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GAS 22 May, 2020 12:00 pm   
Editorial staff

The past is still a burden for the Yamal gas pipeline (ANALYSIS)

It is hard to present specific figures about the Yamal gas pipeline because the majority of data is a trade secret. However, it has been established that the new rules for operating the pipeline are still a hybrid solution that may change once the problematic historical contracts with Russia expire – write Wojciech Jakóbik and Mariusz Marszałkowski from BiznesAlert.pl.

Historical burden

The history of the construction of the Polish section of the Yamal gas pipeline was described in a different piece, but it is worth reminding that on 21 May 1992 Boris Yeltsyn and Lech Walesa agreed to build a Polish section of a gas pipeline that would deliver gas from the Yamal deposits to Western Europe. The decision was included in the Treaty on Friendly and Good Neighborhood Cooperation. This is the origin of the idea to build the Yamal gas pipeline across Poland. On 21 September 1993 the parties established EuRoPol Gaz, a company owned by PGNiG and Gazprom, whose job was to construct the Polish section of the pipe. GazpromBank was one of the creditors of the investment. 

This means that Russians financed the infrastructure. The debt had to be later on paid off with EuRoPol Gaz’s money. Since the beginning this company has been part and parcel of the Polish-Russian relations with regard to the gas pipeline. Because of that, later on Poland found it extremely difficult to apply EU rules to the pipe that had to be implemented in the 21st century. It turned out that even the European Commission was not able to impact the deal with Russia, which we write about below.

Gaz-System as an operator 

Gaz-System became the operator of the transmission system (TSO) Yamal-Western Europe on the basis of the decision of the Polish Energy Regulatory Office (ERO) issued on 17 November 2010. The decision was enforceable immediately and was valid until 31 December 2025. Earlier on 25 October 2010 an agreement had been signed between Gaz-System and EuRoPol Gaz, the owner of the Yamal pipeline. Its expiration date was 31 December 2019. The agreement defined corporate relations and duties of the owner and operator.

The TSO is responsible for operating the Yamal gas pipeline in Poland and cooperating with operators from neighboring countries whose grids are connected to the gas pipeline. The operator also ensures the pipeline’s safety through management and surveillance of maintenance works and manages the pipe’s exploitation. It also needs to provide potential clients with information on conditions for the provision of services and available capacity. Additionally, the TSO enters into and enforces new gas transit contracts for available capacity.

Gaz-System agreed to draft the Transmission Network Code, which was approved by the President of ERO on 31 August 2011. The Code includes all the necessary information and rules for using the transit network Yamal – Western Europe for entities interested in using the pipe’s capacity.

On 19 May 2015 ERO’s President awarded Gaz-System the Independent System Operator certificate in line with the European Commission’s guidelines. The screening procedure took almost a year. During that time ERO fell back on EU requirements to assess whether establishing Gaz-System won’t pose a threat to the Polish and EU gas markets. The decision was necessary to allow Gaz-System to work as a fully-fledged operator of the Yamal-Western Europe gas pipeline. 

Back in 2009 when the talks with Russians started, it was not obvious at all that establishing Gaz-System as an independent TSO would even be possible. The situation changed when the European Commission decided to step in to examine the new intergovernmental agreement. At the beginning of February 2010, the EC voiced its reservations regarding some of the deal’s provisions, including awarding Gazprom Export a monopoly on using the Yamal until 2045, unclear and beneficial transit tariffs and lack of third party access. 

The intergovernmental agreements on providing and transmitting Russian gas to and across Poland went against the provisions of the EU’s Third Energy Package. In the end, EC’s pressure and mediations resulted in amending those provisions which were unfavorable to Poland. The changes included, among others, shortening the duration of the gas delivery deal to the end of 2022 and the transit deal to 17 May 2020. It was also decided that ERO would continue to be responsible for approving the transit tariffs and that an independent TSO would be appointed in line with EU regulations on third party access to the Yamal gas pipeline. At the same time, the parties ensured that the long term deal with Gazprom Export would be respected . 

The EC’s antitrust investigation revealed that Gazprom abused its dominant position on the Central and Eastern Europe markets, including in Poland and Bulgaria. According to the Commission, the Yamal gas pipeline was used to split markets and offer unfair prices. The EC obliged Gazprom to change its practices by offering prices closer to those on European markets. However, the attempts at enforcing those requirements were impeded in Poland yet again by the past events. “The Commission ascertained during its investigation that the antitrust proceedings were not able to impact the existing situation because of the intergovernmental agreement between Poland and Russia,” Brussels stated. 

A hybrid solution 

The EC decided it could not interfere with the intergovernmental agreement between Poland and Russia. Whereas, according to the historical agrement that established EuRoPol Gaz, the company’s shares were owned equally by Gazprom and PGNiG, which forced the two owners to make decisions by consensus. This means that without Russia’s ‘yes’ changing the functioning of the owner of the Yamal gas pipeline is still impossible. Probably because of the lack of cooperation from Russia’s side, the relations between EuRoPol Gaz and Gaz-System were not settled by an agreement between operators, but by an ERO decision from 9 December 2019, which described the so-called entrustment agreement. This was a consequence of the decision from 17 November 2010 on appointing Gaz-System as the operator of the pipeline. Since the previous decade the company has been formally the pipe’s TSO and ERO’s 2019 decision extended this state of affairs until the end of 2022. “The energy law says that in such a situation the President of ERO issues an administrative decision that established an agreement between SGT EuRoPol Gaz and OGP Gaz-System. In line with the regulations, the decision replaces the next contract between the entities. The goal of such a solution is to allow the operator to successfully fulfill its duties,” the Office announced. 

However, the content of the ERO decision is secret and the Office, as well as the TSO have refused to reveal it. BiznesAlert.pl managed to unofficially confirm that the document lays out how the revenue from  the transmission of Russian gas is distributed. Gaz-System receives the money and its significant portion is then transferred to EuRoPol Gaz at a fixed rate. The specific figures depend on a number of factors. Among the most important ones are the cost of purchasing and injecting the technical gas (aka fuel gas) that propels Yamal’s compressors and maintains pressure necessary to ensure deliveries. According to BiznesAlert.pl’s findings, EuRoPol Gaz needs between 400 and 500 mcm of the gas, depending on the situation, i.e. the capacity reservation levels, the weather and others. 

In reality ERO’s decision is a form of a trade deal on entrusting the operator’s duties, which replaces a typical contract between operators, to which – as we have assumed – Russians do not want to agree. This is why its content is a trade secret, which entities engaged in running the Yamal gas pipeline in Poland do not want to reveal. However, it is no coincidence that this state of affairs will run its course at the end of 2022. 

At the end of 2022 the second historical contract that involves EuRoPol Gaz will expire. Perhaps the necessity to wait until the agreement, which was also questioned by the European Commission and PGNiG, expires led to the implementation of a hybrid solution for the Yamal gas pipeline. Once the delivery contract ends, it will be possible to again make an attempt at an entrustment agreement. Depending on a number of political and market factors that are difficult to predict in 2020, Russia may either again be against a conventional agreement, or agree to it. ERO will be again able to issue another administrative decision on how the Yamal should function after 2022. However, Poles, who by then will be free of all historical burdens, will be in a better position to implement changes. EuRoPol Gaz will in reality become an object of gas relations between Poland and Russia. This means it may be bought by the State Treasury and become dependent on the operator of the Polish transmission system. However, a different solution that would sanction the new rules for Yamal without any historical burden may appear. 

The current hybrid solution makes it difficult to acquire reliable information on the revenue from Russian gas transit via Poland and on Polish-Russian relations, as well as Polish-Polish relations with regard to the Yamal. Because this issue is extremely complicated and there is little information available, Russian media are able to present a dishonest take on this situation where Poles want to take over Russian property, i.e. the pipe, subsidized for years by Gazprom. Opinions like these go against the facts, but they can be found in, e.g. the energy portal Neftegaz.ru, which predicts the “end of socialism” for Yamal once the historical transit deal expires. Actually, in reality this is the beginning of transparency and normal functioning in line with EU regulations, written about in a different piece, but unfortunately this is not the end of the game with Russians.

EuRoPol Gaz’s revenue vs profit 

One of the most important problems caused by the long-term transit deal was the cap on the profits EuRoPol Gaz could earn. This was based on the governmental decision from 12 February 2002 and an earlier document dated 25 August 1993 about the construction of a Transit Gas Pipeline System for transmitting Russian gas across the territory of the Republic of Poland and the deliveries of Russian gas to the Republic of Poland. 

EuRoPol Gaz’s statute includes a provision, which says the company cannot accumulate funds above a profit of PLN 21 million net. The company was allowed to use its revenue to realize investments approved by its main shareholders, to pursue any operational activities related to transmitting gas and to pay back loans and obligations to its creditors. 

In the 1990s EuRoPol Gaz received credits to build Yamal’s infrastructure from Gazprom and PGNiG. According to estimates, the total cost of constructing Yamal was over USD 1.3 billion. Poland’s PGNiG lent EuRoPol Gaz about USD 300 million and the rest was credited by Gazprom (via GazpromBank). Additionally, the Polish government agreed to exempt the company from property tax, VAT and income tax. 

EuRoPol Gaz was to pay off its debt to Gazprom with its profits from gas transit and by offering preferential transit tariffs. According to EuRoPol Gaz’s financial statements, the company fully repaid its debt to Gazprom at the end of 2018. BiznesAlert.pl independently confirmed this fact with our sources close to the Yamal gas pipeline. Even though the debt has been most probably paid off, Gazprom is still benefiting from a preferential tariff model. 

In line with the intergovernmental agreement from 12 February 2003 and a later intergovernmental contract from 29 October 2010 (both of which to this day impact the tariffs proposed by EuRoPol Gaz) the rates are low. The agreement states that the tariffs were to drop in line with a schedule. 

In 2003 the rate was USD 2.74 per 1000 cm of gas transmitted over 100 km (the total length of the Yamal Gas pipeline in Poland is 648 km). Between 2004 and 2005 it was USD 2.5 and in 2006-2013 it was USD 1.55, while between 2014 and 2019 it was USD 1 per 1000 cm transmitted over 100 km. 

The above figures might have changed as a result of negotiations between Poland and Russia, or PGNiG and Gazprom. However, considering the current tariffs, it seems most probable that the agreement from 2003 still impacts the tariff applications EuRoPol Gaz submits today. 

ERO determines the tariff upon EuRoPol Gaz’s request

Gas transit tariffs for the Yamal pipeline are determined by ERO upon request of the pipe’s owner – EuRoPol Gaz. The conflicts between the two shareholders of this company, i.e. Gazprom and PGNiG, have numerous times made it impossible to agree on new fees for gas transit. 

According to the clarifications offered by ERO in March 2019, which appeared in the justification for new transit fees binding between 1 January 2020 and 31 December 2022, the current rate is still based on EuRoPol Gaz’s calculations derived from the so-called legacy agreements. This is the effect of the revised Energy Law Act from 26 July 2013. Point 1, article 22 of the amended act says “Energy companies that on 3 September 2009 were owners of a transmission grid keep their right to realize contracts for gas fuel transmission services that had been signed before that day, until they expire, without the possibility to extend them. A legal action whose goal will be to extend the deadline for these agreements is void.” This pertains to the deadline for the so-called Yamal contract. Article no. 23 of the revised act pertains to the contract and to the operator – Gaz-System and says “To the contracts for entrusting the duties of a gas transmission system operator, or a combined transmission system operator that were signed before the following bill enters into force, the existing regulations are applied until the agreements in Article 22 of the following bill expire.”

The first legacy contract that ended in May 2020 was about transmission decisions, the second one pertained to the long-term contract between EuRoPol Gaz and PGNiG for gas deliveries across the Yamal gas pipeline. The regulator stressed that the current tariff is lower than if it had been calculated on the basis of the tariff code, which is not limited by the legacy agreements that put a cap on EuRoPol Gaz’s profit at PLN 21 million net.

It is important to point out that even though a profit of PLN 21 million is low, Gazprom did not pay this sum every year to the gas pipeline owner. The real totals are a lot higher, but they are not part of the profit of the company that operates the gas pipeline, i.e. Gaz-System.

According to the document drafted by ERO on determining new tariffs for gas transit from 29 March 2019, the predicted revenue from the EuRoPol Gaz’s transit in 2020 is to be PLN 943.860 thousand. However, it should be mentioned that the fee determined by ERO is the maximum revenue of the company expected in 2020. The revenue comes from gas transit only because according to the company’s statement sent to ERO it did not have a stable income from different endeavors. 

Conclusions

To reiterate, the disadvantageous provisions of the transit contract, which caused low income for EuRoPol Gaz result from Poland’s weak negotiating position in 1993, 2003 and 2010, which impacted some of the intergovernmental agreements with Russia. None of the legacy intergovernmental agreements, or those signed between companies generated any real profit for Poland. Neither did they provide cheap gas (for many years it had the highest price in Europe) or adequate profits from gas transit. Poland’s Supreme Audit Office published detailed reports on those contracts in 2018.

It is worth stressing that because of the engagement of PGNiG as well as tax exemptions, Poland largely contributed to the construction of the Yamal gas pipeline and in turn it should have expected much larger profits. Despite the fact that the transit contract with Russia has expired and despite the fact that auctions for Yamal capacity in line with EU rules have been implemented, the situation has not really changed. ERO still needs to set the tariff at a level that does not exceed the cap for EuRoPol Gaz. This situation will continue until the second legacy contract, the so called Yamal transit deal from Russia to Poland ends, which will happen at the end of 2022. Perhaps Poland will be able to negotiate better terms for transmitting Russian gas across its territory. However, it remains to be seen whether Gazprom will still need this route in 2023 when a new gas pipeline, i.e. the contentious Nord Stream 2 pipeline, will be completed. In the end, it is worth stressing that Poland is not dependant on revenue from Russian gas transmission. One could also imagine a situation where the Yamal gas pipeline is used to a larger extent to transmit gas from the Northern Gate projects and the reverse flow on the border with Germany. Getting rid of the burdensome legacy contracts with Russians will allow Poles to freely plan the future of Yamal. This will bring an end to the toxic and detrimental, from the point of view of the Polish state, dependence on Gazprom and the Kremlin’s foreign policy in the gas sector.   



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