June 2020 Russia-Poland gas relationship: risks and uncertainties of the ever after 1. Introduction The existing long-term contracts (LTCs) between Poland and Russia for the transit and supply of natural gas are coming to an end, with the transit contract expiring on 17 May 2020. As suggested by a recent OIES insight, Russia’s requirements for Polish transit in the second half of 2020 could be secured by short-term bookings rather than a new long-term transit contract.1 Indeed, this is what happened at the beginning of May when Gazprom booked 80 per cent of capacity of the EuRoPol pipeline (the Polish segment of Yamal-Europe), under the new auction system for Q3 2020 when it will be needed to substitute for Nord Stream transit which will be halted in July for regular summer maintenance.2 Gazprom also secured a very advantageous transit tariff for Q3 20203 for the capacity which was offered by Gaz System, the Polish gas system operator, at its regular auctions, conducted under the EU Capacity Allocation Mechanism (CAM) network code. The capacity auctions for the second half of May have shown a high volatility of daily bookings: from relatively high utilization of available EuRoPol capacity (93 per cent on 19 May) to an almost complete cessation of flows (10 per cent of capacity on May 24-25 and no westward flow at Mallnow on 26 May). Gazprom has said that the flows depend on the nominations by its European customers, and it appears that Gazprom is treating EuRoPol as a balancing route and is content with this more flexible arrangement for the time being. Besides being a major transit country for Russian gas exports to Europe with about 33 Bcm per annum in transit via the EuRoPol pipeline, Poland has been the largest buyer of Russian gas in Central and Eastern Europe, purchasing about 10 Bcm per annum in recent years. The current Russia-Poland gas supply contract expires on 31 December 2022 and the Polish state-owned gas company, Polskie Gornictwo Naftowe i Gazowe (PGNiG), the main wholesale supplier of natural gas in the country, has officially informed Gazprom that it is not going to renew the LTC for gas supplies, since it is planning to switch to alternative deliveries of LNG and Norwegian pipeline gas. Thus, an important chapter in the history of Polish gas is coming to an end and a new era is beginning. Meanwhile, end-use consumption of natural gas in Poland has grown from 14.5 Bcm in 2010 to about 18.6 Bcm in 2019, an increase of more than 30 per cent, as the domestic gas network has expanded and new industrial, residential, and commercial customers have been connected to natural gas. Conversely, gas production in the country has been slowly declining. In 2019, Poland produced 1 Pirani, S., Sharples, J., Yafimova, K., Yermakov, V. Implications of the Russia-Ukraine gas transit deal for alternative pipeline routes and the Ukrainian and European markets. OIES Insight 65, March 2020, p.13 2 Nord Stream AG reported that from 14 July to 26 July 2020, the company will temporarily shut down both lines of its gas pipeline system for annual routine maintenance works. https://www.nord -stream.com/operations/transparencyremit/ 3 https://biznesalert.pl/gazprom-rosja-polska-jamal-gaz-system-energetyka/ Energy Insight: 70 Vitaly Yermakov, Senior Research Fellow OIES and Kamil Sobczak, expert, Russia Gas Society approximately 4.1 Bcm of natural gas (21 per cent of its total natural gas supply). Growing gas demand, stagnant/declining indigenous supply, and the approaching expiration of the long-term gas import contract with Russia have turned into a triple challenge for Polish decision-makers. As the urgency of the response has grown, the Polish government and PGNiG have placed their bets on the diversification of gas imports away from Russia, once a dominant supplier, and have achieved remarkable progress in eliminating Russian gas from Poland’s gas balance. In the early 2010s Gazprom deliveries accounted for 90 per cent of Poland’s total gas imports. The situation in 2019 was markedly different: of total Polish gas imports of 14.9 Bcm in 2019, pipeline gas from the Russian Federation was still the largest source with slightly over 9 Bcm (60 per cent of all gas imports and 48 per cent of total consumption), but a far cry from the recent past. Pipeline imports from the west and south (through newly established interconnectors with Germany, the Czech Republic, and Slovakia), increased from 2.7 million cubic meters per day (MMcm/d) in 2010 to 6.8 MMcm/d or 2.5 Bcm per annum in 2019. Poland’s LNG imports in 2019 were 3.4 Bcm. Since 2016, when the LNG terminal in Świnoujście, located on the Baltic Sea near the Polish-German border started its operations, LNG imports have grown from 2.6 MMcm/d to 9.3 MMcm/d in 2019, contributing 18 per cent of total supply and 23 per cent of total imports in 2019. Work to increase capacity at the 5 Bcm (14 MMcm/d) LNG terminal in Świnoujście by 50 per cent to 7.5 Bcm per annum was scheduled to conclude in late 2021, but is now likely to be pushed back to 2022 because of the COVID-19 pandemic. While the gas trade between Poland and Russia has lasted for over thirty years and brought considerable benefits to both countries, it has now reached the point when the whole relationship must undergo a profound transformation in response to the fundamental changes that have taken place in the European gas market with regards to pricing, key contractual principles, and the availability of competitive sources of supply of both pipeline gas and LNG. This Insight discusses the evolution of the Russia-Poland gas relationship, identifies the problems that have emerged, and assesses the opportunities and the risks for both sides stemming from the end of the long-term transit and supply contracts. The Insight also examines how new Russian pipelines and the changes in flows of Russian gas to Europe are likely to impact the transit of Russian gas via Poland and what this means for Poland’s energy security. 2. Brief overview of the history of Poland’s energy balance and the role of natural gas Poland’s energy balance has been always dominated by coal owing to plentiful indigenous reserves and production. Poland is Europe’s biggest hard coal producer and its coal resources are the largest in Europe. According to the International Energy Agency (IEA), the share of coal in Poland’s total primary energy supply (TPES) has declined considerably since the early 1990s when it accounted for well over 70 per cent, but coal remains the key energy supply source accounting for 47 per cent of the total in 2018. Coal provides more than two-thirds of the country’s heat and power generation. The share of natural gas has increased from a mere 8-9 per cent of TPES in the early 1990s to 15 per cent in 2018. About one-fifth of this is produced domestically, and four-fifths is imported. Wind and solar constitute only around 1 per cent of TPES. (See Figure 1) 2 The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members Figure 1: Shares of Poland’s primary energy supply sources, 1990–2018 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Coal Natural gas Oil Wind and solar Source: OIES, data from IEA In absolute numbers, the total supply of natural gas was 16.1 million toe or 16.9 standard Bcm in 2018. (See Figure 2) Figure 2: Poland’s total primary energy supply (TPES), 1990–2018 120 100 80 60 Mtoe 40 20 0 1990 1995 2000 2005 2010 2015 Oil Coal Natural gas Bio-fuels and waste Hydro Solar and wind Source: OIES, data from IEA The IEA noted in its country report that greenhouse gas (GHG) emissions per gross domestic product (GDP) and carbon intensity in Poland are among the highest in IEA Europe member countries owing to old, inefficient, and polluting coal-fired plants.4 4 Energy Policies in IEA Countries – Poland. 2016 Review. IEA, 2017 p.10 3 The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members On the energy demand side, the transition to a market economy in Poland has resulted in enormous structural shifts in economic activity, away from a focus on heavy industry towards service-oriented sectors. As a result, the largest growth in energy consumption has occurred in the transportation sector as growing numbers of private cars and commercial trucks require more petroleum. At the same time, energy use by industry has declined considerably. Improved energy efficiencies have reduced the share of energy use by the residential sector. (See Figure 3) Figure 3: Shares of total final consumption (TFC) in Poland’s energy by sector 40 35 Transport share in TFC 30 Industry share in TFC 25 Residential share in TFC 20 Commercial and Percent public services share in TFC 15 Agriculture and forestry share in TFC 10 Non-energy use share in TFC 5 Share of electricity in TFC 0 1990 1995 2000 2005 2010 2015 Source: OIES, data from IEA Poland’s natural gas balance on the basis of the latest available statistics from the IEA is presented in Table 1.