SHADY GAS FIRM EMFESZ LATEST FRONT IN BATTLE FOR

C O N F I D E N T I A L SECTION 01 OF 03 BUDAPEST 000356 SIPDIS STATE FOR EUR/FO JGARBER AND MBRYZA, EUR/CE, EUR/RUS, EUR/ ERA, EEB/FO, PLEASE PASS TO NSC KHELGERSON AND JHOVENIER, DOE FOR MAPICELLI AND MCOHEN E.O. 12958: DECL: 05/12/2019 TAGS: ENRG ECON EPET PGOV RU UK HU SUBJECT: SHADY GAS FIRM EMFESZ LATEST FRONT IN BATTLE FOR HUNGARY'S GAS MARKET REF: BUDAPEST 320 Classified By: PolEcon Counselor Jon Martinson, reasons 1.4. (b),(d) ¶1. (SBU) Summary: The Hungarian press has been swirling with speculation surrounding the recent cutoff of gas supplies to shadowy Hungarian gas firm Emfesz and its subsequent disputed change of ownership. To some analysts, Emfesz is being squeezed out as part of a recent agreement between Russian PM Putin and Ukrainian PM Tymoshenko to exclude Emfesz's controversial supplier, RosUkrEnergo (RUE),from the Ukrainian gas trade. In this scenario, Dmytro Firtash, RUE's criminally-linked co-owner, who also owns Emfesz, is also a target. Many view recent developments as another effort by Gazprom or its proxies to gain a greater stake in Hungary's gas market. (Note: Gazprom's joint venture with E.On, Panrusgas, is the largest gas supplier on the Hungarian market. End note.) End summary. SHADY HUNGARIAN GAS SUPPLIER CUT OFF FROM CUT-RATE GAS ¶2. (SBU) On April 27, Ukrainian state-owned gas transit company Naftogaz informed Hungarian transmission operator MOL FGSz that it would only transport gas to customers of Gazpromexport. This effectively eliminated gas shipments to Emfesz, which had previously purchased Central Asian gas for import into Central Europe under a long-term contract with similarly opaque trader RosUkrEnergo (RUE). Approximately one month prior, local press reports indicated that Emfesz would probably begin purchasing gas directly from Gazpromexport as the deal between Russia and Ukraine to end the January gas crisis had sidelined RUE, a joint venture between Gazprom and criminally-linked Ukrainian oligarch Dmytro Firtash. Emfesz is the dominant player on the liberalized portion of Hungary's gas market, accounting for roughly 20-25 percent of the total market. Most of its business is with large industrial gas consumers, but it has added thousands of households to its customer list in recent months with an aggressive marketing campaign based on undercutting the regulated retail price by 8 percent, a tactic enabled by its favorable supply terms with RUE. ¶3. (C) According to Dr. Gabor Szorenyi, Director for Gas Licensing, Monitoring and Consumer Protection at the Hungarian Energy Office (MEH),Gazprom and the Hungarian, Ukrainian and Russian gas transmission companies have been unable to reconcile their month-end accounts to determine "who bought gas from which sources." This is probably because Emfesz until recently was still receiving gas through Ukraine. (Note: According to local press reports, gas deliveries to Poland dropped in February when RUE was no longer able to meet its contract commitments. End note.) Dr. Szorenyi told Econoff that the MEH had recently received a letter from Gazprom Deputy Chairman Alexander Medvedev asking that Hungary reduce its gas intake at the Ukrainian border. A subsequent letter from Ukraine's Naftogaz demanded that Hungary reduce its gas intake by 20 percent within one day or face a 40 percent drop in gas pressure from the Ukrainian side, potentially disrupting Hungary's entire transmission system. NEW SUPPLIER NAMED, BUT WHERE IS THE GAS? ¶4. (C) On April 28, Emfesz announced that it would begin purchasing gas from Rosgas AG, a previously unknown company registered, like RUE, in Zug, Switzerland. Emfesz described Rosgas as "a company in Gazprom's network of business interests," but Gazprom emphatically denied any connection with Rosgas. According to press reports, the two principal shareholders of Rosgas are Andras Laki, a Swiss lawyer of Hungarian background, and Tamas Gazda, a Hungarian national who also serves as mergers and acquisitions director for Emfesz and as a member of the board of Emfesz Poland. Emfesz provided the MEH with a letter from Rosgas to prove that it has a new supplier, but according to Dr. Szorenyi, there have been no gas deliveries from Rosgas to date. BUDAPEST 00000356 002 OF 003 ¶5. (C) Istvan Kutas, spokesman for E.On, Hungary's largest gas wholesaler, confirmed to Econoff that Emfesz has kept its customers supplied by purchasing so-called "balancing gas" that E.On sells to MOL FGSz for $1/tcm over the wholesale price. He also says that E.On is selling gas directly to Emfesz for a limited time at a somewhat higher margin over wholesale and that Emfesz is losing money on every cubic meter it sells for the promised discount. According to Kutas, Emfesz lost $2 million in two days last week due to this negative margin on gas sales. Kutas and Szorenyi each note that Emfesz will face a significant financial hurdle at the end of May when it has to pay MOL FGSz for its gas purchases. Emfesz representatives tell E.On, however, that gas supplies from Rosgas will commence by May 15. NEW EMFESZ OWNER: GAZPROM BY ANOTHER NAME? ¶6. (SBU) Until recently, Firtash owned Emfesz through his Cyprus-registered Mabofi Holdings Limited, a unit of his investment holding company, Group DF. On May 7, however, the Hungarian press reported that Emfesz had been sold to Rosgas on April 28, but that the share sale had not been registered until May 4. Mabofi Holdings, which reportedly only realized on May 6 that the sale had taken place, claims that Emfesz General Director Istvan Goczi fraudulently, and without approval from Mabofi or Group DF, transferred ownership in Emfesz to Rosgas based on a 2004 power of attorney granting him authority to carry out the initial acquisition of Emfesz. According to the Group DF website, Mabofi plans to seek legal remedies in Hungarian, Swiss, and Cypriot courts. ¶7. (C) Dr. Szorenyi confirms that Emfesz registered the ownership change with the MEH and adds that the Hungarian authorities have requested additional information regarding the new owner's true ownership structure. In response to Econoff's question about the possible consequence of an unsatisfactory response to this request, Dr. Szorenyi indicated that the GoH would probably be hesitant to intervene as long as customers are being served, particularly given the potentially bad optics of removing the license of the largest player on the unregulated market. ¶8. (SBU) The sale of Emfesz occurred two weeks after Goczi suggested in a local press interview that ongoing gas supply negotiations with Gazprom might also involve the Russian company taking an ownership stake in Emfesz. The Hungarian press further highlights, based on Ukrainian press, that Firtash was under pressure from Gazprom to turn over his operation to Moscow to settle a $514 million debt to Gazprom. The Russian press, as reported in Hungarian media, cites Gazprom sources as saying that Firtash rejected Gazprom's offer and that Rosgas will be controlled by Bulgarian gas middleman Overgas, which is 50 percent owned by Gazprom. ¶9. (SBU) It is also unclear who exactly is in charge at Emfesz. According to the local press, Rosgas representatives arrived at Emfesz headquarters and said Goszi was out. Not surprisingly, Goczi has been removed from the Group DF board of directors. Emfesz, however, still officially claims to the media and in its dealings with E.On that Goczi is the CEO. Econoff has noticed in press reporting that Emfesz's press spokesman, Boris Shestakov, has apparently been replaced by Igor Gallyas. MOL, OTP BANK POSSIBLE PLAYERS IN THICKENING PLOT ¶10. (C) Although he is not convinced that Gazprom is directly behind Rosgas, E.On's Istvan Kutas believes the shots against Emfesz are being called from Moscow and that there may be other intended targets beyond Firtash. According to Kutas, "many people are involved in Emfesz," including Gazprom, without whose consent Emfesz/RUE would not be able to purchase Central Asian gas. He surmises that a faction within Gazprom's management or another company acting as a proxy for Gazprom could be involved. BUDAPEST 00000356 003 OF 003 ¶11. (C) Kutas also suggests that Hungarian energy giant MOL's recent success in barring the door, for the time being, against a takeover by Russia's opaque Surgutneftegaz could have triggered the actions against Emfesz, noting that they began shortly after MOL excluded Surgut from its annual shareholders meeting (reftel). Kutas strongly believes that MOL CEO Zsolt Hernadi and OTP Bank CEO/MOL Director Sandor Csanyi have been involved in Emfesz since its inception and that moves against Emfesz may have been aimed partly at exacting retribution for their efforts to defend MOL, and in a way that more directly targets their personal finances. (Note: Other well-informed local analysts have expressed similar convictions to Econoff regarding possible connections between Hernadi, Csanyi, and Emfesz. End note.) ¶12. (C) To support his theory about Hernadi's and Csanyi's connections to Emfesz, Kutas described how MOL helped remove a previous supplier, Eurobridge, which was owned by an advisor to former PM Orban, after the Socialist government took power in Hungary in 2002. MOL's purchases of gas from the newly-formed Emfesz, in addition to Gazprom, allowed the company a foothold on the Hungarian market. In 2006, within months after MOL sold its gas wholesale business to E.On, all gas-consuming entities owned by MOL and OTP/Csanyi (i.e., MOL's refinery and various factories in which Csanyi has a stake) switched their business to Emfesz. Kutas emphasizes that MOL, as owner of the gas transmission system and gas storage facilities, could have blocked access to Emfesz, but instead gave it an entree to the Hungarian market. During the January gas crisis, Kutas told Econoff that Emfesz was supplying its customers by tapping into storage held in the name of OTP Trade. (Note: E.On purchased MOL's commercial gas storage facilities and wholesale business in 2006. End note.) Recent press reports indicate that Emfesz, under financial pressure, was negotiating with MOL as well as with state-owned electricity giant MVM to sell them minority stakes in a power plant it plans to build in eastern Hungary. OTP Bank has already committed to take the lead in a syndicated bank loan for the project. ¶13. (C) Comment: Given the murky, often conflicting details, it is impossible to know with certainty what is behind the observable events. Gazprom and/or its proxies could plausibly have found a way to simultaneously rob Firtash of his company, expand Russia's presence on the Hungarian energy market, and send a message to Hernadi and Csanyi. Somewhat less likely, but still possible, is the notion that this is all an elaborate ruse to enable Firtash to conceal his ongoing involvement in a reconstituted Emfesz. Only time will (hopefully) tell who are the winners and losers in this latest Hungarian energy skirmish. End comment. Levine