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Submitted by Marcin Bąk on Fri, 05/17/2019 - 08:26
Turning point. Baltic Pipe is an essential energy security improvement element for Poland and Central Eastern Europe


Since 2006, Poland, primarily due to the gas conflicts sparked by Russia, has been striving to diversify natural gas sources, and as such – to improve domestic and indirectly regional energy security. The diversification will lead to more competitive raw material purchase prices and will eradicate unfavourable decisions made by the previous government which strengthened Gazprom's position. Poland's annual domestic natural gas production at 4.5 billion m3 and increasing raw material production from deposits on the Norwegian Continental Shelf, which Lotos and PGNiG have a share in, provide an opportunity to increase independence within the scope of gas supply. Here the expansion of the LNG terminal in Świnoujście with the aim of reaching a capacity of 7.5 billion m3 and construction of the Norwegian Corridor, which Baltic Pipe (throughput 10 billion m3 per annum) is a part of are strategically significant.

Construction of the Norwegian Corridor and its constituent Baltic Pipe will be a game changer, a true turning point for Central Eastern Europe reginal market participants. And, on account of the Northern Gate, an expanded pipeline network and interconnectors between the Polish system and the Czech Republic, Slovakia, Lithuania and Ukraine as well as the potential construction of a floating LNG terminal in Gdańsk, over the next few years Poland stands to become a significant market player on the natural gas market in Central European countries. Investments in gas infrastructure will provide new market opportunities and strengthen the negotiating position of countries which depend on natural gas imports. And changes within the scope of contracts for the supply of this raw material are certainly to be expected. One should also bear in mind that the European Union is looking increasingly less favourably upon the actions of Gazprom. The terms of the gas directive are currently negotiated, pursuant to which regulatory bodies in countries which a given gas pipe runs across will be obliged to enforce EU law.

The European Parliament may tighten some revised provisions during the course of further negotiations as EU law, or the third energy package, will be in force across the entire European Union. Thus it is possible that underwater sections of pipelines in the EU will be subject to stringent terms of the third energy package which would have a significant detrimental impact on the profitability of Nord Stream 2. And the United States are also opposed to the European Union becoming even more dependent on Russian gas. As early as in 2017 the Congress almost unanimously passed a bill on sanctions against Russia which can be imposed for the construction of Nord Stream 2.

 In December of last year the House of Representatives passed a resolution calling on European governments to block the pipeline project and American congressmen appeal to the US President to impose sanctions on entities associated with that investment. Officially the Russian Gazprom is the sole stakeholder in the company behind Nord Stream 2. However, corporations such as Wintershall and Uniper from Germany, British-Dutch Shell, French Engie and Austrian OMV are all involved in its financing. At the beginning of this year US government representatives announced that letters had been sent to those entities declaring applicability of American sanctions. The correspondence pointed out that the actions of those businesses actively undermine Ukraine's and Europe's security and may be subject to US sanctions pursuant to CAATSA (Countering America's Adversaries Through Sanctions Act).

Raw material demand

In 2015 gas consumption in Poland amounted to 15 billion m3, but already in 2017 the annual demand for that raw material reached 17 billion m3. Domestic production generated approx. 3.5 billion m3 and the shortfall in the raw material was purchased from Gazprom. The rising gas demand is primarily driven by the energy and petrochemical sectors. Efforts to reduce smog also result in increased consumption of gas used for heating purposes. And this trend is accelerating. In the coming years the growing demand for the raw material will primarily be satisfied through imports via the LNG terminal in Świnoujście as well as the Baltic Pipe. Construction of a floating terminal in Gdańsk is also in the pipeline.

 

President Lech Kaczyński LNG terminal

The need to diversify supply sources is attributable to Russia. As a result of 2006 and 2009 gas crises, interruptions in the delivery of gas to Ukraine indirectly affected Poland and other European Union countries. There was also a political angle to Gazprom's interruptions and reductions of the gas supply to Poland, and the anti-monopoly investigation carried out by the European Commission found that the corporation abused its market position. Such events coaxed the Polish government into seeking solutions in order to improve its negotiating position in talks with Gazprom.

The decision to build the President Lech Kaczyński LNG terminal in Świnoujście was made in 2006. The Gasport entered use in 2015 as the first facility of its type in the Baltic Sea basin. Today, it is capable of handling 5 billion m3 of raw material every year. Currently works are underway to increase its capacity. In mid-2021 the terminal is to be able to regassify 7.5 billion m3 of raw material. The terminal could ensure Poland diversifies approximately 30 per cent of its gas supply sources. We have concluded long-term supply contracts with Qatar and the USA, with purchase prices on average 20-30 per cent lower than for Russian gas.

 

Norway-Denmark-Poland pipeline

The beginnings of the pipeline connecting the natural gas rich Norwegian Continental Shelf with the Polish coast were difficult. The project was discussed twice and each time Poland withdrew from going further. Already in 2000, the government, under the leadership of Jerzy Buzek (AWS) began negotiations with Norway and Denmark with a view of establishing cooperation in order to build a pipeline and supply gas top our country. Piotr Woźniak (PM's chancellery advisor) and Piotr Naimski (PM's energy security advisor) coined the idea of building a pipeline in order to break the dependency on Gazprom.

The talks were to result in the Norwegian Corridor, or a pipeline laid on the bottom of the Baltic Sea from Norway, through Denmark to the Polish coast. That investment was to make it possible for us to become less dependent on the raw material supplied by the Russian Gazprom. After a dozen or so months of successful negotiations, in September 2001 PGNiG signed a contract with Norwegian partners for the construction of a pipeline and the supply of 74 billion m3 of natural gas to be delivered to Poland between 2008 and 2024. Pursuant to the contract the construction was to be completed within five years, after which approximately 50% less blue fuel was to be imported from across our eastern border. Unfortunately, through a disastrous coincidence the cooperation contract was signed a few weeks before parliamentary elections which resulted in a change of government in Poland. The Democratic Left Alliance (SLD) – Labour Union (UP) coalition came to power. Leszek Miller become prime minister and Marek Pol from UP the deputy prime minister.

In February 2003 Marek Pol gave the green light to conclude a new, extremely unfavourable for Poland contract with Gazprom for gas supply from the Russian Federation. Further down the line this contract was determined to be "contrary to Polish interests" by the Supreme Audit Office (NIK). The contract included a "take-or-pay" clause, forcing Poland to also pay for gas which we did not need. Attempts to renegotiate this contract for gas supply from Russia, so calamitous for Poland, failed to change that clause, as a result of which opportunities for a diversification of directions and sources for the supply of gas were actually reduced. Another economically unsound decision was the consent to cancel a second, parallel line of the Yamal pipeline, which would have strengthened Poland's position as a transit country.

Towards the end of 2003, Leszek Miller's government made a decision which was to have disastrous political consequences, to withdraw from the Norwegian pipeline investment and to cancel the already signed contracts. These actions paved the way for the construction of the Nord Stream pipelines directly between Russia and Germany, sidestepping transit countries such as Poland, Belarus and Ukraine. The contract for the construction of Nord Stream was signed on 8 September 2005. A decision was also made to build Nord Stream 2, which will make European Union even more dependent on the Russian raw material. Between 2005 and 2007, the government attempted to push through an idea to build the Skanled pipeline between Poland and Norway. However, at the time, after Miller withdrew from the previous contract, the Polish authorities were not credible in the eyes of foreign partners. The Norwegians only changed their attitude once PGNiG began purchasing shares in gas deposits on the Norwegian Shelf and believed in our intentions. Negotiations could begin anew. Preparatory works to build the Skanled pipeline began, however 2007 saw another change of government in Poland and the ruling Civic Platform (PO) – PSL coalition were not interested in its construction.

 Once again the project was not seen through and all preparatory works were suspended indefinitely. After the 2015 change in government, talks on the project we resurrected, and Piotr Naimski became involved once again, this time as the government's proxy for strategic energy infrastructure. Norway and Denmark voiced their support for the investment, with the latter interested in reverse gas transit as that would constitute an additional safeguard for that raw material. At the same time the planned system of pipelines is to make it possible for gas to flow from Poland and Sweden.

The Norwegian Corridor project is significant for gas market integration, unification of prices as well as diversification of raw material supply sources and directions. Its primary objective is to ensure supply security for Poland and Denmark as well as Sweden, the Baltic Sea region and the entire Central Eastern Europe. And for that reason, in 2013 the European Commission added the investment to the Projects of Common Interest (PCI) list. That status is granted to infrastructure projects which contribute to the European internal energy market and help the EU achieve its energy policy.

The PCI status emphasises the particular significance of the Baltic Pipe for the security and diversification of gas supply in the Baltic Sea region and Central Eastern Europe as well as its contribution to building an integrated and competitive gas market. Additionally the PCI status facilitates the planning process, decisions and consents required for determining regulatory conditions are issued quicker. This speeds up and simplifies the entire process. In 2017 the promoters of the Baltic Pipe project, i.e. the operators of the Polish and Danish transmission system Gaz-System and Energinet, carried out the Open Season procedure aimed at gathering binding orders for capacity for the Baltic Pipe project before the operators made the final investment decision.

This was another milestone, and the result of the end of the procedure is the conclusion of transmission contracts by market participants for a period of 15 gas years, which confirms the economic sense of the investment and the interest in the project market. On November 30, 2018, transmission system operators in Poland and Denmark, Gaz-System and Energinet, announced that they had taken investment decisions and signed an agreement aimed at jointly implementing the Norwegian Corridor project. Gaz-System will expand the land based transmission system in Poland and will be responsible for the construction of a gas pipeline at the bottom of the Baltic Sea between Denmark and Poland. It will also become the owner and operator of these elements. Analogously – Energinet is responsible for the development of the land part of the transmission infrastructure in Denmark and the construction of the undersea part in the North Sea, at the same time being the owner and operator of these parts of the project.

Currently, project works and detailed technical analyses of all project components are being carried out, and for 2020 it is planned to obtain permits necessary to start construction of the gas pipeline. The investment should be completed by 2022, which will coincide with the end of the contract with the Russian Gazprom for the supply of raw material via the Yamal gas pipeline, which dictated one of the highest prices in Europe to Poland. The launch of this strategically important investment will not only make it possible to become independent of Russian gas, but will also lead to marketization of raw material purchase prices, and through a gradual transformation of the fuel structure in a low-carbon direction will also contribute to the development of a greener energy and system heating based on gas.

 

The Northern gate and its significance for Central Eastern Europe

The LNG terminal in Świnoujście together with Baltic Pipe is to create the so-called Northern Gate, which will be the beginning of the North-South Corridor, connecting Adriatic gas pipelines with the North Sea via two-way gas pipeline networks. The corridor will pass through Poland, the Czech Republic, Slovakia, Hungary and will connect the Northern Gate with an LNG terminal in Croatia. Its southern end is to reach the island of Krk, where a gas port is to be built. Project implementation requires a modernization of existing gas pipelines in order to eliminate the technical limitations of their capacity and the construction of interconnectors, i.e. intersystem gas connections between individual countries.

At present, Gaz-System is constructing interconnectors on the border with the Czech Republic and Slovakia, and plans include investments connecting the Polish gas system with Lithuania and Ukraine. The construction of interconnections will contribute to the independence of the region's countries from the dominant supply of raw materials from the east. The capacity of the proposed gas pipeline from Norway through Denmark to Poland is to amount to 10 billion m3 per year, which will force Poland to export some of its gas to other countries in the region. However, Central Eastern Europe countries are already looking for ways to become independent of imported fuel from Russia.

Ukraine may be one of the possible recipients of gas, however in this case it would be necessary to implement a gas connection between the transmission systems of both countries. The effects of creating a monopoly and dependence on gas imports from one unpredictable supplier are best seen on the example of Bulgaria. The Russian prohibition on re-export of gas and the conditioning of gas supplies by that country on transmission infrastructure restrictions and the taking over of these assets are in force there. As a result of full dependence on Russia, Bulgaria pays the most in Europe for imported fuel.

The possibility of using the potential of the Norwegian Corridor and the LNG terminal to increase the stability and energy security of countries covered by the Three Sea initiative, i.e. located near the Baltic, Black and Adriatic seas is a separate issue. The main aspect of the cooperation of countries taking part in this initiative is regional cooperation in the scope of diversifying natural gas supplies and creating a competitive market. To some extent each one is dependent on gas supplies from Russia. The construction of gas pipelines connecting Poland with Slovakia and the Czech Republic will increase energy security in the region. Gaz-System is also preparing an update to the feasibility study for a floating LNG terminal in Gdańsk and has applied for inclusion of this project on EU's Common Interest Projects list.

If gas demand exceeds the transmission capacity of the Baltic Pipe and the expanded terminal in Świnoujście, it will be reasonable to build a floating terminal in Gdańsk. For Central Eastern Europe's point of view, construction of the Baltic Pipe is rational. This infrastructure is extremely important, because - thanks to alternative supply routes and gas sources - Poland will have a historic opportunity to offer Central Eastern European countries opportunities to diversify sources and mitigate possible threats related to dependence on supplies of Russian and Asian gas transmitted by Nord Stream.

This will allow not only to increase energy security, but also to obtain more favourable gas supply terms. Construction of the Baltic Pipe is also an opportunity for Polish businesses to expand geographically. Lotos owns shares in 28 licenses, while PGNiG is currently a holder of 24 licenses for the Norwegian Shelf.

 PGNiG will be producing gas for decades to come and from 2022 Poland, similar to our western neighbours, will be able to import gas from its own deposits by means of a gas pipeline directly connected to the Polish coast.

 

Krzysztof Gigol

 

From  Rzeczy Wspólne nr 29 (1/2019)