GAS 30 March, 2020 10:00 am   

Kwieciński: PGNiG will be a multi-energy company that is independent of Russian supplies (INTERVIEW)

PGNiG’s CEO Jerzy Kwieciński has announced the company will invest in new projects and become fully independent of gas from Russia. He wants PGNiG to have a strong position on the international arena and as part of the European hydrogen alliance. What surprised you positively and negatively after taking over the PGNiG reins?

Jerzy Kwieciński: PGNiG is a very good Polish company. It has a strong position in the country, but it could be much stronger in Central and Eastern Europe than it is now. Currently the biggest challenge is to build the company’s value. PGNiG may achieve this by becoming a fully multi-energy concern. All major companies in this industry are heading in that direction. They not only extract or sell hydrocarbons, but also enter other areas of the energy industry. If I were to say what the company was missing, I think that’d be it. Not enough diversification. Of course, the capital group includes PGNiG Termika, which produces heat and electricity, but we have to take further steps. We need to be more multidisciplinary in the energy business as well as in other areas. Our advantage is that we have seven million clients most of whom have been with us for years.

Of course we do not intend to withdraw from the gas market – this fuel will allow the Polish economy to decrease emissions while pursuing the climate neutrality goal. We are actually predestined to play an important role in this process. This is why I would like to stress that over the past few years PGNiG managed to achieve significant progress when it comes to the diversification of gas supply for the entire economy. The goal is to be independent of our eastern supplier. This is the right path to take.

We are in the midst of an oil and gas prices crisis. How is PGNiG responding to this challenge?

This situation has both positive and negative aspects. We need to counteract the negative ones and use the positive ones. When it comes to the oil we produce in Poland and in the Norwegian continental shelf, the drop in prices means lower sales profits. On the other hand, some of our gas supply contracts, including the biggest ones, are indexed to oil prices. Since not until that long ago oil was rather expensive, we had to sell gas at low market prices, even though we paid a lot for it. We can now assume that the purchasing price will be lower.

In case of gas there are also pros and cons. Cheaper gas means lower revenue for us – both when it comes to extraction and trade. Last year PGNiG’s revenue from gas sales went up because we increased sales. At the same time low gas prices are an incentive to use this fuel for heat and electricity generation. This will facilitate the transformation I mentioned. Energy from cheaper gas will be cheaper and we will want to take advantage of this. In the short term the changes will have a negative impact, but in the long term they may be positive.

At the same time we will be developing new competencies at PGNiG in other areas of the energy market that are not related to oil and gas.

Is this why PGNiG has announced a hydrogen program?

I was surprised that there were areas in which PGNiG didn’t have any significant presence. One of those was hydrogen. It is said it is the next transport fuel. However, we should seriously consider using it in gas transmission networks, which could transport hydrogen or a mixture of natural gas and hydrogen instead of just natural gas. A lot of countries are working on this, not only Japan, which is well-known for its engagement in this area. We should also join this process more efficiently than before.

Does this include green hydrogen produced with renewables?

When power demand drops, renewables can be used to produce hydrogen. A similar case could be made for biogas. There are a lot of possibilities. The EU Battery Alliance is a good blueprint to follow. A similar hydrogen coalition could be established. We would want to participate in it.

This is a vision for the future, but PGNiG is still bogged down in the past. What will happen to the Yamal contract?

Soon enough, at the end of 2022 this agreement will expire. Its terms are very unfavorable for us. Additionally, gas supplies as part of the Yamal agreement are disrupted from time to time. This has happened seven times over the past few years. We cannot allow this, which is why I will continue the policy of pursuing full independence of gas from the Yamal contract.

In this context one could ask what should be done with the Yamal gas pipeline once the deal expires. However, we should remember that the majority of gas it transmits goes to Germany and this will definitely not change. Whereas the contract for gas supply to Poland is exceptionally unfavorable to us. This is why we are hoping for a positive decision of the Stockholm Court of Arbitration, which we are expecting this month (in March – red.). We have reason to believe that the judges will accept our arguments and change the formula for calculating the price of the Russian gas, so that it is more in touch with what is going on in the markets.

Another aspect of these relations is the contentious Nord Stream 2. How will PGNiG use the fact that you were included in the derogation procedure for the pipeline?

Obviously Nord Stream 2 should in its entirety be subject to the EU gas directive with regard to unbundling, third party access and tariffs transparency. We believe there is no reason to award derogation to the NS2 pipeline. It would mean the project received preferential treatment, which would be detrimental to the market and gas supply security, not only to Poland, but the entire European market.

The decisions about derogation are made by domestic institutions, in this case it will be Germany’s energy regulatory body, Bundesnetzagentur. In response to our application, the office agreed to allow PGNiG to participate in the derogation process. This shows that our role is important and that our arguments on the impact of NS2 on the market and security are relevant. We want to enforce our rights that stem from the European legal order.

How can PGNiG impact this process?

We want our voice to be heard and considered when key regulatory decisions are made. The fact that we will participate in this process allows us to present our arguments and challenge the applicant’s position. The final decision will be made by Bundesnetzagentur. It has to be in line with the EU law and in our opinion the gas directive leaves no doubt that the derogation of NS2 from the Third Energy Package is legally impossible.

It is said that Ukraine is planning to use its transmission and storage infrastructure to create a gas hub. Is this a challenge or an opportunity for PGNiG?

Our goal is to fully implement our government’s policy, so we especially want to participate in creating a regional gas hub. Poland and Ukraine are taking actions to this end, but we are not competing, it’s the opposite – we complement each other. PGNiG’s experience on the European and global gas markets, the existing and planned infrastructure in Poland aimed at regasification, as well as a developed exchange market, together with Ukraine’s infrastructure may constitute an attractive offer for all countries in the region.

We import liquefied gas from various places, including the US, whose significance as a delivery source will be increasing, to Poland because our plan is to sell it abroad. The first deal of this kind was signed with a private company from Ukraine called ERU Trading last August, and concluded in the 4th quarter of 2019. The gas we delivered to Ukraine as part of that agreement first arrived at the Lech Kaczyński LNG terminal. We want to provide similar services to other states in the region, but Ukraine is undoubtedly the most interesting one. We have trading experience there, but this isn’t the only area where we are planning to develop. We are also interested in exploration and production of gas. Last year we signed an agreement with ERU to this end. We are planning to start drilling by the end of this year.

Is there a chance to sign a gas contract with Naftogas?

Short-term gas supply deals are prevalent on the Ukrainian market. PGNiG has already delivered gas to Naftogaz, especially in March 2018 when, at the last moment, Gazprom had withdrawn from the already-signed deal to deliver gas, which posed a threat to the security of Ukraine’s gas system. When it comes to long-term contracts, we are aware that Naftogaz is interested in purchasing gas from regasified LNG. We are ready to pursue this kind of cooperation and to sign such a deal.

How is PGNiG planning to develop its presence in Ukraine this year?

Our priority is to start gas exploration and extraction by the end of the year. We are also planning to change the character of our presence there and to strengthen our team, which until now has mostly handled technical matters. We already have a representative office in Brussels because that’s where the legislation is drafted, we also have one in Moscow, but we are moving it to St. Petersburg where Gazprom’s HQ is located. It is obvious that strengthening our presence in Ukraine forces us to establish a proper representative office in Kiev. Apart from that, we are also continuing our deliveries and storage activities in Ukraine.

How is PGNiG fighting against the coronavirus?

We are not indifferent to what is happening. We are keeping an eye on the technical aspect of supply, so that the system functions without problems. I can assure everyone that the system is secure and works properly. Despite the fact that the pandemic is dangerous for all companies, we are well prepared for emergency situations. We have introduced a number of solutions that ensure the correct functioning of key processes. One fifth of all employees at our capital group work remotely. If we add to that other absences caused by, e.g. childcare needs, we will see that almost 40% of employees do not come to work, and we employ almost 25 thousand people. Those whose presence is necessary, e.g. to ensure the continuation of production, are equipped with thermometers, masks and protective clothing. We minimized the number of meetings, suspended travel and introduced job rotation. Doing this is not cheap, we have already spent PLN 1.5 m and the costs are growing.

We are also taking care of our clients, which is why we’ve decided to suspend debt collection from those who are currently in a financial predicament. We have also temporarily closed all of the 137 customer service centers. Fortunately, the majority of queries can be handled via the phone or on the internet on our electronic customer service platform. However, this is not our final word – we need to show solidarity with the society and our contractors.

Do you have more time on your hands now that so many public events have been cancelled?

No, it did not give me more free time. We are working in difficult conditions to ensure the critical infrastructure for secure gas deliveries operates without fault. This requires being constantly in touch with the relevant parts of our capital group and other entities. However, we are contacting remotely, just like in the case of this interview. The situation forced us to change the way we work. I believe this will impact how companies will function once after the crisis is over and it will also have some benefits. The digital economy will profit from this. We will get used to remote work, we will limit travel and commuting. Hopefully that’s when we will have more time.

Interview by Wojciech Jakóbik