Energy Insecurity: Poland Between a Rock and Hard Place

Poland has struck a new gas deal with Russia, but the country remains stuck between the proverbial rock and hard place. What to do?

“There is no risk of disruptions in natural gas supplies to Poland,” the Economy Ministry declared last week following the resolution of protracted talks over Russian gas supplies. But the negotiation process illustrated, yet again, Poland’s dependence on Russian natural gas.

Energy insecurity is one of the great bugbears of Polish foreign policy and a source of major apprehension in relations with Russia. And this year’s gas negotiations, as in the past, were unpleasant.

“I would like this discussion to be the last one,” said Tomasz Chmal, an energy expert at the Sobieski Institute, a Warsaw-based think tank, summing up the general feeling in Poland.

That’s an understandable desire, but one which will likely go unfulfilled.

The gas, at last

The preliminary intergovernmental agreement reached by Polish and Russian officials secures annual deliveries of 10.2 billion m3 of natural gas for Poland through 2022. The increase (up from 7.4 billion m3) will fill a supply gap of two billion m3 left by a cessation of deliveries from Ukraine in 2009.

Gazprom deputy CEO Alexander Medvedev said the contract, which still needs to be signed at the government level, as well as between gas monopolists Gazprom and PGNiG, would be finalized next week.

Polish PM Donald Tusk has backed the deal, while the Polish energy sector watchdog (URE) has given its official green light.

The EU, whose complaints halted a gas deal back in February, had a representative present at the negotiating table and should see some of its requirements satisfied. The bloc had insisted that the infrastructure transporting gas through Poland be accessible to third parties, and that the pipeline itself be run by an independent entity.

The price of gas in the contract is not yet known but, according to Mr Chmal, they will probably be above market prices. In the short term, however, Poland has no other choice.

A game of influence

The political map of Central and Eastern Europe might have changed a great deal since 1989, but its network of gas pipelines is still a stark reminder of Soviet dominance.

Simply put, Poland is utterly reliant on Russian gas and pipelines. “In the short term there are no other options comparable in volume,” Andrzej Szczęśniak, an independent energy market analyst, stated bluntly.

There’s a commonly held belief in Poland – and elsewhere – that Russia wields Gazprom as a foreign policy tool. And the under-construction Nord Stream pipeline, which is to carry 55 billion m3 of gas directly from Russia to Germany annually, bypassing Poland, makes many in the latter country nervous.

“When the Nord Stream is completed, Russia won’t be pressured by German consumers [to maintain deliveries to Poland] anymore. This is the game,” commented Mr Chmal.

But is it? According to Mr Szczęśniak, Poland’s prime concern should be to improve business relations with Russia and to keep gas supplies out of the realm of politics.

“Poland has weak leverage on Russia because it cut business contacts with Russia four years ago,” he said. “Normally good sense tells you to have the best contacts possible with suppliers. In Poland we have done the opposite,” he lamented.

Marko Papic, an analyst at American intelligence company Stratfor, added that Russia actually has a strong interest in making sure that its relationship with Poland is accommodating.

“Russia needs the EU to stay out of its business as it tries to lock down Ukraine, Belarus and the Caucasus,” he explained. “To do that, Russia needs good relations with major EU countries. Poland has leverage there,” he added.

Proof of this leverage, according to Mr Papic, can be seen in Russia’s “magnanimous” declaration that Poland would not lack gas if the contract was not signed in time.

Alternative options

Poland’s new contract with Gazprom is no substitute for investment in alternative sources, however, as gas consumption is set to rise at a pace that even the increase to 10.2 billion m3 of Russian gas will not cover.

According to Mr Chmal, “14.4 billion m3 [of combined Russian imports and local production] is just the bottom line for Polish demand in the next few years. If the economy grows, and I am optimistic about this, then demand will increase, too.”

For now, the bulk of Poland’s annual gas consumption goes to the chemical and oil-refining industries. Only one-third is used by Polish households, mainly for heating, and almost none goes towards electricity generation.

But this last point might change. Currently around 95 percent of Polish electricity is generated using coal. Although this dependency on coal won’t end any time soon, the country is under pressure from the EU’s climate change package to reduce its percentage in the energy mix.

Gas-fired power plants, although virtually unheard of in Poland, produce only half as much CO2 as coal-fired plants and provide a good balance with less-reliable energy from renewable sources like wind, according to Mr Chmal.

“I think there is room for at least a few gas-fired power plants in Poland,” he said. “If we decide to build them, then 10.2 billion m3 will not be enough.”

Betting on LNG

The option with the best prospects to help meet demand, according to all experts, is the liquefied natural gas (LNG) terminal being built on the Baltic coast in Świnoujście.

Construction is going smoothly and the 2.5 billion m3 capacity terminal should be functional in 2014. Supply should not be a problem, as one contract with Qatar has already been signed by PGiNG and other partners appear to be interested.

Another reason to bet on LNG, according to Mr Papic, is that shale-gas production in the US may reduce that country’s demand for gas imports to the point that market prices drop, making new sources more attractive for countries like Poland.

“Instead of buying from Qatar, Poland might want to buy from the Caribbean, which could in the future be looking for new clients,” hypothesized Mr Papic.

Cash flows east, gas flows west

The Baltic Pipe and the Świnoujście LNG terminal are among 43 projects funded by the EU to bolster Europe’s energy infrastructure and lower its dependence on energy imports from Russia. The Nabucco pipeline, designed to pump gas from the Caspian Sea, is another, and one which could in theory benefit Poland. It’s unlikely to be built soon, though, if ever.

“Nabucco for Poland is a fairy tale,” said Mr Szczęśniak. “There is interest, but the product is not viable.”

EU-funded projects that stand a better chance of improving Poland’s energy security include plans to install connections between neighboring countries and enable the reversal of the gas flow in pipes that transport gas from Russia to Europe.

According to Mr Papic, “Central Europe currently has myriad unconnected national networks, with almost every country essentially a separate market, only connected via a main trunk line, which is usually controlled by Russia and only flows in one direction.”

Poland is no exception. Over 30 billion m3 flows through it to Germany every year via the Yamal pipeline, according to Mr Chmal. One option to consider in case of a force majeure would be to reverse the flow, which is technically impossible at the moment.

The lack of interconnectors between markets has also been described by experts as a major obstacle to quick relief in case of a crisis.

But the problem is not only a technical one. Mr Chmal was unconvinced that the situation would be much different for Poland even with the right technology. Although it is not said openly, no one is willing to make any move that Gazprom could see as hostile, he explained.

Deal with the present

There are also steps that Poland could and should take at home. Today, one-third of Polish gas is produced internally. There is plenty more, but the current monopoly in the gas sector means there is a lack of incentive to search for it

The country has a lot to do when it comes to drilling at home, according too when it comes to drilling at home, according to Mr Szczęśniak. “In Poland there are a lot of reserves, but they are not used because of low competition in production,” he lamented. Indeed, he believes that the state monopoly on the sector should be dissolved, but said the government had no intention of doing so for now.

Despite this, state-owned companies regularly make headlines with new projects and storage facilities. But according to a source who wished to remain anonymous, many of these projects boil down to PR operations by state-owned energy companies wanting impress the government.

The Polish gas sector can’t pressure the goverment to behave in a more business-like fashion, said Mr Szczęśniak.

“PGNiG is state-owned – it’s a conflict of interest, and there is no question that the privatization process in the sector should be accelerated,” he added.

Shale drilling could be a game-changer but, according to most estimates, its true potential will not be apparent for another 10 years. Indeed, for Tomasz Chmal, there are still too many question marks.

“I would not make predictions. It’s like a lottery ticket,” he said.

So it all comes down to Russian gas. But Gazprom’s deputy CEO recently hinted that Poland and Europe’s reticence to comply with Russian conditions might have endangered supplies.

“The reliability of European gas supplies will be determined by competition with other global gas markets, primarily in Asia,” Alexander Medvedev said in an interview posted on his company’s website. “The [EU anti-monopoly] reform poses a real risk of underinvestment in the European gas industry.”

Is this a sign of problems to come or simply rhetorical posturing?

According to Mr Chmal, it’s closer to the latter. Although Gazprom might be unhappy with Europe, Asia doesn’t want to pay as much for gas, he said.

Thus Europe, Poland and Russia seem set to continue their uncomfortable partnership for the foreseeable future. Assuming there are no new problems in the pipeline.

Source: Warsaw Business Journal