Black Sea Natural Gas Games: A Fork in the Road for the BRUA Pipeline Project
Hopes were riding high on the discovery of Romania’s Black Sea natural gas deposits in 2012, which were expected to provide a cheap and local source of the fuel for Central and South Eastern Europe (CSEE). ExxonMobil and OMV Petrom would carry out the offshore production, and the Bulgaria-Romania-Hungary-Austria (BRUA) pipeline project, formally conceived in 2016, would deliver 4.4 billion cubic meters per year to the preeminent regional hub located in Baumgarten, Austria. The European Commission prioritized BRUA and made European Union (EU) funding available for it, given its contribution to regional energy security, market integration, and competition. Furthermore, the project had also been meant to incentivize Romania and Bulgaria to speed up market liberalization efforts.
Stakeholders of BRUA were optimistic, but, like other failed proposals attempting to open this natural gas route before it, BRUA has found itself in the geopolitical crosshairs between the interests of a US oil major, an Austrian oil and gas major, and a Hungarian prime minister who has negotiated backroom gas deals directly with Russian President Vladimir Putin. The unfolding tug of war has led to the suspension of the pipeline’s initial route and it is unclear whether the parties involved will be able to find a common denominator.
No common vision from within
ExxonMobil’s plans to deliver natural gas from the Black Sea to Central and Western European markets were first impeded by Romania’s piecemeal approach and inability to push through comprehensive energy law reform, but the company has persevered nonetheless. What is forcing ExxonMobil to reevaluate its options at this advanced stage is the sudden withdrawal of Hungarian transmission system operator (TSO) FGSZ Földgázszállító—on the order of the energy regulator Hungarian Energy & Utilities Regulatory Agency (MEKH)—from the Hungarian-Austrian bidirectional capacity upgrade (HUAT). MEKH halted the project on the heels of a successful 2017 open season by unilaterally rejecting FGSZ’s economic project assessment.
MEKH defended its decision to pressure FGSZ to scrap HUAT on the grounds that investment costs were too high compared to its counterproposal, which would transit volumes through the underutilized Slovak-Hungarian (SK-HU) pipeline through Slovakia to Baumgarten—the HUSKAT route. Not coincidentally, this route would prove quite beneficial for Hungarian stakeholders. FGSZ’s proposal avoids investment risk and utilizes the SK-HU pipeline that it is in the process of purchasing, while the Hungarian government moves closer to its ambition of becoming a gas hub. Together, this would carve out a greater role for incumbent energy (trading) champions, which generally have close ties to the government. Since HUSKAT capacity would be less than what was bid for HUAT, Hungarian traders would be granted the opportunity to re-route excess Black Sea gas to neighbors like Ukraine, Serbia, and Slovenia at higher prices.
Gas Connect Austria (GCA)—the Austrian TSO—has been pushing for the HUAT connection, arguing that it would provide the cheapest gas for customers. GCA responded to MEKH’s decision to suspend HUAT by referring the matter to the Agency for the Cooperation of Energy Regulators (ACER)—the EU’s energy regulatory watchdog—which would have the power to force Hungary to hold another open season. This decision will be handed down on April 6th. Echoing this sentiment, Austrian oil and gas major OMV responded in an open letter that the HUSKAT route would entail higher transport costs. It has been speculated that pressure from OMV alone could weigh on ACER to request FGSZ to hold a new capacity auction. Meanwhile, Eustream held a successful open season for HUSKAT with its Hungarian and Austrian counterparts in late-2017, at the urging of ExxonMobil. This established that the Slovak transmission system could be upgraded with relatively small investment for the demanded level of transit.
ExxonMobil could decide to back down and settle for HUSKAT as a quick and stable guaranteed solution by not putting forth a subsequent HUAT bid and effectively killing the route. Alternatively, if the major prefers HUAT, it can cancel HUSKAT and press the Orbán government in Hungary, potentially leading to considerable risks and delays. Hungary, meanwhile, will likely hope that ExxonMobil remains committed to HUSKAT past the binding deadline at the end of March. If ACER’s decision just days later is unfavorable, then it remains to be seen whether Hungary will cave to mounting pressure.
Broader geopolitical implications
HUSKAT has granted Hungary an opportunity to expand its regional influence; however, if Budapest pushes too hard against the will of other stakeholders and thereby risks the full cancellation of the project, it would undermine any strategic gains. In Hungary’s act of resistance, we also need to consider the elephant in the room, Russia. Currently, Gazprom’s clear European priority is to secure the completion of North Stream 2. Romanian natural gas also poses competition to Gazprom’s volumes that may eventually flow to Europe through Turkstream and the Southern Gas Corridor. The sheer economic incentive may push Moscow to pressure projects that pose competition to their market share. President Putin’s cozy relationship with Hungarian Prime Minister Viktor Orbán provides a channel to sabotage alternative import routes, including BRUA. Moreover, Moscow’s ambitions to maintain its natural gas monopoly and wield significant political influence in Central and Southern Europe should not be discounted.
ExxonMobil’s direct involvement in BRUA provides an opportunity for the US to influence the course of actions. Taking a stance and facilitating diplomacy for the project’s development would convey US commitment to the region’s energy security. US Secretary of State Michael Pompeo’s and US Secretary of Energy Rick Perry’s recent visits to the region underscore this commitment, but strong engagement has to continue to move the project forward. The US can look out for its economic interests, pave the way for enhanced energy security, and facilitate intra-NATO cooperation by maintaining a presence in the region.
Nolan Theisen is an energy associate at GLOBSEC and the Regional Centre for Policy Research (REKK) based in Budapest. He is currently working with regional authorities, experts and stakeholders to navigate the energy and mobility transitions in Central and Eastern Europe (CEE). John Szabo is a PhD candidate at the Central European University’s Environmental Sciences and Policy Department and a junior fellow at the Hungarian Academy of Sciences. Prior to his PhD, John worked for multiple key actors in the energy industry.