[NGW Magazine] Poland spreads gas risk with EU help
Poland is in the throes of reorganising its gas supplies, planning for a future when demand will grow as coal is sidelined. An outspoken critic of Gazprom, it might find its future gas supplies are more expensive than at present.
Poland is investing heavily to realise its geopolitical ambition of becoming an energy hub for central and eastern Europe by connecting 12 regional states: the signatories to the Three Seas Initiative. Russia’s Gazprom, the current monopolist, could in consequence end up worse off – something that Poland will be happy with - but the cost of its gas could be higher. Behind Poland’s ardour for new gas interconnectors lies the economic reality. The fast-growing economy is driven by coal, the dirtiest of fossil fuels, and the country generates more than 85% of its electricity from it. With the domestic shortage of coal last year, Poland had to resort to imports which rose by 60% in 2017.
“Poland realises that the bickering with the European Union on the abundant use of coal cannot last forever. Sooner or later, it will have to adhere to the strict EU environmental regulations…. Its pursuit of gas links with Denmark, Lithuania, Slovakia, Ukraine and possibly with Germany in future is a clear hint it is ready to switch from a coal-based industry to a gas-prevalent economy,” consultant Mikhail Krutikhin, with Moscow-based RusEnergy, told NGW. “The transition will be very costly and the immediate use is not tangible yet. But the Poles have a trump card: Gazprom,” he said. Poland is among the eastern European countries to have suffered from Gazprom’s disruptions to gas supply, mostly for political reasons, the analyst said. The links will remove the risks to supply, he said.
Earlier this month, Polish national gas transmission operator Gaz-System said it was seeking permits to lay the Baltic Pipe, connecting Denmark and Poland with a direct access to Norway’s gas fields. The pipeline which is due by the end of 2022 will expand Europe’s transmission capacity by up to 10 bn m³/yr. By comparison, total Danish gas demand for 2016 was 2.5 bn m³. The final investment decision on Baltic Pipe is expected to be taken this year. In late 2017, Poland also announced that it and Slovakia were ready to proceed with a 165-km, €107.7mn gas interconnector. The project was one of the most generously funded of all 18 projects selected in the European Commission's second 2016 Connecting Europe Facility.
Meanwhile, gas Interconnector Poland-Lithuania (GIPL), after being suspended in 2016 moved forward last year with Gaz-System selecting designers to prepare a new blueprint of the pipeline in the southeastern part of the country. It has to be done by the end of 2019. The price-tag for GIPL is €558mn, with €305mn coming from EU coffers. The project is due in late 2021. When in place, the gas links will improve gas supply security in central and eastern Europe. The gradual transition from the coal-dependent economy to a sustainable and diverse, energy-wise, economy poses a huge challenge to Poland though. The good news is that the EU will partly finance all the three afore-mentioned Polish gas projects, whose implementation sits well with Poland’s grandiose aim: to create a counter to the influence of Russia to the east and Germany to the west.
The endeavor identified as the Three Seas Initiative is generally seen as a thinly-veiled power grab by Poland. Formally founded in Dubrovnik in August 2016, it has 12 central and eastern European states as members. Poland and Croatia, which play the first fiddles in the initiative, however say that when complete the initiative will assist in integrating common infrastructure projects north-south in the new EU states of central and eastern Europe.
“So far, the initiative is viewed with raised eyebrows in Brussels owing to its political implications. The EU is in an ambivalent position: embracing it would mean building a strong union – some of whose members employ anti-EU rhetoric – within the greater European Union. But turning it down in its entirety would mean a blow to the goals of the European Union’s strategic energy security,” a Lithuanian energy expert and the former chief of the Lithuanian energy pricing regulator, VKEKK, Vidmantas Jankauskas, told NGW.
“If Poland pursues simultaneous implementation of the gas projects with Denmark, Lithuania, Slovakia and possibly with Ukraine in the future, it may be too much for a single country. But with the geopolitical ambitions set apart, the Poles are forced to think of the day when coal is phased out of their energy structure, hence the far-reaching gas projects and the greenlighting of a €6bn nuclear power plant in the country by 2029,” he added. Nevertheless, it may be premature to speak of the death of coal in Poland: it has recently revealed it plans to build 10 GW of new coal power plants – of which 3.2 GW are already in construction – and to develop new open-pit mines holding 3.2bn metric tons of lignite, the dirtiest form of coal. And Gazprom is certainly not ready abandon the Polish and the other central European markets, where its exports rose sharply in the first 11 months of 2017 compared with 2016: to Serbia by 26.7%, to the Czech Republic by 26.1%, to Slovakia by 26%, to Hungary by 24.4% and to Bulgaria by 7.1%. In Lithuania, where Gazprom accounted for 60% of the gas consumed in 2017, up 5% from the previous year, the Klaipeda LNG terminal and the jetty Independence, supplied by Norway's Statoil, were used at only 50-60% of nameplate. The reality is the former eastern bloc states still prefer Russian gas: it is cheaper and does not need new infrastructure.
“We see that American LNG is expensive and is finding it extremely hard to expand into Europe. No one can say for sure that with the Polish gas interconnectors built, the gas will be cheaper than that of Gazprom gas. I’d not be surprised that the situation in Poland would mirror that in Lithuania now (after the Polish gas links are built),” Krutikhin said.
But Wojciech Jakobik, a Polish energy expert, who sees Polish gas demand rising from current 16bn m³/yr to 20bn m³/yr in the near future, believes that about 15bn m³ of gas could be imported from “various directions and not necessarily from Russia. We do not know the price of Norwegian gas that will be for Baltic Pipe. It could be really cheap, especially without oil price index and coming from PGNiG’s own reservoirs. According to Polish officials, Gazprom gas in long term deal with Poland is the most expensive option on the table,“ the analyst stressed. “I do not see a risk of oversupply. The more choice you have, the better price you get,“ he added. Energy security expert at the Sobieski Institute in Warsaw, Grzegorz Pytel, made the point that Gazprom is not a regulated company in any of the countries, including Poland: “Gazprom conducts its business with respect to pricing and supply in the same way as the US monopolies had done at the end of the 19th century.” However, he agrees that building pipelines and LNG terminals includes “incredibly" high costs. “Given the monopolistic position of Gazprom in Poland, and elsewhere in central and eastern Europe, no private investor is likely to be prepared to risk committing very high sunk costs unless they are guaranteed to recover such costs... So you need a state or the EU, or a state-controlled company which is told what to do, to cover them," he said.
Echoing his words, Agnia Grigas, a non-resident senior fellow at Atlantic Council and the author of The New Geopolitics of Natural Gas, told NGW that she sees Polish gas projects as “strategic" – as opposed, perhaps, to making commercial sense. “Not only commercial considerations are in play. Moreover, Gazprom’s gas tends to be cheaper only for countries that follow the Kremlin’s foreign policy line or are not subject to Gazprom’s monopoly and have a number of viable alternatives," she said. According to her, the buildup of infrastructure will further integrate central and eastern Europe with the European gas market improving competition and security of supply. “They are Poland‘s response to Russia‘s Nord Stream as Poland wants to ensure its own interconnectivity and infrastructure when it is being bypassed by Nord Stream," Grigas said.
Poles want diversification
Poland should diversify its gas supply sources as soon as possible, according to a survey carried out for monopoly PGNiG. Breaking dependence on a single supplier would significantly improve national security and contribute to lower gas prices, according to the survey by GfK Polonia.
“The survey findings have confirmed that the policy of diversifying natural gas supplies and the strategy of building Poland’s energy security carried out by the ministry of energy is what meets Poles’ understanding and their expectations,” said energy minister Krzysztof Tchorzewski.
His deputy, Michal Kurtyka, who is responsible for gas, said that the policy of diversification means more infrastructure, including expanding the LNG terminal in Swinoujscie and the Baltic Pipe project. In addition, independence from Gazprom means lower prices; and using more gas means lower emissions.
As many as 93% of those surveyed believe that Poland should import natural gas from diverse countries, rather than Russia which now supplies around 70% of the total demand, or 13.7bn m³ last year. PGNiG CEO Piotr Wozniak said: "Poles are also dissatisfied with the high prices paid for gas imported from sources east of Poland. Consumers in Poland pay far more than their counterparts in other countries, such as Germany."
However, Baltic Pipe is expected to carry just 2.5bn m³/yr of PGNiG's equity gas to Poland, or just a quarter of the pipeline's potential.
PGNiG however did not comment on what value the respondents placed on the desired diversity of supply.