The energy summit of the European Union and the United States is an occasion to talk about emergency gas supplies in the event of a new war in Ukraine. The gas war waged by Russia in Europe, in which Poland is already a front-line country, should once and for all free the Old Continent of its dependence on resources from the east – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.Czytaj dalej„Poland at the front lines of the gas war (ANALYSIS)”
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.
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.
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.
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.
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”
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)”
If the new German government continues its policy of protecting Nord Stream 2 at all costs, it will pay for it on both sides of the Atlantic, and only Vladimir Putin will come on top. Here’s what the confidential document says – writes Wojciech Jakóbik, editor-in-chief at BiznesAlert.pl.Czytaj dalej„The leaked, classified document on Nord Stream 2 tests Germany’s credibility”
It is still unclear when gas will start flowing via the contentious Nord Stream 2 pipeline. The crisis on the Polish border should be another argument against giving Russia new leverage in the form of a gas pipeline, but the energy crisis may lead to a deal. In the meantime, however, we should tighten our belts to survive the high gas prices and monitor the certification process in Germany – writes Wojciech Jakóbik, editor-in-chief at BiznesAlert.pl.Czytaj dalej„The border crisis is another argument against Nord Stream 2”
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.
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.
In order for the Baltic Nuclear Power Plant to transmit electricity to Poland, a power connection has to be built, but it doesn’t and probably won’t have political support in Poland. However, Russians may lobby in Europe for a cable to the Kaliningrad Oblast fro a different reason – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.
Nuclear power from the Oblast without a connection
The idea to engage Poland’s ZE PAK, which is owned by Zygmunt Solorz-Żak, in the NPP project in the Kaliningrad Oblast is bad from the point of view of Poland’s security and foreign policy, an issue Mariusz Marszałkowski wrote about. However, this project is not feasible for other reasons as well. Piotr Naimski, the Government Plenipotentiary for Strategic Energy Infrastructure, explained that according to the Polish energy law, only power plants that are constructed on the basis of Polish regulations can be connected to the grid.
However, this does not mean that a power connection with the Kaliningrad Oblast to import electricity from the Baltic Nuclear Power Plant cannot be built. For this to happen political will is necessary, and the so-called power bridge from Kaliningrad has been tested in the history of the Third Polish Republic a few times already. It requires bilateral agreements between Poland and the Russian Federation and between the Polish grid operator PSE and its Russian counterpart Rosset (FGC UES). There is no political climate in Warsaw for this to happen.
The talks with ZE PAK about power imports may have started, because of the problems with high energy prices in Poland. The company’s response is to invest in renewable energy sources and green hydrogen. It will import first electrolyzers to Poland. They may be powered with the mentioned renewables, as well as nuclear power that could be produced in Pątnów, as one of the potential locations. The Polish Nuclear Power Program says that up to six reactors will be constructed. They are to be located in two or three facilities, depending on the technology. Reportedly the first one is to be built in Pomerania, perhaps Bełchatów will be next, and then Pątnów (Greater Poland region – ed.). The NPP in Greater Poland could also power Solorz-Żak’s electrolyzers. It is also worth mentioning that Russians will promote hydrogen generation from their nuclear power in the EU as well. Purple hydrogen will be either zero- or low-emission, but the fact that it will come from Russia will – as usual – create risks when it comes to the security of supply, and hook Europe on another Russian gas. A better alternative is the Polish purple hydrogen that will be generated in result of the Polish Nuclear Power Programme.
Getting power from the Kaliningrad Oblast is such an uncomfortable topic in Poland that few people want to comment on it without holding on to their anonymity. Government representatives don’t want it to become bigger than it is, as some of them believe it is just a pseudo-event with an unaccounted origin. One of BiznesAlert.pl’s sources at the government claims that a power bridge with the Oblast will not be built, especially considering the fact that the Baltic states are synchronising their grids with the continental system via Poland, using the underwater cable HVDC Harmony Link. Once the Baltic states cease to be a power island, it may turn out that the Russian exclave will become one, as it will be surrounded by a European system that operates at a different frequency. Another source of ours claims that the talks between the government and investors did not result in any decisions. Meanwhile, our interlocutors from the private sector believe that perhaps someone wanted to pull the rug from under ZE PAK.
Another reason for promoting the NPP in Kaliningad
Russia taking shots at cooperation with Europe with regard to power generation may be its attempt at opening a discussion on the future of the Kaliningrad Oblast. In the years to come they may demand that it is synchronised with the EU, unless they fail to make it self-sufficient when it comes to energy. This will be possible thanks to the development of power generation from gas. As recently as in 2019 President Vladimir Putin announced that the Pregolsky Gas Power Plant, which was commissioned in that year, will give the Oblast an aggregate generation capacity of 1 GW, which will be enough for Kaliningrad to be self-sufficient. This is why the Baltic NPP is perceived as a facility built to export power, much like the Belarusian Astravets NPP, which has become a hot topic for the Baltic states. Lithuania is accusing Russia of using the plant to undermine the synchronization process and derail new non-Russian power projects that allow the Baltic states to make themselves independent of imports from Russia. It is worth reminding that nuclear power from the Oblast has been previously promoted as an alternative to the Visaginas Power Plant in Lithuania and the Polish NPP. The idea to lower the costs of synchronization of the Baltic states with the European system by connecting them to the NPP in the Oblast was first put forward in 2014 by Rudolf Dolzer who was the facility’s advisor. The Baltic NPP once was and may become yet again a tool in the Kremlin’s foreign policy toolkit.
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.