Contributed by Szabo Kelemen & Partners Andersen Attorneys.
In Hungary, the extraction of hydrocarbons, including unconventional hydrocarbons, is subject to authorization by the Mining Supervisory Authority.
In 2017, the Hungarian Mining and Geological Office and the Hungarian Geological and Geophysical Institute merged to form the Hungarian Mining and Geological Survey (MBFSZ), a central office whose task was to carry out the state’s mining and geological tasks. Since January 1, 2022, the general and universal successor to the MBFSZ, the Regulated Activities Supervisory Authority (SZTFH), has been carrying out these tasks, as well as the mining supervision and state geological tasks previously the responsibility of government offices.
In Hungary, mineral resources and geothermal energy are state-owned in their natural places of occurrence.
According to Art. 3 (1) of the Mining Act, the mineral raw material extracted by the mining company becomes the property of the mining company upon extraction, and the geothermal energy extracted for energy purposes becomes the property of the mining company upon utilization.
According to Art. 20 (1) of the Mining Act, the state is entitled to a mining fee, based on the extracted mineral raw material and geothermal energy.
The most notable market player in Hungary both in the production and trading of oil is the state monopoly, Magyar Olaj- es Gazipari Nyrt. (MOL). MOL is a company established in Budapest, Hungary, which has as its core activities the exploration for, and production of oil and gas, the transportation, storage, and distribution of oil products at both retail and wholesale levels, the transmission of gas, and the production and sale of alkenes and polyolefins. The transport business within MOL operates 4,550 kilometers of 300-800 millimeters diameter gas pipelines and 900 kilometers of 200-600 millimeters diameter oil pipelines, including 900 gas transfer and hub stations and three compressor stations. FGSZ Zrt., a 100 percent subsidiary of MOL, is the only TSO in Hungary. FGSZ Zrt., as TSO, controls the Hungarian transmission pipelines.
The number of shares held by the Hungarian state in MOL decreased from 25.24% to 5.24% in recent years due to donations to some domestic funds. However, these donations do not appreciably affect the voting rights of the state.
In 2021, Hungary has signed a new 15-year natural-gas supply deal with Russia’s state-controlled energy firm, Gazprom. Given the dependence of Hungary on Russian gas (see later), this contract is crucial for the domestic energy sector.
The energy mix of Hungary is based on gas and oil; however, Hungary is poor in both of these resources. In 2020, Hungary adopted a net-zero emission target by 2050. This is part of a wider change in the country’s energy and climate policies. Consequently, and also relying on similar EU targets, the energy mix of Hungary is expected to move towards renewable energy, and energy policy and law are expected to rather focus on sustainability and renewables in the forthcoming years.
2. OVERVIEW OF THE COUNTRY’S OIL & GAS SECTOR
2.1. Legal framework – a brief outline of your jurisdiction’s oil & gas sector
The primary legal basis of mineral extraction activity is Act No. XLVIII of 1993 on Mining (Mining Act). Important pieces of law for permitting procedures are Governmental Decree No. 203/1998. (XII.19.) (detailed permitting rules), Act XXXII of 2021 on the Surveillance Authority for Regulated Activities, Government Regulation No. 53/2012 on mining construction permitting, Government Regulation No. 314/2005 on EIA and IPPC, Act No. LIII of 1996 on nature conservation, Government Regulation No. 275/2004 on Natura 2000 sites, Government Regulation No. 312/2012 on construction permitting, SZTFH Decree 13/2022 (I. 28.) on mining waste management, Ministerial Decree No. 8/2014 (II. 18.) on the mining concession tender procedure, Act XVI of 1991 on Concessions and Act CXCVI of 2011 on National Property. For permitting procedures, Act No. CL of 2016 on the General Public Administration Procedures is also highly important.
In Hungary, mining operators holding a hydrocarbon exploration license or an exploration right under a concession contract may only carry out their exploration activities based on an approved exploration technical operating plan.
A mining operator entitled to mine oil and gas may initiate the extension of the mining rights to underground storage of hydrocarbons based on the provisions of Article 5(2) of the Mining Act. The ownership of the state-owned hydrocarbons in the underground gas storage as a natural occurrence may, upon request, be acquired by the mining operator holding a gas storage operating license as defined in a separate act, prior to extraction, as provided for in Section 3(1) of the Mining Act.
In 2020, a significant share of domestic consumption was provided by imports of oil and oil derivatives and gas, totaling 549,974 terajoules net of imports. Dependence on imports decreased by 12.9 percentage points to 56.2%.
Gas imports rely almost entirely on Russian gas, which comes to Hungary in pipelines. Regarding oil imports, the Friendship and the Adria pipelines play a heavy role. The Friendship – Druzhba – pipeline, which supplies Hungary from Russia, is the longest oil pipeline in the world. The pipeline starts in Samara in south-east Russia. Oil import – since oil is generally not that much reliant on pipeline infrastructure – is also heavy on roads, waterways, and rail.
In 2021, the Croatian interconnector has appreciated significantly, following the start of deliveries from the Krk (Croatia) LNG terminal since the beginning of the year. From the current 2.6 billion cubic meters of transport and regasification capacity, up to one billion cubic meters of LNG per year could arrive in Hungary.
Hungary is a key market for natural gas trading since it is a hub between North and South, as well as, West and East.
2.2. Domestic oil & gas production and imports/exports
The domestic conventional oil production in 2019 was 1.37 million cubic meters, the non-conventional was 0. The amount of conventional oil as a geological asset in Hungary in 2020 was 273.43 million cubic meters, and out of that 23.14 million cubic meters was a recoverable asset. The amount of non-conventional oil as a geological asset in Hungary in 2020 was 537.11 million cubic meters, and out of that 58.52 million cubic meters was a recoverable asset.
The domestic conventional gas production in 2019 was 1,849.74 million cubic meters, the non-conventional was 2.5 million cubic meters. The amount of conventional gas as a geological asset in Hungary in 2020 was 185,336.8 million cubic meters, and out of that 75,691.53 million cubic meters was a recoverable asset. The amount of non-conventional gas as a geological asset in Hungary in 2020 was 3,923,315.59 million cubic meters, and out of that 1,565,326.03 million cubic meters were a recoverable asset.
Distribution of energy produced from basic energy sources in Hungary (2017): Gas takes 11% and oil takes 9% of the energy produced from basic energy sources.
Hungary’s dependence on energy imports was increasing in the last decade before 2017. 32% of the country’s energy needs in that year came from domestic production and 68% from external markets. The import rate of 2017 was the highest in the past almost 30 years. It changed in the last years, and the import decreased to 56.2% in 2020. Hungary is one of the moderately energy import-dependent countries in the EU.
Imports rely almost entirely on Russian gas, which comes to Hungary in pipelines, but there is a new agreement (2021) with Croatia about a bigger amount of LNG import to Hungary.
2.3. Foreign investment and participation
No special requirements or limitations are prevailing in Hungary to this end. However, merger clearance rules are applicable to acquisitions and also a ministry notification might be applicable for the acquisition of strategic infrastructure or companies (please see Section 9.3.).
2.4. Protection of investment
The Energy Charter Treaty provides a multilateral framework for energy cooperation that is unique under international law. It is designed to promote energy security through the operation of more open and competitive energy markets while respecting the principles of sustainable development and sovereignty over energy resources.
The Energy Charter Treaty was signed in December 1994 and entered into legal force in April 1998. Currently, there are 53 signatories and contracting parties to the treaty. This includes both the European Union and Euratom.
Furthermore, Hungary, as an EU member state, is subject to all secondary EU energy laws. These laws however dominantly regulate the gas and electricity sector and not the oil sector.
3. EXPLORATION OF OIL & GAS
3.1. Granting of oil & gas exploration rights
In Hungary, mining operators holding a hydrocarbon exploration license or an exploration right under a concession contract may only carry out their exploration activities on the basis of an approved exploration technical operating plan.
Once a concession contract has been concluded, the concession company established by the concessionaire, as the mining contractor, will have the exclusive right and obligation to carry out mining activities, the licenses for which will be issued by the Mining Supervisory Authority. The concession contract may be concluded for a maximum period of 35 years, which is renewable once for a maximum period of half the duration of the original concession contract. The extension of the concession contract must be initiated at least six months before its expiry.
3.2. Foreign exploration
The rules are predominantly the same for domestic or foreign companies. The authorization of hydrocarbon prospection, exploration and production, and hydrocarbon storage is subject to the following specific rules, in addition to the general rules set out in the Mining Act.
- According to Art. 22/A (8)-(9) of the Mining Act, in the case of hydrocarbons, the conclusion of the concession contract is conditional on the provision of a financial guarantee in the form of a bank guarantee of HUF 200 million per exploration block.
- According to Art. 14 (1) of the Mining Act, the exploration period for conventional hydrocarbons shall be a maximum of six years (the initial exploration period shall be a maximum of four years, which may be extended by up to half of the initial exploration period once); for unconventional hydrocarbons, the exploration period shall be a maximum of eight years, subject to the possibility of extending the initial period twice (4+2+2 years).
- According to Art. 22 (13) of the Mining Act, the mining operator must submit the final exploration report within five months of the end of the exploration period (previously 6 months).
- According to Art. 22/C of the Mining Act, following the establishment of a mining claim, the hydrocarbon fields must be re-explored within two years of the expiry of the tenth year after the mining claim was established, failure to do so will result in the penalty of a reduction in the area of the mining claim, and the areas thus released will be made available for concession again.
- According to Art. 22/A (13) of the Mining Act, In the case of hydrocarbons, the total area of exploration by mining operators may not exceed 15,000 square kilometers.
3.3. Stages of the exploration process
Through a concession contract, a concession is granted for a limited period of time for the prospecting, exploration, and extraction also. The license covers all stages.
3.4. Obligatory state participation
Article 20 (1) of the Mining Act provides that the state is entitled to a mining fee for the extracted mineral resources and geothermal energy. The amount of the mining fee payment obligation is set out in Article 20 of the Mining Act, and the frequency of self-declaration and payment of the mining fee is set out in Government Decree 203/1998 (XII. 19.) on the implementation of the Mining Act (Vhr).
The mining fee shall be determined as self-declaration in accordance with the provisions of Government Decree No. 54/2008 (III. 20.) on the determination of the unit value of mineral raw materials and geothermal energy and the method of value calculation (Decree). Pursuant to Article 4(5) of the Vhr, the obligations for oil and gas must be fulfilled on a monthly basis. A mining fee self-declaration shall be submitted even if no mining fee payment obligation has arisen during the relevant period.
In the case of hydrocarbon mining, the amount of the mining fee is determined primarily by the date of production of the hydrocarbon field concerned and the amount of hydrocarbons extracted from the field. On this basis, the following categories are distinguished, in accordance with Article 20 (3) of the Mining Act:
- for oil and gas extracted from hydrocarbon fields put into operation before January 1, 2008, the mining fee is 16%,
- in the case of fields put into operation before January 1, 1998, the mining fee rate shall be calculated using the formula in accordance with Article 20 (3) b) of the Mining Act. If the fee rate calculated in this way is less than 12%, the mining fee rate shall be 12% on the basis of paragraph (3) b) bb),
- in the case of oil and gas extracted from hydrocarbon fields put into operation after January 1, 2008, the rate of the mining fee:
- 12%, if the volume of gas extracted from the hydrocarbon field does not exceed 300 million cubic meters per year or 50 kilotons per year in the case of oil,
- 20%, if the annual volume of gas extracted from the hydrocarbon field is more than 300 million cubic meters but not more than 500 million cubic meters or more than 50 kilotons but not more than 200 kilotons in the case of oil,
- 30%, if the annual production of gas from the hydrocarbon field is more than 500 million cubic meters or 200 kilotons in the case of oil,
- 12% for gas obtained from the involuntary replacement of gas from underground gas storage put into operation before July 1, 2007, and 12% for carbon dioxide gas,
- 2% for hydrocarbons of non-conventional origin and hydrocarbons that can be extracted by a special process, and 2% for the recovery of hydrocarbons from associated gas extracted with thermal water,
- a mining margin of 0% on the quantity of hydrocarbons extracted by means of increased-efficiency processes.
The level of the mining fee for hydrocarbons is influenced by the world market price of oil and gas. Pursuant to Article 20 (4) of the Mining Act, if the monthly average of the Brent oil price on the stock exchange reaches or exceeds USD 80/barrel, the mining fee for oil pursuant to Article 20 (3) a) and c) of the Mining Act is increased by 3-3 percentage points. If the monthly average of the quoted Brent oil price reaches or exceeds USD 90/barrel, the mining fee shall be increased by a further 3-3 percentage points. There are also special provisions for the gas fields put into operation before January 1, 1998, and for the gas fields put into operation after January 1, 1998.
3.5. Risks to be considered
If the mining operator carries out the mining activity in an irregular way, the Mining Supervisory Authority may impose a fine on the mining operator, suspend the continuation of the activity, revoke the permit and order the restoration of the original condition or, if this is not possible, the reclamation of the landscape, or cancel the mining right of the mining operator, in which case paragraphs (6) to (7) of Article 26/A of the Mining Act shall also apply.
Pursuant to Article 41 (2) of the Mining Act, a mining operator who fails to comply with the statutory obligation to notify, self-declare, or pay the mining fee, or fails to do so, is deemed to be carrying out mining activities in an irregular way.
According to Article 41 (6) of the Mining Act, the fine may be imposed repeatedly. The maximum amount of the fine is HUF 10 million. If the defendant fails to remedy the unlawful situation on the basis of which the fine was imposed within the time limit set or if the violation is repeated, the fine may be imposed repeatedly. The maximum amount of the repeated fine is HUF 30 million.
In order to recover the unpaid mining fee, the value of the unauthorizedly extracted mineral raw material, the fee, fine, and supervision fee imposed to make up for the loss of mining fee in the event of a cessation of extraction, as well as the interest on late payment, the Mining Supervisory Authority will contact the tax authority.
A mining contractor or a geological prospector shall compensate for damage caused by mining and geological prospecting activities to property, buildings, other parts of the property and appurtenances of property, and damages caused by water drainage, including expenses incurred for the prevention, mitigation, and remediation of damage.
Mining and exploration activities are deemed to be “hazardous activities” under private law and as such escaping liability for any damages caused to third persons in connection with mining and exploration is extremely limited and challenging.
4. PRODUCTION OF OIL & GAS
4.1. Granting of oil & gas production rights
According to Art. 3 (1) of the Mining Act, the mineral raw material extracted by the mining company becomes the property of the mining company upon extraction, and the geothermal energy extracted for energy purposes becomes the property of the mining company upon utilization.
The Regulated Activities Supervisory Authority (SZTFH) is responsible for carrying out the state’s mining and geological tasks.
4.2. Foreign production
The rights to produce oil & gas are granted by concession (see in Section 3.2.). Concession agreements are governed by the provisions of Act XVI of 1991 on Concessions and the Mining Act. Based on the Mining Act, in principle, the areas subject to concession are publicly tendered by the ministry. The winning bidder(s) shall create a Hungarian entity for the activity subject to the concession agreement and shall maintain majority ownership and voting rights in this entity during the whole term of the concession agreement. Rights and obligations under the concession agreement shall be practiced/performed by the concession company. The winner(s) of concession, as members of the concession company, shall undertake to perform all actions – including corporate actions – which are required to duly perform all obligations under the concession agreement.
Exploration and production rights under the concession agreement might exclusively be transferred or assigned based on the prior consent of the competent ministry. The consent might only be granted by the ministry if the transferee/assignee undertook to perform each obligation under the concession agreement and meets all former tendering criteria, itself. If transfer or assignment is not possible in this way, a call for a new tender shall be published.
Concession agreements are subject to private law in issues not regulated by, or otherwise permitted by mandatory law.
The Concession Directive (Directive 2014/23/EU of the European Parliament and of the Council of February 26, 2014, on the award of concession contracts) is implemented in Hungary, the rules laid down therein are therefore applicable.
4.3. Stages of the production process
Through a concession contract, the government grants a concession for a limited period of time for the prospecting, exploration, and extraction also. The license covers all the stages. Since the concession holder has ownership over the mined product, export is usually not subject to special licensing.
4.4. Obligatory state participation
Please see Section 3.4.
4.5. Risks to be considered
Please see in Section 3.5.
5. TERMINATION OF PRODUCTION OF OIL & GAS
5.1. Abandonment and decommissioning
Abandonment or decommissioning of infrastructure used in oil & gas production shall be notified to the mining authority together with the technical plan of closing the infrastructure and recultivating the area (where and to the degree it is possible). Pursuant to Section 42(2) of the Mining Act, the production area shall be abandoned in a condition that is not dangerous to either nature or the surface. Based on the Mining Act and its implementation decree, the technical plan – amongst others – should be supported with geological surveys prepared for the surface and the underground area, an environmental impact study, security measures for the protection of waters, a plan for the recultivation of land, a plan for the deconstruction of facilities, a plan for the prevention, remediation and compensation of potential mine damages, a proposal for the utilization of the area for other purposes and required investments.
Based on Section12(4) of the Mining Act, the infrastructure created for production is owned by the concessionaire and shall be deconstructed at the termination of the concession agreement, as well we, the area shall be reinstated to its original condition (to the degree it is possible). The concession agreement might deviate from this rule.
5.2. Environmental and HSE consideration
Pursuant to the Government Decree no. 314/2005 (XII.25.) both the starting and abandoning and/or decommissioning oil & gas facilities require an environmental protection authorization from the competent authority of environmental protection. The detailed rules of the proceedings are defined by this government decree, also.
6. SAFETY OF OIL & GAS EXPLORATION AND PRODUCTION
6.1. International treaties to which the jurisdiction is a party
Hungary as a landlocked country is usually not a party to offshore safety treaties.
6.2. Offshore Safety Directive
Hungary as a landlocked country has not implemented the OSD, however, it is a directly applicable secondary EU legislation.
7. IMPORT, EXPORT, AND SALES OF OIL & GAS
7.1. Import and Export of oil & gas
Export and import of gas products are usually carried out via pipelines. Bidding auctions are organized by the TSO for entry and exit capacities. The TSO shall grant access to entry and exit capacities in an indiscriminatory manner. However, the participation at bidding auctions is subject to holding a license issued by the Hungarian Energy and Public Utility Regulatory Authority – in principle, a limited gas trading license – joining the clearing system, provision of financial security, and other conditions laid down in relevant laws and the general terms and conditions of the TSO and the clearing system operator. Subject to several other conditions laid down in Act XL of 2008 on Natural Gas (Natural Gas Act), transit of natural gas via Hungary might be carried out without holding a Hungarian gas trading license.
Oil is an excisable product, therefore cross-border sales or deliveries of oil might be subject to export and import licenses and a customs warehouse license.
The Hungarian Hydrocarbon Stockpiling Association was set out by Act No. XLIX of 1993 on the strategic stockpiling of imported crude oil and petroleum products (currently in effect as Act No. XXIII of 2013 on the strategic stockpiling of imported crude oil and petroleum products) in order to ensure the availability of sufficient volume of strategic crude oil stocks in Hungary in the event of a supply disruption. The association is responsible for the creation and maintenance of the level of strategic stocks laid down by the aforementioned act as well as providing for the necessary conditions.
There is only one gas TSO in Hungary, FGSZ Zrt., which is a 100% subsidiary of the national oil company, MOL Nyrt. Pursuant to the Natural Gas Act – and except for several exceptions – the TSO must be the owner of the transmission pipeline it operates. The construction and operation of transmission pipelines are subject to a licensing obligation with the Hungarian Energy and Public Utility Regulatory Authority, a building permit, and a usage permit issued by the mining supervisory authority. Permits are subject to many special authority consents (environment protection, catastrophe prevention, etc.).
Access to the transmission pipeline is granted in a non-discriminatory manner, however, access is usually subject to holding a license and the conclusion of a network use agreement with FGSZ Zrt., which establishes further criteria laid down in ancillary documents (the Business and Trading Code, the internal policy of the capacity booking platform, standard service agreement, as approved by Hungarian Energy and Public Utility Regulatory Authority from time to time).
7.3. Land rights
Usage rights and/or ownership rights over the track of the pipeline and the mandatory protection area shall be acquired. The state of Hungary has compulsory acquisition rights to land if the public interest is manifestly substantiated.
7.4. Access and integration
There is only one gas TSO in Hungary, FGSZ Zrt. Access to the transmission pipeline is granted in a non-discriminatory manner, however, access is subject to holding a license and the conclusion of a network use agreement with FGSZ Zrt., which establishes further criteria laid down in ancillary documents (the Business and Trading Code, the internal policy of the capacity booking platform, standard service agreement, as approved by Hungarian Energy and Public Utility Regulatory Authority from time to time).
7.5. Gas transmission and distribution
There is only one TSO in Hungary, FGSZ Zrt. The operation of a transmission network requires a license from the Hungarian Energy and Public Utility Regulatory Authority (subject to other authority consents). The TSO must have the ownership of the transmission pipe(s) it operates pursuant to the Natural Gas Act.
The operation of a distribution network is also subject to a license issued by the Hungarian Energy and Public Utility Regulatory Authority. The operator must be the majority owner of the distribution pipeline it operates pursuant to the Natural Gas Act. The ratio of ownership shall be determined based on the book value of all assets operated by the distributor of natural gas.
A distribution line may be installed subject to the prescribed technical safety, financial and economic conditions, in possession of the Hungarian Energy and Public Utility Regulatory Authority’s operating license, in accordance with the legislation on proceedings of building authorities relating to special structures falling within the competence of the mining authority.
In addition, a DSO must also have the necessary metering equipment and means of data transmission, data processing, and IT systems in place with facilities to link up with the IT systems of system operators for the purpose of data communications, as well as bodies within its organization, or of the outsourcing contractor employed upon the consent of the Hungarian Energy and Public Utility Regulatory Authority, for the ongoing operation and supervision, and - within its organization - for the maintenance of these assets and an emergency response unit to eliminate any supply disruption, as well as a non-stop technical control unit within its organizational structure to communicate with the authorized operators of connected networks and with the network users. The in-depth technical and organizational requirements of DSOs are defined in specific legislation adjoining the Natural Gas Act.
The activities of DSOs for selling and buying natural gas for the purpose of corrective accounting and system balancing, and also for own consumption are not trading activities within the application of the Natural Gas Act.
Where a customer is supplied directly from the transmission line DSO functions shall be carried out by the TSO, including the operation of the supply line.
A distribution fee is payable for using the distribution pipeline and joining pipelines. It is either a flat fee or a base fee plus a usage fee depending on the nature and volume of usage. A joining fee is also payable. A joining fee might also be payable in case of capacity improvements. The principles of calculating the fees are determined in the decrees of the President of the Hungarian Energy and Public Utility Regulatory Authority (most recently decree no. 8/2020 (VIII.14.) of the President of the Hungarian Energy and Public Utility Regulatory Authority) and the individual fees applied by DSOs – calculated based on the decree of the Hungarian Energy and Public Utility Regulatory Authority – are approved by the Hungarian Energy and Public Utility Regulatory Authority in authority orders.
8.1. Trading license
Gas trading In Hungary is subject to holding a trading license issued by the Hungarian Energy and Public Utility Regulatory Authority.
The most important pieces of Hungarian legislation to be considered for gas trade licensing are:
- the Natural Gas Act; and
- its implementing decree (Governmental decree no. 19/2009. (I. 30.) re. the implementation of the Natural Gas Act).
According to (Sections 28 and 114(1) points a) and e) and 114(3) of) the Natural Gas Act, trading in natural gas can only be carried out by authorized natural gas traders (i.e. in possession of in compliance with the appropriate license issued by the Hungarian Energy and Public Utility Regulatory Authority). (Section 28(3)-(6) of the) Natural Gas Act describes the “full scope” and the “restricted scope” licenses whereby the main difference is that restricted license holders are not authorized to supply natural gas to end-users, with the exceptions of certain transactions on the regulated natural gas market.
The provisions on natural gas suppliers shall also apply to restricted license holders, except Sections 28/A-31/C, Paragraph a) of Subsection (2) of Section 62, Subsection (1) of Section 63, and Section 113 of the Natural Gas Act. The restricted license holders shall be exempt from the provisions set out in Sections 122-123, too. These provisions relate to communication with users, customer service center, special rules on costumers, switching between supplier rules, universal services, on standard business rules, and special licensing provisions re. corporate events (e.g. events like a merger, demerger, capital decrease, etc.), special reporting/licensing obligation re. acquisition of control, etc.
Restricted gas trading might be performed in Hungary via:
(i) a passported license (for an entity legally registered in any Member State of the EU or any State that is a party to the Agreement on the EEA, and engaged in the supply of natural gas in the country where established); or
(ii) a domestic license (for an entity legally registered in Hungary).
Both the application and holding of a license are subject to other conditions (transparent ownership structure, other organizational rules, financial and technical capabilities) detailed in the Natural Gas Act and its implementing decree.
Exchanges in Hungary mainly deal with MGP and spot products. Certain derivative products are also available. The most preferred exchanges are CEEGEX and HUDEX.
The Hungarian Competition Authority (in Hungarian the ‘Gazdasagi Versenyhivatal’) has competence over anti-competitive practices in the oil and gas sector. The principal criteria of establishing anticompetitive conducts (anticompetitive agreements or abuses of dominant position) are the same as for other sectors.
The Hungarian Energy and Public Utility Regulatory Authority also has special competence in the so-called ‘significant market power proceedings’ as regulated by (Sections 56-57) of the Natural Gas Act.
The Hungarian Energy and Public Utility Regulatory Authority and Competition Authority entered into a co-operation agreement in conducting their respective proceedings and to boost effective detection of anticompetitive restraints.
9.2. Anti-competitive actions
Both the Competition Authority and the Hungarian Energy and Public Utility Regulatory Authority in their own proceedings have the traditional powers upon establishing a breach of competition rules (establishment of a breach of law, ordering the undertakings to stop the conduct, imposing fines). Also, anticompetitive agreements are null and void from a private law perspective and private actions for damages are also available to third parties under the same rules, which are applicable to other sectors.
Merger clearance rules are also the same for the energy sector as for other sectors from a competition law aspect. The substantive test is established by Act LVII of 1996 on the Prohibition of Unfair and Restrictive Market Practices (Competition Act) and uses a mixture of the earlier SLC text with the SIEC text of the EUMR, of which both the legislator and the Competition Authority expects a more economic assessment: “The Competition Authority shall prohibit the concentration if, having regard to Subsection (2) [note by the author: to efficiency considerations] the concentration constitutes a significant impediment to competition in the relevant market, particularly in consequence of the creation or strengthening of a dominant position.”
The time frame of merger clearance proceedings, based on type, is outline below:
- Merger clearance (certificate to implement the merger) – deadline of eight days with no possibility of extension.
- Merger clearance (Phase I) – deadline of 30 days with no possibility of extension.
- Merger clearance (Phase II) – deadline of four months that might be extended by 20 days in case of initial Phase II proceedings or by two months if originally Phase I proceedings turn into Phase II proceedings.
- Competition supervision proceedings for non-filing (in case of mixed thresholds) – four months that might be extended by two months.
Pursuant to Sections 122 to 124 of the Natural Gas Act, mergers in the gas sector might also be subject to notification to or approval of the Hungarian Energy and Public Utility Regulatory Authority in certain cases. Such applications shall be made independently from the merger clearance application to the HCA. Also, the application/notification shall be decided based on different criteria than a competition law assessment (e.g. transparency of ownership, security of service provision, etc.).
The State of Hungary has pre-emption rights in some strategic gas facilities, as well as, special substantive rules regarding the acquisition or change of control in the liquidation proceedings of so-called undertakings of strategic importance are also applicable.
The Government of Hungary might grant immunity from antitrust merger clearance obligation in governmental decrees in case of so-called mergers of strategic importance. This immunity is of course not applicable to mergers of community dimension under the EUMR.
Act LVIII of 2020 prescribes additional notification obligation to the ministry liable for the internal economy in case of certain investments by a foreign investor made into strategic companies as defined by the act and its enforcement decree. Several oil and gas companies, mainly those which control critical infrastructure, qualify as strategic companies under the act. Consequently, certain acquisition in these companies by a foreign investor requires the notification to and subsequent acknowledgment by the ministry. Any company registered in Hungary, the EU, the EEA if their controlling owner is a citizen of or is incorporated in a country other than these areas; or any private individual being a citizen of, or an entity incorporated in a country other than Hungary, the EU, or the EEA shall amount to a foreign investor under the act. Missing the notification or completing the transaction despite the ban by the ministry, might trigger heavy administrative fines. Also, agreements, unilateral declarations, or corporate resolutions not complying with the provisions of the act shall be void.
10. STABILITY CLAUSE AND DISPUTE RESOLUTION
10.1. Stability clause
No express stabilization clause is included in domestic oil and gas laws. It is underlined in this respect that Hungary is an OECD, WTO, and EU member state. Additionally, we note that the Act on Concessions discloses the possibility of the state to amend the terms of the concession agreement to the detriment of the concessionaire.
10.2. Compulsory dispute resolution procedure
In general, no compulsory dispute resolution procedures are applicable to the oil & gas sector.
10.3. International treaty protection
Hungary is a signatory to, and it has duly ratified both the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the ICSID. No special difficulties exist in Hungary in litigating or seeking to enforce judgments or awards, against government authorities or state organs. However – in a very limited scope – disputes are reserved for the exclusive jurisdiction of Hungarian courts or Hungarian arbitration courts in Section 17(3) of Act CXCVI on National Assets. (Pursuant to Section 17(3) of Act CXCVI on National Assets – in the lack of any provision of international treaties to the contrary – the entity holding the right of disposal over national assets located within the borders of Hungary shall exclusively stipulate the application of Hungarian law and the jurisdiction of Hungarian courts or Hungarian arbitration courts in a civil law contract.)
There have been many instances when domestic corporations under foreign ownership successfully obtained judgments against the Hungarian Energy and Public Utility Regulatory Authority, most notably in connection with setting prices by the Hungarian Energy and Public Utility Regulatory Authority and the Hungarian Energy and Public Utility Regulatory Authority decrees influencing access to critical infrastructure.