A nuclear race for the undecided client in Poland

Americans and the French are preparing offers to build nuclear power plants in Poland. Lurking in the shadows are Koreans who have also declared they were ready to take part in the program. Their engagement suggests that the 2033 deadline for the first reactor is achievable. The race for the nuclear contract in Poland is benefiting the client who is still on the fence – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.

The nuclear club in Europe

The French embassy in Warsaw organized a meeting with journalists on the occasion of the opening the EDF office, which is to handle issues related to the nuclear power contract, in the capital city of Poland. During the event representatives of the French government and business argued that the EDF offer is the best for the Polish Nuclear Power Programme, according to which the first reactor should be completed in 2033 and another 6-9 GW should be added by 2043. “The end of 2022 is the last call to build a nuclear power plant in Poland by 2033,” Philippe Crouzet, the High Representative for Polish-French Cooperation on Civilian Nuclear Energy, said. “Germany abandoned this source of power, and Great Britain left the European Union. France supports Poland joining the nuclear club. This will balance the situation,” he stated. He also added that “it is apparent that some countries want to phase out nuclear power. Thanks to its strength France can support Poland on its road to this goal.” The French have also used a political argument and have proposed mutual support during voting and political debates in the European Union on nuclear power. However, it is worth pointing out that Poland and France are already voting hand in hand when it comes to nuclear power and this should not change, irregardless of which partner Warsaw will choose, as this is in the interest of both countries. This is why one should expect that Paris and Warsaw will continue to defend the atom in the EU taxonomy and other disputes of this kind. On the other hand, France will stick to its ambitious climate policy, which it can pursue with ease precisely thanks to nuclear power, which has made it the least emission-generating state in the European Union. Therefore, one should understand that irregardless of Warsaw’s decision, Paris will turn up the heat on climate policy at a time when Poles will want to turn it down.

Polish engineers at EDF construction sites

The French want to convince Poles with the fact that the EPR technology is accessible in Europe and has already acquired a license in France and Finland, and that it is also present outside the EU – in China and Great Britain. EDF argues that this type of a reactor is 36 percent more efficient and generates 30 percent less waste in comparison to the competition. EPR1200 is capable of producing 9 TWh of power a year, and thus prevents 6.6 million tons of CO2 from polluting the air. The French have also offered nuclear waste utilization with the help of their companies. They have also promised that the reactor will be so flexible that it will be capable of turning down the power by 80 percent within 30 minutes, and that its availability will be at over 90 percent. These features are important, considering the fact that nuclear power will be used to supplement the capacity of renewable energy sources in Poland. EDF has argued that their reactor could successfully be used to produce purple hydrogen, which is important for the EU climate policy and its climate neutrality target. The French also claim that the repeatability of the nuclear power projects at Hinkley Point C and Sizewell C in Great Britain has made it possible to lower the construction cost by 20 percent. So, the Polish copy could be cheaper than the projects that have been used by critics of nuclear power as examples of the technology being too expensive. The French believe that if the contractor for the Polish nuclear power is selected in 2022, it will be possible to complete the project by 2033. “We believe this is doable, which is why we are talking to our partners,” Deschaux said. EDF has promised jobs to Polish engineers in the country and abroad. It has identified 350 Polish companies that could take part in the construction of the NPP, and has reminded that in case of Hinkley Point C, 64 percent of the production was local. Poland doesn’t have a nuclear sector, but it can count on 45 percent in the beginning, 60 later on and then even more. Therefore, the companies engaged in the construction of the reactors in Poland could later on count on contracts for other EPR projects across the world.

Who will be the highest bidder?

The French are cautious when it comes to engaging their capital in Poland’s nuclear projects. “The financing model will be selected by Poland as a client. EDF will adjust to that choice. The money will come from export credits with proper guarantees and from Poland’s own funds, be it public, or private investors,” Philippe Crouzet assessed. “At Hinkley Point the contract for difference mechanism is used. It makes it possible to bankroll part of the investment. There is also another element that is not being discussed – Regulated Asset Base, which lowers investment risk and enables acquiring cheaper financing. This will affect production cost,” Thierry Deschaux, who is responsible for managing the EDF office in Poland, said. Interestingly he is also employed at Dalkii, which belongs to the EDF Group. During the meeting there was no mention of any financial engagement by the French government, despite the fact that in the past there were rumors about French banks wanting to cooperate. This may be an important issue when it comes to the race against Americans, who have promised Poles that the export bank EXIMPORTBANK would engage in financing the Polish nuclear power plants. The US companies Westinghouse and Bechtel have already received a grant from the United States Trade and Development Agency for a FEED study, which will be prepared by the company started by George Westinghouse for the Polish Nuclear Power Plants company (formerly known as PGE EJ1). Westinghouse will provide engineering know-how about the AP1000 technology, while Bechtel will bring in knowledge on managing facilities of this type. So far, the French have not offered such far-reaching financial and political engagement. Perhaps they are put off by the fact that the practically ready proposal for building the NPP by EDF in Poland was rejected when the government changed in 2015.

An undecided client

The potential technology and capital providers for the Polish Nuclear Power Programme are competing at full speed, which proves the Polish plans do have a true potential. The competition between them is good for the client who can also choose the South Korean proposal, which is presented by the Korea Hydro & Nuclear Power company with much less detail, also on BiznesAlert.pl. That Poland has still not decided who will build the nuclear power plant on its territory only reveals that the 2033 deadline for commissioning the first reactor is arbitrary and secondary in view of the fact that already in the 2020s our country’s dependence on the import of energy and gas will be growing. This is because the capacity generation gap will be widening, and due to the lack of alternatives it will be sealed with gas.

Poland is not at the mercy of Gazprom despite the issues with Baltic Pipe

The problems facing the Baltic Pipe project have led the public opinion to believe that Poland may reach a dead end, and be forced to sign a new Yamal contract with Gazprom. This will not happen thanks to decades of diversification. Plan A is being implemented and we have a plan B – Wojciech Jakóbik, editor in chief at BiznesAlert.pl writes.

Full freedom to choose a gas supplier

Gas supply from Russia is a very hot topic, because for years it was a political issue due to Gazprom’s unpredictability. The company could afford to act that way mostly because until the completion of the LNG terminal in Świnoujście and gas connections with its neighbors, Poland did not have alternative sources of supply. The existential threat of having the gas supply cut off disappeared after 2015, when the LNG terminal was opened, which is why Poland is in a different situation than Ukraine, which still depends on the flow of Russian gas via its territory. This is because the transfer brings in big profits and requires the maintenance of pressure in transmission gas pipelines. Whereas Poles are able import gas from other sources, and if for some reason Gazprom fails to deliver the gas it will pay a fine, just like in 2017 when it turned off the tap due to alleged technical problems (gas contained water). However, if Poles decide that the Russian price is unfair, the dispute may go to an arbitration court, which happened in 2015. Poland’s PGNiG won that case in 2020, Gazprom carried out the sentence, and the head of Gazprom Export Elena Burmistrova sent warm signals to Poland claiming it was an “infallible client, a great country”. “We are still embroiled in many disputes with the Poles, but at the same time we continue trade negotiations,” she said back then. One could argue that such statements are another benefit of Poland’s diversification efforts.

Poland needs more imported gas, irregardless of the progress of the Baltic Pipe

Poland is following a real diversification plan, which is supposed to be done and dusted at the end of 2022, when the Yamal contract with Gazprom will end. PGNiG decided not to renegotiate the agreement. Some politicians from the governing coalition decided that Poles would stop buying any kind of gas from Russia, once the Baltic Pipe and the expansion of the LNG terminal are done. However, the initial plans for developing Poland’s gas market have failed to respond to the country’s real needs, which is visible in Gaz-System’s forecast, according to which by 2030 the demand for gas in Poland will increase by 50 percent. This year I published my own calculations, which say that Poles will need 2.1-3.8 bcm of gas more, even if the diversification projects are not delayed, including even the Baltic Pipe that should be ready in October 2022. In this light, the problems of the pipe’s onshore section in Denmark, which may or may not delay the entire project, seem secondary in relation to the general direction that Poland is following to become less dependant on the import of gas. Probably Poles will import additional gas from their neighbors due to the fact that the demand is higher than the original forecast. Finally, it is worth adding that this is one of the reasons why the capacity of the planned FSRU (aka the second LNG terminal) in the Bay of Gdańsk is expected to reach between 4 and 8 bcm a year, depending on the demand.

Last choice provider

A higher demand for imported gas in Poland does not actually mean that we will need to automatically sign a deal with Russia’s Gazprom. One should expect that Russians, who want to maximize their sales in the European Union, in view of the energy transition in the EU, will fight for every client. This means they will probably present an attractive price offer to Poland, just like Paweł Majewski, the PGE CEO, expected. One could imagine that Russians will offer a shorter contract, for a smaller volume and without controversial clauses questioned in the EU, and with a low price. They will join the ranks of other potential providers, and Warsaw will be free to make a decision on the basis of its own definition of energy security. One could bring up the example of Ukraine, which thanks support from the US and the EU, stopped buying gas from Gazprom and has been importing gas from the EU since 2015. The gas molecules from the West that are delivered by the Dnieper River probably partially come from Russia, but Kiev does not have to negotiate with Petersburg where Gazprom’s HQ is located, and instead is in talks with western companies that are known for following cooperation standards. Poland will be able to use such a solution if it decides not to use the Russian offer. The physical supply of additional gas may in the future be delivered via the connections with our neighbors: the Polish-Lithuania gas pipeline, the Poland-Slovakia pipeline, the connection with Czechia – Stork, the connection with Germany in Lasów and the reverse flow on the Yamal pipeline on the border with Germany. Poland has a choice and is no longer at the mercy of one main provider, which will lose strategic importance after 2022, because the unfavorable Yamal contract will end. In my opinion, Poland’s historical experiences suggest that we should first look for gas somewhere else. Thanks to the ongoing diversification, the number of alternative offers will be growing, and so the gas price on the market will be going down.

A deal on Nord Stream 2 is on the horizon

Russia wants to again use gas for political purposes and force Ukraine to make concessions in turn for maintaining gas transit across its territory, even if Nord Stream 2 is completed. The outline of the deal is now emerging before the Biden-Putin summit in Geneva. In this game Poland may become the guardian of the EU energy security – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.

Pushing for a Nord Stream 2 deal

Vladimir Putin, the president of Russia, announced during the International Economic Forum in Petersburg that Ukraine had to “show good will” if it wanted to maintain Russian gas transit across its territory. It was his way of commenting on Kiev’s concerns about the fact that launching the contentious Nord Stream 2 would undermine gas transit from Russia, which is a source in considerable revenue. Rainer Seele the CEO of Austria’s OMV, which is financially engaged in Nord Stream 2, argued on the Russia 1 channel that Ukraine could convince Gazprom to keep sending gas via its territory. “An attractive offer should be made. If you offer good terms, Gazprom will definetely consider them,” he said. Whereas the German Frankfurter Allgemeine Zeitung quoted Steffen Seibertath, spokesman of the German government, who claimed that “the most important thing for the German government is for Ukraine to remain a transit country, even after Nord Stream 2 is launched”. In theory, this solution is guaranteed by the temporary agreement between the European Commission, Ukraine and Russia on maintaining gas transit via Ukraine signed in late 2019. The deal is binding until 2024 and was negotiated with the participation of Germany. President Putin’s words uttered in Petersburg are important in this context. He announced there that the construction of the first out of two lines of the contentious pipeline has been completed. However, in reality the Danish and German sections need to be welded together in the next two weeks. Putin stated that the first line could start delivering gas in 10 days. Earlier Deputy Prime Minister Alexander Novak was more conservative about the entire project, and assessed it could be completed by the end of 2021, two years after the original deadline.

What may the Nord Stream 2 deal include?

Frankfurter Allgemeine Zeitung suggested the temporary agreement on gas transit via Ukraine could be extended beyond 2024. If Ukraine does offer Russia a good transit deal, which is possible as it already offers discounted prices to providers from the European Union that use its infrastructure, including Poland’s PGNiG, such a scenario could take place. In such a case one could imagine that Russia would only use the pipeline’s first line (half of the 55 bcm capacity), leaving the other one free, provided it is finished, which is still up in the air, to offer supply to third parties in line with the regulations of the third energy package imposed by the revised gas directive of the European Union. This would be similar to the solution applied to Nord Stream 1 and its German leg called OPAL. If Germany doesn’t introduce a moratorium on the construction of Nord Stream 2, the parties will have to discuss the so-called shut down mechanism, which would make transit via this pipeline dependent on Russia’s conduct. One could imagine that the supply via Nord Stream 2 could be linked to a transit contract with Kiev, to allow the western clients to decide about their route. Whereas Germany could invest in natural gas and hydrogen transmission infrastructure in Ukraine to calm down Kiev. That’s when Ukraine’s idea to establish a consortium to manage its transmission network by taking over shares in the OGTSUA TSO, first formulated in the first decade of the 21st century, could reemerge. At this point Ukraine’s constitution excludes the possibility of Gazprom owning those shares, but such a variant could come into play if Kiev is pressured by Russia and its western partners that have already generally agreed on the Nord Stream 2 deal. However, the belarussisation of gas pipelines in Ukraine should be avoided. Due to its debts Belarus sold Russia’s Gazprom its gas pipelines in 2011, and consequently its gas policy lost its sovereignty. By the way, it should be said that a possible failure of the talks in Geneva could still lead to the introduction of the suspended US sanctions against the Nord Stream 2 operator and its CEO Matthias Warning. The sanctions that make certification and insurance of a ready gas pipeline impossible are still in force. Only after Americans reverse them, will it be possible to supply gas via Nord Stream 2.

What role could Poland play?

Poles could play an active role in the face of a potential deal on Nord Stream 2.

First, Poland should strive to make this dispute a European problem and make sure the European Commission plays the crucial role in the talks to decrease the impact of the visible concert of powers on the final shape of the deal. The most important element of these endeavors is to transfer the leading role in these talks from Berlin to Brussels, which would go in line with the idea of the joint climate and energy policy.

Second, Poles should include in the talks the issue of natural gas and hydrogen security in case Nord Stream 2 was to become a tool of russification of the EU climate policy. The supply of fuels via the contentious gas pipeline should be curbed by the priorities of the Union’s diversification policy and the by levy on products depending on GHG emissions with the usage of such mechanisms as CBAM.

Third, Poland should to the very end pursue a moratorium on the construction of Nord Stream 2 until the talks on the deal are over, to take the pressure off of the European negotiations, especially Ukraine.

Fourth, Poles should demand that the European Union take political responsibility and Germany business responsibility for the stability of gas transit via Ukraine, and then join the engagement in Ukraine’s gas sector in a way that will ensure fruitful cooperation, which had been already started by Poland’s PGNiG.

Fifth, they should take care of the bilateral context of the Nord Stream 2 talks and demand that Germany make concessions on the joint energy and climate policy in turn for the engagement in the deal on the contentious pipeline. For instance, Germany could show good will by supporting Polish projects, e.g. by agreeing to EU financing for new gas investments, or withdrawing their objection to the construction of nuclear power plants in Poland, or by engaging in such projects.

Russia is threatening to use the Yamal pipe to get back at Poland

“The Russian newspaper Vzglyad commented on BiznesAlert.pl’s piece about the plan to subject the capacity of the Polish section of the Yamal gas pipeline to regulations. Russians are threatening Gazprom will take revenge in court and argue that the Polish plan is an argument for Nord Stream 2. This is just a swan song, because the old will not come back,” writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.

A Polish energy empire?

Gaz-System wants to take over the Polish section of the pipe from EuRoPol Gaz and then modernize it to deliver gas from the LNG terminal and the Baltic Pipe to the east, a plan BiznesAlert.pl reported on first.

Vzglyad argues that Poles will want to make those changes against Gazprom’s will. The Russian Institute for International Political and Economic Strategies – RUSSTRAT claims that the Russian company will be able to demand compensation, and if that fails, will go to court. This would be an opportunity to get back at Poland after PGNiG won with Gazprom at the arbitration court, and received over six billion Zloty of overpayment for a hiked-up gas price. Poles are planning to end the Yamal contract with Gazprom at the end of 2022, and not sign an analogous one in the future. Consequently, Gazprom’s impact on the Polish market will dwindle so significantly that the political abuse that took place in the past will no longer be possible. Nevertheless Russians will still use the available tools to pursue their short- and long-term goals, and it looks like the looming dispute over the Yamal gas pipeline is in their toolkit.

“Nord Stream 2 may become even more important for Russia than originally planned. It is a protection against the risk the gas transmission across Ukraine entails, and it may also be a safeguard in case of any problems with transmitting Russian gas via Poland,” Vzglyad writes. The newspaper alleges that Poland wants to build an “energy empire”, because it’s planning to build a gas hub and “arbitrarily manage” the capacity of the Yamal pipe on its own territory. The authors write about the Baltic Pipe project in this context. The construction of the offshore section has already started and it is to be completed in 2022. They also elaborate on the plans to connect the import infrastructure – the gas pipe from Norway, the LNG terminal and the potential FSRU in the Bay of Gdańsk – with the Yamal pipeline in order to distribute the gas across Poland. “Poles may redesign the way the Yamal pipeline works either with Gazprom’s permission, or without it,” the RUSSTRAT says. The Institute speculates that Poles could demand that Russia give up control over the Yamal pipeline as part of additional compensation for the overblown gas price, or that it would use the Office of Competition and Consumer Protection that questions the right of western companies to finance Nord Stream 2, but does not have any basis to make such claims.

However, the fact is that the Yamal pipeline capacity in Poland is already made available at capacity auctions in line with EU regulations, whose implementation Gazprom had been blocking for years. The polonization of the Polish section of the Yamal gas pipeline by the Polish TSO Gaz-System, which will need to take control over the infrastructure and add it to the regular operation of the Polish transmission system, will not change that. It is worth reminding that the pipeline is operated on the basis of a mixed formula, which goes against EU regulations, which enforce ownership unbundling between the operators of infrastructure and gas providers. The EuRoPol Gaz’s shares are split in half between PGNiG and Gazprom, which is both a recipe for a stalemate and a historic relic, an issue we wrote about previously on BiznesAlert.pl.

Gazprom’s swan song

Since the idea of filing a lawsuit with regard to the Yamal gas pipeline has emerged, we should expect the topic to come back after 2022. Since Nord Stream 2 has been mentioned, we should be ready for Russians to use the dispute over the Yamal as an argument for the contentious pipe to Germany, which may be used in case the conflict over its construction drags on, but also if the construction works are delayed even until 2024, which is possible according to some analysts. Still, Poland follows EU regulations, which are a protective shield against Gazprom’s abuses. The polonization of the Yamal gas pipeline will, in a way, put an end to the dispute about this pipe, and in a wider context to the arguments over the contract terms for supplying Russian gas to and across Poland. Despite the fact that it may lead to Russia taking revenge, the polonization will make it possible to finally normalize the operation of the Polish gas transmission system, which will cease to be under Gazprom’s influence. All that will be left is for pro-Russian outfits in Poland to try to convince the public opinion that Warsaw should give up on its plans.

Baltic Pipe construction takes off, but will Poland sign a new deal with Gazprom?

The construction of the Baltic Pipe on the Baltic Sea has taken off, but if Poland wants to remain independent of Gazprom, it needs to invest in diversification projects. However, in view of the stricter climate policy such plans may be a lot more difficult to finance.  In 2023 Warsaw may need either from Russia or some other source between 2.1 and 3.8 bcm of gas, and in the long run – an FSRU and perhaps even Baltic Pipe 2 – Wojciech Jakóbik, editor in chief at BiznesAlert.pl, writes.

Baltic Pipe takes off

On the 5th of May the ship Castoro 1 that belongs to Italy’s Saipem will set out from the port of Rotterdam to build the offshore section of the Baltic Pipe on the Baltic Sea. The inauguration of works at the Baltic section of the pipe, which will carry Norwegian gas to Denmark and Poland, will be accompanied by speeches of politicians, including from Italy. Among the guests will be Piotr Naimski, the Government Plenipotentiary for Strategic Enery Infrastructure, and the CEO of Poland’s gas TSO Gaz-System. Poles are hoping that the offshore section will be done and dusted by the end of 2021. The entire pipeline is to be ready by October 2022, and will allow Poland to replace its long-term gas contract with Gazprom with Norwegian gas from deposits that are under the control of Poland’s PGNiG and gas from producers from the Norwegian shelf. As part of the so-called Yamal contract Poland will buy up to 10.2 bcm of gas a year until the end of 2022. As of the end of the next year, Baltic Pipe will transmit up to 10 bcm a year.

The National Ten-Year Development Plan (KDPR) for the Polish Gas Transmission System for the Years 2022-2031, which will be in consultations until 12 May 2021, says that within a decade the demand for gas in Poland will increase by as much as 50 percent, while peak demand will soar even by 100 percent in comparison to the records set in 2019-2021. If already today Poland needs about 20 bcm of gas a year, in 2030 that amount may go up to 30 bcm, mostly due to the energy transition that will run on gas in the 2020s, since nuclear power will be available as late as in the 2030s.  It will be also necessary to make sure we have the ability to maintain independence from various gas sources in line with the EU N-1 standard, which says that gas infrastructure has to be capable of satisfying the entire demand in case one source becomes unavailable. Another piece of legislation that has to be considered is the diversification regulation, which limits the maximum supply from one source to 70 percent between 2017 and 2020 and to 33 percent for 2023-2026. This pertains to deliveries from one source understood as an entry point into Poland’s transmission system, such as connections with non-EU states, as well as onshore and offshore supply monitored according to the place of loading.

It is worth taking stock of the sources that will be available in early 2023, when the Yamal contract will be no longer in force.

  • The Baltic Pipe will cover up to 33 percent of deliveries to Poland, so its entire capacity of 10 bcm a year will be used if the demand is at about 30 bcm. An annual demand of about 20 bcm in 2023 will make it possible to import 6.6 bcm a year via the Baltic Pipe, provided that PGNiG will book the capacity at 8.2 bcm a year. This is a rough calculation, because in the KDPR Gaz-System estimated the domestic demand in 2023 at 19.3 bcm. A spike in gas demand is to occur after 2024 when new gas power plants will be opened.
  • Another gas source available to Poles are LNG deliveries. By December 2023 the capacity of the LNG terminal in Świnoujście will be expanded from 5 to 8.3 bcm a year, so in 2024 it will be ready to process more gas. In 2023 the available capacity will still be at 5 bcm, and the supply will be additionally diversified by the fact that PGNiG has signed fixed-term contracts with a few companies from the USA and one from Qatar.  It has not been decided yet whether the Floating Storage Regasification Unit in the Gdańsk Bay will be constructed, but it could provide between 4.5 and 8.2 bcm a year between 2026 and 2027.
  • Additionally, Poland will also have interconnections with its neighbors. One of those is the Poland-Lithuania Gas Pipeline (GIPL) that will be ready by July 2022. The pipe will allow Poles to tap into the FSRU in Klaipeda, whose only user until 2024 is PGNiG, which will allow the company to import gas via the gas pipeline and tank trucks. The total capacity of the FSRU in Lithuania is 4 bcm a year, out of which Poles could use 1.9 bcm as that will be the available capacity of the GIPL in the southern direction, and it will be in accordance with the diversification regulation. This gas will fuel, among others, the Ostrołęka C power plant that is to be constructed in north-eastern Poland. Another project is the Poland-Slovakia gas pipeline with a capacity in the norther direction of 5.7 bcm a year. The pipe is to be ready in 2021, and its entire capacity is to be used in line with the regulation in 2023. The Poland-Czechia gas pipeline is yet another gas import source with the annual capacity of 0.5 bcm which will be expanded to 1 bcm in 2027. This investment will be pursued instead of the Stork II gas link (6.5 bcm at the entry to the Polish gas system) which was abandoned by Net4Gas. Next in line is the virtual reverse flow on the Yamal gas pipeline, which gives uninterrupted access to 5.5 bcm and interrupeted access to 2.7 bcm at 8.2 bcm a year. The supply from this direction will be in line with the diversification regulation. In 2023 the modernization of the Yamal gas pipeline will not be ready yet. The new adjustment will make it possible to distribute gas from the Baltic Pipe and LNG to the north-east Poland, a possibility I wrote about in a different article.

Will Poland sign a new deal with Gazprom?

All of this means Poland will not need to sign a contract directly with Gazprom to cover its gas demand in 2023. However, it will be able to reach for this solution if it turns out it is the most economically beneficial option. However, European providers will also be at hand in Germany, Czechia and Slovakia. Poland hasn’t had any political problems in the past with them, which is not the case with Russia. The ability to freely choose a supplier may make the relations with Gazprom purely business-like. The fact that Russia cooperated after PGNiG had won the dispute at the arbitration court, and carried out the sentence without any problems may be a good omen in this context.

In 2023 the domestic production of gas in Poland will be at 4 bcm, 6.6-8.2 bcm will come from Baltic Pipe and there will be 5 bcm of LNG. This means, Warsaw will be able to provide between 15.6 and 17.2 bcm via the entry points without the eastern border. The rest, which is about 2.1-3.8 bcm will have to come from the remaining system interconnections. So, it should be expected that Poles will not sign a new contract with Russians, and will instead choose a European supplier, or a short- term contract for 2024-2027 with Gazprom for a small volume, similar to other agreements signed by this company in Europe today.

Diversification continues

According to the report on the monitoring of the security of supply of gaseous fuels from July 2020  “the diversification investments pursued by the transmission system operator will not only play a key role in meeting the growing demand for gaseous fuels, but, as the amount of power generated in gas-fuelled power plants will grow, they will also contribute more to ensuring a stable power supply.” “The most important element of expanding the infrastructure necessary to diversify natural gas supply to Poland is the Baltic Pipe and increasing the capacity of available regasification capability through the construction of the LNG terminal in Świnoujście, and the construction of a floating regasification terminal in the Gdańsk Bay,” we read. The increase in gas demand in Poland coupled with the goal to maintain the independence of supply from eastern sources, will then create the necessity to expand the transmission infrastructure, and then adapt it to the EU climate policy regulations.

If in 2030 the demand does reach 30 bcm a year, it will be necessary to import roughly up to 10 bcm via the Baltic Pipe, 16.4 bcm of LNG (maximum capacity of the terminal and the FSRU from various suppliers) and 3.6 bcm via the interconnections at the border. This entails billion-zloty investments in new transmission capacities, which will make it possible to not buy gas from the east, or purchase it without being forced. The first option is the FSRU and the second is Baltic Pipe 2 that will make it possible to decrease the dependence on liquefied gas. Another wave of costly investments will be necessary to adapt the gas infrastructure to transport renewable gases such as biomethane and hydrogen. This has to be done in order to maintain the EU support and a business justification for these gas pipelines after 2050, so that they do not turn into stranded assets once the EU becomes climate neutral.  The government should protect those  regulations that allow the financing of the modernization of the infrastructure in view of the mounting discussions on allowing EU subsidies to be spent only on projects not related to fossil fuels. So in theory, adapting gas pipelines so that they can transmit renewable gases may not be on the table in the future, as exemplified by the initiative of some European states on the TEN-E regulations, we wrote about on BiznesAlert.pl. If changing the regulations doesn’t go well for Poland, the mentioned FSRU may not be added to the Project of Common Interest lists, which means it will not receive EU subsidies from the Connecting Europe Facility. However, in 2019 this investment did acquire this status already.

Changes in Naftogaz might complicate the discussion over Nord Stream 2

The Orthodox Easter in Ukraine was marked by questionable staff reshuffles at Naftogaz, the counterpart of PGNiG. These adjustments may complicate the dispute over Nord Stream 2 at a key moment and undermine the efforts of, among others, Poland – Wojciech Jakóbik, editor in chief at BiznesAlert.pl, writes.

The Naftogaz scandal

Right before the Orthodox Easter holiday, the CEO of Naftogaz Andriy Kobolyev was fired from his job. He’s held this position for seven years, since the Euromaidan revolution in 2014. He was replaced by Yuriy Vitrenko, his previous rival and subordinate. Officially, he was called off because of the losses Naftogaz had suffered in 2020. However, it is difficult to accept that this was the real reason, because the entire gas sector in Europe recorded losses last year due to the coronavirus pandemic. It is also worth mentioning that Naftogaz owes a debt to the state-owned Ukrnafta and the state budget due to the unpaid bills on the domestic market between 2015 and 2019. In lieu of the debt, Naftogaz paid into the Ukrainian budget UAH 141 billion, which is 13 percent of the entire budget revenue. In 2020 changes were introduced to the retail gas market. Their goal was to gradually get rid of those arrears. During Kobolyev’s time in office, the company continued the dialogue with the US and Germany on the contentious Nord Stream 2 gas pipeline, through active lobbying to stop the pipe’s construction. These processes are now in jeopardy, because of the unexpected upheaval at the company located by the Khreschatyk Street in Kiev.

On the 28th of April, the Ukrainian government dismissed the supervisory board and the Naftogaz CEO. The board met on the 30th of April and quit. It still has a two-week notice period, during which it will hand over its duties to the new board. Officially Kobolyev thanked his team for contributing to the reforms, while Vitrenko announced he would continue them. However, he started his term in office by bringing up the “disappointing 2020 results” and a drop in gas extraction by the Dnieper. It is worth reminding that back during the presidency of Petro Poroshenko, Ukraine announced it would become independent of gas imports by 2020 thanks to increasing domestic production. It looks like Vitrenko is going back to those plans. “We have to force Ukrgazwydobywania to increase output to cover the demand of Ukrainian consumers,” he said during his first press conference. He also ensured that any future staff changes would be based on merit. Vitrenko also wants to move gas reception points from Ukraine’s eastern to western border, so that Naftogaz could be made responsible for deliveries in the territory of Ukraine. This idea also originated in 2014, but is yet to be implemented.

The changes in Naftogaz had been questioned by the company before they were implemented. Already on April 28, Naftogaz argued in a press release that the Ukrainian government’s decision to call off the supervisory board was a “legal manipulation” that undermined the rules of corporate governance at state-owned companies. The company warned that the proposal to change Naftogaz’s board could be presented only by the board itself, not through “manual control” from Kiev. “Despite the crisis and growing debts of Naftogaz’s partners due to the legal loopholes that stemmed from state regulations, the company managed to contribute to the budget UAH 141 billion in 2020,” Kobolyev’s team reminded before being fired. It also mentioned that UAH 57 billion was sitting on Naftogaz’s bank account, which allowed the company to maintain liquidity, as the only state-owned company with such reserves. “The government’s decision is a message to all companies controlled by the state. Working for the benefit of the budget and Ukraine’s citizens is not in the interest of particular political powers, and may be punished. This is a clear message to investors that the conditions under which companies in Ukraine work are unpredictable and may change depending on the political situation,” Nafogaz said in a statement that has been since removed from its website.

Changes at the finish line of the dispute over Nord Stream 2

The West reacted to the developments in Kiev. The US State Secretary Antony Blinken is to talk about this issue during his visit to Ukraine’s capital city in the first week of May. Americans are “deeply concerned” about the recent changes. “Unfortunately, these actions are just the latest example of ignoring best practices and putting Ukraine’s hard-fought economic progress at risk,” the US State Department spokesperson said. “We will continue to support Ukraine in strengthening its institutions, including advancing democratic institutions and corporate governance reforms, but Ukraine’s leaders must do their part as well,” he stated. Philip Reeker who is the Acting Assistant Secretary for European and Eurasian Affairs, replied to the question on whether Nord Stream 2 and Ukraine would be discussed during the bilateral talks between the US and Germany at the G7 summit. Reeker ensured “Nord Stream 2 remains an issue.” “And we will continue to make very clear to the Germans our views of that project, that it should stop, the laws that we have in place, and, of course, we have a lot of other issues to discuss with Germany as well. And so we will have the standard range of bilateral discussions on that,” the diplomat explained. He also reminded that the US was concerned about the lack of transparency with regard to the changes at Naftogaz. “And any attempt to change governance and the selection procedures at government agencies is troubling,” Reeker stated. He also mentioned the US was supporting the reform of the energy sector by the Dnieper with USD 110 million. These topics are to be discussed with the Ukrainian president Volodymyr Zelensky. “Corporate governance is a critical part of a stable democratic society, and we will continue to call on Ukraine’s leaders and representatives to respect transparent corporate governance practices, particularly in the management of state-owned enterprises and particularly in the energy sector,” Reeker said.

The controversy over Naftogaz has emerged at the worst possible time. The Fortuna barge and Akademik Cherskiy continue the construction of the contentious Nord Stream 2 gas pipeline between Germany and Russia. Americans have not extended the sanctions, but in line with the regulations drafted by the State Department, the list of entities that are to be encompassed by them is to be updated with a new “black list” by the 17th of May. The shift in tone among the biggest critics of Nord Stream 2 is also visible. Annalena Baerbock, the Green Party’s candidate for the seat of the German chancellor, admitted during a DFS 2021 conference organized by a German think tank DGAP, that Nord Stream 2 may be completed, but that no gas deliveries should be allowed through it. In this context she referred to the EU gas directive, which is to encompass the contentious pipeline if it is completed. This means that even those forces that are most skeptical about the project in Germany have admitted that it may be impossible to block it, even if the Greens enter the government after the September parliamentary election. The construction of Nord Stream 2 is to be concluded in September 2021 as well, so that it is ready to work in 2022.

Undermining Poland’s efforts

The scandal in Naftogaz will not make it easier to lobby against this project in Washington, which is still vacillating between taking action that would really threaten the completion of Nord Stream 2 and finding a way to cooperate with Germany, to make it possible to finish it. It’s a choice between a moratorium on the construction, and a shut down mechanism that would turn off deliveries in case Russia was acting inappropriately. It is worth adding that Ukraine has been an active opponent of Nord Stream 2 in cooperation with, among others, the Polish government. The foreign ministers of both countries wrote a letter to the US in the Financial Times, where they called on stopping the contentious Nord Stream 2 project. Both diplomats pleaded with Washington to act quickly, but when it comes to extending the sanctions this has not happened. However, it is still possible to include Warsaw and Kiev in the possible talks with Germany on the moratorium or the switch off for Nord Stream 2. The Naftogaz scandal will make cooperation in this regard more difficult, and it will undermine the credibility of this company, which wants to cooperate with Poland on gas extraction, a step the new CEO is hoping for so much. This is certainly a way to undermine the possible talks about the long-term contract between PGNiG and Naftogaz, which have been taking place for years without any conclusions.

CBAM and Europe’s climate geopolitics that will generate conflict with everybody

The European Union wants to use the Carbon Border Adjustment Mechanism (CBAM) to force its foreign partners to reduce emissions. This is Europe’s way to protect the competitiveness of its economy that is burdened by the climate policy, and also a source of disagreements with China, Russia and the US – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.

The carbon mechanism will be used to impose a new tax on goods imported to the European Union. The tariff will be determined on the basis of the amount of CO2 emissions generated during the production process in countries, which have not introduced a climate policy as ambitious as the one in Europe. This solution has already caused resistance in the United States, which has confirmed its willingness to cooperate on climate policy. John Kerry, the US Special Presidential Envoy for Climate, warned in the Financial Times that the CBAM should be a “last resort”. “I think it is something that’s more of a last resort, when you’ve exhausted the possibilities of getting emission reductions and joining in some kind of compact by which everybody is bearing the burden,” he told the FT. Russians are also concerned about CBAM, because according to VTB Capital, their energy companies could lose even RUB 187 billion a year due to the new tax. The EBITDA of those firms, including Inter RAO, OGK-2, TGK-1, Mosenergo, Enel Russia and Unipro will drop by about 16 percent if the new tax is levied.

During the recent Leaders Climate Summit organized by the US, new declarations about climate policy were made by western states, which BiznesAlert.pl wrote about, but the non-western big polluters – China and Russia – did not make any new promises. The Chinese have declared they supported climate protection in developing countries by monitoring emissions in Africa and establishing low-emission zones in Southeast Asia as part of the Belt and Road Initiative, aka the New Silk Road. Chairman Xi Jinping explained this during the summit. One could infer that China is using this initiative to combine the foreign aspect of its climate policy with its economic expansion. Whereas Russians are pursuing an arbitrary climate policy at this point, which encourages, but does not force companies to publish data on GHG emissions without any consequences.

However, what the EU is doing could be perceived as an attempt at regaining the competitiveness of its industry in response to the fact that currently only European companies bear the burden of an ambitious climate policy. If the goal of the European Green Deal is economic rebirth thanks to green technologies that protect the climate, then CBAM is the guard that will protect the competitiveness of this economic vision. This is one of the reasons why Poland supports this proposition.

“Poland supports the introduction of this new instrument, because the existing EU ETS system (created for producers in the EU) entails the risk of production being transferred outside of the European Union to escape emission restrictions,” the Ministry of Climate and Environment explained in a comment for BiznesAlert.pl. “Such a scenario creates two kinds of risks. First, it undermines the efficiency of EU’s ambitious climate policy by interfering with the price signal related to the external effect of carbon dioxide emissions. Second, it undermines the equality of opportunity when it comes to the competitiveness of European businesses, which have to bear the costs of carbon dioxide emissions as part of the EU ETS, and companies outside of the EU, to which those burdens do not apply,” the ministry pointed out.

“CBAM could be an impulse for manufacturers outside of the EU to take action to reduce emissions, which would in turn lower pollution across the world. It is of key importance to distinguish between the new system (CBAM), which is dedicated to companies outside the EU, and the already existing EU ETS, which has been designed for entities in the EU. The EU ETS does not address the problem of emissions outside of the EU, but generated by the demand in the EU. Therefore, CBAM has been designed, first and foremost, as a tool that is to limit emissions outside of the EU,” the ministry commented.

The European Commission is to present the fundamentals of CBAM in June. The European Parliament called on the EC to introduce this solution by 2023, and to adapt it to the requirements of the World Trade Organization. CBAM is criticized mostly for undermining the regulations that guard free trade. The critics of this approach could argue that it’s not about protecting the climate, but the European industry, which would mean CBAM is set to become a new geopolitical or geoeconomic tool.

The heat this summer may be searing when it comes to the political arguments over CBAM, which, while it may help Europe regain its competitiveness despite the ambitious climate policy, will also generate conflict with all the major players. It remains to be seen whether Europe will convince them to its global climate policy vision, or fail entirely. The future of transatlantic cooperation for climate will be especially interesting in this regard, because despite high-sounding declarations by the new White House administration, the discussion on CBAM proves that climate policy may remain a bone of contention for Brussels and Washington.

Putin’s new energy weapon is a threat to Ukraine. Poles may help

Vladimir Putin may limit the supply of diesel oil and LPG to Ukraine to destabilize the country in view of the growing tension on its eastern border and the Black Sea. In theory Poles could reduce this risk – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.

Putin’s new energy weapon

The temperature in eastern Ukraine is rising again, and Vladimir Putin may use another of his tools from the energy and fuel sector to exert pressure on this country. As early as in May, Ukraine may experience diesel and LPG shortages, that may cause social unrest, which would be welcome by the Kremlin, which wants the situation in Kiev to destabilize. Perhaps deliveries from Poland, Lithuania and Belarus could defend Ukraine against this scenario.

In early March a Swiss company called Proton Energy Group decided it would stop delivering oil products to Ukraine as of the 1st of April 2021. The Ukrainian Oil and Gas Association and the Security Service of Ukraine advise against cooperating with this entity. This was the company’s response to the fact that the Ukrainian authorities seized Glusco gas stations causing Proton Energy, whose only supplier of oil products to Ukraine since 2016 has been Rosneft, financial losses. In 2020 the company delivered to Ukraine 1.74 million tons of diesel oil (23.4 percent of the market), and 443 thousand tons of LNG (22.3 percent). Ukraine’s General Attorney accused Proton Energy Group of tax evasion to the tune of USD 8.5 million.

Ukraine gets the majority of its oil from Belarus (half of the market), while import constitutes about 85 percent of supply to its market. It is worth mentioning that Kiev also imports 54 percent of LPG from Russia. Ukrainians did reform their gas market after the Euromaidan revolution, but failed to attend to their fuel sector. The Kremenchuk, Lysychansk, Drohobych and Nadvirna refineries were not modernized. The dispute over the Samara-West oil pipeline (Samara Zachidni Napriamok – Ukr.) has not been resolved yet. The pipe transmits oil products from the area of Mazyr via Brody (know in Poland from the Odessa-Brody-Gdańsk project) to Hungary, and it is managed by PrykarpatZapadTrans. In 2011 a court decided that the company had to transfer the control over the pipe from Russia’s Transneft to the authorities in Kiev. However, that sentence was annulled in 2015. In 2016 Russians sold the oil pipeline to a company called International Trading Partners (ITP), and Ukraine’s antitrust authority approved the transaction. The mentioned Proton Energy Group was appointed as the pipe’s operator.

It’s been unofficially confirmed that the company is indirectly controlled by Viktor Medvedchuk, a Ukrainian oligarch and a pro-Russian politician. ITP is owned by Anatoly Schaefer from Germany, whose other company – ITC was an intermediary for oil trade with Russia. In 2019 Schaefer sold the majority share in ITP to Nikolay Vorobey, a Belarusian businessman, and kept his minority shares. The National Security and Defense Council of Ukraine nationalized ITP in February 2021. Still, Medvedchuk reportedly remained a secret middleman that kept the tabs on the Samara-West oil pipeline. The status of the oil pipeline is still unsolved and resembles the fate of the Yamal gas pipeline in Poland and the Trans-Balkan pipeline in Bulgaria. An unclear ownership structure allows Russians to maintain their influence on the strategic supply of raw materials, and consequently on the internal and foreign policy of the country where the infrastructure is located. This idea is based on the Falin-Kwiecinski doctrine, which said that after the disintegration of the Soviet Union, Russia should use gas (and other resources) instead of tanks to pursue its policies. This is the purpose of Nord Stream 2. At the same time oil could be utilized this way as well, and now fuel can be added to the list. It is worth stressing that even today Ukrainians do not have any control over the volume of supply transported via the Samara-West pipeline, which creates the risk of irregularities. Some of the supply disappeared from the pipe and the police failed to ascertain what had happened to it, but it probably found its way to the black market.

“The decision to give up a strategically important oil pipeline to a Russian state-owned monopoly is very difficult to explain rationally,” Wojciech Konończuk from the Centre for Eastern Studies wrote in 2017. He also pointed out that some representatives of the government in Ukraine had ties to Medvedchuk, and the fact that the Security Service of Ukraine accused him of participating in the import of fuels from companies that “finance terrorism”. Konończuk warned that such a dependency put Ukraine at risk of being destabilized by Russia, which would limit fuel supply to this end. Only as late as in February 2021 the National Security and Defense Council of Ukraine, which is systemically tied to the president Volodymyr Zelensky, who is perceived as a person free of any illicit connections, recommended that the control over the Samara-West oil pipeline be taken over, and reminded that it had previously demanded the same back in 2015, but that recommendation was not adopted. An audit is to reveal why this happened. In February Zelensky introduced sanctions against Medvedchuk’s men: Taras Kozak, and news channels 112 Ukraine, ZIK and NewsOne. The Security Service of Ukraine learned that they were financed from Russia. The sanctions were also put on Medvedchuk himself and his wife.

As long as Ukraine depends on Russian fuel supplied via Belarus and Russia and, as long as it does not fully control the Samara-West oil pipeline, and Medvedchuk’s men do not supply the fuel to Ukraine, there is a risk that there will be shortages on the Ukrainian market. Mykhailo Gonchar from the Strategy XXI think tank is concerned that the fuel reserves by the Dnieper may not last longer than the first half of April. Razumkov Centre’s calculations reveal that the spring peak demand for fuels will cause a situation where diesel reserves in Ukraine may run out in May. “The domestic diesel market may experience a shortage of 300 thousand tons of diesel and at least 40 thousand tons of LNG,” Maksym Bielawski, the Centre’s expert told me. Limiting the supply of those fuels to the market in Ukraine may increase prices and cause social unrest, which may translate into changes in political support, perhaps in a way that will benefit the Kremlin. It is worth reminding that Medvedchuk has ties to the pro-Russian Opposition Platform — For Life, and together with the former energy minister Yuriy Boyko went to Moscow the day before the presidential election, which was won by Zelensky, in order to illegally negotiate a separatist transit deal with Gazprom on terms that would be beneficial for Kiev. This is how the gas price was used to impact election results, which, in the end went in line with the expectations of the current president. The diesel and LPG price hikes impact the daily lives of voters, so they may turn out to be a similar tool of control, i.e. the Kremlin’s new energy weapon in Ukraine.

Poles may help, in theory

The alternative are new supplies from Poland, Lithuania and Belarus. This means that Polish companies, both state-owned and private, may play a positive role in the game to make Ukraine less prone to Russia’s malign actions with the use of its influence in the energy and fuel sector, this time in the diesel and LPG departments. Deliveries from outside of Russia could theoretically come from Poland, which would let PKN Orlen, the LOTOS Group and other companies onto the Ukrainian market. It remains to be seen to what degree the transport infrastructure in Belarus could be used. Currently, it is coming under increasing influence from Russia, which demands more economic and political integration, as part of the Union State of Russia and Belarus. It is worth reminding that similar attempts at diversifying oil supply in cooperation with Minsk and with the intermediary services offered by Poland’s Unimot, were at an advanced stage when the contaminated oil crisis had broken out in 2019. However, they were temporarily abandoned when the pro-Russia course reemerged in Belarus, and a bloody crackdown on opposition during the presidential election took place. It is being speculated that a decision on limiting Minsk’s sovereignty will be made soon. This is why the best solution would be to use the transmission infrastructure on the Polish-Ukrainian border, i.e. the infrastructure that is being prepared for the Odessa-Brody-Gdańsk oil pipeline, which lost its economic reasoning in view of the fact that supply from outside of Russia – via the refinery in Gdańsk – significantly increased. However, the project may become profitable again thanks to PERN, provided that it will be used to supply fuels from Poland to Ukraine.

Polonization of the Yamal gas pipeline capacity

Poles want to end the history of disputes with Gazprom. The gas contracts with Russia will expire soon, but the Polish section of the Yamal gas pipeline will stay. It is to be used for efficient transmission of gas around the country, including from the Baltic Pipe and the LNG terminal in Świnoujście. The Yamal is to be functionally connected to the Polish gas transmission system without the necessity to sign new contracts with Gazprom – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.

Polonization of the Yamal gas pipeline

The Polish state has already dealt with the seemingly insoluble problem of the Yamal pipeline (officially known as the Yamal-Europe gas pipeline) by giving Gaz-System control over its capacity. In 2019 the EuRoPol Gaz company, owner of the Polish section of the Yamal pipe, and the Polish TSO – Gaz-System did not reach an agreement within the set legal timeline on a new contract to entrust the operation of the pipe (the previous one expired on the 31st of December 2019). This was caused by a permanent stalemate at the Polish-Russian company, where PGNiG and Gazprom have a 48 percent share each, and 4 percent is owned by PGNiG Gaz-Trading. However, Polish lawmakers were prepared for such a situation. In line with the Energy law, to solve the problem, the contract that governs the operation of the Polish section of the Yamal gas pipeline, was determined by the President of the Energy Regulatory Office and entered into force on the 1st of January 2020. The new agreement significantly widened Gaz-System’s rights as an operator.

The end of the Russian contracts saga

Also in 2019, Poland’s PGNiG announced it had told Gazprom it would not extend the long-term gas supply agreement called the Yamal contract, beyond the 31st of December 2022, and has consistently stayed on message by reiterating it would not sign another deal of this kind. This means that as of 2023 the biggest company on the domestic gas market would stop buying about 3 bcm of Russian gas as part of the Yamal contract, which is now delivered to Poland via two entrances to the Yamal gas pipeline in Włocławek and Lwówek. The lack of a new gas supply agreement with Gazprom means PGNiG will no longer use the Yamal pipe to purchase the Russian gas. However, this does not mean that it won’t be possible for Russian gas to travel across Poland to Western Europe.

Transmission via Poland

In May 2020 the transmission contract between EuRoPol Gaz and Gazprom expired. It determined how much Russian gas was transported across Poland. On the 31st of December 2022, the EuRoPol Gaz-PGNiG transmission contract, which is related to the Yamal agreement, will end as well. This means that today the majority, and after 2022 the entire capacity of the Yamal gas pipeline will be made available only through auctions organized by the Polish TSO Gaz-System. The auctions are open for all interested parties. Today Russians use, and will be able to continue to use the Yamal pipe, but only on the basis of Polish and EU regulations, and on equal terms with other potential companies.

The plan to expand the Transmission System

At the same time, Poland’s TSO is planning to completely take control over the Polish section of the Yamal pipeline, including investments related to the domestic natural gas transmission system, and the process of determining the transmission tariff. This will be made possible by a new entrustment agreement that will replace the one that will expire on the 31st of December 2022. According to my scoop, a kind of an investment road map into gas pipelines in Poland will determine which investments are needed for Warsaw to be able use the Polish section of the Yamal pipeline for the benefit of domestic consumers, without the risk of engaging in toxic relations with Russia’s Gazprom. The plan is called the National Ten-Year Development Plan for the Transmission System for the Years 2022-2031, and it is being prepared by Gaz-System. The draft is to be published already this month.

Yamal connections

The strategy, obtained by BiznesAlert.pl, says that Gaz-System wants to make technological updates to the Polish section of the Yamal, that will make it possible to use the pipe as part of the domestic transmission system. Reportedly the Plan includes, among others, the proposal to build a compressor station in Lwówek to pump the gas from the Baltic Pipe and the LNG terminal in Świnoujście into the Polish section of the Yamal gas pipeline. Then, if the gas transmission from Russia to Germany is halted, the imported gas will be transmitted to the eastern part of the country, where new exit points to Gaz-System’s network are planned. According to the schedule, these new points will start working once the hub and the compressor station in Lwówek are expanded. This will make it possible to transmit gas from the north via the hub in Lwówek to the Yamal pipeline to central and eastern Poland. Of course, by then the entry points to the domestic transmission system in Włocławek and Lwów will be launched. Today they are already enabling Polish companies to import gas purchased on the exchange in Germany, which is then delivered via a virtual reverse flow. If the gas transmission between Russia and Germany is maintained, it will still be possible to use the Yamal gas pipeline to cater to the needs of the domestic transmission system. The gas volume available for transmission from the Polish section of the Yamal gas pipeline will be maintained by Gaz-System at the current level, but from the point of view of the Polish system the pipeline will become more useful.

There won’t be a new long-term contract with Gazprom.

If it turns out that Russians will maintain gas transmission to Germany via Poland after 2022, it will be possible to deliver this fuel to the eastern parts of the country via the so-called virtual reverse flow. From a technical point of view, it will be possible to tap into the Yamal pipeline through the new entry points to the domestic transmission system in the east of the country, and the “shortage” that will be generated in this way, could be replenished with gas from the Northern Gateway – via the new entry point to the Yamal pipeline in Lwówek. This would make it possible to ensure that the volume on the border with Germany is the same as the gas received from Russia at Poland’s eastern border. This will be possible only if Gaz-System manages to make the necessary technical updates to the Polish transmission system without additional agreements between, e.g. PGNiG and Gazprom. By the way, it is worth reiterating that the planned Ostrołęka C power plant will receive gas in accordance with the conditions of the grid connection between Poland and Lithuania (GIPL). This means the gas for the plant will not come from the Yamal pipeline, because the GIPL will be tapped into Lithuania’s resources and Poland’s transmission system – the compressor station owned by Gaz-System in Hołowczyce.

Will the Suez Canal blockade impact oil and gas prices in Poland? (ANALYSIS)

The Suez Canal has been clogged since the 23rd of March. Will the blockade cause issues with the delivery of energy resources, and thus undermine Polish home budgets? Only if it lasts for a long time, which seems unlikely – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.

Suez Canal blocked

The Suez Canal is an artificial waterway opened in Egypt in 1869 that connects the Mediterranean and the Red Sea, shortening the time of travel from the Persian Gulf to Europe by about nine thousand kilometers, which is up to ten days at sea. The reasons behind the recent incident are unknown. However, we do know that on the 23rd of March a cargo ship Ever Given run aground on the canal’s bank blocking the passage. According to the canal authority, this happened either due to a sand storm or human error. It locked over 300 ships in an almost 100-km long queue, causing delays in delivering many goods, including oil. However, it’s been since announced Ever Given would be freed at the beginning of the last week of March 2021. On the 28th of March, new tugs were arriving to help free the ship, dig it out of the sand and lower its tonnage.

Oil barrels and gas from the Middle East that were travelling to the Old Continent still constitute an important share of deliveries to Europe. In 2020 the European Union imported 6.3 percent of natural gas from Qatar. To compare, it imported 44.7 percent of gas from Russia. Last year the EU imported 8.5 percent of oil from Iraq and 7.1 percent from Saudi Arabia. To compare, it got 28 percent of oil from Russia. Therefore, it is worth to first investigate whether the blocked Suez Canal impacted the prices of energy sources such as oil and gas.

In the first week, the accident did not impact the oil price, which… went down due to the grim economic data, which indicated the economic slowdown would continue due to the coronavirus pandemic, and despite the ongoing vaccination efforts across the world. The International Energy Agency announced the demand for oil would go back to the level from before the pandemic as late as in 2023. On the day of this announcement Brent lost over 8 percent and the US blend WTI – about 10 percent. It was the biggest slump since the second wave of the coronavirus that had occurred around October of 2020. It’s also a signal that the third wave continues to impact the market in line with the forecast of BiznesAlert.pl, a development which shatters the optimism of investors. The wave is responsible for the sliding of Brent since 18 March, and its impact was exacerbated by new lockdowns imposed during the Easter holidays in the West. Brent that up until the first week of March had been priced at over USD 70 per barrel dipped to USD 62 in the third week of that month. Another drop, to about USD 60, was caused by the news about new lockdowns in EU states introduced due to the increasing numbers of COVID cases.

Impact of the blockade on the oil and gas market

On the news of the blockade, the Brent price rose to nearly USD 64 on the 25th of March, but it dipped on the same day to almost USD 61. This is how the uncertainty about this incident shared by investors was reflected in the price. If the issue had been quickly dealt with, its impact on the oil market would have disappeared quickly, and the oil price would have gone back to normal. However, when it turned out it would be impossible to refloat the ship quickly, the Brent started to go up again on the 26th of March. Investors started to worry that the Ever Given incident would have a long-term impact on oil prices, which they reflected in the barrel price that went up on the 29 March to over USD 64, only to experience a slight dip after the recent news on unclogging the canal. The fate of the barrel will depend on how quickly the passage via the Suez Canal will be made possible. However, there are other factors at play as well, which contribute to the price dropping, such as the coronavirus pandemic’s impact on economic activity. It is worth stressing that the OPEC+ states have the necessary tools to halt the dropping prices, for instance, they may decide to limit oil output again as of April 2021.

The spot price of liquefied gas on the London exchange hovered around GBP 46 after it had plummeted from over GBP 75 for one thermal unit, which was caused by the cold spell in February 2021. The blockade of the Suez Canal forced some LNG tankers to retreat, but the market reacted moderately and priced the gas at GBP 48. It has been suggested that Europe’s dependence on gas from Qatar will cause the prolonging blockade to halt even a million tons of LNG in the Red Sea. However, it is worth reminding, that European customers still have significant gas supply from the US and South Africa at their disposal. They also have long-term contracts with Qatar, according to which the Qatari are responsible for the cargo, removing any delays and paying penalties for not supplying the gas. This is why the diplomatic crisis between Qatar and a coalition led by the Saudi Arabia in 2017 and the resulting blockade of Qatar’s shipping routes did not cause issues on the LNG market.

Poland doesn’t have to be concerned

To sum up, the blockade of the Suez Canal has a limited impact on the price of energy resources – LNG and oil. If it is removed quickly, it should not affect the finances of the Polish people, just like it was in the case of other past crises in the Middle East. It is also worth reminding that the importance of the canal for oil trade is dropping systematically, even though in the 1950s about 1.2 million barrels a day were transported across the channel. Today only a few percent of Europe’s oil imports goes through that passage. In 2019 it was 333.618 million barrels from Iraq and 287.829 million from Saudi Arabia. The array of choice is growing with the traditional supplier – the Russian Federation – leading the way and the emergence of the new tycoon – United States. Poland receives deliveries of the Saudi Light blend via the canal from Saudi Aramco and LNG from Qatar on the basis of a long-term contract between PGNiG and Qatargas. So far there haven’t been any issues with those deliveries. The oil and LNG trade is becoming more global, which means the contracted suppliers can offer an alternative, and if not, clients can find one. So the supply of hydrocarbons to Poland is not at risk because of the blockade of the Suez Canal. This means, Poles will probably not notice whether the Suez events had any impact on the prices at gas stations.

Either way the issue may cease to have any impact on the prices very soon. Inchcape Shipping Services, which is working on freeing the Ever Given has announced it managed to refloat the ship. Soon it will report on the progress on dealing with the traffic jam that formed at the passage. The oil prices started to drop. On the morning of the 29th of March the barrel cost around USD 63.48 after dropping from USD 65 a day earlier.