HUNGARY MAKES DUE AMID GAS CRISIS; STEPS UP

C O N F I D E N T I A L SECTION 01 OF 04 BUDAPEST 000030

SENSITIVE
SIPDIS

DEPARTMENT FOR EUR/FO JGARBER AND MBRYZA, EUR/CE JLAMORE,
EUR/RUS, EUR/ERA, EEB/FO, PLEASE PASS TO NSC ASTERLING

E.O. 12958: DECL: 01/09/2019
TAGS: ENRG ECON EPET PGOV HU SR BH MK
SUBJECT: HUNGARY MAKES DUE AMID GAS CRISIS; STEPS UP
DIPLOMACY

REF: BUDAPEST 10

Classified By: Pol/Econ Counselor Eric Gaudiosi, reasons 1.4 (b),(d)


1. (SBU) SUMMARY: The GoH continues to improvise at home and
abroad as it responds to the January 5 cutoff of Russian gas
supplies via Ukraine. Hungary is currently tapping both its
commercial and strategic gas storage reserves to the maximum
extent possible while the GoH continues to tinker with the
appropriate degree of domestic rationing, introducing further
uncertainty to commercial and industrial gas consumers.
Although officials have predicted privately that the shutoff
will be resolved "within a week," they are taking a less
confident tone with respect to the ability of domestic
supplies to sustain current demand levels in the event of a
protracted shutoff. As such, the GoH is working hard on the
diplomatic front to bring about an end to the crisis. END
SUMMARY.

STORED GAS, DOMESTIC RESOURCES COVER DOMESTIC DEMAND...


2. (U) E.On Foldgaz, Hungary's primary gas wholesaler and
sole gas storage operator, received word on the afternoon of
January 6 that supplies of Russian gas through Ukraine would
be cutoff completely, after supplies were cut by 20 percent
the preceding day. Since then, E.On has been able to meet
roughly 90 percent of daily gas demand by drawing on its 3
bcm in commercial gas storage, from which it is now able to
draw up to 53.5 mcm/d, according to E.On spokesman Istvan
Kutas. On January 7, the GoH ordered the opening of
Hungary's 500 mcm strategic storage to add a further 3.5
mcm/d to the country's daily supply. Hungarian oil and gas
giant MOL has managed to temporarily increase domestic gas
production from 8 to 9 mcm/d. (Note: These figures correct
the erroneous 18-22 mcm/d cited in reftel. End note.) After
initially dropping from 6 mcm/d to as low as 1.5 mcm/d, gas
imports via Austria's Baumgarten terminal are currently at 4
mcm/d following a decision by E.On Foldgaz parent E.On
Ruhrgas to release gas from storage in West Europe.


3. (SBU) The GoH continues to calibrate its approach to gas
rationing after an uneven start. Within the first 18 hours
after the gas cutoff, Hungary implemented the first two
stages of its rationing plan by:

1) cutting gas supplies to "interruptible" consumers that can
easily switch from gas to fuel oil, including the 900MW Tisza
power plant owned by AES and the Budapest Airport, and
restricting gas supplies to large industrial consumers that
use at least 2500 cm/hour; and,

2) restricting gas to mid-sized users consuming between
500-2500 cm/hour.

By the afternoon of January 7, however, the GoH had to walk
back its restriction on gas for processors of basic
foodstuffs following pressure from interest groups and food
companies. By January 8, the GoH removed gas-use
restrictions on mid-sized consumers owing to slightly warmer
weather and the initial success of the restrictions in
reducing gas demand--consumption fell from 68 mcm on Tuesday
to 61 mcm on Wednesday and was expected to remain between
60-62 mcm on Thursday. (Note: Hungarian households managed
to reduce gas consumption by 3 mcm/d purely through voluntary
conservation efforts, according to Miklos Poos, deputy head
of the Department of Environment, Renewable Energy, and
Energy Conservation at the Ministry of Transport,
Telecommunication, and Energy. End note.)


4. (SBU) An Embassy contact at Alcoa, which had to
significantly scale back operations due to cuts in its gas
supply on Wednesday, confirmed Thursday that supplies had
been restored and that the plant was operating normally, but
he remains concerned that supply restrictions could be
reimposed at any time, as long as the Russia-Ukraine cutoff

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remains in effect. Istvan Kutas at E.On echoed this
sentiment, saying he believed the government had been too
quick to lift the restrictions as long as there is no end in
sight to the crisis. (Note: Kutas added that even after the
crisis is resolved, it will probably take several days to
thaw frozen compression stations in Ukraine and restore gas
flows to normal levels. End note.) In the event that
restrictions return, Alcoa and other companies have
successfully lobbied to ensure the minimal supply of gas
needed to prevent damage to technical equipment that might
occur if left idle.

...BUT BALKANS LEFT IN THE COLD


5. (SBU) Following the cutoff, the Hungarians immediately
informed neighboring countries in the Balkans that supplies
would cease due to the cutoff of transit gas from Ukraine and
the need to use domestic supplies to cover domestic demand.
PM Gyurcsany announced on January 8 that Hungary would be
able to release 1-2 mcm to Serbia--reportedly enough to cover
one-fifth of its daily consumption--based on Hungary's
ability to contain demand below peak levels on the previous
day. According to Gyurcsany, this supply will be reevaluated
on a daily basis and will only continue as long as Hungary
has excess supply to sell. In addition, E.On's Kutas
informed us on Friday that it had obtained a commitment from
its parent company for an additional 2.7 mcm/d through the
Baumgarten terminal to ship to Serbia. Kutas noted that E.On
had to overcome strong objections by the GoH and MOL to
supply this gas to Serbia, and that it would remain on an
interruptible basis depending on Hungarian domestic
requirements. The Bosnians have also contacted E.On to
inquire about potential supplies, but Kutas did not know if
additional gas would be available.


6. (C) Mihaly Toth, an official in the Prime Minister's
office, tells us privately that the government is resolved to
assist Serbia to the fullest extent possible, confiding that
Energy Minister Molnar (a rising star in the MSzP) had
blotted his copybook rather badly with the brief cut-off of
shipments to Serbia. The PM had made it clear to Molnar that
Hungary will do its utmost to support its neighbors, and that
"every morning" the GoH will determine how much it can send
to Serbia. Toth also mentioned that Bosnia had also asked
for Hungarian assistance, and said the GoH would do what it
could but is still looking into the practicalities of sending
gas through Serbia to Bosnia.

FURTHER RATIONING LIKELY IF CRISIS PERSISTS


7. (SBU) Despite past and continuing claims by various
government and energy company officials that Hungary's 3.5
bcm gas storage reserves are sufficient to satisfy the
country's daily gas needs through the winter season, recent
statements by some key officials belie this initial
confidence and perhaps explain Hungary's active diplomacy on
the issue. In an emergency session of the parliamentary
foreign affairs committee on Wednesday, MOL Chairman Zsolt
Hernadi expressed concern that Hungary might only be able to
rely on stored gas reserves to meet current demand levels for
about 2-3 weeks due to the gradual loss of pressure as gas is
withdrawn. E.On's Istvan Kutas confirmed that stored
reserves can only be tapped at peak levels for about 10 days
before the loss of pressure forces a 10-percent decrease in
withdrawal levels. He suggested that withdrawal rates could
drop quickly when stored gas falls below 50 percent of
capacity, and Toth confirmed that "the less we have the
harder it is to withdraw." (Comment: Hungary's commercial
reserves are currently at about 80 percent of capacity,
suggesting that it will reach the 50-percent mark within
three weeks if peak withdrawals continue. End comment.) PM
Gyurcsany told the press on Thursday that Hungary can
continue to meet current gas demand for the next two weeks,
but that industrial consumers would face further restrictions
if the situation persists beyond 3-4 weeks. He continues to

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emphasize, however, that there is currently no danger that
the so-called "protected market"--households, hospitals,
schools, embassies, and other public buildings--will face any
shortfalls.


8. (C) Toth emphasized to us that "we are not in crisis,"
commenting that Hungary is in "much better shape than we were
in 2006" in terms of its reserves and its planning. Although
he conceded that there had been unanticipated issues, he
railed against the opposition,s orchestration of school
closures in municipalities under its control, commenting that
"it is not only misleading but dangerous to give the public
the impression that we are on the brink of disaster." He
thought this was a partisan maneuver that marred an otherwise
united front in response to the shutoff. He also said that
the government was hearing from businesses regarding the
economic impact of the reduction in internal supplies, but
had made the decision that it could not give financial
compensation as some companies had sought.

GOH PRESSES FOR DIPLOMATIC SOLUTION


9. (SBU) While studiously avoiding the appearance of having
taken sides in the Russia-Ukraine dispute, PM Gyurcsany in
letters to Russian PM Putin, Ukrainian PM Timoshenko, and
Czech PM Topolanek moved beyond labeling it a simple trade
dispute to "one of the most important issues of cooperation
between Russia, Ukraine, and Europe." As such, he asked the
EU to take "firm action" against Kiev and Moscow and
advocated EU financial support to Kiev and monitoring of gas
transmission across Ukraine to help end the dispute and
restore gas flows. At a Thursday meeting of the Visegrad-4
in Bratislava, Gyurcsany called for the "energy Iron Curtain
between East and West Europe (to be) pulled down" through
improved interconnection of Europe's energy networks. PM
Gyurcsany and President Solyom both plan to meet their
Ukranian counterparts in Hungary next week to press for an
end to the crisis. FM Goncz, meanwhile, led discussion at
the recent Ministerial meeting in Brussels, calling for an EU
policy that would prevent the distinction between "haves" and
"have-nots" within the EU. She also underscored the
importance of solidarity with states not in the Union but
affected by the crisis, most notably in the Balkans.


10. (C) Toth predicts that the shutoff will be resolved
"within a week." He believes that both Moscow and Kiev are
losing international support for their respective failings,
and will accordingly be motivated to find a compromise. He
believes Russia will not want to undermine its relationships
with the Slavic states of the Balkans, and that both Russia
and Ukraine need the revenue. He also said that Russia has
no place to store the gas and will need to resume shipments
soon. Hungary understands, however, that Putin wants any
deal to be "announced at Sochi."

NABUCCO LIKELY TO BENEFIT FROM CRISIS, BUT SO COULD SOUTH
STREAM


11. (SBU) COMMENT: The unprecedented nature of the current
gas cutoff and Hungary's less-than-previously-expected
wherewithal to ride out the crisis based on its storage
reserves have clearly focused minds here in Budapest. GoH
officials were similarly vocal during the 2006 gas cutoff in
their calls for energy source diversification and a common
European energy policy, but subsequent actions, including
bilateral deals with Russia to host the South Stream
pipeline, did not match the rhetoric. We suspect the timing
of the current crisis, just weeks before Budapest is to host
a Nabucco Summit, could spur more determined action on the
part of the GoH to sustain Nabucco's momentum. Earlier this
week, PM Gyurcsany gave clear priority to Nabucco over South
Stream as Hungary's most important "iron in the fire." But
so far there are no signs that Budapest is reconsidering its
commitment to South Stream. Toth expressed as much
frustration with Brussels as with Moscow, and Finance

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Minister Veres this week told Ambassador Foley that the
Ukraine cutoff strengthens the case for both pipelines,
although Moscow had done nothing to "accelerate" their South
Stream deal in months. END COMMENT.

Foley