There are plans and no cheap gas: How Poland is trying to become a gas hub

Poland’s anti-Russian stance is not the only reason why it is urging Eastern Europe to give up on Russian gas. It has plans to become a gas hub and for this purpose, it needs Norwegian gas and LNG from the United States. Its PGNiG company is going to shortly make a contract to import American LNG within the next five years.

“This agreement is the first PGNiG contract entered into under the medium-term LNG contract portfolio. Most of them will serve to provide diversified gas supplies to Poland and Central and Eastern Europe to increase the energy security of the region, historically dominated by Russian gas,” said Piotr Wozniak, President of the Management Board of PGNiG.

The Poles are afraid that Russia’s Nord Stream 2 project may strengthen the positions of German companies and Gazprom’s other European partners and that they may steal attractive customers from Poland and undermine PGNiG’s positions.

Last week, Poland undertook one more attack against Russian gas. Polish Foreign Minister Witold Waszczykowski urged Eastern Europe to stop importing Russian gas. "We want to finish the Russian contract in 2022. Moreover, we urge other states, for example Croatia, to build a gas terminal in the Adriatic that could provide that part of Europe with gas from other countries of the world," he said, adding that American LNG could replace Russian gas.

It is clear why Poland is worried. Gazprom is enlarging its exports to Eastern Europe: by mid-November, it had increased its supplies 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%. Croatia has become a vivid example of Russian gas victory over American LNG: in Sept, Gazprom and Prvo Plinarsko Drustvo prolonged their contract on the supply of 1bn c m a year till 2027. In the meantime, LNG Croatia is planning to use the EU’s loan to build an LNG terminal on Krk but it is not clear if this project will have customers. Each year Croatia consumes almost 3bn c m, wherein 2bn c m are produced at home.

It is obvious why Eastern Europe prefers Russian gas: it is cheaper and does not need new infrastructure. American LNG is expensive and is finding it extremely hard to expand into Europe. Even the Poles, who have an LNG terminal, have bought just 97mn c m of it so far.

But instead, they have cut Russian gas imports. According to PGNiG, in Jan-Oct 2017, the company imported 7.1bn c m from Russia, which is 600mn c m less than in Jan-Oct 2016. As a result, Gazprom’s share in Poland’s gas imports has dropped from 90% to 71%. The rest is spot contracts and LNG from Qatar (16% and 13%, respectively).

The LNG terminal in Świnoujście is now using 30% of its capacity. “Next year, we will receive two tankers a month, mostly from Qatar,” says the terminal spokesman Tomasz Petroszenski. This year PGNiG and Qatargas signed an addendum to their contract, which says that till 2020 Poland will import 2.9bn c m of LNG from Qatar each year.

The rest may be American LNG. PGNiG and Centrica LNG Company Limited have signed a five-year contract. In 2018, the Poles will get nine tankers or 1.5bn c m. It is not known how much the American LNG will cost.

Earlier, PGNiG told Biznes Alert that the Poles are still waiting for an attractive proposal from the United States and hope that American LNG will become more competitive than Russian gas.

But the only thing the Americans have offered so far is 1.5bn c m of LNG. They are more interested in Asia, where gas prices are much higher than in Europe. And this is the first challenge to Poland’s plans to become a gas hub. According to PGNiG’s strategy, at first, Poland is supposed to enlarge LNG imports from the United States and after 2022, when the contract with Gazprom expires, it is supposed to launch a 10bn c m Baltic gas pipeline from Norway. But the Norwegians are not enthusiastic about this project as they export all of their gas to Western Europe and have no extra gas for Eastern Europe. But the Poles have as many as 18 licenses in Norway and are already developing 4 fields. But still, this year, their share in Norway was just 517mn c m against 573mn c m in 2015. So, it is not clear where they are going to get 10bn c m of Norwegian gas from and who will finance this project.

But this is not all. Poland’s underground storage facilities can hold no more than 2.9bn c m. This is enough for a country consuming 15bn-17bn c m but not for the gas hub of a region consuming 50bn c m. One option for the Poles is to create a joint gas hub with the Ukrainians but the sides have different approaches to this project. During the last Polish-Ukrainian gas forum in late Oct, PGNiG’s Vice President Maciej Woźniak said that Poland had plans to export American LNG to Ukraine, while Head of UkrGasVydobuvannya Oleh Prokhorenko said that by 2020, Ukraine was going to stop importing gas and to start exporting gas to Poland and other countries. Wozniak said that the Ukrainian economy would grow and would need more gas, while Prokhorenko said that the Ukrainians might switch to other sources.

According to Co-Chairman of Ukraine’s Energy Strategies Fund Dmitry Marunich, the Polish-Ukrainian plan to create a joint gas hub is impracticable yet as the sides have no gas pipelines of necessary capacity. “There is a feasibility report on a new gas pipeline, but its Ukrainian section alone will need 200mn EUR – the money Kyiv does not have. Poland’s projects to build interconnectors with the Czech Republic, Slovakia and Lithuania have been postponed. Without them, the Poles will not be able to pump large quantities of gas to Eastern Europe,” Marunich said.

Now Poland can pump to Ukraine no more than 2bn c m a year. The Ukrainians prefer buying gas from Western European traders, who have supplied 9.8bn c m this year against 900mn c m supplied by PGNiG. It is not a secret that this is mostly Russian gas re-exported by traders like Engie of France or RWE of Germany. These companies are one more obstacle to Poland’s plan to become gas hub for Eastern Europe, Ukraine and the Baltics. To be honest, Poland would not object to buying Russian gas, but the problem is that for German and French traders Russian gas is much cheaper than for PGNiG. This is why the Poles are suing Gazprom in Stockholm.

The Russian gas allows German companies to keep spot prices in Germany lower than in Poland. According to PGNiG, in June, in Germany spot gas cost $219 per 1,000 c m against $241 per 1,000 c m in Poland. Once Nord Stream 2 is built, it will give Gazprom’s partners more cheap Russian gas and they will be able to steal customers from PGNiG.

According to Biznes Alert, Finnish Fortum is planning to buy Uniper, Gazprom’s German partner under the Baltic gas pipeline project, and may steal try to PGNiG’s customers. This is why the Poles refused to set up a joint venture to build Nord Stream 2. European companies will not be able to join the consortium because of the decision by UOKiK (Poland’s Anti-Monopoly Office), which is worried that this project will make Gazprom even stronger in Central and Eastern Europe. Even if Uniper is not sold the Finns, this scenario can be realized by other companies.

Poland does not yet have anything to become a gas hub. Even if Nord Stream 2 is wrecked, the Poles have nothing to offer to their neighbors. “Do they want to become a hub just to resell 5 billion cubic meters of more expensive LNG? The only potential buyer is Lithuania, but that country has its own LNG terminal. They can resell gas to each other using the interconnector they are going to build for 0.5bn EUR lent to them at the expense of European taxpayers,” says Alexey Grivach, Deputy Director of the National Energy Security Fund.

Co-Chairman of Ukraine’s Energy Strategies Fund Dmitry Marunich does not believe that Poland can become a gas hub. “The Poles do not produce gas, their relations the Russians are spoiled, in Eastern Europe there are no industrially developed states. The Poles may try but I see no way for them to do it,” Marunich said.

European experts believe that a cut in Russian gas supplies to Europe will cause a rise in gas prices and this is the only way for American LNG to compete with Russian gas. Poland hopes that the Americans will win this competition but for this, they will have to use noncompetitive methods.

EADaily Analysis