Tag: Germany

Gazprom’s new game

Gazprom’s new game

Gazprom skillfully uses market tools to play a game, which has a completely non-market character and business and political goals that are aligned with the Kremlin’s agenda – writes Wojciech Jakóbik, editor-in-chief at BiznesAlert.pl.

A new face of the gas crisis

The Russians have not turned off the gas tap, nor have they threatened with a new gas crisis. Hiding behind routine procedures, they are limiting the supply of this fuel to Europe, waiting for the other side to take certain steps. Gas reserves in European storage facilities, co-owned by Gazprom via the Astora company, are at a record low level. Russians did not replenish stocks in the summer of 2021 after they were at a high level after the 2020/21 heating season, when the demand on the market had been record low, due to the pandemic restrictions. Historical data from Astora’s storage facilities in Germany, dating back to January 2016, show a relatively regular process of gas replenishment in the summer, when the fuel is cheap and demand is low, and a draw in the heating season, when it becomes more expensive and demand increases. Because of the pandemic, 2020 was clearly different, as gas consumption during the heating season was at a record low. The graph depicting gas storage levels after a period of regular waves, shows reserves at a high level, which had persisted from the end of 2019 to the autumn of 2021. Contrary to the previous years, the stocks have not been used up, because the restrictions introduced due to the pandemic decreased economic activity, and consequently the demand for gas. Another anomaly was the onset of winter in early 2021, when gas consumption from storage facilities suddenly increased to a record level on the 4th of January 2021.

Gazprom’s gas storage facilities in Germany (Astora). Graph prepared by the author on the basis of AGSI + data.

It is worth recalling that in 2020 Gazprom transmitted to western Europe and Turkey 135.75 billion cubic meters, including 45.84 bcm to Germany, the biggest recipient. At the same time, it sold 39.14 bcm to Central and Eastern Europe, of which 9.67 bcm ended up in Poland. This gives a total of 174.89 bcm in 2020. Gazprom predicts that sales to western Europe, Central and Eastern Europe and Turkey, not counting the countries of the former Soviet Union, will reach 175-183 bcm in 2021. This means that gas export from Russia remains stable, despite record gas prices, which could suggest that the sale should go up as that would be in the economic interest of the company, regardless of the importers’ pleas for more deliveries. Interestingly, this topic appeared on one of Gazprom’s press conferences back in April 2021, and the head of Gazprom Export responsible for sales abroad Elena Mayorova, said that she would plan the export policy depending on the results of the first quarter of this year. The data in question revealed record-low stocks and high draw, as well as record sales to the so-called far abroad (the aforementioned Europe and Turkey without the former Soviet countries). Between January 1 and April 15, 2021 it went up by 28 percent year on year, to 60.5 bcm. After breaking these records, the Russians probably decided to limit sales to Europe.

As early as the summer of 2021, they continued to boast of a record increase in exports, but this record actually occurred only in relation to the record supply declines of 2020 caused by the pandemic restrictions. Gazprom Export reported sales of 115.3 bcm to countries outside the Commonwealth of Independent States in the first half of 2021. This is a year on year increase of 23.2 percent, or 21.7 bcm. However, deliveries in the first half of 2021 were actually lower than in January-June 2018, when there was an actual record of 117.1 bcm. At the same time, Gazprom transmitted 198.97 bcm to the Old Continent in 2019, and in 2020, which was affected by the pandemic, only 174.9 bcm. This means that Gazprom has reduced exports to Europe and Turkey in comparison to the figures from before the pandemic, despite the record prices during the energy crunch, and also expects significantly smaller deliveries in 2021 (the mentioned range of 175-183 bcm) than in the pre-pandemic 2019 (198,97 bcm). This went against the expectations in Europe, which presumed Gazprom would increase the sale and prices would drop. Gazprom acted contrary to market logic. However, the Russians follow their own way of thinking, that is a mix of business and politics.

Market game or political game?

The data from the Oxford Institute for Energy Studies (OIES), a think-tank known for explaining the Russian point of view, show that the oversupply of gas in Europe in 2020 caused a record low price, an increase in LNG sales and a decline in Russia’s market share, as it lost out to competitors. The increase in LNG supply to Europe in the first half of 2020 was combined with a decrease in purchases from Gazprom. LNG supplies from the USA reached 9.3 bcm in the first half of 2020. Gazprom’s customers who signed long-term contracts must adhere to the take-or-pay (TOP), according to which a portion of the contracted gas volume has to be paid for, even if it is not collected. This means they have room to reduce purchases in Russia by the amount not impacted by the TOP clause, depending on whether they have an alternative, such as LNG, which served as a way out more often than not in 2020. Deliveries to Germany fell by 25 percent year on year in the first half of 2020. OIES acknowledges that Germany has optimized its portfolio by increasing LNG purchases and reducing purchases in Russia to the contractual minimum. An example illustrating this trend can be Poland’s PGNiG, whose contract with Gazprom stipulated that the TOP clause applies to 80 percent of the volume. In 2020 PGNiG brought in about 9 bcm of gas from Russia and almost 4 billion cubic meters of LNG. Deliveries of liquefied gas accounted for 25 percent of imports of this company, and those from Russia – a record low level of 60 percent. Imports through the European stock exchanges accounted for the remaining 15 percent. However, the data collected by the OIES show that the increase in demand in 2021 was significant, due to the aforementioned cold spell in January, among other things. LNG was not enough to cover the additional demand, and customers asked Gazprom for more. Data from the first half of 2021 show that PGNiG increased purchases from Russia by 17 percent, to 4.8 bcm, that is by about 700 million cubic meters, keeping the share of this gas supplier in the vicinity of 60 percent. Meanwhile, according to the latest available data, in the third quarter of 2021, gas import to Poland from the east was at 67 percent (a 1 percent decrease year on year), while 24 percent arrived in LNG tankers (increase by 4 percent). Deliveries from European stock exchanges accounted for 9 percent, which is a decrease of 6 percent. PGNiG’s attempts to maximize imports from outside Russia, while limiting purchases on exchanges hit by record prices, are therefore evident. However, there are reasons why the price on the exchanges was so high, and one of those was Russia limiting the supply. Moscow is not starting a price war to fight for clients, it is trying to maximize its market participation and number of long-term contracts. For this reason, Gazprom fulfils only the minimum contractual obligations, and only books the necessary gas transmission capacity. It pays for the transmission of 40 bcm annually via Ukraine under a temporary contract valid until the end of 2024. The remaining gas reaches Europe via Nord Stream 1, the Yamal pipeline and Turkish Stream. Deliveries via Nord Stream 1 and Yamal-Europa are carried out by auction without transmission contracts. Gazprom reserves their capacity in intraday, daily, monthly and quarterly auctions. The company did not book any capacity on the Yamal pipeline as part of a yearly auction. This does not mean it won’t meet its contractual obligations (PGNiG has reported it does meet them), but it may do it in a less predictable manner – through auctions for shorter periods, which will increase market uncertainty fuelled by emotions, and ultimately result in more price increases. According to IHS Markit, Gazprom’s average pipeline deliveries to Europe fell in October 2021, when the new gas year began, to 322 million cubic meters, compared to an average of 393 mcm per day between April and September 2021. Since the summer holidays, the volume has been dropping in comparison to the average from the 2015-2019 period.

Market shares of individual players. Graphics: OIES

Gazprom’s exchange is another tool used by the company to increase the pressure. While it operates in line with the law, the way it is utilized goes against market logic. Gas prices on Gazprom’s Electronic Sales Platform (ESP) broke records already in April 2021. At that time, they averaged at EUR 13,993 per megawatt-hour, compared with the lowest price recorded in August 2020 of EUR 6,744 per megawatt-hour. Thus, the Russians had a market rationale for increasing gas sales to Europe on exchanges via the ESP. However, they did so to an increasingly modest extent. In a record-breaking session at the ESP on April 15, 2021, they sold 1,323,504 MWh, or 124 million cubic meters. Meanwhile, on October 10, during the last session on the ESP in 2021, Gazprom sold 43 800 MWh, or 4 million cubic meters. The Russians sent to the electronic platform only so much gas, despite the record price of EUR 26,702 per megawatt-hour. Originally Gazprom planned four sales sessions, which were included in its e-schedule: in November – 8, 15, 22 and 29, and in December: 6, 13 and 20. The sessions are usually organized on Monday. However, this did not happen despite the record price and Putin’s promise to increase supply to Europe. The official explanation was that the domestic market had to be given the priority on the orders of President Vladimir Putin on the basis of Gazprom’s estimates, which suggest that the demand for gas in the Russian Federation will increase by 7.5 percent, or 18.6 bcm in 2021-25. Those who share Gazprom’s point of view argue that the pandemic caused a decline in gas production in Russia by 6.2 percent year on year, i.e. by 46 billion to 693 billion cubic meters, of which Gazprom reduced its output by 9.3 percent, or 47 billion to 455 bcm. Gazprom then reduced gas supply to storage facilities by 38 percent, i.e. by 20 billion to 33 bcm. The latest excuse made by the company is that it is not flexible, even though it had already planned to increase production in 2021 by 55 bcm to reach 510 bcm. That’s the most in over a decade. It can therefore be assumed that Gazprom has gas, but does not want to sell it other than on the basis of long-term contracts bypassing Ukraine, for example, with the help of Nord Stream 2 with a capacity of just 55 billion cubic meters annually. 

The Russians use coercion and persuasion to acquire new long-term contracts, and more often than not threaten with stopping the supply altogether, like in the case of Moldova, which was forced to sign a new contract, as it didn’t have any alternatives. Sometimes they also explain away the reduced deliveries to Europe with fewer orders from clients in France and Germany, an excuse recently used by President Vladimir Putin during his annual end-of-year speech. However, this is only half-true, because some European customers do not really want to enter into new long-term contracts and prefer to buy gas outside Russia, for example, on the exchange, but there is not enough gas on it, because of Gazprom’s deliberate actions resulting from its original market policy. In this way, the Russians gain long-term security of sale and bypass Ukraine, as long as their customers stay with them longer and agree to a certain supply route. An example of Gazprom’s victory is the deal with Hungary’s MOL, which was signed in 2021 for 10 years, and which can be prolonged by another 5 years until September 2036, and include a volume of 4.5 bcm annually and deliveries via the Turkish Stream, bypassing Ukraine. Moldova is another case. It signed a 5-year contract until 2026, and in return agreed to delay reforms that would make energy integration with Europe as part of the Energy Community possible. Gazprom is also in talks with the German VNG to extend the contract and increase the volume of deliveries started in November 2021, during peak price. Thus, the Russians are using the record gas prices to conclude long-term contracts that will cement their position on the market long after the crisis is over. “Long-term contracts offer prices that are three, four and even seven -times lower,” assured Putin when talking about contracts with Russia’s Gazprom which, in his opinion, are cheaper than the offer on the European exchanges. “The European spot market merely reflects the current state of supply and demand, but is not a valuation tool that can offer equilibrium in the long-term,” the head of Gazprom Export Yelena Burmistrov said. “Those who signed long-term contracts with us, are now happy with their prices,” she added. The current energy crisis will eventually end, prices on the exchanges will again be more attractive than the Russian offer, but the agreements with the Russians will remain.

A gas trap

Gazprom’s game in the Old Continent market is not traditionally market-oriented, because this company sees the market differently from its customers in the European Union. The tycoon from St. Petersburg is playing to increase market share, even limiting today’s revenues to earn more in the future from maintaining its position on the European Union market. The Russians are using available market tools. However, it is not certain that they are acting in accordance with the laws of the market, especially with regard to the antitrust law of the European Union. Gazprom is acting like the OPEC oil cartel, which restricts sales to drive up prices in the hope of regaining market shares lost to shale oil competition. Gazprom is doing the same, seeking to push out the growing LNG competition from around the world, albeit increasingly from the US shale gas sector. This behavior may also be partly explained by the fact that Gazprom remains an instrument of the Kremlin’s foreign policy, which uses long-term gas contracts to achieve certain long-term effects in relations with countries dependant on Russian gas, even at the expense of short-term loss of profit. Moldova is the most glaring example of Gazprom seeking to maintain this dependence, but this problem affects all of Europe, which, by abandoning diversification and becoming dependent on gas during the transition period of climate policy, may increase and extend this dependence for decades, including through hydrogen. I call this phenomenon russification of the climate policy, and falling into dependence on gas from Russia on this route – a gas trap. The energy crisis is another opportunity for Gazprom to play a game that is formally based on market rules, but may also hide substantial political risk, which all Europeans should understand. This is an argument for a second anti-trust investigation that the EC should launch. Arguments in this case have been presented by Poland, Ukraine and other critics of Gazprom, and the Commission is looking into them, having already sent a survey to the Russians on this issue, according to information obtained by BiznesAlert.pl. Moscow is also trying to use the current situation in the short term, to force the start of gas supplies through the disputed Nord Stream 2 pipeline, which, however, will launch only after certification in Germany, which is not expected to occur before the second half of 2022. Russian Deputy Prime Minister Alexander Novak admitted in the fall that there were two ways to reducing the record gas prices in Europe. It’s either selling more gas on Gazprom’s platform, or agreeing to start deliveries via Nord Stream 2. It can therefore be concluded that the Russians are deliberately limiting supply, in order to persuade the Europeans to unblock the disputed pipe.

Revenge of Catherine the Great

Gazprom’s scheme is an argument for avoiding new long-term contracts with the Russians, despite the seemingly attractive offer that is tempting more customers. Poland may also face this temptation in 2022, when high gas prices may still be here. Gazprom predicts that the average price of gas in Europe in the fourth quarter of 2021 will be USD 550 per 1000 cubic meters and the same will happen in 2022, mainly due to record low stocks, which – as we have already established – are so low mainly due to Russia’s Gazprom, because the German storage facilities of this company (Etzel, Jemgum and Rehden) are filled at 16 percent, the Austrian Heidach at 39 percent, and the Dutch Bergemeer at 23 percent. At the same time, the European average is 60 percent. IHS Markit predicts that reserves in European storage will reach less than 15 bcm by the end of March. For this reason, it predicts that prices on the TTF stock exchange in the summer of 2022 will be 25 percent higher than the forecast, and will reach EUR 44 per megawatt-hour in the first quarter and EUR 34 per megawatt-hour in the second and third quarters. This is more than the highest price on Gazprom’s electronic platform in 2021. Next year, Russians may have an argument for long-term contracts, whose price may be lower than the record breaking quotes on the exchange.

Pipeline deliveries from Russia. Graphics: IHS Markit.

Some customers might be tempted, like the Hungarians. One can also imagine that Gazprom’s customers will want to become supply agents in Europe. For example, in Poland, the aforementioned VNG from Germany may someday want to sell more gas through the companies already present there – Handen and Gaz Energia, for example, at the Gaz-System/Ontras interconnection point. The operator there is Ontras, which is part of the EnBW group to which VNG belongs. The reverse flow on the Yamal pipeline in Mallnow may be used by VNG or another provider related to Russia. It is operated by GASCADE, which is equally owned by Gazprom Germania and Wintershall DEA. If the energy crisis continues into 2022, when the Yamal PGNiG-Gazprom contract ends, the Russians will be able to use the “market game” described above to tempt Poland to sign a new long-term contract, instead of continuing spot purchases, to which access is already restricted. Poland will be interested in additional gas, because calculations even before the crisis suggest that it may need an additional 2.1-3.8 bcm annually from 2023 onwards. If the Poles agreed, for example, after early parliamentary elections in 2022, resulting in a coalition with the Polish People’s Party and Waldemar Pawlak, known for extending the Yamal contract in 2010, a new long-term agreement could be concluded, limiting the possibility of further diversification of gas supplies to Poland. It would be similar to the one signed by Moldova or Hungary. It’s not difficult to imagine that such a deal could mean gas will flow via NS2 to Germany and then to Poland, bypassing Ukraine, winning another client for Gazprom and making it possible for the Russian giant to defend its market share. All completely in line with the Kremlin’s foreign policy goals. This would be the second Yamal contract, but probably because of the supply route, it would be called a Baltic deal. The Act on reserves limits this risk. This law allowed Poles, contrary to European trends, to replenish gas reserves for this heating season at almost one hundred percent, which means Warsaw’s gas reserves are the highest in Europe. Otherwise, it could turn out that they would have to replenish their stocks in 2022 from the Katharina storage facility in Brandenburg, which is being expanded by VNG with Gazprom’s help, provided it would even have gas.

Interestingly, the Katharina gas storage facility enjoys the highest reserves in Germany with a level exceeding 70 percent throughput and the largest fuel injection, as if waiting for additional orders. Gas delivered via Nord Stream 2 and stored at a facility named to honor Catherine the Great and sold to Poland would be history laughing in our faces and Gazprom’s success, which is just about business only on the surface. For this reason, Poland should continue the course of reducing dependence on gas from Russia, despite the energy crisis and at all costs avoid reverting its gas policy in 2022. A drastic increase in the cost of gas imports forced PGNiG to borrow PLN 2.7 billion. It is worth considering whether to subsidize this company in 2022, so as not to run out of gas or risk a return to dependence on Gazprom in 2023. One of the tools for achieving this goal is the polonisation of the capacity of the Yamal gas pipeline, which can be used for physical imports of gas from the Baltic Pipe and LNG, but also for spot purchases from Germany. The Poles continue the course allowing not to sign any contract with the Russians, and to supplement the supply from LNG and the Baltic Pipe with spot contracts on the German stock exchange. Despite the fact that in the coming months it will be an expensive option, in the long-term it is more competitive than political deals with Gazprom, and once the crisis is over, it will again be cheaper. 

A classified Nord Stream 2 protocol with Baltic Pipe in the background

A classified Nord Stream 2 protocol with Baltic Pipe in the background

Does the US-Germany agreement on Nord Stream 2 contain a secret protocol? Is Poland concerned mainly about Ukraine, because it is calm about the Baltic Pipe, which in the best case scenario will move faster than the pipe from Russia? – asks Wojciech Jakóbik, editor-in-chief at BiznesAlert.pl.

Czytaj dalej„A classified Nord Stream 2 protocol with Baltic Pipe in the background” →

The nuclear in the taxonomy, or how not to fall into Putin’s gas trap (ANALYSIS)

The nuclear in the taxonomy, or how not to fall into Putin’s gas trap (ANALYSIS)

It is possible that the EU will bankroll nuclear power through its taxonomy scheme, just like gas, but new nuclear power plants and regulations on the security of supply of this fuel are necessary to avoid replacing the dependence on Gazprom with over-reliance on hydrogen. The Russians are already building a hydrogen valley in East Germany – writes Wojciech Jakóbik, editor-in-chief at BiznesAlert.pl.

Czytaj dalej„The nuclear in the taxonomy, or how not to fall into Putin’s gas trap (ANALYSIS)” →

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.

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.

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.

If Germans block nuclear power, Poland may set up an inquiry committee into Nord Stream 2

If Germans really decide to block nuclear power in Poland, Warsaw may set up an inquiry committee at the European Parliament, which will delay deliveries via Nord Stream 2, provided the pipe isn’t stopped by US sanctions – writes Wojciech Jakóbik, editor-in-chief at BiznesAlert.pl.

Denuclearization

Germans have launched an initiative to denuclearize Europe. They want nuclear energy to be phased out not just in their country, where it will cease to exist in 2022, but in the entire European Union. They are targeting the financial model, because they are against financing nuclear projects from EU subsidies and national support mechanisms. This may be their way to undermine Poland’s plan to bankroll half of the cost of its nuclear power with domestic subsidies, which may be a form of public aid subject to supervision of the European Commission, on which Germany may want to exert pressure. Another way to derail Poland’s plans are environmental permits, once the locations of the NPPs in Poland are chosen.

One of the arguments raised in the debate on this topic is that Germany may rely on the solidarity principle, which was elevated by the Court of Justice of the European Union to the rank of a regulation during the dispute over OPAL, a Nord Stream line in Germany. Gazprom wanted to pump more gas via that pipe, and the European Commission agreed. However, that decision was questioned in court by Poland, and subsequently undermined by the Justice Court on the basis of the solidarity principle, which says that no decision of the EC can hurt the interests of individual member states. This is why some believe that Germany could use the solidarity principle to question the Polish Nuclear Power Program, as Berlin believes that nuclear power goes against its interests. It is worth stressing that the consultations on Poland’s Nuclear Program have already ended and that Germany participated in them. This means the attempt to torpedo Poland’s plans could be made at the next stages of the endeavor, provided that Poles are successful at pursuing the project.

Relief from across the pond

However, in Poland’s opinion Germany’s anti-nuclear proposition will be against the EU law. “From the formal point of view, the implementation of German postulates would violate European law on several levels. We have repeatedly argued, and we are not alone in this, that discrimination against nuclear energy in the EU is incompatible with the principle of technological neutrality and energy sovereignty of the Member States. Neither the EU institutions nor any Member State can demand that the chosen decarbonisation path be abandoned, as long as it guarantees the fulfillment of climate obligations,” the Ministry of Climate and Environment explained in a statement for BiznesAlert.pl. According to the ministry “the exclusion of any low-emission energy source violates the freedom to shape the energy mix guaranteed in Art. 194 of the Treaty on the Functioning of the European Union, which, without the availability of funds available for other sources, becomes only a formal freedom.”

The ministry also warned that “Germany’s goal is for nuclear energy to be also excluded from the so-called green taxonomy of the EU, which would mean limiting and ultimately excluding financing of nuclear projects by private financial institutions”. However, Poles do have a cure for this problem. They want to include Germany’s demands when choosing the partner, i.e. they will acquire funding outside of the European Union. In this context it is worth taking a closer look at the financing model of the Cernavoda Nuclear Power Plant in Romania. It was co-financed by the US Exim Bank, with which Poland’s Bank Gospodarstwa Krajowego and the Climate and Environment Ministry are cooperating to develop a financing model for Poland’s nuclear energy. It’s one of the reasons why it looks like Americans are still favored by Poles. After all, the US is able to ensure financing irregardless of the intrigues surrounding nuclear power in Europe.

Therefore, the European law may be a double-edged sword when it comes to nuclear power in Poland, but still in Warsaw’s view it cannot block the atom. When it comes to Nord Stream 2 there are fewer doubts. If the gas pipeline is completed despite the US sanctions, which the White House has announced would be extended, it will still need to face new obstacles, including EU regulations. Nord Stream 2 will have to be subject to the EU gas directive that entails unbundling, which protects the market from the abuse from monopolists such as Gazprom. Until this requirement is met, the pipe will not be allowed to pump gas. The Argus agency has already suggested that deliveries via Nord Stream 2 will not be able to start before 2022. If the delay is longer, it may turn out that the contentious gas pipeline will start operation later than the Polish-Danish-Norway Baltic Pipe, which is to decrease Poland’s dependence on Russian gas.

An inquiry committee into Nord Stream 2

At the same time a new legal tool that may undermine Nord Stream 2 is emerging on the horizon. Members of Europe’s Energy union cooperate to implement the organization’s goals, which include energy security and diversification of energy sources and supply from third countries, to decrease the dependence on energy imports. The Treaty on the Functioning of the European Union which Poland’s Climate and Environment Ministry mentioned, allows the European Parliament to start an inquiry committee into the incorrect application of the EU law. If Germany tries to block nuclear power, Poland may in theory open such a committee at the European Parliament, which has been traditionally sceptical about Nord Stream 2. This could delay gas transmission via the pipeline, of course, provided US sanctions don’t stop it beforehand. The OPAL precedent also allows to question the Nord Stream 2 project and OPAL’s twin pipeline EUGAL, on the basis of the EU law and the case law of the Court of Justice of the European Union.