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Poland lacks muscle to diversify gas supplies

Reuters, Wednesday July 1 2009

* Poland must invest to break gas dependence on Russia

* Chemical sector vulnerable to disruption

* LNG diversification a key issue

By Patryk Wasilewski

WARSAW, July 1 (Reuters) - Poland lacks the muscle to break its dependence on Russian gas supplies and will need to invest in new infrastructure to tap alternative routes before diversification can become a reality.

The European Union’s largest ex-communist economy gets two thirds of its natural gas and more than 90 percent of its oil from Russia via pipelines across Ukraine and Belarus. A third of Poland’s gas needs are covered by domestic extraction.

Poland’s negotiating position appears as weak as ever ahead of a final phase of negotiations with Russia to secure delivery of 2.5 billion cubic metres of gas needed to meet annual demand. It now has only deliveries guaranteed until end-September 2009.

Poland and Russia met in March in Warsaw and two months later in Moscow to discuss energy supplies but no fixed date has been set for the concluding round of talks.

An official of Poland’s gas monopoly PGNiG said earlier on Wednesday Poland hoped to sign a deal with Russian gas giant Gazprom by end-August.

If Warsaw does not accept Russia’s terms, it will face the need to limit deliveries for its chemical sector, the biggest gas consumer in Poland.

“At the moment gas supplies to Poland come from a single source and that makes its negotiating position very hard,” said Krzysztof Rozen, a partner at KPMG Advisory in Warsaw.

Poland saw its gas supplies drop by nearly a quarter for more than five months due to a January spat between Russia and Ukraine and reduced supplies to some Polish chemical plants.

The government knows such a scenario could be repeated if it fails to reach a deal with Russia on supplies from 2010.

“It is possible that we will be receiving less gas. That means the chemical sector would have to be shut down, with massive repercussions for the economy,” said Przemyslaw Wipler, general director at the Jagiellonian Institute think-tank.

RUSSIA’S INTERESTS

Russia may choose to raise an array of issues in the talks, ranging from control of the Polish leg of the Yamal pipeline to the controversial Nord Stream pipeline to be built under the Baltic Sea, a project strongly opposed by Poland.

Russia may want to alter gas transit fees for the Polish leg of Yamal, it may seek more control over Yamal operator Europolgaz and also a long-term contract for gas supplies.

“Poland would prefer to conclude a 5-year contract with Gazprom now. However, it could be the case that Gazprom may be unwilling to do so (…) but willing to conclude, say, a 10-year contract instead,” said Katya Yafimava, a researcher at Oxford Institute for Energy Studies.

If Russia demands an extension of the contract, it is unlikely Poland will be able to refuse.

“We just lack arguments to avoid (such a scenario),” said Monika Kalwasinska, an analyst at the PKO BP brokerage.

Increased gas supply levels until 2022 significantly lower the economic viability of Poland’s main diversification plan, construction of a liquefied natural gas terminal.

The Swinoujscie terminal is scheduled to go online in 2014 and will have an initial capacity of 2.5 million tonnes of LNG, more than enough to make up for the 2.5 billion cubic metres of gas not covered by the Yamal contract.

If volumes in the Yamal contract are increased, they would cover almost all Poland’s needs and thus make the LNG terminal, or any other means of gas delivery, very costly or even useless.

“A long-term supply deal would mean that diversification is forfeit,” Wipler said.

Kalwasinska was not so negative, noting a rise in gas usage or a temporary drop in domestic extraction could help accommodate higher imports.

INFRASTRUCTURE KEY

Poland’s next chance to change the supply structure would come sometime ahead of expiration of the Yamal contract in 2022, assuming Poland goes ahead with the needed investments.

This leaves the Swinoujscie terminal as Poland’s only real option, given that plans to build a pipeline joining the Scandinavian gas system with Poland via Denmark failed due to insufficient supply after the Skanled project was suspended.

“The LNG terminal is a strategic investment… Failure (to get a short-term gas deal) should only be an argument for more determination in building the terminal,” Rozen said.

So far the government is pushing the LNG terminal project, but volumes contracted are lower than those analysts see as a proper supply mix for Poland.

“I think a sensible mix of gas supplies for Poland would be one-third from each source - a third from Gazprom, a third domestic and a third LNG,” Oxford Energy’s Katya Yafimava said.

Assuming consumption remains stable at about 13.5-14 billion metres, this would mean some 4.6 billion cubic metres would come through the terminal. So far, PGNiG has a deal to supply some 1 million tonnes per year of LNG starting in 2014.

(Editing by Keiron Henderson)