North Central Europe is important to world energy markets because it is a significant producer and exporter of coal and an
important transit point for Russian oil and natural gas pipelines
Note: Information contained in this report is the best available as of March 2002 and is subject to change.
GENERAL
BACKGROUND
Poland, the Czech Republic, the Slovak Republic (commonly referred to as Slovakia), and Hungary are all the members
of the Visegrad Group and share certain common characteristics in addition to being
geographical neighbors. The Czech Republic and Slovakia were the single country of Czechoslovakia formed from the former
Austro-Hungarian Empire in 1918 (with an interruption during the Second World War) until Czechoslovakia's peaceful dissolution
into the independent states of the Czech Republic and the Slovak Republic in 1993. Hence, the Visegrad group was known as the
Visegrad Troika when it was formed February 15, 1991 in Visegrad, Hungary. Hungary, Poland, and Czechoslovakia had all been
Communist states and members of the Warsaw Pact during the years following World War II until 1989-1990. All three states had
developed heavy industry that was characterized by being very energy intensive and polluting. Poland is much larger than the
other states of the Visegrad Group in area and population, having a greater population than the other three combined. Hungary's
main ethnic group is not Slavic in origin, unlike the other two (now three) states. Hungary and Slovakia have large minority populations,
with both having large populations of Roma, and Slovakia having a significant Hungarian minority. The issue of ethnic Hungarians
living outside Hungary has become an important issue for the current Hungarian government, which passed a law granting economic,
cultural, and educational benefits to ethnic Hungarians in neighboring countries. This has caused some friction with Slovakia,
which sees the law as having an extraterritorial nature.
All four countries have successfully transitioned to democracy and have made great strides in moving to market-based economies. Slovakia was slower to change than the other three, especially in the area of democracy, and is unlikely to be among the first group of former Communist countries to enter the European Union (EU), although the country has made great strides of late. Poland remains a more rural society than the Czech Republic or Hungary. All four countries have applied for membership in the EU, with Poland, the Czech Republic, and Hungary probably acceding in 2004 or 2005. In 1999, Hungary, Poland, and the Czech Republic became the first former-Warsaw Pact countries to join the North Atlantic Treaty Organization (NATO). Slovakia is a member of NATO's Euro-Atlantic Partnership Council. The Czech Republic became a member of the Organization for Economic Co-operation and Development in 1995, Hungary and Poland joined in 1996, and Slovakia in 2001. As members of the Visegrad Group, the four countries are also members of the Central European Free Trade Agreement (CEFTA). There is a customs union between the Czech and Slovak Republics, and most products have no tariffs or quotas for trade amongst the other countries, with the exception of agriculture. CEFTA was founded by the Visegrad Troika, but Slovenia, Romania, and Bulgaria have since joined.
The Visegrad countries are
dependent on trade with the EU and in particular with Germany. Continuing economic challenges that these
countries share include: technologically backward agricultural sectors that will
find it difficult to compete internationally; industries that are still more
energy intensive than their counterparts in western Europe (though energy
intensity is on a declining trend as these economies become more similar to
their western counterparts; see chart); costs from heavily-polluting industries
and clean-up costs; the challenge of increasing standards of industries and
services to the levels of the EU.
REGIONAL
ENERGY ISSUES
Coal is the only fossil fuel of
abundance in the region, and only Poland and the Czech Republic have substantial
quantities of hard coal. Poland is the largest hard coal producer and exporter
in absolute terms by far, though the Czech Republic exports over one-third of
its production, whereas Poland only exports about one-fifth of its coal output.
Of strategic importance is the fact that most of the crude oil and natural gas
from Russia that is piped to western Europe passes through
the Visegrad region, with the four countries only taking a small part of this
for domestic consumption. Crude oil consumption in the region is small -- only
about 56% of that of Spain alone. Not only is the region's total
natural gas consumption (1.4 trillion cubic feet - Tcf) smaller than its
neighbor Germany (over 3 Tcf), but Poland and Hungary each satisfied more than
one third of their natural gas consumption from domestic sources in 2000.
Preliminary estimates of imports of Russian natural gas into the region during
January-November 2001 show Hungary importing 257.8 billion cubic feet (Bcf), the
Czech Republic 243.7 Bcf, Poland 240.1 Bcf, and Slovakia about 236 Bcf.
The Czech Republic and Poland export coal to each other, and both countries have import quotas for the other. Unions in Poland have campaigned to have the quota for Czech imports lowered, whereas industries in the Czech Republic have campaigned to have the quota for Polish imports raised. Polish coal has become cheaper than Czech coal in the Czech Republic, but Polish unions claim that Czech coal is "dumped" in Poland. Neither government has changed its quotas so far.
Oil Transit
The northern branch of the 1-million-barrel-per-day
capacity Druzhba ("Friendship") pipeline from Russia through Belarus brings oil to Poland which then can be
transited onward to Germany. The 1.2-million-barrel-per-day capacity southern
branch of the Druzhba pipeline runs from Russia through Ukraine into Slovakia. In August 2001, the
Yuzhnyy-Brody pipeline was officially opened in Ukraine. This allows Caspian region oil that is piped to Black Sea ports to
be shipped across the Black Sea to Yuzhnyy's Pivdenny terminal (near Odessa) and
then transported in a new pipeline to Brody, where it connects with the southern
Druzhba pipeline for shipment to Slovakia, Hungary, and onward. There is
discussion of extending the Yuzhnyy-Brody pipeline north to Plotz in Poland
where the pipeline could tie into the Druzhba northern route and/or an existing
line to the Polish Baltic Sea port of Gdansk and allow imports of Caspian crude
oil to Poland, Germany, and other Baltic states. The southern Druzhba pipeline
splits in Ukraine just before it reaches the borders of Slovakia and Hungary.
Some of the oil imported into Hungary transits onward to the former
Yugoslavia and the Croatian port of Omisalj on the Adriatic.
Natural Gas Transit
The region is extremely important as a transit center for
Russian natural gas exports to western Europe. The Yamal pipeline from Russia
will deliver about 1.1 Tcf per year into Poland by 2005 under current contracts.
Most of this natural gas transits onward to Germany. Yamal is the only route
that bypasses Ukraine. The Russians have considered adding additional
routes that bypass Ukraine for their natural gas exports to Europe, partially
because Russia has accused Ukraine of stealing natural gas transiting through
the country and because of Ukraine's nearly $2 billion in debt to Russia for
natural gas. The planned Yamal II pipeline would link Yamal with the Southern
pipeline to make for an additional source for the pipelines in Slovakia that
currently take natural gas transiting through Ukraine. Yamal II has not been
formally approved yet and there are still disagreements about its route in
Poland. Germany and Russia appear to favor a route that is more southerly, as
that is where Germany has more natural gas demand, but Poland favors a more
northerly route that could provide some natural gas to its industries as the
pipeline passes through to Germany. A possible entirely new natural gas pipeline
from Russia to Slovakia by way of Belarus and Poland appears to have been
cancelled by Gazprom in February 2002. This pipeline differed from the planned
Yamal II in that it would have had a new source pipeline in Russia, instead of
just feeding off of existing Russian pipelines and would only have transited
through the region to western Europe; it would not have provided natural gas to
the intermediary countries. In March 2002, Poland's state auditor NIK urged the
Polish government to renegotiate its long-term supply deal with Russia.
The Brotherhood (Druzhba), Progress, and Soyuz natural gas pipelines that go through Ukraine to Slovakia have annual capacities of about 1 Tcf each. There is still some excess capacity in the pipelines. From Slovakia, the natural gas transits to Austria and the Czech Republic. The natural gas that passes through Slovakia represents about 25% of the natural gas consumed in western Europe and about 70% of the Russian natural gas exported to western Europe. The Druzhba pipeline splits in the Ukraine, with one part going to Hungary. Hungary takes some of the natural gas, and the rest continues on to the Balkans. At a meeting of the Visegrad Group's Economic Forum in September 2001, the possibility of providing Polish natural gas imports from Norway and/or Denmark to Slovakia and/or Hungary was discussed, with favorable statements by leaders. The region's leaders worry about being too dependent on Russia.
Regional Integration
There have been attempts by various energy companies in the
region to merge in order to compete with larger rivals from the west and from
Russia. The two largest oil companies in the region, Nafta Polska's PKN Orlen of
Poland and MOL of Hungary have been in so-far unsuccessful talks to sell a
17.58% share of PKN Orlen for some time. OMV of Austria has now been permitted
to be involved in these talks by the new Polish government, which have been
extended now to April 15, 2002. The result of such a sell-off likely would
create a loosely-tied regional oil company. MOL did purchase a 36.2% share of
Slovakian oil company Slovnaft in 2001, which is the only integration of the
region's oil companies so far, though MOL in particular continues to look for
ways to expand in the region.
The region shares the CENTREL electricity system, which links the Czech Republic, Slovakia and Hungary. In 1995, the CENTREL system was connected with Western Europe's system. Poland also has electricity connections with Ukraine and Belarus. Currently, both north-south and east-west connections are being expanded, as part of the EU's Trans-European Energy Network project, including a new link to Lithuania. The four countries of the region are also members of European electricity transmission system Union for the Coordination of Transmission of Electricity (UCTE). UCTE coordinates the interests of transmission system operators in 20 European countries.
There has been some interest in a regional energy
exchange market, but rivalries over where it would be based as well as the
regions's eventual integration into the EU that might make such a market
superfluous have delayed this idea. Poland and the Czech Republic are developing
electricity exchanges, while such exchanges are still in the planning stages in
Hungary and Slovakia. Hungary imports a large amount of electricity from
Slovakia, and is the region's only net power importer. Much of Poland and the
Czech Republic's electricity exports go to western markets, Germany in
particular.
POLAND Poland is planning to enter the EU in the group's next
expansion, and the country is in the midst of reforms necessary to meet
membership criteria. Coal and steel industry restructuring is expected to be
completed by the end of 2001, and the energy sector will be open to competition
by about 2004. Many Polish farmers are opposed to joining the EU, as they
believe it will entail agricultural reforms that will render them unable to
compete with imports. Poland has a current account deficit and is working to
make its exports more competitive. On balance, EU membership is expected to
benefit Poland, decreasing trade barriers with key trade partners such as
Germany and enhancing political stability. In turn, Poland is a key to EU
expansion plans, as Poland is by far the largest country, in terms of both
population and gross domestic product, among the twelve states that have begun
discussion of accession to the EU.
Energy Oil Poland's oil and gas industries were consolidated in
1981 into a single entity, the state-owned Polish Oil and Gas Company (PGNiG),
which dominates the natural gas and upstream oil industries. In 1996, PGNiG
became a joint-stock company. The company is slated for privatization after
restructuring is completed, bringing the country into line with EU regulations.
While a specific privatization plan remains forthcoming, major components of the
company are expected to become independent from each other, rather than having a
single holding company. There could be one upstream company; one company
responsible for gas trade, transmission and storage; and four regional gas
distribution companies. The upstream company and the four distribution companies
would be privatized first, while the transmission and storage company could
remain state-owned for longer.
Oil imports from Russia through the Druzhba ("Przyjazn"
in Polish) pipeline traditionally have been the main Polish oil source.
Following the breakup of the Soviet Bloc, Poland attempted to diversify its oil
sources and to reduce its dependence on Russian oil. For this reason, the
"Naftoport" oil terminal at Gdansk was constructed in the 1990s, with a capacity
to receive about 600,000 bbl/d. However, Russian oil has remained relatively
inexpensive, and economic factors have resulted in Poland actually increasing
its imports of Russian oil. In addition, Poland imports oil from Russia's
Kaliningrad enclave through the Naftoport. Russian oil is not imported through direct agreements
with Russian suppliers. Rather, there is a complex network of middlemen, the
most important of which is the J&S Company of Cyprus. In 2000, 60% of the
crude oil purchased by PKN Orlen and 70% of the oil purchased by Rafineria
Gdansk (RG) was from J&S. It is estimated that J&S supplies between 60%
and 70% of of all crude oil processed by Polish refineries. To the Russians,
these middlemen are referred to as "operators" and because of a host of
regulations, important documents, and licenses, the operators do all the
paperwork and financial transfers. Some Polish politicians have questioned this
system.
Poland and Ukraine reached an agreement in February 1999
to complete jointly an extension of the 500,000-bbl/d Odesa-Brody pipeline for Caspian Sea oil
to go through Ukraine to Poland. In July 2000, Germany-based EuroGas, Inc. won ten
concessions to explore and develop oil and natural gas deposits in southeast
Poland. The company believes that the area, the Karpaten Flysch oil province
near the city of Sanok, potentially has a 350-million-barrel oil field, or an
equivalent quantity of natural gas, which would represent one of the larger oil
and gas discoveries in the region. In November 2000, EuroGas signed an agreement
with PGNiG to jointly develop the area through EuroGas' subsidiary. As part of
the agreement, PGNiG acquired 30% of EuroGas' Polish subsidiary, EuroGas Polska.
The state's oil companies are held through Nafta Polska,
a state holding company and privatization vehicle. Nafta Polska's PKN Orlen
controls about 60% of the wholesale and about 40% of the retail fuel markets. In
September 2001, the sale of 75% of the 90,000-bbl/d Gdansk refinery to Rotch
Energy of the United Kingdom was approved. Rotch paid about $250 million for its
stake and agreed to invest $600-$700 million in expansion over the next few
years to boost the refinery's capacity to about 150,000 bbl/d.
Gasoline and diesel demand has fallen slightly in recent
months, due to higher prices and an economic slowdown. However, the demand for
heating oil (which is sometimes used as a vehicle fuel) and liquefied petroleum
gas (LPG) has risen sharply, and about 530,000 vehicles in Poland are capable of
using LPG, with many vehicles being converted every year.
Natural
Gas The outlook for natural gas imports into Poland is
problematic over the next few years. Despite the fact that Poland's real GDP has
grown by about 21% since 1997, natural gas demand has remained flat and is
predicted to remain so over the next decade. Even optimistic unofficial Polish
government forecasts estimate demand in 2005 to be between 484 and 572 Bcf. Much
of the reason for this is that natural gas is simply uneconomical for power
generation in Poland compared with coal. Yet, at the same time, diversification
of natural gas sources is a high priority for Poland, and those traders with
diversified sources will have priority. Russia supplied over 60% of all Polish
natural gas in 2000, with smaller amounts coming from or through Germany as well
as over 30% from domestic sources. Poland and Russia disagree about the route of
the proposed extension of the Yamal pipeline (Yamal II). Poland's contracts with
Gazprom are for imports to increase to 441 Bcf per year by 2010. However, in
January 2002, Polish Economy Minister Jacek Piechota stated that the contract
with Russia as well as the specifics of the extension of the Yamal pipeline will
have to be renegotiated.
PGNiG recently has reached agreements to import Danish
and Norwegian natural gas. In July 2001, an agreement was
signed with Dansk Olie og Naturgas (DONG) of Denmark to import 16 billion cubic
meters (565 Bcf) over eight years, starting in 2003. This would be done through
the planned $330-million, 186-mile BalticPipe pipeline, scheduled to be
constructed beginning in the summer of 2002. The pipeline's capacity, 283 Bcf
per year, is four times the volume that PGNiG will import from DONG annually,
prompting some to question whether the pipeline will be financially viable. In
September 2001, PGNiG and Norway's (now defunct) Gas Negotiating Committee (GFU)
agreed to the delivery of 74 billion cubic meters (2.6 Tcf) over 16 years. This
replaces the previous contract with Norway for 500 million cubic meters (18 Bcf)
per year until 2006. These deliveries would not start until 2008, and would
gradually increase over the first three years. Norwegian exports to Poland would
require the construction of the $1.1-billion, 683-mile Austerled pipeline. Given
probable increasing domestic natural gas production and flat demand, it will be
very difficult for Poland to maintain its Russian, Danish, and Norwegian
contracts in their present state. The new government already has signaled that
it will probably amend or even cancel some or all of these contracts.
Poland needs to increase its environmental standards as part of its application to
achieve member status in the EU. Increased consumption of natural gas, as an
alternative to coal, is considered to be a key component of Poland's plan to
meet the stricter regulations. The Polish government forecasts that about 14% of
electricity will be generated from natural gas by 2020, up from just 2% in 2000,
but still a relatively small share. Poland also will need to liberalize at least
28% of its natural gas market by August 2003, according to EU directives.
The Yamal pipeline connecting Poland to Siberian natural
gas sources, began operations in September 1999. The $35-billion pipeline was
designed to carry natural gas supplies from the Yamal (West Siberia) field in
Russia to Germany and other Western European countries through Belarus and
Poland. Under a 25-year contract signed in October 1996, annual throughput
capacity of the pipeline is slated to increase to 32 billion cubic meters (about
1.1 Tcf) by 2005. The Polish section is operated by EuroPol Gaz and is 48% owned
by PGNiG and Gazprom each, with the remaining 4% owned by a consortium of Polish
firms called Gas Trading. Russia is seeking to link this new pipeline with the
Southern pipeline, which would allow additional Russian gas to reach Western
European markets while bypassing Ukraine (Yamal II). The exact route was
discussed at senior-level Russo-Polish talks in January 2002, though no decision
has been taken. Also in January 2002, Gazprom and PGNiG announced that
feasibility tests will begin soon for the second stretch of the pipeline.
Gazprom estimates that when all sections of the Yamal pipeline as well as two
new compressor stations are complete, the total capacity will be 2.26 Tcf. Plans
for an entirely new natural gas pipeline from Russia through Belarus and Poland
to Slovakia appear to have been put aside indefinitely by Gazprom following
friction between the Polish, Ukrainian, and Russian governments over the issue.
There was some worry by Polish officials of damaging relations with Ukraine,
because the diversion will cost Ukraine transit fees.
PGNiG is undertaking a program to add more than 6,200
miles to its gas distribution network by 2010. The company is also planning to
invest $670 million over the next three years to upgrade its transmission
system. PGNiG is appealing a ruling by the government gas regulatory agency that
the company cannot raise its rates. PGNiG believes that raising rates for some
customers is vital to its restructuring.
Coal There are currently seven state-owned coal holding
companies. They are: Bytomska Spolka Weglowa (six mines); Rudska Spolka Weglowa
(4); Gliwicka Spolka Weglowa SA (5); Katowicki Holding Weglowy (9); Nadwislanska
Spolka Weglowa (5); Rybnicka Spolka Weglowa (5); and Jastrzebska Spolka Weglowa
(5), for a total of 39 operating mines. Weglokoks is the country's largest coal
exporter. The company was created in 1993 as the successor to the state-owned
coal monopoly; it is owned by the State Treasury. The other coal exporting
company is Kopex, which may merge with Weglokoks in the future. Privatization of Polish coal mines is just beginning,
with the Bogdanka mine, one of Poland's most profitable, approved for a 45% sale
to Management Bogdanka, a private company that is a consortium of investors. The
fully private Jadwiga mine in Zabrze is expected to begin functioning February
or March 2002. PricewaterhouseCoopers is advising the Ministry of the Economy on
further privatization and restructuring, and three tentative plans have been
drawn up that vary in the degree that the size of the sector that is maintained
and the degree of subsidies and privatizations that would be put in place. A new
plan proposed by the current government would create a new holding company
called Polish Coal (PW) that would take over the shares of the seven state-owned
companies and act as the manager until the coal sector is fully privatized.
Another aim of this plan is to control the price of coal in Poland so as to
avoid regional disparities that make imports cheaper in some parts of the
country. It is estimated that various mining reform programs will cost $2.26
billion through 2006. The changes brought about by the coal restructuring
program have had some positive economic and environmental implications, which
are important for Poland's accession to the EU. Despite this, Polish coal miners
have been extremely resistant to the changes, and have held protests and strikes
in opposition. The Polish coal industry is one of the country's most important
employers and has a powerful union, so there are important political
considerations to all reforms of the sector, as well as commensurate efforts to
find employment for displaced miners.
Electricity Poland's electricity is produced by a combination of
independent power producers that sell to the state-owned grid operator PSE SA,
as well as by PSE itself. There are 17 power plants and 19 power and heating
(CHP) plants. PSE transfers power to 33 local distributors, of which the G8
Group is the largest. PSE is in the process of initiating an hourly balancing
market for Poland. There has been some consolidation of producers, the most
important of which is Poludniowy Koncern Energetyczny (PKE) with total capacity
of 4,640 MW. It is expected that only consolidated producers will be able to
compete with Western companies as the Polish market continues to open. Poland's status as an EU applicant makes it more
important that efficiency and environmental goals are met in a timely fashion.
In November 1998, Poland ambitiously committed to adapting its electricity
market regulations to EU standards within four years. Renovation of the sector
is expected to cost about $15 billion by 2010. For these reasons, Poland's power
generation is in need of investment. Multilateral lending institutions, most
notably the World Bank and the European Bank for Reconstruction and Development,
are involved heavily in financing and participating in projects ranging from
building new, non-coal facilities to providing cleaner technologies for existing
coal-fired plants. Privatization is seen as the key to modernization and
efficiency of the electricity sector. In September 1996, a law was passed that
laid the foundation for de-monopolization and privatization of the industry.
Plans called for reducing the number of generating companies from 35 to 7 and
for privatizing power generation by the end of 2001. A law that took effect in
December 1997 sets the groundwork for third-party access to the power grid and
vests authority in an independent Energy Regulatory Office. However, the
privatization has been delayed. According to the head of the Energy Regulatory
Office, it will be two to four years until Poland's energy market is truly
competitive. Outstanding long-term supply contracts between power generators and
the national grid company, PSE, need to be resolved before market pricing can
take effect. Currently, companies consuming more than 40 gigawatthours (GWh) of
electricity annually can legally choose between suppliers, but this has yet to
be fully implemented. Regulations are still seen as insufficiently defining
PSE's position in the new system, such that as PSE continues to regulate itself,
the opening up of the grid is restricted.
Electricite de France (EdF) is one of the larger
investors in the Polish electricity sector thus far. It has a 57.9% share of the
El. Krakow CHP plant and a 11.5% share of the ZEW Kogeneracja CHP plant. Working
with Gaz de France, EdF in June 2000 won a tender to buy a 45% stake of the
cogeneration company Zespol Electrocieplownia Wybrzeze (ZEcW), which serves
Gdansk. EdF already owns a controlling stake in Elektrocieplownia Krakow,
serving Krakow, and a smaller stake in a cogeneration group in Wroclaw. In
November 2001, EdF's Zecw Group in Poland and Dalkia, a subsidiary of French
multinational Vivendi, reached an agreement to purchase 45% of two thermal
electric power plants at Torun. EdF is looking to invest in the distribution
side as well. Sweden's Vattenfall has already invested in the distribution side,
owning 32% of the large southern GZE distribution group as well as 55% of
Warsaw's district heating plant in Siekierki. Vattenfall plans to gain majority
shares as soon as possible. Belgium's Tractabel recently acquired a 25% stake in
the Polaniec power plant, which is Poland's fourth-largest power generator. In
August 2001, the Polish government granted Spanish utility Iberdrola the
exclusive right to negotiate the acquisition of 25% of the G8 Group electricity
distributor. In southern Poland, a new coal-fired plant is under construction by
a subsidiary of U.S.-based PSEG. This will replace the Chorzow plant, now over
100 years old. American utility PSEG signed a deal to puchase 35% of the Skawina
power plant for $24.8 million in January 2002. PSEG plans to invest $56 million
in the plant, part of which will be used to make the plant compliant with
stricter environmental regulations.
Environment Similar to the pattern seen in other transition
countries, Poland's energy
consumption has decreased in the past 10 years as inefficient factories and
industries were closed down. However, unlike the majority of the former Eastern
Bloc, production has rebounded in Poland. Although the country's carbon emissions have dropped
since 1989, Poland's dependence on coal, along with the explosion in private
automobile use among Poles, correlates to high levels of energy and carbon
intensity in Poland. Poland's renewable energy
sector is small, with only a few hydroelectric power plants. However, as Poland
enters the 21st century, the country is
beginning to shift away from non-ecological coal mining and related industries
towards a more service-oriented, less pollution-intensive economy. In November
2001, Poland's Southern Energy Concern (PKE SA) announced plans to start up two
12-MW wind farms on the coast and in the southern mountains. CZECH
REPUBLIC Since the end of the Communist era in 1989, when 100% of
industries were state-owned, the Czech Republic has made great progress in
privatization. It is estimated that only 10% of Czech industry was state-owned
at the start of 2001. The government has plans for further privatizations in the
chemical, energy and mining, telecommunications, and steel sectors. The
structural reforms and economic rebound have strengthened the Czech Republic's
fast-track status for membership in the EU, which is currently slated for
2003-2005.
The Czech Republic's unemployment figure, at about 8.5%,
is about the European average, is expected to remain steady over the next two
years. In late 2001, growth in industrial production began to slow in response
to falling demand in key foreign markets, especially Germany, though domestic
demand remains fairly strong. Czech inflation is low, falling to an annual rate
of 4.1% in December 2001. Following an October 1999 European Commission report
which warned that the Czech Republic was lagging behind other so-called
"firstwave" countries in the introduction of European Union (EU) laws and
structural reforms, the opposition Civic Democrats and the ruling Social
Democrats (the country's two major parties) agreed to make approval of EU
legislation a priority and to speed up the pace of reforms and the stalled
privatization process. One issue to be dealt with for the Czech Republic's
accession to the EU is the need for further restructuring of the country's
energy sector and the end of energy subsidies. The energy chapter was included
in the accession talks between the Czech Republic and the EU in November 1999,
and while the Czech Republic applied for a phase-in period that would postpone
full liberalization of its electricity market until 2005 and of its natural gas
market until 2008, the EU called on the Czech Republic to look for ways of
re-evaluating its application. In addition, it is estimated that achieving
environmental compliance with EU standards by 2004 will cost about $15 billion.
The Czech Republic became a member of the International Energy Agency (IEA) in
2001. The decision in October 2000 by Czech authorities to
activate the controversial, Soviet-era Temelin nuclear power plant in southern
Bohemia led to a diplomatic confrontation with neighboring Austria, which argues
that the plant is unsafe. A compromise was reached between Austria and the Czech
Republic that allowed EU inspectors to assess the plant in December 2000, before
it began operating commercially. In November 2001, the premiers of Austria and
the Czech Republic came to an agreement to make certain bilateral duties in
regards to the Temelin plant part of the Czech Republic's accession process to
the EU in return for Austria not blocking the Czech Republic's accession. The
other members of the EU must agree to this unusual step of having a protocol
attached to the accession treaty. (See Electricity section for more on the
Temelin plant.) Oil Czech oil consumption, which totaled 172,000 bbl/d in
2001, is projected to remain about the same in 2002. Oil imports are piped
primarily from Russia, via the Druzhba pipeline, and Germany, via the Mero
pipeline, which allows the land-locked Czech Republic to import crude oil from
the Italian port of Trieste via the Trans-alpine pipeline network. The Druzhba pipeline, with a capacity of 73 million
barrels per year (200,000 bbl/d) to the Czech Republic, historically has been
the source of the majority of the country's foreign oil. The completion of the
Mero pipeline, which has the same capacity as the Druzhba, allows the Czech
Republic to reduce its reliance on Russian oil. As the country continues to
re-orient its economy to the West, imports of oil from Russia are declining
while oil imports from the EU are rising. Overall, however, the Czech Republic's
desire is to reducing its dependence on oil imports by reducing its consumption.
High world oil prices in 2000 meant that the Czech Republic's increase in oil
imports was slight in 2000, but imports may increase more in 2001 due to
relatively lower world oil prices. In April 2001, the EU agreed to the Czech
Republic's request to extend the transition period for building a 90-day state
oil reserve until December 2005. Mero CR, which operates the Czech oil
pipelines, is constructing three storage tanks, each with a capacity of 786,000
barrels, as part of the plan to raise reserves to comply with the EU directive.
Completion is expected in 2004. Refining There also is a smaller refinery in Pardubice owned by
Paramo, A.S. It has a capacity to refine about 20,000 bbl/d. Natural
Gas The Czech Republic relies almost exclusively on imports
for its natural gas consumption (approximately 98% of consumption). Most of the
limited domestic gas production that does occur is carried out by a British
company, Ramco Energy's Medusa Oil & Gas, near the Austrian border. MND also
also extracts a small amount of natural gas. The the vast majority of gas
consumed is imported from Russia. According to the Czech Statistical Office, in
1999 the Czech Republic imported approximately 78% of its natural gas from
Gazexport, Russia's Gazprom subsidiary, with about 15% of its gas coming from Norway, 6% from Germany, and only about 1% from
Slovakia. The percentage coming from Norway is expected to increase in the
coming years, at the expense of Russian exports. Transgas, the major gas utility in the Czech Republic,
is responsible for purchasing natural gas for Czech consumption. Although the
Czech natural gas industry was restructured in 1994, Transgas remained
state-owned and operated until January 2002. On January 29, 2002, the National
Property Fund of the Czech Republic and RWE Gas of Germany signed a contract for
the sale of 97% of the shares of Transgas for koruna 117.3 billion. Transgas
currently sells natural gas to eight regional gas distribution companies, the
largest of which is Jihomoravska Plynarenska in southern Moravia. For an
additional koruna 16 billion, RWE has acquired shares between 46% and 58% in
these regional suppliers. The deal is contingent on final approval by the Czech
and German anti-monopoly offices and the European Commission. RWE will become
Europe's fifth-largest integrated natural gas company and the Czech Republic's
largest foreign investor. Reforms have increased Transgas' profitability, from
koruna 1.8 billion in 2000 to about koruna 3.8 billion in 2001. Transgas sold
346 Bcf of natural gas in 2001. Pipelines At the beginning of November 1999, Transgas concluded
with Gazexport a long-term contract for the transit of Russian natural gas
across the territory of the Czech Republic until the year 2020. Until the year
2008, the contract guarantees the current volume of conveyed natural gas at the
level of 28 billion cubic meters per year (91.9 Bcf). After 2009, however, the
contract guarantees the conveyance of only 13 billion cubic meters (42.7 Bcf)
annually. The reduction is connected with the start of the Yamal gas pipeline
across Poland, which bypasses both the Czech Republic and Slovakia. Coal
Poland was one of the first of the former Soviet
satellite countries to hold free elections and to successfully introduce market
reforms (1989). A new constitution was approved by a national referendum in May
1997. On September 23, 2001, Poland held legislative elections in which no party
won an outright majority. In October 2001, a coalition government was formed by
the Democratic Left Alliance (the former Communist Party) that won 41% of the
popular vote, but was still 15 seats short of an absolute majority. After
joining with the Polish Peasants Party in a coalition, Leszek Miller of the
Democratic Left Alliance became prime minister on October 19, 2001. The new
coalition has called for a relaxing of monetary policy by Poland's Central Bank
in order to promote economic growth and to reduce the country's high (over 16%)
unemployment rate. Poland's real GDP growth rate slowed from 4% in 2000 to 1.3%
in 2001. It is estimated that Poland's high rate of foreign direct investment
($10.6 billion in 2000) fell considerably in 2001. The economic downturn has
also reduced government revenue, to as little as 49% of the target for
January-July 2001. The budget deficit was estimated by the previous government
to be about $7 billion, or 4% of GDP, in July 2001. The current government has
taken measures, including a new tax, to ensure that the budget deficit does not
exceed $9.4 billion, especially in light of continuing low economic growth
rates. Poland's inflation rate is at a recent historical low.
In April 1997, the Polish government passed a new Energy Act, which required the Government Economic
Committee to pass "Guidelines on Poland's Energy Policy Through 2020." The
document spells out long-term energy forecasts and action plans for the Polish
government. The key objectives include: increased security of energy supplies,
(including diversification of sources); increased competitiveness for Polish
energy sources in domestic and international markets; environmental protection;
improving energy efficiency; and reducing energy-related carbon emissions. Coal
is Poland's most important domestic energy source. While coal production is
declining and will continue to decline over the coming years, it will remain a
key energy source. In 2001, the Supreme Board of Inspection (NIK) released a
report stating that energy sector reform is moving too slowly. The report cited
insufficient privatization in the oil sector, a halt in natural gas sector
restructuring due to a dispute with the regulator, and problems with coal sector
reforms. Poland will have to have a 90-day oil reserve by 2008 as part of its EU
agreements.
With proven oil
reserves of only 115 million barrels, Poland relied on imports for 97% of its
2001 oil consumption. Poland's oil demand is expected to increase by as much as
50% by 2020. Polish oil production increased from 10,000 barrels per day (bbl/d)
in 2000 to 14,000 bbl/d in 2001, but this is still a small fraction of oil
demand (434,000 bbl/d). Polish oil production comes primarily from fields in
southern and western Poland, with the southern reserves nearly exhausted.
However, the Barnówko - Mostno - Buszewo "BMB" field discovered in 1996 in the
Polish part of the Permian Basin (near the German border directly east of
Berlin) has potential reserves of about 73 million barrels and the Miedzychod
field is estimated to have even more, so Poland should be able to increase its
production as these fields come on line.
Most of
Poland's refineries, which were built in the 1960s and 1970s, need modernization
in order to meet the current shift in demand towards lighter products such as
gasoline and diesel fuel. Refinery capacity also will need to expand to meet
growing oil demand. PKN Orlen's 260,000-bbl/d Plock refinery has had some
improvements done and others are planned in its efforts to eventually conform to
EU standards.
Poland has an estimated 5.1 trillion cubic
feet (Tcf) of natural gas reserves. The country imported over 65% of its
442-billion cubic feet (Bcf) consumption in 1999. Natural gas production
remained fairly stable throughout the 1990s, hovering between 150 Bcf and 180
Bcf, and was about 183 Bcf in 2001. This rate of production is expected to
continue into the 21st century, as new exploration takes the place of depleting
reserves. FX Energy, a U.S.-based company active in Poland with a 49% stake in
the Fences gasfield (51% is owned by PGNiG), began production at its Kleska well
in March 2001 at an initial rate of 2 million cubic feet per day. PGNiG is
planning to launch 200 new drilling sites in 2002 at a cost of Zl 700-800
million and invest Zl 600 million in domestic oil and natural gas exploration.
The company also plans to liquidate 1,500 old and exploited drilling sites
within the next five years.
Although coal represents only 2% of Poland's total
GDP, it is by far the dominant fuel in the country's economy, accounting for 95%
of primary energy production in 2000. Polish coal, though of high quality, has
various geological features that make it difficult to mine. Hard coal (mostly
bituminous) provides about 65% of electricity generation, with brown coal
(lignite) providing nearly all of the rest of the fuel consumed in Poland's
power plants (many of which provide heat and hot water as well as electricity).
Poland is the world's ninth-largest coal exporter, with coal going primarily to
customers in Europe and the former Soviet Union. These exports historically have
represented a major source of foreign exchange.
In May 1998, Poland announced a comprehensive
restructuring program for its coal industry aimed at maximizing efficiency and
paying off some of the industry's $4.5-billion debt. Before Poland's
democratization, the industry had been heavily subsidized. In 2000, Poland
closed 22 coal mines and partially closed seven others, with about 16,000 miners
leaving the industry. This reduced production by about 10.3 million metric tons
(11.4 million short tons), but the coal mining industry became profitable for
the first time, and has continued to be profitable in 2001, though this has been
attributed to a write-off of part of the industry's debt. Production rose very
slightly, 0.5%, to 103.9 million metric tons (114.5 million short tons).
With installed
electric capacity of over 30 million kilowatts in 1999, and electric generation
of 134 billion kilowatt hours (bkwh), the Polish power generation sector is the
largest in Central and Eastern Europe. As noted above, most of Poland's
electricity comes from coal-fired plants, which are highly polluting and operate with outdated technology. The
Polish government expects electricity demand to grow by over 50% by 2020. Poland
produces more electricity than it consumes and exports the excess to neighboring
countries. Polenergia, a new company, was established by Polish grid operator
PSE, a German distributor, and a private Polish company, to sell privatized
electricity, including electricity from Russia, to Western European markets.
As the
transition to democracy proceeds in Poland, environmental
issues have become increasingly important. During the 1980s, Poland was one
of the most polluted countries in Europe, and while democratic reforms have
brought about reductions in the level of air
pollution, there remains much room for improvement. In fact, as Poland
negotiates with the European Union (EU) for membership, the EU has spotlighted
Poland's environmental record, making the country's accession to the exclusive
group contingent on improvements in Poland's environmental record.
The Czech Republic has
very limited oil reserves, and therefore relies almost exclusively on imported
oil for its consumption need. Domestic oil production, which is extracted by the
firm Moravske naftove doly (MND), reached 6,400 barrels per day (bbl/d) in 2001.
In January 2002, Czech oil company Ceska Naftarska Spolecnost made a discovery
at its Breclav block in southern Moravia, near the Vienna Basin. Oil is flowing
from a test well, but estimates of production from the field are not set yet.
Also in January, Australian-based Carpathian Resources discovered a natural flow
of crude oil at its Postorna 1 Well in the Vienna Basin.
The Czech Republic has two major refineries, at Litvinov
and Kralupy. The refineries, which have been privatized and are now owned and
operated by Ceska Rafinerska, have a combined capacity of 178,000 bbl/d. These
refineries supply slightly less than 50% of the gasoline and diesel market in
the Czech Republic. Ceska Rafinerska is owned by holding company Unipetrol,
which is 63% owned by the government. There are four companies that are still
competing for the 63% government share when full privatization occurs, which is
expected sometime in 2002. Ceska Rafinerska began producing gasoline and diesel
fuel from a new, czech koruna-8-billion cracking unit at Litvinov in April 2001.
The added capacity will raise the production of light products, mainly petrols
and diesel oil, while the production of heavier fuel oils, the demand for which
is decreasing, will be reduced. Ceska Rafinerska sold about 1.1 million barrels
of processed fuels to Poland in 2000, and plans to export about 1.9 million
barrels in 2001.
As the Czech Republic strives to meet EU
membership criteria, natural gas is becoming increasingly important to the
country's energy mix. With the need to improve its environmental conditions, the
Czech Republic is turning to cleaner-burning natural gas for its energy needs
rather than coal. As a result, natural gas consumption has increased by 30%
since 1993, from 259 billion cubic feet (Bcf) in 1993 to 337.3 Bcf in 1999. The
Energy Regulation Office (ERU) has annouced that household natural gas prices
will rise 5%-10% in January 2002.
With nearly 32,000 miles of natural gas pipelines, the
Czech Republic is a major transit center for Russian gas. Transgas is
responsible for transporting Russian natural gas for export to Western Europe.
Natural gas is piped to two points on the Czech-German border: Waidhaus, the
main point, which delivers gas to Bavaria and points west and south; and Hora
Svata Kateriny, on the border with eastern Germany, from which gas travels to
Berlin and northern European destinations. The pipelines have been utilized at
capacity levels since 1997.
A program for restructuring the Czech coal industry was
approved by the government in December 1992. On the basis of this program,
former state-owned coal mining companies were transformed into five large and
two small commercial mining companies. In addition, the Czech government has
reduced the number of inefficient mines in operation, cut the labor force
associated with coal mining, and increased awareness of environmental issues
related to the industry to bring the country in line with EU standards. The
Czech Republic also has stated that it will accept the European Commission's
decisions on coal prices in the common market.
As a result, the production of lower-quality brown coal,
used mainly by power-producing and heavy industries, has been reduced
significantly in the past ten years, especially the production of lignite.
According to producer estimates, production of brown coal fell 12% in 2001 to
49.6 million short tons. The launching of operations at the Temelin nuclear
power plant in southern Bohemia (see nuclear section, below), probably will
cause brown coal mining to fall even more in 2002. Severocekse doly is the
largest producer of brown coal, followed by Mostecka uhelna spolecnost and
Sokolovska uhelna.
Black or hard coal, mined in particular by the
Ostravsko-karvinske doly (OKD) company in northern Moravia, has also experienced
a noteworthy decline, but the fall has been not as drastic, and furthermore,
black coal continues to have better export markets. In 2000, OKD's production of
black coal was 12.3 million short tons. In 1999, Severoceske doly Chomutov
accounted for 46% of overall Czech mining production, followed by Mostecka
uhelna spolecnost, with a 33% share, and Sokolovska uhelna with 21%. Of late,
the domestic market for black coal has improved, and Czech industry,
particularly steel, has demanded more than the import quota amount of coal from
abroad.
The sharp reduction in coal mining over the last ten
years has resulted in total employment in the four largest mining companies
falling to less than 40,000. In comparison, OKD alone employed about 100,000 at
the beginning of the 1990s. Further cuts in the mining workforce are expected.
Czech coal consumption has fallen by 28% during the
period 1993-1999, as the country switches to other fuels for electricity
generation. Net exports of coal were 6.4 million short tons in 1999. Net exports
have declined in the past few years, in part because of cheaper Polish coal
exports in the region.
Electricity
Both
electricity generation and consumption generally have been rising in the Czech
Republic. From 1993 to 1999, electricity production in the country rose 9.2%,
from 55.6 billion kilowatt-hours (Bkwh) to 60.7 Bkwh. During the same time
period, electricity consumption increased 7%, from 49.6 Bkwh to 53.1 Bkwh. By
November 2001, it was estimated that the country's consumption was 68.2 Bkwh on
an annual basis, though the net figure (excluding consumption of power stations)
was 63 Bkwh. The country is a net exporter of electricity, with the annual
amount estimated at about 0.73 Bkwh.
Ceske Energeticke Zavody (CEZ) is the Czech Republic's
dominant electric power utilities company. The company produces about 70% of the
country's electricity, operating 28 power plants, of which 10 run on fossil
fuels, 13 are hydroelectric plants, two are wind power stations, two are nuclear
power plants, and one is a solar power station. CEZ owns 10,700 MW of generation
capacity in the Czech Republic, as well as the national transmission grid, which
CEZ operates under control of the company's recently established, wholly-owned
subsidiary Ceska Prenosova (CEPS).
In an effort to liberalize its electricity sector to
conform with EU standards, the Czech Republic has attempted to privatize CEZ.
The privatization of the company, which is 67.6% owned by the state, is to be
bundled with majority shares in six distribution companies and total control of
the transmission grid company CEPS. In January 2002, the Czech government
canceled a tender for the privatization of CEZ. The government stated that the
bids submitted by Electricite de France (EdF) and a consortium of Enel and
Iberdrola (of Italy and Spain, respectively) failed to meet the conditions of
the tender. The companies wanted certain concessions regarding purchasing of
brown coal and a state guarantee for the Temelin nuclear power plant, and there
were also issues with the prices offered. Another concern for the government was
its ability to handle such a large influx of foreign exchange at this time when
the sale of Transgas would already bring in about $3.6 billion.
The largest heat and electric independent power producer
(IPP) is Elektrany Opatovice a.s., and there are a number of smaller foreign and
domestic IPPs operating in the Czech Republic. In order to enter the EU, the
Czech Republic must open up 26.48% of its electricity market to competition. The
Energy Act adopted in November 2000 opens up the market gradually from 2002
onward, such that 30% of the electricity market will be subject to competition
by 2002, 50% by 2005, and 100% by 2006. Producers with over 10MW of installed
capacity and consumers with annual consumption above 40 gigawatthours (about 60
large industrial firms) will be in a competitive market at some point this year.
Additionally, subsidies for household electricity prices are to be eliminated by
the year 2002, meaning that prices will rise over 10% in January, as announced
by regulatory agency ERU recently. However, prices for transmission and
distribution services will continue to be regulated by the state due to their
monopoly character. Another objective is to increase the share of renewable
resources in overall electricity consumption from the current 1.7% to 3%-6% by
the year 2010.
Electricity export have become increasingly important for the Czech Republic over the past few years, peaking in the first six months of 2001, when the country exported 6.69 terawatt-hours of electricity. The majority of the electricity was imported by Germany. However, since then exports to Germany have fallen by over 30% as German utility E. On canceled its contract with CEZ on July 1, 2001, due to concerns about the Temelin nuclear power plant and pressure by environmentalists over cheap electricity from polluting power plants being "dumped" on the EU. However, E. On has signalled that it may again become a buyer of Czech electricity by purchasing only non-nuclear-produced electricity. In November 2001, CEZ, along with coal producers Severoceske Doly, Mostecka Uhelna Spolecnost, and Sokolovska Uhelna, and trading company Carbounion Bohemia, formed a new company called Coal Energy that will be essentially a marketing company for CEZ's coal-produced electric power. Coal Energy is looking to expand electricity exports to Serbia, Romania, Slovenia, and other Balkan countries.
Nuclear
The Czech Republic has two operable nuclear power plants,
at Dukovany and Temelin. Both are of Soviet design. The plant at Dukovany is
equipped with four, 408-MW generators of the relatively new (1980s vintage)
VVER-440-213 pressurized water reactor design. Dukovany provides approximately
20% of total Czech electricity output.
After years of delay, the controversial Temelin nuclear
power plant, located just 30 miles from the Austrian border in southern Bohemia,
was cleared for operations by the Nuclear Safety Authority on October 9, 2000.
Although the plant is of Soviet design, Westinghouse was contracted to bring the
plant up to Western safety standards during its construction. It consists of two
VVER-981V320 generators, each with a capacity of 890-MW. The first reactor was
connected to the national grid in December 2000, but was shut down in May 2001,
because of circuit and turbine problems and remained closed to allow an EU
inspection team time to assess the plant's safety. In August 2001, the EU
inspection team found some minor flaws that could be remedied, but declared the
plant safe. The first reactor was restarted, but shut down again within a week
due to technical problems. Workers claim that the technical problems are not
associated with the reactors, hence the plant is safe. The first reactor is
currently undergoing tests and its trial operation is expected to be launched in
spring 2002. The second reactor is expected to be launched in the beginning of
2003. When the plant is fully operative, it will provide over 20% of the Czech
Republic's power needs.
Temelin has been controversial since construction first
began in 1986. Opponents have argued that the plant is unnecessary, noting that
the Czech Republic already produces more electricity than it consumes, and that
additional electricity can be generated by improving the existing distribution
network rather than installing new generating capacity. Critics have also
accused CEZ of offering to supply energy to other countries at prices that are
below production costs (dumping), a practice CEZ has publicly denied.
Although CEZ has stated that Temelin meets and even
exceeds EU safety standards for nuclear power plants, Czech and Austrian
environmentalists who oppose the project have accused CEZ of failing to conduct
adequate safety checks. Ironically, one argument in favour of Temelin is an
environmental one; specifically, that it will relieve the northern Czech
Republic, whose aging coal-burning stations and extensive strip mines have
turned the area into one of Europe's most polluted regions, of continued
environmental degradation.
The Czech government is eager to privatize Temelin when
it sells its shares in CEZ. SLOVAK
REPUBLIC
The government began a structural reform program in 1999 that aims to privatize several state-owned companies, control the budget deficit, and reform the healthcare and social security pensions systems. The government has had some success, with budget deficits of 5% of GDP during the Meciar era reduced to 3.7% in 2001 and targeted for 3.5% or less in 2002. Proceeds from privatizations in the steel, energy, telecoms, and financial sectors have also helped reduce the deficit. After growth rates of 1.9% in 1999 and 2.2% in 2000, growth finally went above 3% in 2001 to 3.1%. Slovakia needs solid economic growth to reduce its high unemployment rate, one of the highest in Europe at about 17.5%, but as high as 40% in some areas of eastern Slovakia.
A possible drag on Slovakia's growth in 2002 is continued low growth in the EU, and particularly in Germany, Slovakia's most important trading partner. Trade accounts for about 76% of Slovakia's GDP, and Slovakia's trade deficit grew substantially in 2001, with exports declining 3.7% and imports rising 6.5%. Slovakia's trade deficit has been sustainable because of substantial inward investment flows, but it is unclear whether they will continue. Another drag on the economy has been the recent collapse of BMG Invest, an investment scheme that had 200,000 investors who will most likely not be compensated for their losses.
Slovakia closed the energy chapter of its EU accession talks in November 2001. The country agreed to close the two oldest of four blocks at the Jaslovske Bohunice nuclear power plant. The Economy Ministry sets energy policy.
Oil
Slovakia's oil
production is the smallest of the four countries in the Visegrad Group, with
production of only about 1,000 bbl/d in 2001. This is an increase over the
previous year, with most of the gain coming from Nafta Gbely's Gajary Baden
reserves in western Slovakia. Nafta Gbely is one of 18 members of the Nafta
Group, Slovakia's oil and natural gas extraction company. Slovakia is a small
oil consumer at about 72,000 bbl/d in 2001, and is nearly completely dependent
on imports.
Slovakia imports its crude oil from Russia through the Druzhba (Friendship) and Adria oil pipelines. These pipelines have a capacity of about 422,000 bbl/d, but have not been used at full capacity. Transpetrol, the operator of the pipelines in Slovakia, transported about 187,000 bbl/d in 2000, of which about 106,000 bbl/d went to Slovnaft's refinery in Bratislava and the rest was shipped onward to the Czech Republic. Slovnaft is Slovakia's only refinery, and it has a capacity of 115,000 bbl/d. Slovnaft is 36.2% owned by MOL of Hungary.
In December 2001, the Slovak government approved the sale of a 49% stake with managing powers in Transpetrol to Russia's second-largest oil producer, Yukos. Yukos was chosen over domestic company Slovnaft. Yukos plans to use the pipelines' available capacity to supply more oil to western Europe, in particular to Germany through the Druzhba and to Croatia's coast for shipment to Mediterranean countries through the Adria. The Adria pipeline connects to Croatia through Hungary.
Natural
Gas
Slovakia, though a very small producer of
natural gas, is very important as a transit country. It is estimated that about
25% of the natural gas consumed in western Europe transits through Slovakia.
This represents about 70% of the Russian natural gas exported to western Europe.
Slovakia produced only about 7 Bcf of natural gas in 1999. However, the
country's per capita natural gas consumption was the highest amongst the
Visegrad Group countries, as about 80% of Slovak households are connected to the
natural gas network. Slovakia's state-owned natural gas monopoly, Slovensky
Plynarensky Priemysel (SPP) plans to invest 1.643 billion crowns for additional
gas mains in 2002 to connect additional households. In March 2001, a consortium
of Gaz de France (GdF), Ruhrgas, and Gazprom submitted a 49% stake in SPP, which
is being reviewed by the state's privatization committee. However, ruling Party
of the Democratic Left leader Pavel Juncos has since declared that a 49% stake
could not be sold for the $2.69 billion offered, but only a 34% stake. It is
reported that the Slovak cabinet has agreed to the consortium's offer, but this
has yet to be officially announced.
There are two major natural gas pipeline routes in Slovakia. Both receive natural gas from Russia via Ukraine; one transits onward to the Czech Republic and Germany, the other transits to Austria. The pipelines' Slovak sections are operated by SPP. The pipelines deliver about 3.18 Tcf per year to Western Europe. There are plans to build an extension of the Yamal II natural gas pipeline that would bypass Ukraine and instead transit Belarus and Poland to Slovakia. The planned 373-mile pipeline, 72 miles of which would pass through Slovakia, would have a capacity of 1.06 Tcf per year.
Slovakia's natural gas market is to be liberalized (i.e. customers will be able to choose their supplier) in stages, with liberalization beginning July 2002 for customers with an annual consumption of more than 882 million cubic feet (25 million cubic meters), in 2003 for customers with an annual consumption of more 530 million cubic feet (15 million cubic meters), and in 2008 for customers with an annual consumption of more than 177 million cubic feet (5 million cubic meters).
Coal
Slovakia's coal
reserves and production are much smaller than that of the other members of the
Visegrad group. Slovakia's coal reserves are estimated at just 190 million short
tons, all of which is subbituminous and lignite. Most of the coal is used for
electricity production. Production was about 2.5 million short tons in 1999.
There are three coal mining companies in Slovakia, all of which are privately
owned, and almost all the coal they produce is brown coal. The largest is
Hornonitrianske bane Prievidza (HBP), with about 64% of all coal sales. Its main
customer is Slovakian electricity company Slovenska Elektrarne (SE), however,
HBP has plans to build its own coal-fired power station. The other two companies
are Dul Dolina (also known as Bana Dolina) and Bana Zahorie.
Electricity
In 1999,
Slovakia's installed electric power generating capacity was about 7.8 million
kilowatts, about the same as that of Hungary, despite Slovakia having a smaller
population. Slovakia's generating capacity is diversified, with coal, natural
gas, hydro, and nuclear power plants each having less than a third of overall
capacity in 1999. With two nuclear reactors coming on line in 1998 and 2000,
Slovakia has become more reliant on nuclear generation and less reliant on coal
and fuel oil (mazut) for electricity generation. Slovakia still has substantial
unused hydroelectric potential. Slovakia generated about 22.6 Bkwh of
electricity in 1999, and it is estimated that this total increased in 2000 and
2001. SE alone, which supplies about 85% of Slovakia's electricity, is estimated
to have generated about 24.9 Bkwh in 2001. Slovakia was a small net electricity
importer in 1999, but it is estimated to have become a net exporter in 2001, as
preliminary estimates of electricity consumption in 2001 are about 26.9 Bkwh.
SE is Slovakia's dominant electric power company. It is state-owned, but it is likely to be partially privatized after undergoing organizational and financial restructuring. The government acknowledges that this restructuring will not be completed before the September 2002 elections. SE generates about 85% of Slovakia's electricity, operates the national transmission grid, and trades electricity. Distribution is carried out by three regional companies: Zapadoslovenske Energeticke Zavody (ZSE), Stredoslovenske Energeticke Zavody (SSE), and Vychodoslovenske Energeticke Zavody (VSE). The government has issued tenders for 49% stakes in these companies, and several foreign firms have expressed interest, including CEZ of the Czech Republic.
On January 1, 2002, consumers of more than 100 gigawatthours (Gwh) were supposed to have been allowed to choose their supplier. This covers about 19 large companies that rerpresent some 28% of the market. This liberalization was postponed by the Economy Ministry, however, because an independent electricity regulating agency has not yet been formed and the restructuring of SE is incomplete. Liberalization for customers using more than 40 Gwh is scheduled for 2003, and complete liberalization for 2007.
Nuclear HUNGARY
Slovakia has two nuclear power plants, which generated an
estimated 59% of Slovakia's electricity in 2001. All of Slovakia's functioning
reactors use the VVER-440 V213 Soviet design and are operated by SE. Slovakia's
nuclear plants are regulated and monitored by the Slovak Nuclear Regulatory
Authority (UJD). The Jaslovske Bohunice plant at Trnava has four, 408-MW
reactors that are functioning, and one decommissioned reactor. The plant's two
older reactors are due to be decommissioned in 2006 and 2008 as part of the
energy chapter of Slovakia's acession agreement with the EU. An EU study in 1992
determined that the two older functioning reactors at the plant could not be
modernized at a reasonable cost. The two newer reactors will require investment
of 12.62 billion crowns by 2008 for their modernization, according the the
Ministry of the Economy. The modernization is required by the UJD, the
International Atomic Energy Agency (IEAA), and legislation. The Mochovce plant
has two completed 412-MW reactors that went on line in 1998 and 2000 and two
uncompleted reactors whose construction has been halted as government financial
support for them has ended.
The Federation of Young Democrats (renamed Fidesz-Hungarian Civic Party (MPP) in 1995) captured a plurality of parliamentary seats in the May 1998 elections and forged a coalition with the Smallholders and the Democratic Forum. The head of Fidesz, Viktor Orban, became Prime Minister. The current government is more nationalistic than the previous ones, and has championed the rights of Hungarian minorities living in surrounding countries. The government has also slowed the pace of liberalization in some sectors and has favored more state intervention than the previous government. A parliamentary election is scheduled for spring 2002. Hungary entered NATO in 1999 and has applied to become a member of the EU in 2004 or 2005. Hungary became a member of the International Energy Agency (IEA) in 1997
Hungary had strong economic growth of 5.2% in 2000 and this continued into 2001, with a growth rate of 3.8%, despite the global economic slowdown, especially in major trading partners Germany, Italy, and Austria. Hungary has had the strongest economy in the Visegrad group over the past three years. Hungary is dependent on exports for economic growth, and a 13% expansion in exports (especially services) in 2001 was a prime factor driving Hungary's growth and the reduction of Hungary's current account deficit to about 2.1% of GDP. Inflation began to fall in late 2001, and is predicted to be about 6.5% in 2002, the lowest level since Hungary became a market economy. The lower inflation has made it possible for the central bank to cut interest rates 50 basis points in January 2002.
Oil
Hungary is the largest
producer of crude oil among the Visegrad Group by far, though still a small
producer by international standards. Crude oil production rose very slightly in
2001 to about 27,000 bbl/d, but production of natural gas liquids fell by about
5,000 bbl/d. Hungary's oil production had been declining steadily since its peak
in the mid-to-late 1980s of 62,000 bbl/d. Nearly half of Hungary's crude oil
comes from the Algyo field in the south central part of the country, and the
remainder is produced from numerous fields with production of less than 2,000
bbl/d. Oil reserves are about 110 million barrels. Hungary's oil and natural gas
company MOL has undertaken increased domestic exploration, and the company
estimates that only 60% of the country has been thoroughly explored. 
Hungary consumed about 146,000 bbl/d of oil in 2001, so the country is reliant on imports, mostly from Russia. Consumption has declined steadily from a peak of 244,000 bbl/d in 1980. Russian oil is imported through part of the Druzhba pipeline. A smaller amount of oil is also imported from the Middle East.
Hungarian Oil and Gas Company (MOL) is Hungary's largest company in terms of net revenue, and is dominant in the upstream and downstream oil sectors. The company is responsible for almost all of Hungary's natural gas and oil exploration and production, transmission, stockpiling and wholesale trade. It has an 82% share of the wholesale oil market and a 42% share of the retail market. It was partially privatized through stock market flotations 1994-1998. The state retains a 25% "golden" share. In 2001 MOL merged its domestic and international upstream activities into one unit and decided to cease all oil exploration abroad with the exception of Yemen. MOL will, however, continue to acquire areas abroad where oil has already been discovered. MOL has attempted to purchase downstream assets in other central European countries, but its only successful purchase so far is a share of Slovakian refiner and retailer Slovnaft. In November 2001, MOL sold its 51% stake in oil storage firm Koolajtarolo to the Crude Oil and Oil Product Storage Association (KKKSz) for 6 billion forints.
In 2001, MOL shut down the crude processing facilities at its 60,000-bbl/d Tiszaujvaros and 10,000-bbl/d Zalaegerszeg refineries as part of a cost-cutting move. The Zalaegerszeg refinery will operate as an asphalt plant and the Tiszaujvaros refinery will still be used for a small amount of other processing, but the only remaining crude oil refinery in Hungary is MOL's 161,000-bbl/d Szazhalombatta refinery. Retail oil products prices and trade were liberalized in the early 1990s.
Natural
Gas
Hungary produced about 121 Bcf of natural
gas in 2000. Hungarian natural gas production has been declining steadily for
many years, though domestic production still accounts for a significant share of
consumption. Consumption fell slightly, to an estimated 411 Bcf in 2000 from 437
Bcf in 1999, as both domestic production and imports declined. About 80% of
Hungary's natural gas imports are from Russia through part of the Druzhba
pipeline. Some Russia gas transits onward to the former Yugoslavia through
Hungary. The Gyor-Baumgarten natural gas pipeline connects Hungary to Austria
and western Europe's natural gas grid. This enables Hungary to import natural
gas from GdF and Ruhrgas. Natural gas demand is expected to increase by about
20% by the end of the decade, so Hungary's natural gas imports will increase
significantly in light of declining domestic production.
MOL is Hungary's only natural gas producer and importer and operates the natural gas pipelines. Natural gas distribution is the responsibility of regional companies. In addition to natural gas' use for electricity generation and industry (60% of total use), about 60% of Hungarian households are supplied with natural gas (40% of total use). Natural gas represented about 41% of energy consumption in Hungary in 1999.
MOL has been losing money for several years now, at a current rate of over $1 million per day, or about 118 billion forints in 2001. This results mainly from government price caps, which force MOL to sell imported natural gas at a loss. In September 2001, MOL lost a lawsuit against the government in the Constitutional Court. MOL charged that the government was violating laws on natural gas pricing in forcing the company keep natural gas price increases below levels necessary to recover costs. Because of this, MOL has attempted to sell off at least part of its natural gas division. However, the government is not eager to lose control of Hungary's natural gas assets. Hence, despite the interest of several foreign companies, including a local subsidiary of GdF and Ruhrgas, the state-owned Hungarian Development Bank is in exclusive talks to acquire 100% of MOL's natural gas division, effectively re-nationalizing the company and a step backward from the liberalization occurring in the region. Prime Minister Orban has stated that he wants price controls for natural gas to remain in place for up to eight more years.
Coal
Hungary is a much
smaller coal producer than Poland or the Czech Republic, and about 95% of the
coal produced is brown coal (including lignite). Nevertheless, coal is an
important part of Hungary's energy mix, accounting for 14.6% of energy
consumption in 1999 and about 25% of electric power generation. Coal's share is
declining, however, and is expected to continue to do so in the next ten years.
Hungary produced about 15.6 million short tons of coal in 2000. This is down
sharply from about 22.4 million tons produced in 1989, at the end of the
Communist era. This reflects a decline in certain energy-intensive heavy
industries as well as closures of unprofitable mines that occurred in 1990s as
the industry privatized. In addition, domestic lignite with high sulphur content
has caused air pollution, and a new coal-fired power plant being built will use
imported Russian coal. However, Hungary's lignite (about 85% of reserves) is
inexpensive to produce through open-pit mines in the Matra and Bukk mountains,
so there will continue to be a demand for it at older electricity generating
plants. Hungary's coal consumption in 2000 was about 16.1 million short tons,
down sharply from 25.3 million short tons in 1989.
Electricity
Hungary's
electricity sector, like others in the region, is undergoing a process of
liberalization and restructuring. Most of the sources of Hungary's capacity and
generation are thermal, though Hungary's 4-unit nuclear plant at Paks generates
slightly less than 40% of total electricity generated. Hydropower generates less
than 1% of Hungary's electricity. It is estimated that Hungary generated about
34.9 Bkwh in 1999 and consumed about 33.5 Bkwh in 1999. Consumption peaked at 37
Bkwh in 1989, but declined in the early 1990s as Hungary's post-Communist
economy grew less energy-intensive. Electricity consumption has since increased,
but at less than the rate of economic growth. The Hungarian government predicts
that electricity consumption will grow an average of 1.45% per year this decade,
assuming 5% economic growth. According to the Hungarian government, power
generating capacity currently exceeds consumption by about 30%. Nevertheless,
Hungary is a net importer of electricity, mostly from Slovakia. Preliminary
estimates of 2000 production show it declining, but 2000 consumption was steady,
so electricity imports rose in 2000. The electricity sector accounts for about
4% of Hungary's GDP.
For years, the state-owned Hungarian Electricity Works (Magyar Villamos Muvek - MVM) generated most of Hungary's electricity, was the sole importer/exporter, and owned and operated the national electricity grid through subsidiary Mavir. This has changed, however, as Hungary's eight generation companies were unbundled from MVM over the past few years, and Mavir was acquired by the Ministry of Economic Affairs in February 2002, with the state privatization agency APV exercising ownership rights. In return, MVM is to be compensated financially by the government and by APV handing over stakes in a number of power plants to MVM. However, this may be problematic as liberalization proceeds, as no generator will be able to hold more than 30% of total market capacity. MVM already owns the Paks nuclear power plant and the Vertes power company, which are already about 30% of capacity. The eight generating companies (seven thermal and one hydroelectric) have been partially or fully privatized, but hydroelectric power company Tiszaviz Kft will likely be returned to full ownership by MVM as part of the compensation for Mavir by APV. Tiszaviz's two hydroelectric plants are slated to be modernized later this decade. There are also independent power producers (IPPs) in Hungary, which sell their power to distributors under long-term power agreements.
MVM/Mavir has made and continues to make improvements to Hungary's electricity network. In November 2001, MVM completed a 17 billion forint, network control system that connects the system to 166 other power plants and distributors and prepares the Hungarian power industry for the planned market opening in 2003. In September, MVM announced that it plans to restart investment projects on the national grid, including an expansion of the Sandofalva-Bekescsaba powerline for 18 billion forints and an expansion of the line between the southern city of Pecs and the nuclear power plant at Paks. In May 2001, MVM (represented by Mavir) became a member of European electricity transmission system Union for the Coordination of Transmission of Electricity (UCTE) as the result of a 12-year process. Hungary's power and transmission system operates in accordance with the systems of most other European countries, providing increased security of supply according to MVM.
Hungary has passed electric power liberalization legislation set to go into effect beginning in January 2003. It will begin with large consumers (about 200-300 large industrial users with annual consumption above 6.5 Gwh) that represent about 35% of the market. The legislation still requires lower-level regulations that will specify how much electricity these large users can purchase on the open market or from abroad. These regulations will also need to specify how so-called "frozen" costs will be distributed. These are additional costs that arise from the fact that consumers in a free market are unlikely to buy all the power that wholesaler MVM has already purchased through long-term contracts and will have to be reimbursed. Additional liberalization will be phased in gradually, but must conform with EU regulations by the time that Hungary accedes, as the country has not requested any special exemptions. New power stations were permitted to be built without long-term purchase contracts as of February 2002. Many analysts are skeptical of Hungary's liberalization plans, because Hungary's electricity producers have higher costs than outside European sources, but are protected by long-term contracts with MVM. It is unlikely that the government would simply allow many power plants to go out of business when exposed to competition. Another problem is that MVM is selling below cost to distributors because of price caps, and then being compensated by the government for losses. Currently, the government is considering allowing the large consumers to purchase no more than 50% of their electricity on the open market in 2003. Also, given the small size of Hungary's electricity market and the continuing prevalence of long-term contracts, the creation of a physical spot or short-term market may be difficult. Nevertheless, in June 2001, the European Commission announced its satisfaction with Hungary's regulation of its electricity sector and concluded that the relevant legislation is in line with EU requirements.
Hungary has several new power plants planned or under construction. Central European Steel Group of Russia plans to build a 590-MW coal-fired plant near the border with Ukraine. Higher quality Russian coal will be used as the fuel source, and the plant's construction is expected to begin by the summer of 2002. Fortum Engineering of Finland and Budapest Power Plant plan to build a 110-MW gas-fired, combined cycle power plant in the Kispest area of Budapest. The plant will also produce 120 MW of district heat. E. On of Germany's Hungarian subsidiary built and owns over 90% of a combined-cycle 95-MW power plant in Debrecen that was officially opened in November 2001. The plant is an IPP, having no long-term contract with MVM. AES of the United States has been very active in Hungary, having purchased state-owned power producer Tizai Gorup in 1996. AES at the time promised to make several hundred million dollars in investments in return for long-term contracts with MVM that would support the costs of the investments. In October 2000, AES sued the Hungarian government and MVM and canceled new investment in Hungary because it claimed that MVM had failed to agree to the contracts. In January 2002, AES reached a compromise with the government and MVM that will have MVM obligated to purchase power from AES' 860-MW Tiza II oil and gas-fired plant for 15 years and for two more years from AES' smaller coal-fired power plants, after which the two coal-fired plants will be retired. AES also agreed not to build two new power plants the company had planned. NRG Energy of the United States has also invested in Hungary's power sector, having bought Powergen of the UK's Csepel II 389-MW combined cycle gas turbine power plant in April 2001.
Nuclear
The Paks nuclear power plant at Tolna Megye consists of
four Soviet-design, second generation VVER-440/213 reactor units that each have
a net generating capacity of 433 MW (the oldest unit has a net capacity of 430
MW). Paks is owned and operated by MVM subsidiary Paks Nuclear Power Plant Co.
The Hungarian Atomic Energy Authority (HAEA) regulates the plant. The plant is
undergoing a 60-billion-forint multiyear safety upgrade program to be finished
at the end of 2002. HAEA is considering a request by the Paks Nuclear Power
Plant Co. to extend the lifetime of the four reactors beyond their 30-year
design lives and to uprate the power at each unit by about 10%. The four units
went online between 1982 and 1987. In June 2001, an accidental fire occurred
that caused the plant 1.15 billion forints in losses and 150 million forints in
repairs, but the accident did not have to do with the nuclear reactor, so there
were no significant safety issues raised. Hungary has bilateral agreements with
the other countries of the region for notification and information sharing in
the case of an emergency. The EU regards the plant as safe by Western nuclear
power plant standards.
| Table 1. Economic and Demographic Indicators for North Central Europe | ||||
| Country |
Gross Domestic Product (GDP), 2000E (Billions of U.S. $) |
Real GDP Growth Rate, 2000 Estimate |
GDP per capita, 2000 Estimate (U.S. $) | Population, 2001E (Millions) |
| Poland | 158.3 | 4.0% | 4,097 | 38.6 |
| Czech Republic | 50.8 | 2.9% | 4,943 | 10.3 |
| Slovak Republic | 19.2 | 2.2% | 3,555 | 5.4 |
| Hungary | 46.8 | 5.2% | 4,680 | 10.0 |
| Total/Weighted Average | 275.1 | 3.9% | 4,278 | 64.3 |
| Table 2. Energy Consumption and Carbon Dioxide Emissions in North Central Europe, 2000 | ||||||
| Country | Total Energy Consumption (quadrillion Btu, 1999) | Oil (thousand barrels per day, 2001) | Natural Gas (billion cubic feet) | Coal (million short tons, all types) | Electricity (billion kilowatthours) | Energy-Related CO2 Emissions (million metric tons of carbon, 1999) |
| Poland | 3.84 | 431 | 444.6 | 155.3 | 138.8 | 84.5 |
| Czech Republic | 1.54 | 175 | 327.4 | 63.3 | 63.2 | 28.5 |
| Slovak Republic | 0.70 | 72 | 292.3 | 11.2 | 27.8 | 9.2 |
| Hungary | 1.07 | 149 | 411.2 | 16.1 | 38.2 | 16.2 |
| Total | 7.15 | 827 | 1,475.5 | 245.9 | 268 | 138.4 |
| Table 3. Energy Supply Indicators in North Central Europe | ||||||||
| Country | Crude Oil Reserves, Million Barrels, 1/1/02E | Natural Gas Reserves, Trillion Cubic Feet, 1/1/02E | Coal Reserves, Million Short Tons, 1999 | Oil Production, Thousand Barrels per day, 2001 | Natural Gas Production, Billion Cubic Feet, 2000 | Coal Production, All Types, Million Short Tons, 2000 | Electricity Generation, Billion Kilowatthours, 2000 | Crude Oil Refining Capacity, Thousand Barrels per Day, 1/1/02 |
| Poland | 114.9 | 5.12 | 15,773 | 14.2 | 174.9 | 179 | 145.1 | 382 |
| Czech Republic | 15 | 0.14 | 6,809 | 6.4 | 2.9 | 71.3 | 73.1 | 198 |
| Slovak Republic | 9 | 0.53 | 190 | 1 | 14.1 | 4.1 | 29.9 | 115 |
| Hungary | 110.9 | 1.28 | 4,917 | 37.2 | 121.9 | 15.6 | 34.2 | 161 |
| Total | 249.8 | 7.07 | 27689 | 58.8 | 313.8 | 270 | 282.3 | 856 |
Sources for this report include:
BBC; CIA World Factbook; Czech News Agency; DRI WEFA; Economist Intelligence
Unit; Financial Times; Hungarian News Agency; PlanEcon; Platts Oilgram; Polish
News Bulletin; Prague Business Journal; Slovak Spectator; U.S. Department of
Commerce; U.S. Department of Energy and Energy Information Administration;
Weekly Petroleum Argus; World Markets Online.
For more information from EIA, please see:
EIA - Country Information on Poland
EIA - Country Information on the Czech Republic
EIA - Country Information on the Slovak Republic
EIA - Country Information on Hungary
Links to other U.S. government sites:
CIA World Factbook - Poland
U.S. Department of Energy's Office of Fossil Energy, Energy Overview of Poland
U.S. Department of Energy's Office of Fossil Energy, Poland Energy Law
U.S. State Department's Consular Information Sheet - Poland
U.S. Commerce Department's Country Commercial Guide - Poland
U.S. State Department's Background Notes on Poland
Library of Congress Country Study on Poland (October 1992)
U.S. Commerce Department's Market Access and Compliance, Poland
U.S. Commerce Department's Market Access and Compliance, Electric Power Generation in Poland
U.S. Commerce Department's Market Access and Compliance, Profile of Polish Oil and Gas Company
U.S. Commerce Department's Market Access and Compliance, Profile of Polish Natural Gas Sector
Information from the U.S. International Trade Administration
U.S. Embassy in Poland
U.S. Department of Energy, Office of Fossil Energy's International
Section -- Czech Republic
U.S. State Department
Country Commercial Guide FY 1999
U.S. Department of Commerce's
Country Commercial Guide FY 2000
U.S. Embassy in Prague
U.S. International Trade Administration, Central and Eastern
European Business Information Center (CEEBIC)
U.S. Department of State Background note on Slovakia
U.S. Department of State background note on Hungary
The following links are provided solely as a service to our customers,
and therefore should not be construed as advocating or reflecting
any position of the Energy Information Administration (EIA) or the United States Government.
In addition, EIA does not guarantee the content or accuracy of any
information presented in linked sites.
The Official Website of Poland
Poland's Government Information Center
Polish Oil and Gas Company
Poland's Embassy in the U.S.
World Bank on Poland
National Association of Regulatory Utility Commissioners on Poland's Energy Regulatory Office
Energy companies in Poland, compiled by BizPoland
EuroGas (follow "Current Projects" link to information about Poland)
FX Energy
Weglokoks
Official Czech Republic Site
World Bank: Czech Republic Country Brief
Central Europe Online -- Czech Republic
Czech Statistical Office
Czech Environment Ministry
University of Texas REENIC-- Czech Republic
Columbia University -- Czech Republic page
Hungarian Government page
Slovakia government links
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File last modified: March 27, 2002
Contact:
Charles Esser
charles.esser@eia.doe.gov
Phone: (202) 586-6120
Fax: (202) 586-9753