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Anna Mikulska from the Baker Institute comments on the vistas for the development of the LNG market in Poland after contracts with Americans are signed.
In 2018, Poland (PGNiG to be more exact) signed 6 long-term contracts with American LNG suppliers. The contracts were concluded for the next 25 years. They will be nominal until 2023, which is related to the Yamal contract, which is effective until 2022 and which binds Poland to Russia, and putting into use the currently emerging American export terminals step by step. However, adding the LNG already sent to Poland by Qatargas, Poland could receive up to 10 billion cubic metres of liquefied gas in 2024.
The contracts signed by PGNiG are immensely important due to the Yamal contract, which imposes unfavourable prices and other terms and which is coming to an end. Through the differentiation of suppliers of gas – including LNG (spot and long-term) and the gas to be supplied by the Baltic Pipe from Norway – Poland will achieve not only an array of new suppliers, but also a stronger negotiating position with each prospective supplier as regards supplies after the expiry of the Yamal contract. Of course, this applies to the Russian Gazprom.
Please note that the contracts signed by PGNiG with American suppliers are not identical. To the contrary, they are differentiated in terms of (i) duration, (ii) specific supplier: Venture Global, Cheniere, Sempra; Centrica, (iii) terminal: Cacasieu Pass, Plaquemines LNG Sabine Pass LNG, Corpus Christi LNG, Port Arthur LNG; and (iv) contractual terms.
Therefore, along with the already effective contract for Yamal LNG and a target contract concerning the Norwegian gas from the Baltic Pipe, they fit perfectly into the policy of gas diversification in Poland and Europe. What is more, the volumes specified in these contracts indicate that after 2022 Poland could theoretically do without the Russian gas, thus fulfilling the declarations of the Polish government in this respect. Theoretically as these contracts are structured and differentiated so that they allow not only guarantee of energy supply safety in Poland, but also flexibility of the Polish import policy, and so better economy of gas import.
How?
The LNG contracts signed by PGNiG are of two types:
– DES (Delivery Ex Ship)
– FOB (Free on Board)
In the DES contracts, the risk of fluctuations in the supply costs is borne by the supplier. The contracts concluded by Poland with Cheniere are regarded as competitive in terms of price – at least in comparison to the currently effective Yamal contract. Long-term forecasts also indicate their cost-effectiveness. PGNiG helped negotiate good terms as the said contracts are not only a source of target profit for Cheniere, but they also reinforce the profitability of the planned terminal, and so contribute to ensuring that it will be built.
Thanks to quick action, Poland achieved some kind of “anchor tenant pricing”: this is a situation where one can achieve a better pricing by buying from a developer when the residential building is still at the planning stage and the developer needs a “critical mass” of prospective clients so that the project is profitable and can be launched. At times, such flats can be bought at their cost (or even less). Prices are usually much higher for buyers when the building is already erected and it is them that the developer makes money on.
In the case of the FOB contracts, the risk related to transport is borne by the importer. However, as the buyer takes control over the cargo after shipment to LNG tankers, they can dispose of the gas on a “free on board” basis: in the case of PGNiG, it can send it to the Polish market or, if the market was not profitable or did not need gas at a given time, release the cargo and sell it to a different market in the so-called spot transaction. In addition, PGNiG can perform an arbitrage and, for instance, sell the FOB gas on a different market if the gas can be obtained in Poland more cheaply from a different source.
Therefore, the DES contracts form some foundation as to guaranteed supplies and energy supply safety and the FOB contracts supplement that energy supply safety (they can be performed in Poland at any time), but they also boost the profitability of the project thanks to flexible terms of supply.
What does it mean for Poland?
1) In most general terms: thanks to the contracts concluded between PGNiG and the US (but also Qatar and Norway), Poland will be safer in terms of energy supply as regards price and geopolitics.
2) The differentiation of suppliers and contractual terms and flexibility of these contracts not only deepen the energy supply safety, but is also economically beneficial: it raises the profitability of purchases of gas by allowing arbitrage.
3) if all LNG and Baltic Pipe contracts signed by PGNiG are performed with increasingly higher participation on the market of spot contracts, Poland indeed will not have to buy gas from Russia.
4) However, the fact that Poland will not have to buy gas from Russia does not mean that it should not or will not be able to. As a result of the market differentiation and supply flexibility, Poland will win a more privileged position in potential negotiations with Gazprom on supplies after 2022. It is known that the Russian gas may be competitive in terms of price due to low costs of extraction and transmission. It is also known that Russia will fight for the European market. Poland can take advantage of this not only to achieve low prices, but also to win beneficial terms of transmission, for instance as regards “take-or-pay” or a determined place of acceptance, indexation of price to hubs instead of oil or the possibility to renegotiate contracts in their term if the pricing terms etc. change on the market. Here, of course, the above FOB contracts help considerably, i.e. contracts concerning the gas that may but does not have to reach Poland.
5) As it will be possible to replace any supplies of the Russian gas after 2022 with spot transactions or directing FOB volumes to Poland, Russia will lose both its economic and geopolitical edge.
6) The diversification strengthens the negotiating position of Poland not only towards Russia but other suppliers as well.
7) As regards the development of a gas hub in Poland: so far, this will not happen shortly due to (i) growth of domestic demand and forecasts of further such growth resulting from the gasification of the country and the capacity and heat engineering market; (ii) import possibilities, especially as regards LNG the volumes are limited (after extension of the terminal in Świnoujście to 7.5 billion cubic metres). However, so far there is an option to cooperate with the Polish neighbours, such a Ukraine, the Czech Republic or Slovakia, which do not have access to their own LNG import terminals and are and will be interested in supply diversification. Do remember that even though the terminal in Świnoujście is currently being extended to 7.5 billion cubic metres of regasification capacity, there is a possibility of its further extension to ca. 10 billion cubic metres if such extension is profitable (in terms of profit and the geopolitical situation). In addition, more time will be needed for it.
To sum up, the contracts signed by PGNiG prove excellent orientation of its management in the gas market landscape not only in Europe, but also in the entire world. The differentiation of the contracts shows sophistication and gives Poland an opportunity for a better negotiating position and better terms of gas contracts, including potential contracts with Russia. Moreover, thanks to early conclusion of contracts with American companies, Poland won some kind of “anchor pricing:” potential price-related benefits in terms of gas from currently planned LNG export terminals in the US. At the same time, the diversification and flexibility of the contracts helps considerably reduce the possibility of gas transmissions to be used for geopolitical purposes.
In addition, some claim that the LNG contracts are significant in tightening cooperation with the state or administration of the US. Nevertheless, their role cannot be overestimated. It should be noted that unlike PGNiG or Gazprom, American companies are not representatives of the US or the energy supply policy of the American government. They are private companies and as such they are driven by profit. Of course, each additional activity of American companies on the Polish market will be conducive to better diplomatic relations. Most probably, this will have additional implications in the energy sector due to support for energy export from the current administration. Nevertheless, the LNG contracts are not a direct indication of the US involvement in Polish affairs as it is private companies that are contracted. The contracts are rather an indication that American companies deem Poland an attractive market and PGNiG an attractive partner.
However, the vast majority of American LNG export will be sent to Asia. In addition, strong support for energy exports on the part of the American administration is not a given. The involvement of the US government will depend on who leads the administration. It is currently Donald Trump, but it is not certain who will rule after the upcoming 2020 elections. All the more, there is no certainty whatsoever as to what administration and what priorities will direct the American foreign policy in the 2030s and 2040s.
