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Oct 9, 2013 | 10:04 GMT

Poland's Continuing Quest for a Better Natural Gas Deal

Poland's Continuing Quest for a Better Natural Gas Deal
JANEK SKARZYNSKI/AFP/Getty Images
Summary

Poland is one of the Central and Eastern European countries striving to diversify its natural gas supplies, particularly to wean itself from Russia. Several factors will allow Warsaw to negotiate with Moscow from a relatively strong position over the coming years, making Poland one of the countries most likely to get better contractual terms on natural gas imported from Russia.

On Oct. 7, Polish Economy Minister Janusz Piechocinski said, "We hope that in Central and Eastern Europe the time has come to talk with Gazprom about the renegotiation of gas rates because the market is becoming more friendly to recipients than to suppliers." He indicated that Poland would want to renegotiate natural gas prices but did not specify when such negotiations would start.

In November 2012, Poland's state-controlled oil and natural gas company, Polish Oil and Gas Co., negotiated a retroactive discount of more than 10 percent (the exact discount was not disclosed) on its long-term contract with Gazprom, which runs until 2022. Poland now pays around $525 per thousand cubic meters — still roughly 30 percent higher than the average on the Continent. Warsaw is looking to even the playing field.

The Polish economy minister's comments came just four days after EU Competition Commissioner Joaquin Almunia stated that the EU Commission is preparing the next steps in the investigation against Gazprom launched last year, which covers the company's operations in Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia, Hungary and Bulgaria. The European Union is investigating whether Gazprom hindered the flow of natural gas across countries by dividing the markets, prevented the diversification of gas supplies and imposed unfair prices by fixing the price of Russian gas to oil.

Central and Eastern European countries advocate for better integration of natural gas infrastructure with the rest of Europe, and also aim to strengthen their positions in negotiating natural gas contracts with Russia by having the European Union apply pressure on Gazprom as a bloc. Lithuania is a prime example of a country trying to use a combination of domestic diversification efforts and EU backing to weaken its dependence on Russia.

Because of the logistical difficulties in securing alternative supplies — such as a lack of pipeline connections or liquefied natural gas import terminals to import non-Russian natural gas — the pressure the European Union can put on Gazprom is limited. However, a number of factors allow Poland to negotiate with Russia from a position of relative strength.

Poland's Diversification Efforts

Because of its domestic coal reserves, Poland is a relatively energy-independent country. However, when it comes to natural gas, Poland relies on imports. Two-thirds of Poland's natural gas demand is met through imports, about 80 percent of which come from Russia (which supplies around 32 percent of the European Union's total natural gas imports). According to a statistical review by BP, Russia supplied 9 billion cubic meters of the 16.6 billion cubic meters of natural gas Poland consumed in 2012. Poland is trying to lessen Russia's importance as a natural gas supplier through a number of diversification efforts.

Onshore Shale Gas Basins in Poland

Poland - Shale Gas Basins

Poland is one of the strongest proponents of shale gas exploration in Europe. Warsaw hopes to profit from a boom in its shale gas sector similar to the one the United States experienced. However, although shale gas is being extracted at low quantities at a Polish test well, the sector's long-term prospects remain uncertain due to geological, infrastructural and legislative hurdles.

Poland also has more concrete and shorter-term diversification plans. At the end of 2014, a liquefied natural gas import terminal on Poland's Baltic Sea coast is expected to be completed and will have an initial import capacity of 5 billion cubic meters per year (depending on demand, it could be expanded to 7.5 billion cubic meters).

Although there are still strong physical and contractual limitations, Poland has also been diversifying its imports of piped natural gas through interconnectors to Germany and the Czech Republic (the import capacity from Germany has been around 1.5 billion cubic meters per year since 2012, and the annual import capacity from the Czech Republic is 0.5 billion cubic meters). Warsaw has also used so-called virtual reverse flows, in which the natural gas flow is not actually reversed but supplies requested in Poland are subtracted from the natural gas flowing on to Germany. Russia is still the supplier of this natural gas, but purchasing supplies from companies other than Gazprom allows Poland to benefit — particularly from the lower prices Russia offers to German companies. Ukraine is currently applying a similar strategy to escape its contractual terms with Russia.

A Possible New Russian Natural Gas Pipeline

0404 Russian Pipelines

Another factor that bolsters Poland in negotiations with Russia is its position as a transit state, which could be strengthened in the future. Poland and Russia already co-own the nearly 700-kilometer (435-mile) Polish section of the Yamal gas pipeline, which has an annual capacity of 33 billion cubic meters and runs from Russia through Belarus and Poland to Germany. Russia on several occasions has considered building a natural gas pipeline called Yamal-II, which would run through Belarus and Poland into Slovakia. The goal for Russia is to have other transit diversification options for natural gas sales to Europe and, more specifically, to bypass Ukraine. When Moscow last addressed the idea in April, Warsaw was quick to dismiss the plan, but that does not mean the idea has been abandoned. Poland faces a dilemma: On the one hand, Yamal-II would weaken Ukraine, which Poland is interested in drawing closer to the West, but on the other hand the pipeline would increase Warsaw's leverage with Moscow as a transit state and bring in investment.

Russia's Position

As the economic crisis lingers in Europe, the possibility of Russian investment in domestic energy sectors will become more enticing, especially if the European Union begins to have difficulties financing energy projects through the joint EU budget. Thus, the relative economic weakness on the Continent gives Moscow an opportunity to maintain its strong position in Europe's energy sector, even if it agrees to further price reductions on natural gas.

Russia is aware that it will likely face greater competition in Europe in the future as liquefied natural gas and shale gas become more available. Price reductions undermine the economic viability of diversification efforts in other countries and therefore serve Russia's long-term goal of maintaining a large market share in Europe.

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