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Then, on 25 September, OMV came up with a £10 billion offer to shareholders, financed by massive borrowing. But by that stage MOL had erected even more formidable defences, buying back over 40 per cent of its own stock. The Hungarian government then obligingly passed a law, popularly known as ‘lex MOL’, designed to deter takeovers of strategic companies by foreign state-owned companies. As OMV is controlled by a combination of the Austrian state and IPIC, an Abu Dhabi sovereign fund, the law would hinder the deal, although it stops short of giving the government a veto.
The battle has now settled to trench warfare, both sides deploying the usual array of investment bankers, lawyers, PR consultants and Brussels lobbyists. Both sides face time pressure. MOL cannot sustain its expensive share buy-back indefinitely without driving some institutional investors into the arms of OMV. Conversely, OMV is trying to get a quick ruling against lex MOL by the European Commission before its entire effort loses credibility.
A patriotic tone has crept into the debate in Hungary. Viktor Orbán, leader of the opposition Fidesz party, said, ‘Those young people following us should not allow Hungary to become Gazprom’s most cheerful barracks,’ an allusion to Hungary’s pre-1989 status as ‘Moscow’s most cheerful barracks’.
The irony of Orbán’s remarks is that both companies and their governments have been courting Gazprom with great ardour and at each other’s expense — a game in which the only winner will be Gazprom. Since both countries receive over 75 per cent of their natural gas from Russia, this is perhaps to be expected. But there is a greater prize, of becoming a regional transit, storage and distribution hub for Gazprom: securing this could catapult either company into a commanding and highly profitable position in the region. Knowing this well, Gazprom has set the pygmies dancing to the tune of a hurdy-gurdy.
Take the Nabucco pipeline, an OMV-led consortium project intended to bring Caspian gas to Europe via Turkey. The scheme has been ill-starred, with no certainty of supply and less credibility than a competing Gazprom project, Blue Stream. Despite being a partner in Nabucco, MOL and the Hungarian government have done plenty to undermine Nabucco. According to Levente Benkö, a Fidesz foreign policy staffer, ‘In June 2006 the Nabucco agreement was signed in Vienna. A few days later Alexei Miller [chief executive of Gazprom] came to Budapest. He set up a joint venture with MOL “to explore possibilities around Blue Stream”. Both the government and MOL are playing a double game here.’
Then this year the Hungarian prime minister Ferenc Gyurcsány told the International Herald Tribune that Hungary would support Gazprom’s Blue Stream over Nabucco. The latter, he said ‘has been a long dream and an old plan. But we don’t need dreams. We need projects.’ Since Nabucco is hardly likely to come to fruition if its partners publicly declare it to be hopeless, Gyurcsány’s comments could turn into a self-fulfilling prophecy: nothing would better serve Russia’s interest.
Not to be outdone, OMV embarked on its own love-in with Putin. On his visit to Vienna in May, OMV and Gazprom agreed on a joint venture to develop a gas distribution hub in Austria, where the Nabucco pipeline will terminate. Letting Gazprom into this facility immediately undermines Nabucco’s supposed diversification of supply. A delighted Putin declared Austria to be ‘the biggest and, I stress this, the most reliable transit agent for Russian gas’.
According to Thomas Huemer of OMV, ‘OMV regards the upcoming wave of consolidation as an opportunity for both companies to combine their strengths.’ But the two companies’ assets generally overlap rather than complement each other, and a merger would create anti-trust issues in several markets including Hungary, Slovakia and the Czech Republic. Brussels would demand disposal of assets such as oil refineries, potentially letting Gazprom and another major Russian player, Rosneft, in through the back door. And as has happened with other strategic assets in the region, no one could predict the future owners of MOL assets once they have been taken over.
Brussels, to its credit, is starting to wake up to this. Rules are being drafted to prevent companies which do not adhere to the EU’s energy charter — Gazprom for one — from buying into the European market. The Russian response to this provides an interesting insight into its thinking. In a letter to the FT a couple of weeks ago, Russia’s energy minister Viktor Khristenko wrote, ‘Russia stretches across more than one geographical region and we can diversify our industrial and energy co-operation by turning to Asian and Pacific countries. Incidentally, the eastern vector has an important economic dimension — such co-operation will help us develop eastern Siberia and east Asia.’ Which is a polite way of saying, ‘Let Gazprom and Rosneft buy up your energy assets, or we’ll cut you off and sell our gas to China.’
This is hardly a realistic threat in the medium term, but it illustrates the importance of reducing reliance on and exposure to Russia; just as US generals now view global warming as a hard security issue, so we should view energy the same way. So far the EU’s moves do not go far enough. Energy commissioner Andris Piebalgs speaks of interconnector pipes and storage facilities — purely tactical measures that leave the strategic problem of a manipulative, hostile Russia completely unanswered. Hungary’s lex MOL, and yet more robust measures proposed by Angela Merkel, are urgently required and should receive Brussels’s blessing.
Of all of its efforts, the European Commission’s drive to establish free and open markets across Europe is among the most sensible. But such legislation can read ily be abused by a very powerful energy supplier that also wants to buy up its customers, is vertically integrated and controlled by an authoritarian and increasingly hostile state.
Free-market mechanisms are simply not sufficient in such a situation and if the European Commission persists in not seeing this, it is perhaps missing the wood for the trees. This challenge provides a perfect opportunity for the Commission to act in the way it really ought to — on issues that genuinely require pan-European co-operation. Left exposed, small but strategic European energy companies are easy prey for Gazprom and its political masters.
www.neil-barnett.com.
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