Energy 20 October, 2017 10:00 am   

Poland and Ukraine in gas: together, yet somehow separate. Will US LNG change that?

The Polish-Ukrainian Gas Forum which I had the pleasure to moderate was a feast for natural gas sector analysts. Poland and Ukraine want to cooperate, but both countries want to be exporters, not importers of gas. Their plans may converge as part of the regional gas hub unless they do not lose to vested interests of the countries and their companies – writes Wojciech Jakóbik, editor in chief.

Points of contention 

Poland and Ukraine want to be more independent of Russian gas, but each country on its own terms. Poles want to sell gas from the Northern Gateway to Ukraine, while Ukrainians want to increase their extraction and export the raw material to Poland.

“I am able to imagine a situation where there will be dedicated LNG supplies to Ukraine,” Maciej Woźniak PGNiG’s Vice President said. In his opinion, a competitive offer of LNG from the US is possible provided things are coordinated well. Woźniak, who is also responsible for trade at PGNiG, also believes that if the company managed to coordinate its price formulas with those of the intermediary company, i.e. ERU Trading, and the buyer in Ukraine, e.g. Naftogaz, it would be possible to sell LNG from the US or another location, instead of gas from PGNiG’s portfolio.

I explained this idea last April in an article on the Poland-Ukraine-USA deal for LNG deliveries. PGNiG hopes that thanks to a good contract for US LNG, it will be able to present an attractive offer to the region. “The contract may include an exceptional offer based on a new price formula created specifically for PGNiG,” a source at the company revealed. The Polish gas tycoon is counting on Americans to choose it as an intermediary for delivering LNG to Central and Eastern Europe, and believes the US will lower the price to that end to a level that will be competitive in comparison to Russia. During the panel I asked whether Gazprom will be able to respond with price dumping. Maciej Woźniak stated it would not be able to do it forever because it would cause the company’s bankruptcy.

In the meantime Ukraine has declared it would be ready to stop importing natural gas before 2020, which is even before 2022 when Poles would like to enter their market with deliveries from the Northern Gateway (i.e. the expanded LNG terminal and the Norwegian Corridor – Baltic Pipe). Oleg Prokhorenko, CEO of UkrGasVydonuvannya, is convinced the Ukrainian plan will pan out, but Poles are doubtful about its ultimate success. Woźniak reminded that gas demand will be increasing together with the country’s economic development. However, Prokhorenko pointed out that companies could switch to a different fuel.

In his opinion once Ukraine increases its gas production it could sell it to Poland at a market price. “If the gas price at the German exchange will be USD 250 per 1000 cm, we will propose USD 249. Today we import gas from Poland. Perhaps one day we will be selling it to Poland,” he said. When I provoked Mr Woźniak to respond to that statement with a counter-offer, he smiled and said that negotiations should not take place during a conference panel.

Points of convergence 

On the other hand, it is still visible that in general Poland and Ukraine want to cooperate in the gas sector, for instance within the energy integration process. I wrote a report on this topic entitled “Multi-speed energy. The fight for cheap gas for Poland is happening in the East.” It was commissioned by the Jan Nowak-Jeziorański College of Eastern Europe (KEW) and will be discussed at a conference titled Polish Eastern Policy in Wojnowice, which will gather researchers focused on this topic. My thesis is that a united fight for equal treatment on the European gas market is in Poland’s and Ukraine’s strategic interest. The precedents, such as the EU ignoring its own regulations and allowing Gazprom to increase OPAL usage, or no reaction to Nord Stream 2, undermine the community of countries which want to be under the protective umbrella of EU regulations.

NATO has a nuclear umbrella and the EU a regulatory one. It has to be defended against Gazprom’s abuses. This is why Poland’s engagement in the energy integration of the Eastern Partnership countries is not just about altruism. It is an important tool of the eastern policy that offers a perspective of good deals in case the situation is stabilized. It also contributes to defending the rules of the game in the European energy sector, which protect us against abuses perpetrated by giants such as Russia’s Gazprom. However, the biggest responsibility is placed with the eastern countries, which have to continue reforms to keep on receiving financial help. More on this can be read in the report, which will be published soon. Maciej Woźniak seems to share the same view. “The same rules for everybody – this is what we have to fight for,” PGNiG’s Vice President said during the Polish-Ukrainian Gas Forum.

A gas hub, but where?

It is apparent that both sides want a gas hub, which is a junction that offers attractive gas supplies from many sources, but each country wants it for itself, not for its neighbor. The development of Poland’s and Ukraine’s gas markets will benefit the consumers, regardless of whose plans will be executed better. The Ukrainian partners avoided answering questions on the stagnating gas sector reform. Poles boasted about the progress of the Baltic Pipe, but did not specify what they would do if the Ukrainian market is not interested in their gas. When asked about the possibility of abandoning the Poland-Ukraine gas pipeline project, PGNiG mentioned it could still deliver gas to Ukraine via the Czech Republic and Slovakia, or sell the gas in Germany, which is already happening. Gaz-System reminded about the other interconnectors: with Lithuania, the Czech Republic and Slovakia. It is worth mentioning that the construction of these connections has been delayed because the Baltic Pipe has become a priority. The statements from Ukraine show that this solution needs to be reconsidered.

However, if permanent stabilization is ensured by the Dnieper, it may be possible to transmit the US LNG from the Northern Gateway, with a low price guaranteed by the USA, to the Balkans. This would free the region from its dependence on Gazprom. Currently Russia is using the Trans-Balkan gas pipeline to transfer gas to the region. The pipe is supplied via Ukraine. If the Russian declarations check out and in 2019 they will redirect the transit to the planned Turkish Stream, provided it will have a European branch, then Ukraine will have an open gas gateway to the Balkans. Depending on how the situation develops, the pipe could be filled with gas from Poland or Ukraine, or both.

This is why the Polish-Ukrainian gas cooperation is susceptible to security threats. Paweł Turowski, PhD, from the National Security Bureau asked about this during my panel. His question was what threats posed by Russia to the possible gas transit from Ukraine to the Balkans we should expect. All panelists agreed that Russians will do everything to torpedo the cooperation. After all, if the partnership makes it possible to free not just the two countries from Gazprom, but a whole region, which is of strategic importance to Russia, then this may be a reason to take more or less open offensive actions.