At a loss: Why has Poland sold its LNG from United States to Ukraine

In June 2017, the Poles welcomed the first and so far the only LNG tanker from the United States. But instead of using the gas for their own needs, they resold it to Ukraine.

According to ERU Trading, in early summer, its Polish supply partner purchased a natural gas delivery to Poland’s LNG facility and arranged the transportation of the gas by pipeline to the Polish-Ukrainian interconnect. ERU Trading LLC purchased this gas at the border and placed it in storage in Ukraine. The co-owner of the group, Andriy Favorov, has confirmed the report to Interfax-Ukraine: "Yes, we have received LNG via a terminal in Poland. The amount is around 70 mcm." According to the U.S. Energy Information Administration, the United States supplied Poland with a total of 97mn c m of LNG.

“We are proud in our work with our Polish strategic partner to have made the historic, first shipment of LNG to Ukraine and to be delivering this gas to UTG during the winter months. We see this as the first of many such opportunities as we participate in developing energy supply alternatives for the Ukrainian market,” said Dale Perry, President of the ERU Corporation.

According to Nashidengi.info, the ultimate owners of ERU Trading are American Dale Perry, Ukrainian Yaroslav Mudry and American Andriy Favorov. In the past Mudry and Favorov worked for Rinat Akhmetov’s DTEK, while Perry was part of AES in South America, Europe, Africa and the CIS and even earlier served in the U.S. army, studied in the Soviet Union and in the 1990s even co-owned a company renting Russian nuclear submarines for civil research in the Arctic region. He was also one of the founders of SI Energy, a company owning and managing hydropower plants in Georgia. Experts say that ERU Trading has close contacts with Poroshenko’s Administration. This is why it freely imports gas to Ukraine despite Naftogaz’s resistance. And it is the only trader in Ukraine that is insured against any political risks. This year, it has bought a 20-year insurance policy from the U.S.-based Overseas Private Investment Corporation. For the moment, ERU Trading is the only company supplying Polish gas to Ukraine.

According to ERU Trading, they bought the LNG in line with their April contract with Ukrtransgaz. In Apr-Dec 2017, ERU Trading was supposed to supply 218mn c m.

Prozorro reports that Ukrtransgaz paid $231 per 1,000 c m for the gas. According to Co-Chair of the Energy Strategies Fund Dmitry Marunich, this price is lower than the price Poland pays for American LNG.

“One of the companies (either PGNiG or ERU Trading) lost money as a result of this delivery. In Poland, the price of U.S. LNG is a secret. The Poles are sure that it is not profitable and expect some better offers from the Americans,” Marunich said.

According to Polish Foreign Minister Witold Wasikowski, Poland will import gas from the United States only if it is competitive to alternatives from Qatar or Russia. For the time being, American gas is much more expensive but if the Americans make some better offer, the Poles are ready to consider it.

For the moment, Poland pays for U.S. LNG the price of gas at Henry Hub + 15% and liquefaction and transportation costs. According to the Energy Information Administration, the average gas price at Henry Hub is no less than $106 per 1,000 c m. If we add 15%, we will have $122. Liquefaction costs $79, transportation costs $39. As a result, U.S. LNG for Poland costs $240.

For Ukraine, Poland adds $25 for transportation and a $12.5 “entry” tariff. As a result, Ukraine pays $277.5 per 1,000 c m.

According to ERU Trading, PGNiG has supplied Ukraine with 70mn c m. As a result, its losses may amount to $4.3mn. But the June delivery was a politically motivated step and will hardly cripple the company’s budget. According to URE, PGNiG controls 74% of the gas market. In 2016, the company recorded a profit of $577mn.

ERU Trading’s report coincided with Polish President Andrzej Duda’s visit to Ukraine. After his meeting with Ukrainian President Petro Poroshenko in Kharkov, Duda said that Poland was open for Ukraine’s proposals on LNG deliveries. In late Oct 2017, PGNiG’s Vice President Maciej Woźniak said at a Polish-Ukrainian gas forum that his company was going to export LNG from the United States to Ukraine. On Nov 22, 2017, PGNiG announced a five-year LNG import contract with Centrica LNG Company Limited. In 2018, the Poles will get nine tankers with a total of 1.5bn c m. They did not specify the cost of the gas but just said that it was meant for Central and Eastern Europe.

“The June delivery was a test. Even though it was loss-making, the Poles hope that the Ukrainians will buy more. After the accidents at Baumgarten, in the North Sea and at Troll in Norway, sport gas prices in the EU jumped. If this tendency continues, LNG supplies from the United States are quite possible,” Marunich said.

“This is not good for Ukraine, but its regime’s policy has made the country fully dependent on hub prices. Private traders sell gas mostly to manufacturers. According to the new Ukrainian law on the gas market, gas prices should no longer be regulated by the state and should be tied to the imported gas price. For example, on Nov 1, Naftogaz of Ukraine fixed a new price for manufacturers at $321-353 with VAT inclusive. If the price of the gas imported from Europe grows, the tariff may grow even higher and this can make U.S. LNG supplies profitable. This is mere politics but I don’t think that private traders will agree to work at a loss,” Marunich said.

As Professor of the Lodz University of Technology Wladyslaw Mielczarski said to Biznes Alert, the U.S. LNG deliveries are causing losses to Poland ($2 per MBTU or $71 per 1,000 c m). “Each lost $1 per MBTU means almost $50mn a year for each contracted ton (1.38bn c m),” the Polish expert said. This is exactly as much as PGNiG of Poland is going to import from the United States.

Deputy Director of the National Energy Security Fund Alexey Grivach believes that the Poles are trying to make use of Kiev’s reluctance to buy gas from Russia and to make it cover part of the costs of their LNG terminal. “They are already reselling Russian gas to Ukraine on a reverse basis at a higher price. In Oct-Nov 2017, the average gas price in Europe was $205-210, while the average price for Ukraine was $225 in Oct and $240 in Nov. During that period, Poland supplied Ukraine with almost 300mn c m. Almost as much was imported to its LNG terminal. That is, Ukraine is paying for Poland’s LNG,” Grivach said.