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    Former PGNiG gives take on European gas outlook

Summary

A discussion between Mykola Voytiv, representative of the Reform Support Team at the Ministry of Energy of Ukraine and the former President of the Board of PGNiG Piotr Woźniak (2016-2020).

by: Mykola Voytiv

Posted in:

Complimentary, Natural Gas & LNG News, Europe, Global Gas Perspectives, Market News, News By Country, EU, Germany, Russia, Ukraine

Former PGNiG gives take on European gas outlook

MV: What is the outlook for European gas prices in 2022?

PW: The sharp rise in natural gas prices was caused by increased demand in the EU in November-December 2021. Russia anticipated this and responded by not pumping normal volumes of gas into underground gas storage in the Netherlands, Austria and Germany. Russian aggression in Ukraine put further pressure on prices. 

Bear in mind that some prices are fixed under bilateral contracts, such as for Russian gas, while others, for example for Norwegian and LNG supply, are based on prices at European gas hubs. But as a rule, prices begin to fall from the beginning of April, after winter has ended, and remain at a moderate level until October. This is what we anticipate this year as well.

MV: How has natural gas storage policy impacted the market?

PW: In Poland, for instance, we obliged by law each importer to store a certain share of its gas in underground storage. As a result, our facilities are completely filled with gas every year, with the amount exceeding 2bn m3.

Other EU countries did not introduce such obligations to the importers and traders, because they placed significant trust in Russian supply. Germany, Austria and the Netherlands either sold or transferred the operation of some of their storage facilities to Russian companies. As a result of this policy, those facilities were left either empty or partially empty at the end of 2021, despite soaring gas demand.

MV: Following Germany’s decision to halt certification, is Nord Stream 2’s fate decided?

This is not the case. Germany has been contradictory in its comments on the situation regarding this pipeline. At the moment, the launch of Nord Stream 2 does not comply with EU energy law, as the gas supplier and the pipeline operator cannot be one legal entity.

Germany’s energy regulator has been tasked with certifying the pipeline operator, which must be a fully independent legal entity, both organisationally and financially. Therefore, the German chancellor's announced that he “withheld the certification of the pipeline operator” is contradictory, as legally, such certification cannot take place at all, as it contradicts EU energy law.

Using Nord Stream 2, Russia wants to end gas transit via Ukraine completely. If the pipeline is brought online, given Russia’s unpredictable behaviour and Germany’s shaky political position, technically it could achieve this within three days. In this event, Russia would disregard its gas transit contract with Ukraine that runs until 2024, violating it without concern for consequences. 

MV: Will the EU remain united in its commitment to ending Russian gas imports?

PW: Unfortunately, the statements from EU officials that “by the end of 2022 the purchase of Russian gas will be reduced by two thirds” are only declarations. It is difficult to say when this will actually happen.

Generally it will take five to six years for Europe to end its reliance on Russian gas (and the financing of Russia’s military), and to replace this supply with other sources including LNG. However, the decision must be taken unanimously and so far there is no consensus in the EU on this issue. Each European country must develop their own gas supply in the near future, but Germany has been extracting almost no gas from its own fields in nearly three years.

MV: Poland plans to end Russian gas imports by 2023. Where will it get its supply from instead?

PW: Poland will secure alternative supply from the Norwegian shelf via the Baltic Pipel, as well as LNG via the Swinoujscie LNG terminal and the planned Gdansk floating storage and regasification unit (FSRU). In addition, the GIPL interconnector with Lithuania could be used for additional volumes.

MV: Which markets could see a growth in Russian gas imports?

PW: As Russia begins losing its market share in the EU, China will be able to absorb larger volumes of Russian gas. Over time this will require additional transmission infrastructure that Russia is ready to invest in. In addition, Japan and South Korea could become larger markets for Russian LNG. Russia does not need more gas itself, it needs money for bombs, missiles, submarines and fighter aircraft.

MV: As Russia withdraws from the EU gas market, who will take its place?

PW: Norway will be able to expand its market share, as well as other countries operating wells in the North Sea, which remains rich in gas. Notably, upstream activity takes place here in compliance with the highest environmental standards.

I would like to note that during my presidency at PGNiG, we even had the idea to invite the Ukrainian side into a partnership at one of our fields that we explored or had access to on the North Sea continental shelf. Ukraine could take part in tenders for exploration and production at gas fields on the shelf.

MV: If Europe ends Russian gas imports, where does that leave Ukraine’s gas transmission system?

PW: The problem with the Ukrainian gas transmission system is the fact that a large number of small towns and industries are connected directly to its pipelines and not the distribution system.

Nevertheless, over the last five years Ukraine’s energy sector has seen consistent progress. There have been improvements in the regulatory field, in terms of infrastructure, and the transmission system has been separated from national gas distribution and trading. 

Ukraine has a very good opportunity to take advantage of the readiness of the US and its investors to help the country complete the modernisation of its gas transmission pipelines and the system’s unbundling from the gas distribution network. But it is very important that this unbundling is undertaken not only formally but physically, in accordance with market rules. This was a message during US president Joe Biden’s recent two-day visit to Poland that was not covered by the media.

As for alternatives to Russian gas, Ukraine could instead transit gas from the Black Sea shelf, which is rich in gas and oil, although this is currently impossible because Ukraine lacks access to the shelf. Ukraine could also transit gas from Poland.

As for the Polish option, negotiations with both Poland and Lithuania would be necessary. This trilateral cooperation would revolve around supplies from the newly-built GIPL interconnector, the commissioning of which is expected this year, as well as LNG from Polish and Lithuanian terminals, to Ukraine. 

Regarding cooperation with Poland, it is important to reach a concrete agreement with the Polish side, which might not be such an easy task.

Germany has also mentioned the possibility of natural gas supply to Ukraine from the planned LNG terminal in Brunsbuttel. I might also mention Slovakia as an option for cooperation, but this is unlikely, as the Slovaks have an agreement with the Russians that if gas transit through Ukraine is disrupted, supply could come from Nord Stream 2 via OPAL and the Czech Republic.

It is also important for Ukraine to develop natural gas exploration and production, not only domestically but, and I emphase again the openness to cooperation of the US to Ukraine, internationally as well. Imagine a headline in the media in the near future: “Ukraine has received 10 licences for natural gas production in Pennsylvania or Texas.”

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