Market pays for Polish independence [NGW Magazine]
By the time state-controlled giant Polskie Gornictwo Naftowe i Gazownictwo (Polish Oil & Gas Company, or PGNiG) sees its long-term supply contract with Gazprom expire in 2022, Poland hopes to dispense entirely with purchases of gas arriving from the east via the Yamal pipeline. Further than that, the country has grand plans to turn itself into hub for alternative supplies serving the central and eastern European (CEE) region.
In a bid to replace the 10bn m3 purchased from the Russian exporter last year – around 60% of annual consumption – Warsaw is building the Baltic Pipe to link to Norway through Denmark and has booked its capacity. PGNiG has been building its upstream asset base on the continental shelf.
The country’s LNG import capacity is also set to grow. The Swinoujscie terminal will be expanded from the current 5bn m3/yr to 7.5bn m3/yr. A 4.5bn m3/yr floating facility in Gdansk will also be added to cope with the numerous contracts Poland has signed with Qatari and US suppliers.
Yet with Russian resistance stiff, and Nord Stream 2 looming over it, Warsaw is wary of disruptions as it develops these plans. The conservative nationalist Law & Justice (PiS) government has been shutting down competition on the domestic market while it gets PGNiG into shape.
The timetable of infrastructure development reflects these concerns. Since PiS came to power in late 2015, EU-funded links to neighbouring states – such as the GIPL interconnector to Lithuania and Stork II to the Czech Republic – have been delayed. Meanwhile Baltic Pipe and the LNG projects have accelerated.
“The government was quick to change the calendar,” says Polish gas industry analyst and editor of the Biznes Alert outlet Wojciech Jakobik. “It now says it needs to build the diversification infrastructure before liberalising the market.”
That stems from the risk PiS sees from Russian competition while it builds up these alternative sources, a point that has been repeatedly stressed by the secretary of state for strategic energy infrastructure, Piotr Naimski.
“The risk is that the alternative sources prove more expensive,” says CEE energy analyst at Erste Bank Tamas Pletser. “That price difference would have to be covered by someone, be it consumers or PGNiG. That threatens to distort the market should another company have access to the cheaper Russian gas.”
Come 2023, when the Gazprom contract is finished and Poland is happily importing all the gas it needs and more from elsewhere, then the next phase – re-liberalising the market and developing a hub role – can start.
“Liberalising the market now would leave PGNiG in need of subsidies if it is to continue to develop alternative supplies to the volumes it is committed to buy from Russia under the long term contract to 2022,” said Jakobik. “Once that contract is finished, the market can be liberalised. The interconnectors will then be built and that will allow Poland to export some of this gas. In the meantime, PGNiG is being built up to be ready for this role.”
That’s the theory at least. But analysts and smaller players on the market worry that it may not prove so simple.
“This is clearly also a bid to set up a state monopoly,” stated Maciej Markowski, sales and development director at Efengaz, a Gdansk-based gas and power wholesale trader. The company does not work in distribution to end customers because of the obstacles, he adds.
“Two or three years ago the market was reasonably liberalised and worked okay, but the current government and regulator are steadily closing it,” he added.
The main tool used by PiS to limit competition on market is the tightening of storage obligation requirements in July 2017. Previously, companies importing less than 100mn m3/yr were exempted from the obligation to maintain strategic reserves. But now all entities bringing gas to Poland must hold 30 days’ supply in storage, ready for deployment in the event of any disturbance in deliveries.
PGNiG says the change has levelled the market, as all players now work under the same rules and are responsible for energy security. The state-controlled utility has long had energy security obligations in its statutes. However, smaller companies counter that the new legislation has killed competition and encourages PGNiG dominance.
They also note that PGNiG owns the bulk of Polish storage facilities. “Gas storage on the territory of Poland practically means using the services of PGNiG Capital Group,” notes a report by Danish oil and gas consultancy Ramboll.
“You need a licence to import gas from abroad and then have to pay for storage. Efengaz does not, therefore, source gas from outside Poland,” Markowski explained. “Those companies that do have the financial means to secure a licence don’t bother because the cost of storage is very difficult to forecast.”
Companies do have the option of storing gas sourced abroad outside Poland, but then they need to have transmission capacity on cross-border links booked and ready to send gas to Poland. EU challenges have thus far failed to overturn the condition.
These obligations have all but wiped out alternative importers to PGNiG, which has 100% of current capacity at Swinoujscie booked to 2035. Owner and operator Polskie LNG – a subsidiary of state-owned transmission system operator Gaz-System – plans to add a further 2.5bn m3/yr. It also wants to have a new 4.5bn m3/yr floating storage and regasification unit (FSRU) installed in Gdansk by 2025.
Although details have not been released, PGNiG is also believed to have booked at least 90% of Baltic Pipe’s 10bn m3/yr import capacity from Gaz-System and its Danish project partner Energinet.
“Other companies could have participated [in the Baltic Pipe capacity auction]; however, the storage obligation requirement forced many traders to give up their import licence,” Ramboll’s report noted. “Without an import licence, participating in an open season for new import capacity is hardly interesting and defendable from a business point of view.”
The list of companies that handed in their import licences after the new requirements were adopted two years ago is long. Markowski said, meanwhile, that other regulatory challenges are mopping up the stragglers. He pointed at changes to the balancing market made this year that place further stress smaller players, especially targeting their cash flow, which is "everything on the Polish gas market".
The effects of PGNiG’s increasing dominance of the Polish market is not good news for consumers or the environment.
Ramboll calculates that the price spread between spot prices on Poland’s TGE exchange and Germany’s Gaspool increased 14% in the second half of 2017 compared with the first six months of the year.
“This will probably mean the end-users and/or the government need to bear the relatively higher gas price in Poland,” the report warns.
The Oxford Institute for Energy Studies (OIES), meanwhile, warns that the lack of competition could hold back much needed improvements in energy efficiency. That’s no small issue given that severe labour shortages have in recent years put increased emphasis on the need to improve productivity.
“Energy efficiency is one of the factors affecting the competitiveness of the entire economy, especially industry,” the OIES wrote in a report. “Energy efficiency will thus be one of the main determining factors on future industrial growth. Poland has made notable progress in reducing the energy intensity of industrial processes over the last two decades, but still has the fourth highest energy intensity in the EU.”
“Competitors to PGNiG are allowed, and consumers are free to choose their supplier, so Poland does meet EU standards for a liberalised market,” said Pletser. “However, Polish consumers face the risk of higher prices due to low competition and high state involvement in the sector.”
On top of that, he pointed out that investors on the financial markets “definitely don’t like the idea that the government is trying to force through its ideas using listed companies. PGNiG’s stock price has been hit by regulatory changes and prices.”
That complaint is nothing new. Political rather than economic decision-making has long weighed on the equity performance of Poland’s state-controlled energy companies - be they gas, power or oil.
That adds to suspicions that, having striven to build a virtual monopoly, the government may find it hard to give up its privilege once the perceived Russian threat retreats. PiS has strong statist instincts when it comes to the economy and is also seeking to build significant state holdings in the banking and media sectors.
“Everyone’s waiting for 2023; and wondering what will happen,” said Jakobik. “Poland has an independent regulator and all is in place for liberalisation for 2022, but will the government be ready to give up the state’s advantage?”
At the same time, PGNiG hopes it will have bigger fish to fry by that point in time. The state-controlled giant hopes that the construction of the planned interconnectors to link to the neighbourhood will help it overcome the current regulatory blockades to developing a regional market.
Gaz-System predicts gas consumption in CEE will rise by around 13bn m3/yr over the next 20 years to total to 100bn m3/yr. The links to Slovakia and Lithuania are now under construction, with completion forecast for 2021. Although delayed, the pipelines to the Czech Republic and Ukraine are at least on the drawing board.
Locked in its own battle with Russia, Ukraine is a special target for Poland’s bid to offer alternative supplies across the region. In late August PGNiG announced it has sold an LNG cargo to Ukraine-based ERU. The shipment is expected to be routed to via the Hermanowice interconnector point on the Ukrainian border before the end of 2019.
PGNiG is also seeking to develop a remote trading role. The company is already working on global LNG deals as it establishes offices in global trading hotspots like London.
“That gas won’t come to Poland at all,” Jakobik pointed out. “The company is seeking to gain greater independence from the Polish market.”
However, he insisted that, for the moment, the Polish government’s stance is understandable.
“You just have to look at the situation regarding the EU’s actions over Russia’s use of the Opal pipeline to see why Poland is wary of opening its market,” he asserted. “There’s a big risk of allowing a big player to dominate.”
However, it’s not only smaller competitors on the Polish gas market that are paying the price for defending Poland’s energy security. Warsaw is also asking the environment to take one more for the team.
Naimski reiterated in early October that the push to cut Polish dependence on Russian energy means Warsaw will not sign up to EU emissions targets, and instead will extend reliance on coal for electricity generation.
The official told the Financial Times October 3 that it was “not possible and not feasible” for Poland to meet the EU goal of cutting net carbon emissions to zero by 2050. Instead, he said, coal – which currently produces around 80% of Polish power – would still generate up to half the country’s electricity in two decades’ time.
“Security of energy supply is the most important but the responsibility for energy security relies on [individual] member state governments only,” Naimski said. “Because of this, a common energy policy in the European Union is a really difficult task.”