Russia used gas as a weapon against Moldova. This recidivism requires a European response

The homeopathic gas supply organized by Poles and Ukrainians to Moldova, which is suffering from shortages, is only a band-aid solution. Putin used Gazprom as a weapon against that country. It’s time for Europe to respond – writes Wojciech Jakóbik, editor-in-chief at BiznesAlert.pl.

Czytaj dalej„Russia used gas as a weapon against Moldova. This recidivism requires a European response”

Fire, Sword and Nord Stream 2

Fire, Sword and Nord Stream 2

The Crimea Platform was an occasion to talk unofficially about Nord Stream 2. Poland and Ukraine played a significant role in those conversations. Together both countries can create an alternative to the supply system controlled by Putin’s pipe. They should start with solidarity in case Russia disrupts the supply, especially that Moscow is already cutting supply to Europe on purpose – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.

With fire and sword, or with gas and the military

The divisions between the crown’s noblemen and the Cossack nobility (Ukrainians – ed.) that led to the downfall of the Polish–Lithuanian Commonwealth described in Henryk Sienkiewicz’s prose, belong to history. Today Poland and Ukraine work together against Moscow, which is occupying Crimea and using gas for political ends, of which the latest example is it limiting the gas supply to Western Europe to force the launch of Nord Stream 2 as quickly as possible. According to Volodymyr Zelensky, the German promise that the role of Ukraine’s gas sector after Nord Stream 2 will be to provide green hydrogen is “about the future”, whereas Putin’s pipe poses a challenge that is here and now. The draft deal on Nord Stream 2 has many carrots, but still too few sticks. On the pages of Le Figaro and Die Welt presidents Andrzej Duda and Volodymyr Zelensky have warned that the project may be used by Russia to orchestrate a new aggression in the region. Thus, the leaders stressed the security aspect of the proposed deal on Nord Stream 2 formulated by the US and Germany in July this year, an issue that is not talked about enough. The first novel in Sienkiewicz’s Trilogy was titled “With Fire And Sword”, which was a comment on the fratricidal wars in the Commonwealth where this type of weapons were used. In the 21st century Russians are waging their war against Poles and Ukrainians with fire (gas) and sword (the military). The Polish-Ukrainian alliance is making the supporters of NS2 remember about this aspect of the issue. This pertains especially to Germans and others who, contrary to facts, want to present the pipe as a business venture.

Gas solidarity aka SOS

Supported by Poland, Ukraine demands specific security guarantees, that so far have been missing from the agreement on Nord Stream 2. On the 23rd of August politicians from Ukraine, Germany and the United States responsible for energy held a meeting to discuss the deal on the contentious Nord Stream 2 pipe. The talks are to be continued. The Independent Commodity Intelligence Services (ICIS) has ascertained that Ukraine allegedly sought to join the EU solidarity risk sharing system established under the SOS regulation. Ukraine wants to join a group of countries that would support one another in case of issues with gas supply. The group members already include Poland, Germany, Czechia and Slovakia. According to the ICIS source, Ukraine is concerned about a possible gas shortage at a CEE gas hub in Baumgarten this fall, due to the limited supply from Russia, a problem BiznesAlert.pl wrote about previously. If the plan pans out Germany will be responsible for guaranteeing a secure supply to the East at the point in Lanzhot on its border with Czechia. ICIS claims that Poland could benefit from the deal as well, as it would increase its chances at tapping into gas supply from Germany, that would complement the smaller deliveries via Ukraine, caused by a drop in transit across its territory.

The foiled return of Catherine the Great

In the past Poles have already tried to add Ukraine and other members of the Energy Community (e.g. Moldavia) to the solidarity risk sharing system under the SOS regulation, an initiative led by the former Polish prime minister Jerzy Buzek, one of the originators behind the Community. The regulation says that the regional energy solidarity group will exchange gas in case of supply shortages. It had been drafted after the gas crises in 2006 and 2009, and was then revised by, among others, Poles so that the stranglehold Gazprom has on gas storage facilities in Germany was not a threat to the security of gas supply to Poland. Here again a reference to Sienkiewicz’s novel is pertinent. The author’s memorable words about Catherine the Great crushing the Zaporozhian Sich (a disputed area ruled by Ukrainian Cossacks – ed.) are brought to mind when one considers the discussion on the security of gas supply to Europe. The amendment to the SOS regulation includes the solidarity rule, which is the foundation of the cooperation between regional groups. Germany was added to the group with Poles, making it offer gas from its system in case of problems, even if Gazprom does not want to provide gas from its German facilities, the biggest of which is called Katharina, named to honor… Catherine the Great, of which I wrote in 2015. The successful struggle to improve the European regulations increased Poland’s security, but in the future it may also increase Ukraine’s, provided that Kiev’s call is heeded across the European Union. For this reason it would be wise to include the Commission in the talks about the NS2 deal, which was wrongly replaced with Germany, which is trying to put on the EC’s shoes, and thus strips European integration of its credibility, especially when it comes to the gas sector. It should also be ensured that Russians emptying their gas storage facilities right before the winter season, which goes against market logic, will not lead to supply shortages in the European markets this fall. Poles and Ukrainians have warned about this. Polish gas storage facilities are full at 89 percent, and have a capacity of a little under 3.2 bcm. At the same time Ukraine wants to pump a record 20 bcm of gas into its storage before the heating season. Their western neighbors cannot claim they are equally prepared. The European storage facilities controlled by Gazprom are full at a record low 18 percent.

Poland and Ukraine can learn from history

Poles and Ukrainians could take another step and use the three-party cooperation with the US started during the Trump administration, as well as the investments promised in the region as part of the NS2 deal. Co-financing the construction of the Poland-Ukraine gas pipeline, for which neither the Poles nor the Ukrainians seem to be able to pay, would unclog the transit route in both directions, including to Ukraine which could receive 6.6 bcm a year. This move would make Kiev a true member of the SOS regime. Another step could be for Poland and Ukraine to jointly utilize their gas storage facilities to counterbalance the Gazprom-owned storage in Western Europe, which is fuelled by NS2. The Polish and Ukrainian storage facilities could take in LNG and gas from the Baltic Pipe, as well as other sources, e.g. Turkmenistan, which has been suggested by Ukraine. This is why in an interview with BiznesAlert.pl, the CEO of the gas transmission system operator by the Dnieper – OGTSUA has proposed a future where the energy security of NATO’s eastern flank will be strengthened thanks to an integrated gas hub, capable of providing up to 50 bcm of gas a year to the region, thanks to Poland’s diversified gas sources in Świnoujście (LNG terminal) and Pogorzelica (Baltic Pipe). It is worth reminding that the NS2 yearly capacity is 55 bcm. The gas and security sectors need to therefore respond to Russia fighting with fire (gas) and sword (the military). This is why the discussion on the security of the region after the annexation of Crimea should also be about the stability of gas supply and the other way around. The talks about the gas sector after NS2 also need to be about security. Poland and Ukraine can contribute to this debate, provided they receive efficient security guarantees and practical support with regard to gas supply. In the past arguments between our nations led to the disastrous collapse of the Commonwealth. The contemporary, successful cooperation in the gas and security sectors may bring a completely different outcome – further integration in opposition to the threat posed by Russia.

Vicari: Gazprom incident in face of historical gas price record in Europe

Incident at Gazprom facility in Siberia has temporarily affected gas supplies to Europe through Jamal-Europe pipeline. Although Gazprom informs about resuming the gas supplies, this incident is important in wider context of Nord Stream 2 dispute and gas price record in Europe. Madalina Sisu Vicari is commenting this issue for BiznesAlert.com.

The fire occured at Gazprom’s gas condensate facility near Novy Urengoy on Augus 5 has impacted the gas flows through the Mallnow point, which predominantly handles Russian flows to Europe. The gas flows through the Mallnow border point between Germany and Poland almost halved on Thursday, but then the have seemingly been restored on Friday – resumes Vicari. She reminds that the prices in Europe reached historical record on August 6 of $540 per 1000 bcm and the future contracts on ICE exchange reached a peak volume too. It was €44.65 per kWh.

The Urengoy incident has played an important role in the bullish sentiment around the prices increase, although the flows to Mallnow (entry point at Yamal-Europe pipeline at Polish-German border – BA) been restored. But it is not clear yet whether the future gas production or gas exports to Europe would still be affected – states Madalina Sisu Vicari. – However, the gas prices in Europe could still be under high pressure due to gas inventories factor, especially the disparity between the counties with satisfying rate of gas inventories , and the countries with low rates. For instance, on August 7, countries with good rate of gas inventories were : Poland – 83.85% filled inventories ; Italy – 76.03%; Hungary- 72.46% ; Portugal and Spain over 70% rate.

Conversely, the rate of inventories in Austria and Germany , especially at Gazprom’s underground storage facilities is very slow compared with the timing and the needs. Also on August 7, inventories at Haidach UGS ( Austria) were at 34.12% from the total capacity, and at Germany’s Rehden, the inventories are at 8.79% of capacity. Worth mentioning that within half of July, there were no gas injections at Rehden, and between August 5-August 7, there have been withdrawals from Rehden inventories, but no injections . Worthy of mention what were Austria’s and Germany’s gas inventory rate on August 7 : 37.49% , 52.67% respectively – states Vicari in comment to BiznesAlert.com.

Concocting a story about how Poland didn’t want in on a Russian pipe

The dispute over Nord Stream 2 has become so important, that various outlets are now building a narrative according to which Poland did not want a Russian gas pipeline on its territory, so it’s her fault that the pipe now goes directly to Germany. That is completely false. We must reiterate the facts to show how Gazprom is manipulating the public opinion in Europe – Wojciech Jakóbik, editor in chief at BiznesAlert.pl, writes.

Nord Stream 2 is not in Poland’s interest

“After Nord Stream 2 is done, we will get gas from Germany. If Gazprom wants to upset Poland, it won’t be able to, because it will have to transmit the gas via Western Europe,” professor Zbigniew Lewicki told the Rzeczpospolita daily. That’s not true – Poland is in Central Eastern Europe. NS2 bypasses the country. This situation does not strengthen our security. For Poland the Nord Stream 2 is not as big of a problem as it is for Ukraine only because we have the alternative in the form of the LNG terminal, and soon the Baltic Pipe. It took a few parliamentary terms and great pains for these projects to even launch. Yet, the pipe is still a political, market and legal problem, but not just that. Nord Stream 2 is bad for us, and according to the Bruegel think tank the project may increase, not lower gas prices in Central and Eastern Europe. This is because there aren’t enough gas connections between Central and Eastern Europe and Western Europe. This bottleneck situation will make it harder to get Russian gas from Germany, than to buy it via the existing infrastructure. This may up gas prices.

It was Russia that did not want the second Yamal gas pipeline

The fairytales that Poland could have joined the Nord Stream 2 project so that it didn’t bypass it, are based on the lack of knowledge about the fact that in the 90s Poland agreed with Russia it would expand the second Yamal gas pipeline, and it was Russians who failed to keep their end of the bargain. Unsurprisingly Russia proved to be unreliable. A section of the Yamal gas pipeline (Yamal-Europe) runs across Poland. It was completed in September 1999, and according to the documents, a second line was planned. Poles supported this idea, but Russia did not want to get involved. Perhaps this is why in 2001 Poland decided to build a pipeline from Norway. Probably due to that development Russia decided to divert its gas transport to Germany to the Nord Stream pipeline, which bypasses Poland. In 2005 Gazprom and BASF-E.on signed a deal to that end. In 2007 it was officially announced that the second line of the Yamal pipe would not be constructed. This wouldn’t have been a problem for Poland if Leszek Miller’s government hadn’t decided to abandon the Norwegian project. Meanwhile the first Nord Stream was completed four years later.

The idea to build a second pipeline from Russia to Poland came back in 2013 with the so-called “Peremychka”. Russians encouraged Poles to start talks about the second line of the Yamal, but with a new route – via Poland to Slovakia. During a staged conversation with Gazprom’s CEO Alexey Miller, president Vladimir Putin suggested that such a contract could be signed. The transcript of this discussion was then published online. Poles took the bait. PGNiG signed a memorandum on assessing the profitability of the Peremychka, but the whole thing ended with the dismissal of Mikołaj Budzanowski, the Minister of the State Treasury and Grażyna Piotrowska-Oliwa, the CEO of PGNiG. They were fired by the then Prime Minister Donald Tusk, because allegedly he found out about the company’s initiative from the press. The case needs to be investigated further, because the Peremychka route was to run close to the Grupa Azoty facility, which was the target of a hostile takeover in the previous decade by a Russian millionaire. The dispute over the Peremychka caused a crisis in the Polish government, which only shows how these sorts of Russian bites work. In reality the story about Poland not wanting a gas pipeline from Russia is false, and was concocted to convince the public opinion about Poland not being rational on the matter, and Gazprom presenting a reasonable stance.

The best punch line to the story about Poland not wanting Nord Stream 2 is the plan to use the Yamal gas pipeline for delivering LNG and natural gas from Norway from the Baltic Pipe, and to treat it as part of the domestic infrastructure. If Russians do dry up the Yamal, its capacity will be used to benefit Polish interests. If not, they will be able to use it in a civilized way and in line with the EU regulations.

Gazprom’s manipulation tactics

In reality Russians are carrying out an information policy that pushes for projects such as Nord Stream 2, which later on may be used as a tool for the Kremlin’s nefarious foreign policy. I myself had the opportunity to learn how this works, when I took part in an online conference INTERENEF in Croatia’s Split. I was invited to a panel with a representative from the Polish Embassy in Zagreb Bartosz Marcinkowski, Robert Bosnjak from the Croatian Plinacro and Vitaly Yermakov from the Oxford Institute for Energy Studies. At the last moment two representatives from the Russian embassy were invited – Vladimir Prokhorov (Minister Counsellor at the embassy) and Vladimir Ivanov (economic advisor). I found out about this during the panel. The discussion was interesting. The Russians, including the fellow from the Oxford Institute, presented the familiar arguments known from Kremlin’s propaganda mouthpieces, such as the Sputnik. They accused Poland of being “rude”, because it tries to dictate Germany how to run its energy policy. They failed to respond to the fact that the EU states coordinate their policies in line with the energy solidarity principle, which stands in stark contrast to unilateral projects with Gazprom, such as the Nord Stream 2. However, the cherry on top was a question from the audience asked by a citizen of Bosnia and Herzegovina, who accused the Polish participants of being “emotional” and asked the Russians to reiterate their arguments. In result, they got a few minutes to recite their talking points without the moderator interrupting them. After the debate we managed to ascertain that in the past, the lady from Bosnia and Herzegovina worked for a decade at… Gazprom. That’s what a public debate with Russians looks like.

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.

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.