In Europe - East

Oct 16, 2015. Two news articles are enclosed.

Rejection of Russian gas has already cost Poland dearly

This article originally appeared at, Oct 13, 2015. Translated at The Vineyard of the Saker.

Construction of Poland's first liquefied natural gas at the Baltic port of Swinoujscie, July 2014 (photo by Filip Klimaszewski, Reuters)

Construction of Poland’s first liquefied natural gas at the Baltic port of Swinoujscie, July 2014 (photo by Filip Klimaszewski, Reuters)

“We are independent in the gas issue”, happily announces Poland having finally built a terminal for receiving liquefied natural gas (LNG). However, the new marine way of delivering gas from Qatar instead of saving financial resources will entail even higher costs than earlier. Warsaw is already paying, though it has not yet received one single cubic meter of gas.

“Poland has achieved her strategic goal: we are independent in the gas issue” announced the Polish Prime Minister Ewa Kopacz at the opening ceremony of the new LNG terminal in the city of Swinoujscie, referring to the cherished dream of the Polish government – ending dependence on Russian natural gas.

“Now we can get 90% of gas from other sources. Next year, provided we work hard, we will become 100% independent from gas supplies from the East”, Kopacz said. According to her, the terminal will allow Poland to purchase liquefied gas from anywhere in the world and get it by sea. “This independence will enable us to negotiate the gas price”, the Polish Prime Minister added.

The project has taken ten years to be carried out. It was initiated in 2006, with subsequent signing a contract with the contractor Saipem (a subsidiary of the Italian energy giant Eni) in 2008 and getting down to construction works in 2011. Initially scheduled to have been completed by 2013, the construction of the terminal was delayed for 2 years.

The terminal will open not earlier than in mid-2016. Prior to the commercial launch it is necessary to obtain and deliver technical or buffer gas which will develop the pressure required for pumping commercial gas. The first two shipments of LNG from Qatar arriving at Swinoujscie in mid-December 2015 and February-March 2016 are going to be used in performing start-up works, maintenance tests etc., which will further postpone the terminal coming into full-scale operation for several months.

Assuring that the new LNG terminal will render Russian gas no longer necessary, the Polish Prime Minister is stretching the truth. The reality is that the country’s energy is still highly Russian gas dependent. In 2014 Poland consumed 15.5 billion cubic meters (bn cu.m.) of gas, with only less than 28% (4.4 bn cu.m.) of it covered by domestic production; the rest 70% (11 bn cu.m.) was imported. In its turn, 80% (8.4 bn cu.m.) of that imported gas was supplied by Russia and only 20% of it came from Germany, Czech Republic and Norway.

The storage capacity of the new terminal, intended to be further extended by 50%, at the present constitutes 5 bn cu.m. which amounts to a third of the annual demand of Poland.

Now Warsaw has provided itself with a new sea route for gas delivery, but at what cost? Qatar, the only supplier Poland has concluded a contract with so far and only for the delivery of 1.5 bn cu.m. of LNG, will allow to utilize not more than a third of the terminal capacity. The remaining two-thirds have not yet been contracted – probably, owing to the disappointment in LNG which turned out to be too expensive.

The contract with Qatar, under which Poland undertakes for 20 years to purchase around 1.5 bn cu.m. of LNG from Qatargas per year on “take or pay” terms, is extremely unfavorable for Polish consumers. The price of Qatar gas is 2.5 times higher than the one offered by Russia – 700 and 265 dollars per one thousand cu.m. correspondingly, as the analyst of “Alpari” Anna Kokoreva told us. Paradoxically though it may seem, last year Poland asked not Qatargas but Gazprom for a gas price discount.

Thus, 8.4 bn cu.m. of Russian gas would cost Poland 2.2 billion dollars, whereas the same amount of Qatar gas – 5.9 billion dollars. Preferring Qatar to Russia would be a great folly, would it not? Nonetheless, Warsaw will have to purchase that 1.5 bn cu.m. so that not to violate the contract. Moreover, it has already been paying for it.

The thing is the contract had obliged Poland to start purchasing Qatar LNG in 2014, given that the LNG terminal had been planned to be built by 2013. However, the construction lagged but Qatar still insisted that the contract obligations should be met. In the end the parties agreed upon Qatar selling the contractual LNG to other buyers at a lower price with Poland compensating the price difference, told us Alexei Grivach from the National Energy Security Fund. So it happened that Poland cannot physically accept the gas from Qatar yet but has already been paying for it. The first two tankers from Qatar scheduled on December and early next year are delivering technical gas under a different contract signed this September.

Thus, the project on Qatar gas supplies has already proved ruinous for Poland. Warsaw will need decades to recoup the cost of the LNG terminal construction that amounted to 977 million dollars.

As it was stated above, Poland has no choice but to buy the 1.5 bn cu.m. of LNG from Qatar. Unless the domestic consumption increases, gas supplies from Russia will supposedly be reduced by the same amount. In this case we are only talking about the diversification of sources of gas supply to the country, not about the outright rejection of Russian gas – Warsaw will merely reduce the share of the Russian gas import from 80% to 60%. Such a diversification will come at a dear cost – Poland will have to overpay 652.5 million dollars for the purchase of 1.5 bn cu.m. of Qatar gas at 700 dollars instead of the Russian one at 265 dollars. To pursue so economically unreasonable a policy will be nothing but a sheer madness.

It should be noted that in order to utilize the spare LNG terminal capacity Poland is planning to obtain gas at the spot market. It has one peculiarity, though, which is its strong dependency on supply and demand – in the summer period when the European gas consumption dies down, the spot gas price might be lower than pipeline deliveries, whereas in the winter time the demand dramatically goes up and the limited market supply sends gas prices sharply higher. Thus, dealing with the spot market buyers can have no assurance their gas needs will be satisfied (unlike Gasprom which guarantees steady supply throughout the year).

Some time ago Warsaw was considering another variant of turning Russia down in the gas issue. Last year Poland initiated reverse gas supplies from Germany by “Yamal–Europe” pipeline, which had been made possible through the modernization of “Malnov” gas-pumping station in East Germany (its reconstruction was started in 2012). Poland threatened at the time that this project would provide her with up to 5.5 bn cu.m. of gas a year in case Russia halted supplies. However, despite all her ambiguous political statements and discontent over prices, Poland has not ceased purchasing Russian gas.

Either way, choosing reverse supplies from Germany means Poland will continue buying Gazprom gas but through an intermediary. As for Gazprom, it will just make up for the lost volumes by increasing supplies to Germany with Warsaw subsequently having to pay also a margin to the intermediary. That is exactly what the Ukraine – which bought only reverse gas from Europe from June to mid-October this year – is doing now.


Poland’s LNG terminal at Świnoujście termed a proverbial ‘shotgun on the wall’

By Drew Leifheit, published on Natural Gas Europe, Oct 15, 2015

Poland’s Świnoujście LNG terminal, to be completed in May 2016, bears numerous drivers like diversification, security and business interests.

But in a session entitled “The Role of Gas in the Future Energy Mix” at the 25th Economic Forum in Krynica, Poland, Mr. Jakub Jaworowski, Secretary of State, Chancellery of the Prime Minister, Poland, likened his country’s new LNG facility to a “shotgun on the wall”.

Calling it a game changer, both for Poland and the region, that shotgun is there on the wall “just in case”. He explained, “So it greatly enhances our negotiating power with our suppliers, because we can always say ‘well, maybe we can buy some gas from other destinations.’”

A real gas market, he added, does not exist if the infrastructure is not in place. He said that now it is almost impossible to move LNG from Spain to Poland. “Out of Spain’s 230 bcm of LNG regasification capacity, more than one-fourth is in Spain. But it doesn’t matter, because there is no pipeline connection between Spain and Poland, so in case of any crisis we cannot move any gas from Spain to Poland,” said Mr. Jaworowski, who added that this had encouraged Poland to invest in infrastructure in the last 7 years.

Poland has to liberalize its market, insisted Ms. Malgorzata Szymanska, Director of the Department of Oil and Gas, Ministry of Economy, Poland, who explained that the real turning point will be utilization of Poland’s LNG terminal. She commented: “This will introduce a new era in the Polish gas market, and not only in Poland, but for the whole region as it is considered by the European Commission’s Directorate-General for Competition as overrun by the influence of the Russian supplier.”

In connection with this Poland, she said, has invested a great amount of money into its transmission system, offering opportunities for neighboring countries like the Czech Republic and Slovakia, Ukraine by connecting them to the Polish system, all for the sake of enhancing security of supply in Central Europe.

Moreover, LNG in Poland will offer the country new opportunities via new appliances and technologies, like small-scale LNG road transportation, marine vessels in the Baltic Sea region. “So it really gives us marketing opportunity, bargaining power, negotiation arguments and, at the same time, new possibilities for new businesses to break a little bit the dominant position of companies already active in the Polish gas market.”

As for how much of a game changer Świnoujście actually is, Willem Braat, Gas Market Analyst at the International Energy Agency (IEA) offered some of the specifics. Noting that it will have a capacity of 5 bcm in the context of Poland’s 15 bcm gas demand (previously supplied by Russian gas), he admitted: “It is a little bit of a game changer – 5 bcm is 30% of Polish demand.

“In a European perspective, LNG regasification capacity is around 200 bcm, so it’s a couple of percent for Europe,. The good thing is that most LNG projects are based in northwest and southwest Europe, so for eastern Europe this is a great thing to happen.”

Diversification is the key word when speaking about gas in Central & Eastern Europe, according to Michael Labelle, assistant professor at CEU Business School, who opined that the European Energy Union is working towards that robustly, at a political level. “At the national levels, there’s always going to be pressure to keep energy prices low – we see that here in Poland, for example, in its pursuit of shale gas, retaining coal. It’s not a problem, but occurs in every country.”

He noted unsustainable, low prices in Hungary and Bulgaria, something which fuels energy policy actions at the national level.

“The Energy Union as a whole, as it plays out over time, will be much more of a technocratic project that tries to buffer these political swings from privatization to re-nationalization, and develops the market that’s integrated through infrastructure and certain network codes that allow the gas to be traded within the region,” said Prof. Labelle, who predicted the market would eventually be more stable as a result.

The Energy Union is certainly possible, according to Mr. Chris Johnson, General Manager, New Markets Europe, Shell, who said his company is very supportive of that initiative, but admitted that it depended on national commitments to those agendas.

He offered, “There’s a clear driver there. In terms of energy security, it’s a key part of it being able to move the gas throughout Europe to actually unlock the diversification, so there becomes a clear drive for that, ultimately showing a competitive market which is good for consumers.”

As to the question of how much LNG will actually be available and at what price, Mr. Johnson said that on the supply side large new volumes are becoming available out of Southeast Asia and Australia. “Previously, a lot of LNG in the last few years has been flowing out of the Atlantic Basin to serve those Asian markets – that becomes available with those coming onstream,” he explained.

Next year, he noted, US LNG will be flowing, an estimated 100 bcm into the next decade, which would support the market, and many projects are on the drawing board, as well as those that can be expanded – meaning the supply will clearly be there.

“We need to make sure,” he added, “that Europe sends the right signals as well to attract that LNG. It is a global commodity and other markets have been demanding that moreso than in Europe in recent years.”

But would Gazprom’s share of supply have gone down, even without the Ukraine crisis?

The IEA’s Willem Braat said it’s important to realize that indigenous European production of natural gas is decreasing in the coming years, by 35 bcm, while demand will reach 500 bcm by 2020. “So, Europe, either way, will need to get more supply,” he said.

Noting there have not been any disruptions in Russian supplies in the last 5 years, Mr. Braat said that Europe will need to secure its gas supplies for the future. He said, “How we will do that is basically the question of diversification.”

“Geopolitics is absolutely inseparable from this debate,” said Secretary of State Jaworowski. “Given the fact that Russia supplies about one-third of Europe’s gas demand makes it the ‘elephant in the room’ – it’s obviously a key factor.”

From Poland’s perspective, he explained, not much has changed since Russia’s invasion of Ukraine in 2014. “All of the things we’ve been saying and all the fears simply materialized – we’ve always been saying that there is a problem there,” he recalled, “that, out of 28 EU countries, 10 rely on Russian gas for more than 50% of their gas supplies. And we’ve always advocated a change in EU policy towards the gas market. The only thing that’s changed is that more people realize it’s a threat.”

Still, he conceded, much has happened since the gas shut-off of 2009: interconnections and the price movements of a real gas market. The Ukraine crisis, he said, has only accelerated a process that had already begun.


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