Warsaw Throws its Hat into the EU Gas Ring

When Poland‘s state-run oil and gas firm PGNiG signed a 20-year deal for liquefied natural gas deliveries from the US last year and said it would be spending €200 million buying into a project to deliver gas from Norway via Denmark, few eyebrows were raised. Poland, after all, has ben one of the chief critics of increasing EU imports of gas from Russia via the Nord Stream II pipeline and announced it would not be extending its 22-year gas deal with Russian gas firm Gazprom when it expires in 2022. It is, also, one of Donald Trump’s few European admirers and has bolstered its eastern defences against perceived Russian threats.

Piotr Wozniak, President of the PGNiG Management Board, said last week that the LNG contracts signed with US partners will enable Poland to buy natural gas 20-30 percent cheaper than gas PGNiG purchases from Gazprom, Wozniak said.

“It is a matter of security and good in terms of supplies.” Gazprom has proved to be an unreliable partner, according to Wozniak.

“We also import LNG from Qatar and Norway. Our goal is to diversify gas supplies to Poland in order to bring affordable natural gas for Polish citizens, in this case – to our customers.”

The Polish question

The question thus moved to how Poland would replace Russian gas and how viable its plans are to become an alternative hub for gas imports into Europe.

Polish gas consumption is 17 bcm, with supply in 2018 from: domestic production 3.8 bcm, imports by pipeline from Russia 9 bcm (down from 9.7 bcm in 2017), LNG Imports 2.71 bcm and pipeline imports from a westerly and southerly direction 1.5 bcm, according to Wozniak.

Asked if the 4-year old Swinoujscie LNG terminal in north-western Poland was more of a political choice, given that gas prices are likely to be higher from non-Russian sources, Wozniak said the assumption was “false” and the question “politically driven.”

The project aims at creating of a new gas supply channel on the European market, which will for the first time allow the transmission of gas directly from the deposits in Norway to the Danish and Polish markets, as well as to recipients in neighbouring countries. The terminal’s capacity is being increased from the current 5 billion cubic metres (bcm) per year to 7.5 bcm.

The project is considered by the EU as “of common interest” and is deemed “essential to the integration of the European energy networks.”

Pawel Jakubowski, CEO of Polskie LNG, said the LNG deliveries and Norwegian gas supplies could reorientate the central European gas market by creating north-south gas routes to replace the existing east-west links, weakening reliance on Russia.

Poland is also planning the construction of new gas links to the Czech Republic and Slovakia (scheduled for 2019), Lithuania (2021) and with Denmark (2022). A new gas pipeline to Ukraine is also under consideration.

The economic viability of the pipeline has been questioned, but the Polish government believes the price of diversification is worth paying given how much the country has paid for not having diversified in the past.

Tatania Mitrova, who is an expert in Russian gas, said that the long-run marginal cost of Russian pipeline gas into Europe is $5.2/MMBtu, which includes a $2.1/MMBtu export duty, which compares with around compared with about $7.5/MMBtu for US LNG.

The Russian question

Gazprom CEO Alexei Miller believes otherwise. “There is no doubt that pipeline gas supplies from Russia will always be more competitive than LNG deliveries from any other part of the world. It goes without saying.”

Several experts agree. “I see little if any evidence that Polish policy makers are interested in developing a competitive natural gas market, which is kind of a prerequisite for a natural gas hub,” Tim Boersma, Director of Global Natural Gas Markets at the Center on Global Energy Policy, says. “Instead, Polish policy makers have invested heavily in what are generally relatively expensive sources of supply, e.g. oil indexed LNG from Qatar, and are reluctant to implement EU legislation and open their market for competition.”

The aim in Poland, Boersma adds, has not been to grow the natural gas market at the expense of more polluting fuels like coal, but rather to replace Gazprom volumes at all cost.

Anna Mikulska, a fellow in energy studies for the Center for Energy Studies at Rice University, agrees. She argues that countries like Poland may be able to use LNG because it will be still cheaper than what they are used to paying. “But they could probably negotiate better prices with Russia if they wanted, since Russia has room to lower its prices considerably. Thus, the decision to use non-Russian gas will be more based in geopolitics and their experience and attitude toward Russia than actual economic calculus.

“Poland would probably have best chance of becoming a hub if, beyond LNG and Baltic Pipe, it would negotiate contracts with Russia to bring in Russian gas,” Mikulska says.

“I find it very difficult to see Poland becoming a major gas hub in central Europe,” LNG expert Andy Flower said. “The volumes of gas it will be able to import, excluding Russian gas, look to be too small.”