With the Russian energy sector becoming increasingly cost-competitive, multinationals are also mulling opportunities to expand their leverage in central Europe, a key transit area for Russian oil and gas pipelines.
Hungary
The Paris-based International Energy Agency June 13 released an energy analysis of Hungary, a member country since 1997. IEA said Hungary continues to show "remarkable" progress toward energy market liberalization. It is "creating the conditions for an electricity market to develop on similar grounds as in other European countries," and is "paving the way for a natural gas market." A new gas law anticipated later this year opens up 25% of Hungary's gas market to competition. The pending law also creates a new gas price mechanism and discontinues many, although not all, government price controls.
Challenges remain, IEA said. Hungary needs to improve competition and security of supply in the gas and electricity sectors and to introduce cost-reflective prices that put more emphasis on energy efficiency.
Regarding oil markets, IEA said the government should consider reducing price distortions created by high excise duties on light fuel oil in order to diversify energy heating choices.
Meanwhile, the Hungarian Finance Minister said the government plans to sell its 23% stake in state oil and gas company MOL PLC through a combination of a domestic public offering and private placement for foreign or domestic institutional investors. According to Deutsche Bank AG, the value of the 23% MOL stake is about $625 million at current market prices, creating a "significant overhang" relative to market interest in the offering.
"We do not see serious strategic interest in this stake in the market from either international oil companies or from the Russian oils," the bank said. Gas market deregulation slated for 2004 is more encouraging and should support share price, but improving return sentiment on the gas business may not be enough to offset the overhang issues, the bank said.
Romania
Hungary's neighbor Romania, although not an IEA member, also is looking to open up its energy markets, most notably by looking to sell the government-run oil company SNP Petrom SA, perhaps as early as this December. The country needs to persist in making good-faith efforts toward privatizing its oil sector if it hopes to continue receiving foreign aid from the International Monetary Fund and other key lenders.
Time is running short.
Given that 2004 is an election year, the current government has very little room for error, notes Stefan Minovici, president of MIC & Associates Inc., New York, a marketing and investment company specializing in central European energy issues. "They must deliver," he said.
Some labor groups oppose the sale. But both government officials and their political rivals recognize Petrom must be sold, Minovici said. "People know the government does not have the money or the expertise to hold on to this."
European oil analysts expect the company could fetch $1.2-1.5 billion, although any potential buyer will also have to likely shell out another billion or more to upgrade aging facilities.
