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