According to information obtained by BiznesAlert.pl the level of Russian gas transit via the Polish section of the Yamal gas pipeline had dropped before the coronavirus pandemic started. This is what a new reality may look like after the transit contract expires in May 2020, and Gazprom will find it increasingly harder to compete for the European market in these circumstances – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.
Gazprom’s self-inflicted harm
BiznesAlert.pl found out that in early 2020 the transit of gas from Russia via the Polish section of the Yamal pipeline dropped to about 80% out of the 32 bcm yearly capacity. Gaz-System, Poland’s transmission network operator, informed BiznesAlert.pl that during the capacity auction on 4 May for the third quarter of 2020 only about 80% of the transmission capability was booked. This means the drop was not caused by the coronavirus pandemic or the end of the transit contract between Poland and Russia that will run out in May 2020. On the contrary, it is part of a European trend caused by Gazprom itself.
The company admitted in official documents that its gas exports may drop by half in 2020. According to Gazprom, its exports, which in 2019 topped at 199 bcm, may decrease to 166.6 bcm in 2020, a 15% drop. At the same time the company’s goal was to sustain exports at about 200 bcm this year. Simultaneously, the average price of gas offered by Gazprom is expected to drop this year to about USD 133 per 1 tcm, which will entail a drop in revenue from USD 40 million in 2019 to USD 22 million in 2020. According to Gazprom these bad results are caused by a number of factors, including a warm winter, increasing competition from LNG, a drop in oil prices and restrictions imposed due to the coronavirus pandemic.
However, another interesting factor, not mentioned by Gazprom, is the record-high level of gas stored in Europe, which was bracing for the expected conflict between Russia and Ukraine that could have disrupted gas supplies at the turn of 2019 and 2020. The negotiations as part of the so-called tripartite process between the European Commission, Russia and Ukraine took place until the very last day. In the end, the parties signed a temporary transit contract that guarantees minimum transit via Ukraine until 2024. Still, the risk posed by the possibility of a lack of such an agreement forced European gas companies to store amounts of gas so large that Ukraine was able to offer its stored surplus to Poland. It was only a few years ago when Gazprom had announced it would stop gas transit via Ukraine after the completion of Nord Stream 2. This aggressive attitude towards Kiev combined with the impact of market forces, resulted in a drop in gas deliveries to Europe from Gazprom at the beginning of the year. The decrease was also visible in the data pertaining to the Yamal gas pipeline both before and, as it looks like right now, after the historic transit contract between Poland and Russia will expire this May. These problems may stay with Gazprom until gas demand in Europe goes up again.
The political contract that defined the terms and conditions of gas transit via the Polish section of the Yamal gas pipeline will end on 16 May 2020. From then on the pipeline will enter its new normal, as the old contract rules will be replaced with EU regulations that ensure access to the pipe’s capacity in Poland on the basis of auctions. The capacity for the turn of 17 and 18 May will be made available during a within-day auction on 17 May at 4 am. The capacity available from 18 until 31 May will be offered during auctions that will take place every day at 4:30 pm. The monthly capacity for June will be made available for bidding on 18 May at 9 am.
The auctions do not determine which route of transmission will be selected by Russia, but Poland doesn’t need any guarantees in this regard. Until 2024 Russia is partially dependant on the route across Ukraine where it needs to ensure a minimum volume of 65 bcm a year in 2020 and 40 bcm between 2021 and 2024. Other routes are the Yamal pipeline through Belarus and Poland and the Nord Stream pipeline, which is to be complemented by Nord Stream 2 once it’s ready at the turn of 2020 and 2021, provided there won’t be additional delays. According to BiznesAlert.pl’s estimates of the transit fees, the Polish section of the Yamal pipeline will be the cheapest choice. This is the best guarantee for using this route, but from the point of view of the state this isn’t that important. That’s because the transit contract via Poland was badly negotiated and capped the transit revenue for EuRoPol Gaz, the owner of the pipe, at a mere PLN 21 million a year. Today it turns out the bad deal was a blessing in disguise as that sum is very small in comparison to the state budget. Therefore, Poland, in contrast to Ukraine, does not depend on transit revenue and will be fine without deliveries from the East. This will be a challenge that will start debates on the future of the owner of Polish section of the Yamal gas pipeline, i.e. EuRoPol Gaz, but it will not be a problem at a state level. EuRoPol Gaz will have to rely to a large extent on transit fees from the West, e.g. from the Northern Gate projects (the Baltic Pipe and the expanded LNG terminal) and perhaps, in the future, reverse-flow deliveries to Belarus, but that last scenario remains very vague today.
The Russian media have not written much about the consequences of the end of the transit contract between Poland and Russia that is to run its course in May 2020. However, a critical piece about Poland’s policy towards the contentious Nord Stream 2 pipeline has been published by RIA Novosti, which said Warsaw’s stance was equal to “closing Europe”. RIA suggested that if the same EU regulations that would protect the transparent and non-political gas transit via the Yamal pipeline were applied to Nord Stream 2, Russians might be forced to sell some of NS2’s capacity on auctions. It remains to be seen whether this solution will be accepted by the European Commission, which will not allow for the deliveries to begin before assessing the compliance of the project with EU rules. At the same time, Sputnik, a propaganda tool, wrote about the “illogical Baltic Pipe” whose gas Poland would not need because it had a lot of blue fuel from Russia in liquefied form. Sputnik forgot that Poland wants to limit, or entirely discontinue buying Russian gas once the Yamal contract for gas deliveries expires at the end of 2022.
No going back
Perhaps the reason why Russians have been largely silent about the new era for the Yamal gas pipeline is because the pipe will no longer be important for Poland’s gas policy, as it will become a mere gas transit route for blue fuel from Russia and from outside of Russia that operates in line with transparent EU laws. Only the Kommersant daily was honest enough to admit that the deliveries via Poland’s Yamal section would be the cheapest option for Russia. This shows that a new normal has arrived where the political aspect of Russian gas transit via Poland disappears and with it a potential leverage that could be used by Moscow to put Warsaw under pressure. The process will be completed once the delivery contract expires in 2022. After that the Polish gas market and its infrastructure will develop regardless of our troublesome neighbors’ foreign policy. Gazprom is facing a crisis and will have to court Poles who may not be eager to again buy gas from this uncertain source. Russians will be left with propaganda from RIA and Sputnik, trying to wave away reality, or reminiscing about the good old times that hopefully will not come back.