas supplies to "interruptible customers" such as power plants that can switch to fuel oil. If temperatures fall below -10 Celsius (14 degrees Fahrenheit),however, Hammer suspected the cold weather might delay the switch to fuel oil, depending on how well the pipes leading to the power plants have been maintained. In an emergency situation where further rationing is needed, E.On and the GoH have established a list of non-essential industries to which supplies could be cut in order to ensure adequate quantities of gas for households and power plants. BALKANS SPARED A SIMILAR FATE... FOR NOW ¶5. (SBU) According to Hammer, Csaba Molnar, Hungary's new Minister for Transport, Communication and Energy, has ordered MOL to continue supplying contracted gas volumes to Serbia, Macedonia, and Bosnia-Hercegovina. He suspected that the GoH might see this as an inexpensive way, given Hungary's significant gas storage, to earn some neighborly goodwill. Earlier on Monday, however, prior to the cutback from Ukraine, E.On Foldgaz spokesman Istvan Kutas posited to us that it was Gazprom's interest in keeping gas supplies flowing to Serbia that had until then spared Hungary from the supply shortfalls experienced by its neighbors because of its importance as a transit country for Russian gas bound for the BUDAPEST 00000010 002 OF 002 Balkans. Kutas based his assessment on Serbia's recent agreement to participate in the South Stream pipeline, host a Gazprom storage facility, and allow Gazprom to purchase a majority stake in state-owned oil company NIS (see reftel). (COMMENT: If Kutas is correct, Hungary's role in transiting gas to the Balkans could also account for the relatively modest shortfall in Russian gas flowing to Hungary compared to the more significant cuts its neighbors are experiencing. END COMMENT.) HUNGARY'S 3.1 BCM OF PREVENTION PROVES ITS WORTH ¶6. (C) COMMENT: With one of the most gas-dependent economies in Europe--natural gas comprises about 45 percent of Hungary's primary energy consumption--Hungary is highly vulnerable to any disruption of its gas supply, 80 percent of which is imported from Russia. Hungary appears to have taken prudent steps to ensure that it and its neighbors are not left in the cold as wintertime gas supply disruptions become the norm. Hungary's already close energy relationship with Russia does not appear to be up for reconsideration even as Russia again calls into question its reputation as a "reliable supplier." Indeed, Hungarian officials have been explicit in referring to the matter as a commercial rather than an intergovernmental issue. It seems likely that Hungary's commitment to keep gas flowing to the Balkans is motivated more by the desire to maintain and strengthen its energy ties with Russia than by altruism toward its neighbors. Regardless of its motivation, however, the GoH may eventually be forced to reconsider this gesture if the supply shortfall deepens. END COMMENT. Foley