Article written in 2017 for Euroil (Newsbase) discussing European dependence on Russian gas, and the opposing policies of Germany and Poland. A version was also published in Natural Gas World.
Energy disunity in the EU
Downstream energy policy is an area where Europe has rarely been united. Approaches have varied from France’s nuclear strategy, to Germany’s Energiewende and most recently the UK’s coal tax and capacity markets. However, the UK has led the EU and most of its members towards more liberalised competitive gas and power markets, and most policy is now made on commercial and environmental grounds – rather than on security of supply grounds as was often the case in the past. Everywhere in the EU that is, except for Poland, and some of its neighbours to the east and south, notably Ukraine. Here the priorities are still related to security – seeking to reduce reliance on their dominant Russian energy supplier; particularly Gazprom.
Given the history of the region, this is little surprise, and yet Germany seems oblivious to its neighbours’ concerns and determined to undermine their position, with its sights set firmly on secure access to more, cheap Russian energy supplies. Uniper, a German investor in Russian gas supply, has even warned that fresh US sanctions on Russia could lead to greater US dominance in Europe’s energy sector (particularly gas through LNG), which is ridiculous; even if it could be the current US president’s plan too. The competitive US market currently supplies less than 1% of Europe’s gas, whereas Gazprom – a single state-owned monopoly – supplies over a third. Germany should have more respect for the concerns of its neighbours and fellow EU members, especially given the history of the region, and be grateful that there are challengers to Russian monopoly supply. Cheap US shale supplies have put downward pressure on gas prices across the globe.
Polish gas: From anywhere but Russia with love
Over the last few months, Poland has announced that it will double the volume of LNG it buys from Qatargas, has received its first US cargo and has outlined plans for a second LNG regasification project – all as part of a strategy to strengthen and diversify energy supplies away from reliance on Russian gas. It has also called for construction of a 10 bcm/year pipeline to supply Norwegian gas to Poland via Denmark, which could meet the bulk of its gas needs. Poland’s state owned PGNiG, has already established a significant upstream position offshore Norway, with 18 exploration and exploitation concessions, and the company has said that it intends to increase its acreage further with the aim of eventually producing 2.5 bcm/year of gas. The remainder could be sourced from other producers in Norwegian waters, including Statoil.
The pipeline’s capacity would be about the same as the current 10.2 bcm/yr supply deal Poland has with Gazprom – which PGNiG says will not be renewed when it expires in 2022. This supply from Gazprom currently dominates Poland’s 17.3 bcm (2016) demand, which represents 16% of total Polish energy consumption – with domestic coal dominant at over 50%. Another 2.4 bcm was pipeline imports from elsewhere and the remainder domestic production and LNG imports. The volumes are relatively small, and could even get smaller, with forecast consumption expected to fall to 13.9 bcm in 2018, and to 11.5 bcm by 2023 as the share of renewables increases, according to regulator URE.
Poland is also heavily reliant on Russian crude. It imports more than 95% of the crude oil it processes, and most of that comes via the Druzhba pipeline from Russia. It also imports some refined oil products from Russia. Arguably, it might be easier to switch crude or oil product suppliers than gas, but Poland’s beef appears to be with Gazprom in particular, which is perhaps closer to the Russian state than some of the big Russian oil companies.
A thorn in Gazprom’s side
While Poland has been busy looking for alternative suppliers, it has also shown an interest in Gazprom’s activities outside its borders. A challenge is currently underway to the Nord Stream 2 pipeline, which, like Nord Stream 1 before it, will be used for Gazprom to deliver Russian gas to Germany, bypassing Poland and other east European countries. Last summer Poland successfully lobbied against five European energy companies (Uniper, Engie, Shell, Wintershall, OMV) taking equity stakes in Nord Stream 2, although they lent money to the project instead.
And late last year, PGNiG was able to temporarily restrict Gazprom’s OPAL pipeline deliveries from Russia to Europe; mostly Germany. Poland claimed increased flow through OPAL would result in less gas for other pipelines, threatening Polish gas supply. The successful challenge resulted in a 30% drop in gas deliveries to Germany through the pipeline at the start of February – which put upward pressure on prices there and put extra demand on storage in what was a cold winter. But in July, the European Court of Justice lifted the ban on Gazprom, allowing the Russian company to bid on the full 36 bcm/year of OPAL capacity.
Poland and Ukraine continue to pursue Gazprom on anticompetitive grounds, and plan to fight the latest proposed settlement to the current case proceeding through the European Commission, which means it could take years before resolution. Poland’s foreign minister Witold Waszczykowski said Warsaw would fight any settlement: “We believe that the Russians will use their supplies as an instrument of political influence,” he said.
Differing perspectives
But Germany refuses to see Nord Stream in any way other than on commercial grounds, with German Chancellor Angela Merkel recently describing it as a purely economic project. German utility Uniper’s CEO Klaus Schaefer recently said: “Uniper’s readiness to finance the Nord Stream 2 project with other European partners arises from the conviction that this additional gas link makes economic sense and that our contribution to its financing will be profitable.” He added that no-one wanted to pay the higher US landed prices – US LNG is certainly finding it tough to be competitive with current European benchmark prices, although not all Gazprom supplies are linked to such benchmarks.
The latest US sanctions against Russian behaviour in Ukraine now make it more likely that Nord stream 2 will not go ahead, which has left the US open to accusations that they were imposed to encourage US LNG exports to Europe – which could, along with LNG supply from elsewhere – go head to head with Gazprom in competition for European market share. The sanctions were imposed for “strategic economic interests, meaning the targeted dominance of the U.S. in energy markets,” according to Mr Schaefer.
This seems very far-fetched. Even if US LNG exports do get going in sufficient volume to be significant, they are unlikely to establish sales of more than a few percent of European imports and will find it tough to compete on price. Even in Poland, LNG supply is dominated by Qatar, while the pipeline from Norway would itself be enough to compensate for a switch away from Gazprom. Nevertheless, Poland did receive its first US LNG cargo this June at its 5 bcm/yr President Lech Kaczynski LNG Terminal in Swinoujscie, which opened only last year. The second 4.1-8.1 bcm/yr terminal is planned for Gdansk in 2021, with initial tenders already issued.
Gazprom has already succeeded in defending its European market from the threat of European shale gas – with barely any produced across Europe to date and Gazprom sales at record levels. Some reports, including from Reuters in 2012, even suggested the state-owned company helped fund environmental opposition to fracking. Now Russia is battling the new threat of LNG imports, along with hostility from neighbours it treated badly in the past, although with German support and the cheapest gas, it could once again triumph. But without alternatives, Russia’s closest neighbours know from experience that there may be a penalty to pay in the longer term.