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    Editorial: Get the wagons in a circle [NGW Magazine]


At times like these, politicians have to play a defensive hand. [NGW Magazine Volume 5, Issue 14]

by: NGW

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Top Stories, Expert Views, Insights, Premium, Editorial, NGW Magazine Articles, Volume 5, Issue 14

Editorial: Get the wagons in a circle [NGW Magazine]

Warsaw’s decision to amalgamate its energy companies is in keeping with the state’s assertion of control over business life, much to the dismay of the European Commission.

The PKN-Orlen merger with state gas company PGNiG, if indeed it goes ahead, might not create a supergiant concern that could destabilise the national or regional gas market.

But it does promise more co-operation between the now-separate entities, meaning greater efficiency is possible. That matters, at a time of belt-tightening and economic hardship: all governments have to try to balance the books as they fight off the Covid-19-related recession.

The mechanics of taking over PGNiG are not straightforward, says Fitch Ratings. Its $7.8bn share value would be a bit of a stretch if PKN-Orlen is to keep its rating. But there are also some safety-nets. Oil and gas exploration, production and gas trading businesses are about half of its pre-tax earnings, but the regulated trading environment is at least predictable.

“The acquisition of upstream, gas distribution and electricity generation assets of PGNiG is positive,” says Fitch, while warning of a possible downgrade of PKN-Orlen depending on how the deals work out.

Even before it was announced, there was probably little doubt in most people’s minds that Warsaw and its state-controlled industries act together. The furtherance of competitive markets has never been an objective and many gas traders have quit Poland over the years, unable to chip away at PGNiG’s position.

Poland, as it turns its back finally on Russian gas at the end of 2022, is building more capacity for importing LNG and Norwegian gas. All, or nearly all, of this has gone to the incumbent, PGNiG, giving it almost 20bn m³/yr capacity, which is roughly equal to its national demand. Others could have outbid but unsurprisingly they chose not to.

This new gas might not be cheap, compared with hub gas, but at least the government will not be knowingly funding what it dislikes: Russian military expansionism. It believes that this sort of security is worth paying for. And underpinning some of this security is US LNG, which Washington is encouraging Europe to buy, so that Russia will earn less from pipeline gas.

Further justifying the merger, there is much work to be done on coal, which now accounts for about three quarters of the power generation fuel mix.

As coal becomes more expensive to mine and finance becomes more elusive, gas is the only fuel available for dispatchable power. PGNiG has an eye on gas-fired heat and power expansion, as coal retreats. That gas will include more and more biogas, a relatively expensive commodity to bring to market. This massive build-out of infrastructure will be easier to organise as part of a bigger company: since April, PKN-Orlen has also owned generator Energa.

The planned deal is a strong signal that the government sees gas playing an important role in Poland – along with renewables – for some time to come.

An even larger, privately-funded deal has meanwhile has just been done the other side of the Atlantic: Warren Buffett’s $10bn purchase of Dominion Energy’s pipeline and storage assets, including almost $6bn of debt.

Now the proud owner of thousands of miles of steel tubing – and without the Atlantic Coast pipeline (ACP) project to worry about (see p22) – the contrarian Sage of Omaha is nailing his colours to the mast, also counting on gas having a long-term future.

This is riskier than the Polish deal where the government calls the shots. On top of the usual uncertainties surrounding the future cost of renewable technology, the US might well have a new president next year. Joe Biden is doing better in the polls than the incumbent Donald Trump and his plans include a carbon-free power network by 2035 and no hydraulic fracturing on state lands. He is also planning a $2 trillion spend on infrastructure.  

A victory for Biden could threaten supplies to gas markets globally. Governments and traders alike have been acting as if another hundred million tons/year or so of liquefaction capacity were coming online in the US Gulf over the next five or so years. That will need new pipelines linking the Permian basin to the coast and these are no longer a given, judging from the fate of ACP.

But when push comes to shove, Biden might find himself unable to balance the demands of the environmental lobbyists on one hand, with the needs of households, employees and the budget on the other.

Energy security is also key: January-June gas demand for power generation was up 9% on the year before, and gas was the fastest-growing fuel, despite a 5% drop in power demand, the US Energy Information Administration says.

From that vantage point, the future has never looked brighter for US gas: as well as gas for domestic needs, Washington wants plenty of LNG for trade and foreign policy aims. This is not only to back up its anti-Kremlin rhetoric and to work off its trade deficit with China, but also to exert soft power with governments in southeast Asia, where China is taking land.

The picture is scarcely dimmer In Poland and elsewhere in Europe: gas can knock out coal, but knocking out gas leaves nothing but nuclear, if despatchable power is needed. And there is not so much of that around either.

Politicians may devise energy policies that they know will go down well with some of the population, but the former assumptions based on an upward spiral of prosperity have vanished. Now it is much safer and cheaper to stick to what is known to work.