Race against Nord Stream 2

(Jay Sterling Austin, CC BY)

The rationale behind the construction of a pipeline connecting to deposits on the Norwegian continental shelf is being called into question for economic reasons.

Russian gas is cheap and easily available – instead of purchasing it from Gazprom the customer can buy it from European providers. Is it profitable, then, to invest in new sources of gas and its supply routes?

The designers of the so-called Norwegian corridor, i.e. a gas link between Poland and Denmark (the Baltic Pipe), together with the link between the Danish and Norwegian systems, started on the premise that supplying gas from a new, non-Russian source will supplement the process of diversification of the Polish gas market.

The difference between the planned Scandinavian liaison and the already operational LNG terminal in Świnoujście is that the LNG may be competitive with respect to Russian deliveries in one-time spot contracts, which the PGNiG is going to hunt through its newly opened trade office in London. Delivery via the Norwegian corridor, on the other hand, have the potential for long-term competitiveness vis-à-vis the Russian offer due to comparative transportation costs.

Even if Gazprom manages to offer a dumping price, which might be feasible due to the lowest extraction costs in the world it enjoys, the liaison with Norwegian deposits will still enable the Poles to obtain the best available market price offer. This is when the investment in new infrastructure will pay back. Transportation costs will, admittedly, rise by a few per cent (according to Gaz-System, the operator of Polish gas transportation networks, the final price of gas delivery consists of the price of the commodity offered in the contract, at present accounting for 90 per cent of the total, and of the transportation costs, accounting for the remaining 10 per cent), but the contract price offered to PGNiG and other customers will decrease. One cannot overestimate the importance of a viable alternative to Russian gas finally having been made available.

PGNiG against Nord Stream 2

It is precisely the diversification of supply and access to alternative providers that constitute the argument in support of new investment. Although expensive, those moves are necessary, argue the supporters of diversification in Poland. According to PGNiG representatives, diversification will not be guaranteed by the existing and planned gas connections to other countries: Germany, the Czech Republic and Slovakia. To validate their statement they argue that pipelines running through our neighbors’ territories will still pump the same Russian gas from Nord Stream and Nord Stream 2, and as such they have no value from the point of view of diversification.

Indeed, although such a trade would involve multiple contracts and entities under the definition of the European law, in reality it would be conducted with the use of a single Russian commodity, and through the intermediation of a group of companies which will constitute a gas cartel dealing the cards on the gas market in Central and Eastern Europe.

In this way the profitability of Polish diversification projects, i.e. the gas terminal and the Norwegian corridor can be undermined. This is exactly why Polish state companies in the gas industry are determined to carry out the diversification project quickly, before Nord Stream 2 begins its operation.

In order to protect the gas market from the new wave of Russian gas, Piotr Naimski, government plenipotentiary for strategic energy infrastructure, announced a revision of the construction schedule of gas connections. Priority will be given to those that guarantee real diversification and only then connections with Slovakia and Lithuania will be taken into consideration.

In principle this is meant to open the Polish market to the availability of new gas from Russia only after an attractive alternative that is beneficial from the Polish point of view has been provided. The Norwegian provider is also attractive from our point of view because of Norway’s NATO membership and high standards of cooperation displayed by Norwegian gas companies. Following yet another reduction of gas deliveries to Poland from Russia on the night of June 30th to July 1st, 2016, Naimski commented that Gazprom is an unreliable provider.

Ambitious plans of the Polish government

Polish plans will not be easy to implement. In the first place, the feasibility of the Baltic Pipe must be established, and this phase is scheduled to be completed before the end of this year. Gaz-System and the Danish operator Energinet.dk are investigating the level of market interest in the connection constituting the first stage of the Norwegian corridor. The exact route and design details determine the investment costs. And those costs determine project profitability in turn.

The Danes may be interested in the LNG from Świnoujście, as well as in obtaining benefits from the future transport of the Norwegian gas to Poland. The Poles also proposed them the creation of a joint tariff area, which by way of synergy would ensure a greater potential to the unified tariff areas of Poland and Denmark. As far as the Norwegians are concerned, they need to be convinced that there is demand for their gas among Polish customers and in the countries of Central and Eastern Europe.

Gaz-System announced that for the connection to be profitable, it must pump 7-10 billion cubic meters (bcm) a year. It can be estimated that gas deliveries from PGNiG deposits could account for 1-4 bcm a year, a long-term agreement on deliveries between Statoil and PGNiG concluded along the lines of a historical proposal would provide another 4 bcm, and the rest, i.e. 2-5 bcm a year, could be obtained from contracts with gas recipients in Denmark, Germany, the Czech Republic, Slovakia and Ukraine. Such a division of capacity would simultaneously guarantee compliance with EU antimonopoly regulations of the so-called 3rd energy packet.

The Scandinavian parties perceive the construction of the Norwegian corridor as a commercial enterprise whose implementation is conditional on its profitability. For Poles it constitutes a political issue and paradoxically, only its implementation will allow to depoliticize Polish relations with gas suppliers thanks to the real diversification offering freedom of choice to Polish customers.

The success or failure of this project will determine the scale of expansion of the LNG branch in Poland. Following the cost estimates of the Norwegian corridor, decisions will be made about the expansion of the existing terminal.

The implementation of this plan will allow Polish authorities to abandon the formula of long-term contracts with Gazprom and switch to a more flexible form of cooperation or to terminate it altogether. The PGNiG-Gazprom contract expires in 2022 so there are six years left to achieve real diversification.

The implementation of the Norwegian corridor project is also a matter of Poland’s credibility in the eyes of its partners, whom Poland has approached already for the third time with the proposal.

Polish persistence will also be the best answer to comments circulated in the Russian media depreciating Polish plans as unreal and superficial. There is also some plain disinformation to be dealt with, like the news spread by the Russian press that Warsaw was interested in gas from Nord Stream 2. This statement appeared at a time when Poland is the leader of opposition against this project on the European stage. Although Poland of course denied these claims, the tactics of calling Polish plans into question and dividing the coalition mounted against the controversial gas pipeline from Russia may undermine Warsaw’s efforts.

The profitability of gas investments contemplated by the Polish government is therefore dependent on their swift implementation. Whoever is first to persuade potential customers to cooperate will not have to worry about losses from costly projects.

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