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C O N F I D E N T I A L SECTION 01 OF 03 BUDAPEST 000628 
 
SIPDIS 
 
STATE FOR EUR/FO, EUR/CE FOR JLAMORE, EUR/RUS, EUR/ ERA, 
EEB/FO, PLEASE PASS TO NSC JHOVENIER, DOE FOR MAPICELLI AND 
MCOHEN 
 
E.O. 12958: DECL: 08/31/2019 
TAGS: ENRG ECON EPET PGOV RU UK HU
SUBJECT: STORING UP GAS FOR ANOTHER WINTER CUTOFF 
 
REF: A. BUDAPEST 30 
     ¶B. BUDAPEST 356 
 
Classified By: Economic Officer, Jeffrey M. Jordan, reasons 1.4 (b,d) 
 
¶1. (SBU) Summary:  Hungary is nearing the completion of a 
significant addition to its already extensive natural gas 
storage capacity.  This new capacity will further enable gas 
to continue flowing to consumers in Hungary and possibly to 
neighboring countries in the event of a cutoff similar to 
that of January 2009.  Gas injection at Hungary's new 
strategic gas storage site, however, is facing delays due to 
the fact that Emfesz, the controversial gas trader that won 
the tender to supply the facility, still lacks a steady gas 
supply.  Some industry insiders see Gazprom's efforts to 
secure gas storage capacity west of Ukraine as portending 
another gas conflict this winter.  Should this occur, Hungary 
appears well-prepared to meet peak demand for at least one 
month and considerably longer at reduced levels.  End summary. 
 
¶2. (SBU) EconOff met with Istvan Kutas, company spokesman for 
E.On Hungaria (E.On), Hungary's largest natural gas supplier 
and commercial storage operator, and Dr. Gabor Szorenyi, 
Director of Electricity, Gas and District Heating Licensing 
and Monitoring and Consumer Protection at the Hungarian 
Energy Office.  The discussions focused on Hungary's progress 
in replenishing its natural gas storage reservoirs prior to 
winter.  Hungary's extensive gas storage capacity, along with 
the ability to reorient gas imports via Austria's Baumgarten 
gas hub, proved essential to limiting the January 2009 gas 
cutoff's impact to rationing measures imposed on large 
industrial consumers.  Hungary was also able to provide 
modest gas exports to neighbors in the Balkans.  Although 
Hungary fared better than its neighbors to the south, it 
quickly became clear that it would need additional storage 
capacity to weather a protracted gas cutoff (ref A). 
 
E.ON ADDS GAS STORAGE CAPACITY 
 
¶3. (SBU) E.On is nearing the completion of a 600 million 
cubic meter (mcm) expansion of its Zsana gas storage 
facility, one of its five storage sites, increasing 
E.On-owned commercial storage capacity to 4.3 billion cubic 
meters (bcm).  As a result of the expansion, the average 
daily withdrawal capacity will increase by 4 mcm/d to about 
55 mcm/d, enough to cover roughly 70 percent of daily demand 
during periods of peak consumption.  E.On estimates that it 
can sustain gas withdrawals at the peak rate for about 10-14 
days, after which, due to the drop in pressure, it can 
continue withdrawing at about 80-90 percent of the peak rate 
for about 20 days.  According to Kutas and Szorenyi, 
Hungary's gas marketing companies waited until late July, 
when wholesale gas prices were scheduled to drop, to begin 
purchasing gas for winter storage.  E.On is now injecting gas 
into the reservoir at the maximum rate, which should peak at 
33 mcm/d when the Zsana expansion is completed in 
mid-September.  Kutas expects the reservoir to be completely 
filled by late October. 
 
STRATEGIC GAS RESERVE FACES DELAYS 
 
¶4. (SBU) Hungarian oil and gas giant MOL, in a joint venture 
with the Hungarian Hydrocarbon Stockpiling Association, is 
nearing the completion of a new gas storage facility at the 
depleted Szoreg gas field with a dedicated pipline from 
Ukraine to feed into it.  The facility's 1.9 bcm capacity 
will include 1.2 bcm for strategic storage, scheduled to 
begin operation in January 2010, and 700 mcm in commercial 
storage, operable from March 2010.  The strategic stock will 
guarantee Hungary an additional 20 mcm/d for 45 days in the 
event of a gas crisis.  The facility's peak withdrawal 
capacity is expected to reach 25 mcm/d, including the 
quantities available for commercial use. 
 
¶5. (C) According to recent press, gas injection at Szoreg is 
facing some delays.  Technical problems with the compressors 
and pipelines have held things up by a few weeks.  According 
to Kutas and Szorenyi, however, the real cause of the delay 
 
BUDAPEST 00000628  002 OF 003 
 
 
is that Emfesz, which had previously won a tender to fill the 
strategic reserve at Szoreg, lacks the gas needed to fulfill 
this contract.  Emfesz claimed to have a new gas supply 
agreement with Rosgas after the termination of its supply 
arrangement with Rosukrenergo and its controversial 
acquisition by Rosgas (ref B), but the gas has yet to 
materialize.  As such, Emfesz continues to purchase gas from 
E.On on a week-to-week basis--at a price well above what 
Emfesz charges to its clients--to keep its commercial and 
residential customers supplied, but it has not secured a 
source of gas to meet its commitment to fill Szoreg.  (Note: 
Kutas mentioned that after a recent increase in the price 
E.On charges Emfesz, E.On received a letter from Emfesz 
conveying an "order" by the Ministry of Transport, 
Telecommunication and Energy to restore the price to the 
initial level "in the interest of national security."  E.On 
apparently complied.  End note.) 
 
¶6. (C) Emfesz had to scrap plans to begin supplying gas to 
Szoreg by August 15 and now claims it will begin injection by 
August 31, still plenty of time to meet the legal deadline to 
fill the strategic storage reserve by December 31.  Kutas, 
however, cites an "industry rumor" that Emfesz and MOL plan 
to offset Emfesz' obligation by reclassifying 700 mcm of 
so-called "cushion gas," already present in the reservoir and 
used to maintain pressure, as strategic storage gas.  (Note: 
Kutas leaked this information to several local news outlets, 
but only one, economic daily Vilaggazdasag, printed it. 
Kutas attributes this to a general media aversion to printing 
negative news about MOL.  End note.)  MOL publicly denies 
this and claims that all preparations are going according to 
plan. 
 
¶7. (C) In addition to Emfesz' apparent difficulty fulfilling 
its strategic storage obligation, Dr. Szorenyi says the 
Hungarian Energy Office is generally concerned about the 
likelihood that Emfesz will still be without a long-term 
supplier at the onset of winter.  According to Szorenyi, the 
Energy Office is prepared to revoke Emfesz' license and send 
its customers, including the supply contract for the 
strategic storage facility, to E.On if the situation is not 
resolved in due time.  He indicated that injection at Szoreg 
would need to begin by early October at the latest to ensure 
available supply by January. 
 
GAZPROM DESPERATELY SEEKING STORAGE 
 
¶8. (C) Kutas commented on recent reports that Gazprom is 
actively seeking to lease storage capacity downstream from 
Ukraine and posited that Gazprom's efforts to stockpile gas 
closer to its European customers suggests that it might be 
preparing for another gas cutoff this winter.  E.On's own 
industry sources, however, believe a gas crisis is unlikely 
this winter because Gazprom, already under some financial 
strain, cannot bear the loss of cash flow. 
 
¶9. (C) Gazprom is reportedly interested in booking 100-200 
mcm of storage capacity in Hungary to ensure supplies to its 
Balkan customers, who were severely impacted by the gas 
cutoff last January.  According to Kutas, after learning 
through the press about recent talks in Vienna between 
Gazprom and Srbijagaz on directly contracting with E.On for 
storage in Hungary, E.On informed the parties that capacities 
would be allocated based on a public auction.  E.On plans to 
auction off storage space in tranches, with initally-planned 
offers of 40 and 90 mcm tranches beginning in late August and 
early September, respectively, as the new capacity is 
gradually brought online.  This also allows E.On to take 
advantage of probable increases in market rates as storage 
capacity becomes more scarce and winter approaches. 
¶10. (C) In a brief follow-up conversation, Kutas reported 
that Gazprom has since told E.On it is in direct negotiations 
for storage space at a separate site in Hungary, most likely 
the new storage site at Szoreg.  Kutas believes this is a 
bluff, however, given the project's delays and the fact that 
the commercial storage portion is not scheduled to begin 
operating until later this winter, ostensibly too late to be 
of any use in a gas cutoff. 
 
BUDAPEST 00000628  003 OF 003 
 
 
 
GOH TO REFINE CRISIS MANAGEMENT PLAN 
 
¶11. (SBU) Parliament is also set to vote soon, albeit 
somewhat belatedly, on legislation to update Hungary's gas 
crisis management plans, including incentives for large 
consumers to enable rapid fuel switching from gas to oil, 
obligatory provisions for gas marketers to book commercial 
storage, clarification of the rules on use of the strategic 
stockpile, and a modification of consumer rationing measures. 
 An important revision to the rationing rules will allow 
industrial consumers enough gas to heat their facilities and 
protect plant and equipment, even if required to shut down 
production. 
 
HUNGARIANS UNLIKELY TO FREEZE IF THE GAS STOPS FLOWING... 
TEMPORARILY 
 
¶12. (C) Comment: Hungary appears to have put some of the 
lessons from recent years' gas crises into practice.  With 
ample storage capacity to meet daily demand needs, depending 
on the temperature, for about a month without significant 
rationing, Hungary is unlikely to be left in the cold in the 
event of another wintertime gas shortfall.  In addition to 
this near 50-percent increase in gas storage over last year, 
Hungary's domestic gas production (9 mcm/d) and pipeline link 
to Austria (up to 12 mcm/d) further enhance Hungary's ability 
to weather a short-term crisis.  Plans currently underway 
between MOL and its regional partners to establish pipeline 
interconnections with neighboring Romania (2010), Croatia 
(2011), and Slovakia (2015) will offer an expanded range of 
options for keeping gas flowing amid future cutoffs.  Yet, 
such measures are no substitute for source diversification. 
With roughly 80 percent of its gas coming from Russia or 
through Gazprom-controlled pipelines and with natural gas 
comprising over 40 percent of its primary energy supply, 
Hungary will remain highly vulnerable to disruptions in the 
supply or Russian gas.  End comment. 
LEVINE