Concerning: will the Hungarian-Russian gas transport system fall apart?

Arbitration rulings against Gazprom are slowly taking shape, and according to experts with insight into the sector, the Hungarian-Russian gas transport structure could change significantly in the near future. New routes and changes in cooperation may emerge, but Hungary’s security of supply is not at risk.

Portfolio spoke to several experts in the sector about the future of Russian gas in Europe and Hungary, who agreed that the decisions against Gazprom could bring significant changes to the gas market. However, they all emphasised that these changes will mainly affect the import structure, and Hungary’s gas supply will not be cut off.

The background

In 2022, after several European companies refused to pay Gazprom in roubles, the Russian company halted deliveries to many of its buyers. Following this incident, the affected companies filed lawsuits, which are now on track to reach verdicts in arbitration courts. The companies’ combined claims for damages could potentially reach up to EUR 70-80 billion.

However, as Portfolio points out, this fine is so large that it is highly unlikely Gazprom will be willing or able to pay. For this reason, bailiffs have been appointed to collect compensation from any money transfers that the remaining EU buyers of Russian gas make to Gazprom. These countries include Hungary, Slovakia, and Austria, where state gas companies have already received calls from Orlen at the end of May to seize a certain percentage of transactions with the Russian state-owned company.

If the payments are successfully diverted, Gazprom will probably cut off gas supplies to the affected states immediately. If they are not, the damages will remain unpaid.

To ensure the continued import of gas, at the end of May, Hungary issued a government decree prohibiting any outside third party from seizing money from transfers initiated to Gazprom, arguing that it would be an interference in the state’s internal affairs. Although the government decree is questionable from an international legal perspective, it seems effective in the short term, as a transfer to Gazprom was completed without intrusion after its enactment.

However, this solution only provides short-term protection, both because of its international legal challengeability and because EU bailiffs may soon switch to a higher level of enforcement.

Russian gas will not stop but may reach Hungary via other routes

According to an expert interviewed by Portfolio, there is a high likelihood that

“the currently known structure of Hungarian-Russian gas purchases will fall apart sooner rather than later”.

However, this does not mean that Hungary will be left without supplies, especially as the country’s gas storage facilities are currently at an exceptionally high level of 78%.

The experts interviewed highlighted three potential changes for the future. First, new intermediaries could enter the sales and transport process. This could be a way to prevent states from directly buying gas from (and paying) Gazprom, thus circumventing EU enforcement law. Unfortunately, it also means that a number of new players could be involved, some with dubious backgrounds, increasing the risk of contracts. Nonetheless, as Portfolio points out, it is still unlikely to damage the security of supply in the Hungarian gas market.

Secondly, the transport model could change, with Turkey, in particular, playing an important role with its so-called Turkish blend solution, which would involve molecules of many different origins (e.g., Russian, Azeri, Iranian) being blended in Turkey and transported to Europe as a single source. As the experts point out, this way, it would be impossible to know what proportion of gas molecules of what origin are present during transfer, so once again, technically speaking, direct import from Russia would be halted. Still, in practice, a part of the gas entering the EU would still be from Gazprom sources.

The third option concerns the Russian-Ukrainian transit routes, where the experts interviewed believe the Turkish blend could also flow. The future of this route is especially important from a Hungarian point of view because the 2021 Hungarian-Russian long-term gas purchase contract sets out to deliver 1 billion cubic metres per year of Russian gas via the Russian-Ukrainian transit through Slovakia and Austria into the country.

Overall, it can be concluded that Hungary’s sudden withdrawal from Russian gas is doubtful and that the changes that the arbitrations are expected to bring are unlikely to jeopardise the security of supply in the country. Rather, it is anticipated that the Hungarian-Russian gas transmission structure and its contractual framework will undergo changes in the near future, with potential new players entering the field.

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Source: Portfolio