Central Europe steps up efforts to integrate gas networks

By bne IntelliNews May 25, 2012

Tim Gosling in Prague -

Central Europe's bid to strengthen its regional gas network received a double boost on May 24 as Polish gas network operator Gaz-System confirmed its interest in acquiring Czech gas pipeline operator Net4Gas, and Hungary and Slovakia agreed a plan to connect their systems. The moves come amid continued speculation that Russian-backed groups are casting their eye over major assets in the region.

"The deadline for filing the so-called offers of interest in the sale of the Czech gas transmission operator is June 8, and we are definitely interested and will file such an offer," Gaz-System's Jan Chadam told Reuters. German energy giant RWE confirmed earlier this year that it is ready to offload Net4Gas as part of its divestment drive. The Czech unit's main asset is the Czech section of the mainline gas pipeline through which Russian gas imports run towards Western Europe.

Meanwhile, Hungary's Magyar Gaz Tranzit - a unit of state-owned energy group MVM - and Slovakia's Eustream signed off on a deal to build an inter-connector between the two countries by 2015. The agreement to build the €160m pipeline was agreed at government level last year, and will receive €30m of its costs from the EU.

The same day, Energeticky a Prumyslovy Holding (EPH) - which has also professed its interest in Net4Gas - confirmed that it is close to securing the biggest ever syndicated loan in the Czech Republic. The proceeds of the loan will go towards an acquisition programme speculated to total €3bn.

Reducing reliance on Russia

Both Gaz-System's bid for its Czech peer and the Slovak-Hungarian inter-connector are part of an attempt to deepen the integration Central Europe's gas pipeline networks under a wider EU drive to reduce reliance on Russian energy and the infrastructure underlying it.

The 115-kilometre link between Slovakia and Hungary will have an annual capacity of 5bn cubic metres (cm), and offer both country's greater options to import gas from the wider European network. "The strategic importance of the interconnector pipeline for Hungary is access to Western European natural gas networks, and for Slovakia to the north-south gas corridor," MVM said in a statement. Eustream said on its website the new pipeline would allow Slovakia to benefit from planned pipelines running south of it and a planned LNG terminal in Croatia.

Despite being on the market, Net4Gas is pushing ahead with initial plans to build a new CZK1bn (€40m) spur to tap into Poland's network, Czech daily E15 reported in late April, with Brussels to pick up part of the bill. With a capacity of up to 10bn cm, the new stretch of pipeline would offer twice the capacity of the Stork pipeline now connecting the two countries. Czech-Polish cooperation on building the new interconnector "would be independent of the future owner of Net4Gas" Chadam said at the time.

RWE also plans to exit its shared 49% stake (in partnership with France's GDF Suez) in Slovak pipeline operator SPP, which is the next link to the east in the mainline carrying a large chunk of Russian gas to European markets.

The availability of the Slovak and Czech sections of the mainline route for Russian gas exports has set many tongues wagging, especially given the threats still being thrown around between Moscow and Ukraine, which is the first transit state on the line. Russian gas giant Gazprom has threatened to stop transporting exports through Ukraine once it completes the second phase of the Nord Stream pipeline and the planned South Stream gas pipeline, which together will provide over 100bn cm of annual capacity connected directly to the EU.

However, the threat is simply part of Russia's long-winded campaign to wrestle control of the Ukrainian system for itself. Without gas transited across Ukraine, Moscow would lose much of the leverage over Ukraine that it enjoys.

Little wonder then that speculation persists that Gazprom is extremely interested in the Slovak and Czech pipelines currently on the market. The main suspicion is that Czech energy group EPH - 40% owned by Petr Kellner's PPF Group, which has strong Russian business ties - is acting as a front for Moscow, which would likely meet resistance on a political level should it attempt to buy the assets itself.

Reuters reported on May 24 that EPH is close to securing a €1bn loan from local banks. Board member Marek Spurny said the deal could be signed at the end of June, and confirmed that the funds will be used to pursue for acquisition opportunities, of which SPP is one.

Not least, Russian ownership of the land-based mainline all the way to the German border, on top of the sea-based Nord Stream, would provoke severe hand-wringing in Brussels, which is pushing a policy to build an internal, integrated energy market by 2015.

The free flow of gas between all EU member states will require the development of the transmission infrastructure, above all the cross-border connections of gas networks. Gaz-System's Chadam was clearly referencing that strategy when he hinted at possible broader regional plans for the integration of the Polish, Czech and Slovak pipelines, saying they would benefit Europe as a whole.

The planned Polish-Czech gas pipeline also constitutes a significant element in the planned North-South Gas Corridor that will connect Poland's first liquified natural gas (LNG) terminal - currently under construction - through the Czech Republic, Slovakia and Hungary and on to the Adria LNG terminal in Croatia. That could open the way for deliveries of Qatari gas to the Czech Republic from the Polish facility, once it springs into operation. At the same time, the network could also allow Poland to export shale gas to the CE region, should its urgent drive to develop its reserves prove able to support exports.

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