Sat, Oct 06, 2007 page9

• Mood of nations shapes Europe's energy battle

  • By Andrew McCathie / DPA
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  The battle for control of eastern Europe's power sector is taking shape against the backdrop of a new sense of national self confidence across the region, with moves under way to fend off foreign incursions into the industry and worries about the growing threat posed by Russian energy interests.

  While the Hungarian government has stepped up efforts to head off its key MOL oil and gas group from falling into the hands of Austrian rival OMV AG, Central Asia's energy giant Kazakhstan has launched a drive into the EU's giant power market through buying into eastern and southern Europe's energy business.

  At the same time, high energy prices and growing economic prosperity also appear to be helping to nurture a more nationalist approach by former Soviet bloc governments towards their resource sectors.

  "It is clearly a strategic sector," said Ivailo Vesselinov, emerging markets economist with the investment house Dresdner Kleinwort. "This allows government to justify any action they take on the grounds of national security."

  Indeed, last week Kazakhstan unveiled a new law enabling the government to cancel energy contracts that are considered not in the nation's interests.

  The Kazakh move comes against the backdrop of a brawl between the Kazakh authorities and leading international energy corporations over the development of the country's key Kashagan field in the Caspian Sea.

  The increased focus in eastern Europe on its strategic industries also follows criticism of the big sell-off of state energy assets that took place in the years after the implosion of communism and more recently tensions over Moscow's role in energy supplies.

  "The critical issue are concerns that gas supplies from Russia could be used as a political weapon, which in turn could sharpen nationalism in the power sector," said Lars Christensen, senior analyst with Danske Bank.

  In particular, this includes worries that further privatization steps in the former Soviet power sector could open the way for big Russian energy interests such as Gazprom buying into the power sector with several big eastern European utility and infrastructure companies still in state hands.

  "The problem is that there is no viable alternative to Russia. It basically calls the shots [in the energy sector]" Vesselinov said. "It is difficult to see how this sector could be fully privatized," he said.

  Indeed, a key test of how the battle for Eastern Europe's energy resources is shaping up could come before the end of the year when the Romanian government plans to launch moves to sell off a stake in its state-owned natural gas distributor Transgaz SA.

  Moreover, the race to control central and eastern European energy supplies also coincides with growing tensions across Europe about the drive by giant state-owned funds, notably from the Middle East, Russia and China to try to buy major stakes in strategic sectors.

  Prompted by OMV's aggressive US$16 billion takeover bid for Budapest-based MOL, the Hungarian government has drafted a new law barring the acquisition of majority stakes in the energy sector and other strategic industries by foreign state-controlled companies.

  Central Europe's largest electricity group, the largely state-owned Czech utility group CEZ, has also ridden to MOL's aid in its fight with OMV, with the two companies expected to announce this month details of a joint venture to build new gas-fired power plants.

  At least for the moment, CEZ's planned joint venture with MOL may have also helped to undercut Russia's Lukoil and Gazprom's ambitions to boost their role in the region.

  The new Kazakh law giving the government power to annul contracts followed a push by the nation's state-owned KazMunaiGas to build a bridgehead in the EU by announcing in August that it had paid US$2.7 billion for a 75 percent stake in Romanian oil refiner Rompetrol Group NV.

  Rompetrol is also on the lookout for other targets in the Balkans to add to its empire.

  Indeed, KazMunaiGas' decision to take out the Rompetrol stake came after a series of attempts by the state-owned Kazakh energy behemoth to prise open the EU market, including in Lithuania and the Czech Republic.

  Advocates of KazMunaiGas' move on Rompetrol argued that it meant Kazakh oil would be able to flow directly to Europe via Romania consequently helping the EU to diversify supply sourcves away from Kazakhstan's neighbor, Russia.

  But analysts also say there have been concerns in central European energy markets that Kazakhstan might at some point sell on to Russian interests any energy holdings it has acquired, especially because of the leverage Russia exercises in transporting oil and gas exports from Kazakhstan.
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