Interest grows in central and eastern Europe’s energy sector

By Kristóf Ferenczi, Kinstellar
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中东欧能源行业引中资关注 Interest grows in central and eastern Europe’s energy sector
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When Premier Wen Jiabao visited Hungary at the end of June, he made it clear that central and eastern Europe is of key importance to China in terms of furthering and developing its economic relationship with the European Union. Wen stated that: “When we in China pursue the strategy of diversifying foreign trade markets, and encourage Chinese companies to ‘go global’, we take central and eastern Europe as a strategic priority.” He also stated that China should continue to increase investment and enhance cooperation in the development of new energy and the exploitation of natural resources, and encourage joint establishment of industrial parks and high-tech development. He concluded: “China supports competitive Chinese enterprises in investing in central and eastern European countries, and in actively participating in the merger, acquisition and reorganization of enterprises in these countries.” These words illustrate well the recent increase in Chinese interest in what is often termed “emerging Europe” – a term which covers the centre, east and south of the continent.

Kristóf Ferenczi Kinstellar律师事务所
Kristóf Ferenczi

In particular, there is growing interest among Chinese companies in central and eastern Europe’s energy markets, and the prospect that these companies may make significant investments. The energy sector in emerging Europe appears to have been less affected by the recent economic recession than other sectors of the economy. Existing energy projects have continued and new projects have been initiated despite the global economic slowdown, as the energy market requires long-term investment and can offer attractive returns to investors in the long run.

Flagship projects

Chinese parties are already involved in some flagship investment projects in the energy sector. In Republika Srpska (Bosnia-Herzegovina), EFT Group and Dongfang Electric will construct a major new lignite-fired power plant at Stanari. The Chinese Development Bank is providing credit line financing for the construction of the power plant with a project value of €500 million (US$680 million). The Export-Import Bank of China is expected to confirm soon whether it will provide €220 million in lending for the rehabilitation of two units of the Kostolac B thermal power plant and the installation of a flue-gas desulphurization system in Serbia.

China has also shown interest in nuclear energy, with China Nuclear Power Engineering having expressed interest in investing in the new blocks 3 and 4 at Cernavoda nuclear power plant in Romania. The project, which is 85% state-owned through Nuclearelectrica, is estimated to be worth EUR4 billion. Several major Chinese natural resources and mining companies are also targeting mining and natural resources exploitation in central and eastern Europe.

These developments have, of course, not taken place in a vacuum. At an EU-China summit in 2005 the European Union launched its EU-China Energy Dialogue with the signature of a memorandum of understanding with the National Development and Reform Commission. Followed by the establishment of China’s National Energy Administration in early 2008, the EU-China Energy Dialogue has undergone rapid development. Cooperation between the European Commission and the National Energy Administration has increased, with the fourth energy dialogue between the parties having been held in July 2010 in Shanghai.

China-Hungary trade to double

In Hungary, several Chinese companies have established substantial operations, including IT equipment producer Lenovo and telecoms suppliers Huawei and ZTE, which last year won a 200 million contract to build a mobile network for Telenor’s Hungarian unit. Chinese chemical company Wanhua Industrial Group recently completed its takeover of Hungarian chemical concern BorsodChem.

Wen’s recent to Hungary was a success story for the two countries and, in more general terms, for central and eastern Europe as a whole. Since taking office in May 2010 the Hungarian prime minister, Viktor Orbán, has identified the strengthening of political and economic ties with China as one of his government’s main foreign policy objectives; thus Wen’s words were listened to with attention and interest.

China, which has a strategic interest in increasing its investment in the EU, has identified Hungary as a beachhead for that purpose. The two countries signed 12 bilateral agreements in Budapest in June introducing investment incentives for Chinese companies in Hungary; envisaging the development of joint venture projects in the air, rail and water transportation sectors and the energy market; and establishing a 1 billion credit line from the China Development Bank to help facilitate joint Chinese-Hungarian projects. With these new agreements now in place, the Chinese government has said that it expects to double bilateral trade with Hungary to 20 billion by 2015. The agreements have the potential to make Hungary the primary point of entry for Chinese goods and services to emerging Europe.

Kristóf Ferenczi is a partner at Kinstellar in Budapest and is the firm-wide head of Kinstellar’s energy practice. He has substantial experience in energy industry-related transactions, both in the electricity and natural gas sectors. He may be contacted on +36 1 428 4400 or by email at kristof.ferenczi@kinstellar.com

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