Poland Economy Briefing: Start of Construction of the Baltic Gas Pipeline Joanna Ciesielska-Klikowska
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ISSN: 2560-1601 Vol. 29, No. 2 (PL) May 2020 Poland economy briefing: Start of construction of the Baltic gas pipeline Joanna Ciesielska-Klikowska 1052 Budapest Petőfi Sándor utca 11. +36 1 5858 690 Kiadó: Kína-KKE Intézet Nonprofit Kft. [email protected] Szerkesztésért felelős személy: CHen Xin Kiadásért felelős személy: Huang Ping china-cee.eu 2017/01 Start of construction of the Baltic gas pipeline Recent weeks have focused economically on issues of fighting the pandemic and slowly quitting the introduced lockdown. However, despite objective difficulties, the Polish economy is looking for development opportunities, including the progress of international cooperation. The result of the efforts is the start of construction of the Baltic Pipe - one of the largest energy investments in the history of Poland. It is a gas pipeline from Norway to Denmark that is to help Poland become independent of gas supplies from Russia, main gas supplier for Poland and other EU countries. On May 4, 2020 Polish President Andrzej Duda announced that a set of permits had already been collected and the election of contractors completed. The construction of the gas pipeline is therefore expected to start in the second half of 2020, and the works are to be completed by the end of September 2022. The cost of the entire investment is almost EUR 1.5 bln, of which over half of the amount is to be covered by Polish operator Gaz-System. The genesis of the project The Baltic Pipe is an implemented system of gas pipelines connecting Norway, Denmark and Poland with a capacity of 10 billion m3 per year. It is a strategic infrastructure project aimed at creating a new natural gas supply corridor from Norwegian deposits to the Danish and Polish markets, as well as to neighbouring countries. The Baltic Pipe is defined as part of the Northern Gate project, i.e. the concept of full diversification of gas supplies to Poland. The current Baltic Pipe project is the third attempt to build a gas pipeline between the three countries. The first ended in fiasco in 2001 due to the lack of political support for its implementation by the government of the Democratic Left Alliance. The second attempt has been made since 2007 by the government of Law and Justice party (Prawo i Sprawiedliwość, PiS). At that time, the largest Polish gas company PGNiG (Polskie Górnictwo Naftowe i Gazownictwo, Polish Oil Mining and Gas Extraction) joined the project and acquired a free 15% stake in the consortium building the Skanled gas pipeline, which was to send gas from Norway to Sweden and Denmark, and its extension was to be the Baltic Pipe. However, the Skanled project was suspended in April 2009, which changed the whole context of the Baltic Pipe project. The Polish operator Gaz-System conditioned the 1 continuation of the project on obtaining EU funding. However, after gaining the funds for preparatory research in 2012, Gaz-System did not prioritize this investment, mainly due to the development of other diversification projects. Yet, after assuming power in 2015, the PiS government has defined the need to strengthen security of supply by diversifying transmission routes and gas source itself as a priority in gas policy. According to the authorities, this is a significant difference because the diversification of supply routes through the construction of connections with neighbouring countries does not constitute a full guarantee of supply - in a crisis, understood primarily as a cut off of Russian gas supplies for the entire region, Poland would not have a guarantee that neighbouring countries will have enough gas to meet the needs of Polish consumers. Obtaining direct access to an alternative source was so an answer to this problem. Since Norway is the only country with the potential to export gas in Europe except Russia, the Norwegian deposits, also due to their geographical proximity, were naturally considered as a strategic alternative to the gas purchased from Russian Gazprom. Over the following years, intensive work continued on developing a feasibility study and conducting economic tests, assessing the profitability of the project. In November 2018, transmission system operators of Poland and Denmark made positive investment decisions to implement the Baltic Pipe project, which was preceded by the signing of a Construction Agreement by Gaz-System and Danish Energinet. Energinet has also signed a similar agreement with the Norwegian operator Gassco for the Norwegian connection. On June 9, 2017, the Prime Ministers of Poland and Denmark, Beata Szydło and Lars Løkke Rasmussen, signed a memorandum on cooperation in implementing the project. From that moment, work on the construction of the gas pipeline has definitely accelerated. In 2019, the European Commission granted the project co-financing under the “Connecting Europe Facility” instrument for construction works in amount of almost EUR 215 mln. This was the next time the project was covered by EU support. The total amount of EU support granted to Baltic Pipe is EUR 266.8 mln. On April 30, 2020, Gaz-System signed an executive contract for the implementation of this investment with the Italian company Saipem Limited. Next, the Swedish government approved a substitute for the construction of the gas pipeline in Sweden’s exclusive economic 2 zone in the Baltic Sea. This means that all bureaucratic requirements on the way to implement this investment have been met. Polish side, primarily President Duda, Prime Minister Mateusz Morawiecki and Piotr Naimski, Government Plenipotentiary for Strategic Energy Infrastructure, announced the effects of negotiations at the beginning of May, indicating that this is a milestone on the road to becoming independent from gas supplies from Russia. What should the Baltic Pipe be? The project consists of five main components, creating so-called North Gate for the transport of liquid gas: 1. North Sea bottom gas pipeline connecting the Norwegian and Danish transmission systems, 2. expansion of the Danish transmission system, 3. gas compressor station on the Danish island of Zealand, 4. gas pipeline at the bottom of the Baltic Sea between Denmark and Poland, 5. expansion of the Polish transmission system. The gas pipeline has two indisputable benefits. First of all, it gives the access to Danish deposits in the North Sea. Secondly, it gives the access to the planned Skanled gas pipeline, which is to connect Norway, Denmark and Sweden. Especially the latter connection is to be important as the North Sea deposits are slowly depleting. Meanwhile, on the Norwegian shelf, Polish companies Lotos and PGNiG have their investments, so Baltic Pipe will also be able to import gas belonging to Polish companies. According to PGNiG’s plans, the company is to extract approximately 3 billion m3 of gas in Norway, so almost 1/3 of Baltic Pipe’s capacity (10 billion m3) could be used to import gas belonging to Polish companies. This makes the Baltic Pipe a very important element of Poland’s independence from Russian gas. Currently, the country consumes annually about 17 billion m3 of gas, of which about 4 billion m3 comes from domestic resources. Together with gas imported via the LNG terminal in Świnoujście (from the US and Qatar), Poland will be able, in theory, to completely meet domestic gas needs without Russian supplies - and even get a surplus of approximately 2 billion m3. At present, Poland is still being forced to buy gas from Russia. The Yamal contract, concluded in 1996 and valid until 2022, offers the purchase of 10.2 billion m3 of gas annually, 3 of which Poland is obliged to buy at least 85%. Yet, there were times when Russia did not fully comply with the contract, restricting gas supplies (September 2014-March 2015). Poland as a gas hub of Central Europe? The government plans to resell the surplus of imported gas to other countries. This in turn would make the country a gas hub, which is one of the crucial goals of the authorities. The cabinet of Mateusz Morawiecki hopes that Poland will achieve the position of a transit state not only on the East-West axis, but also on the North-South axis, which would allow to obtain significant income from being a gas trading location. It should be remembered that the key factor determining the implementation of this idea, however, is the price attractiveness of gas, not its origin. Without an attractive price offer, new gas pipelines will become empty. Yet, the Polish debate on natural gas is dominated not by a market perspective, where gas is considered in economic terms, but by the perspective of energy security, which means that investments in infrastructure, the shape of the market and contracts are determined by the geopolitical context. From the point of view of achieving the objectives of the government’s economic policy (including the expansion of Polish gas enterprises, for which the cost of obtaining gas is key to market competitiveness), only the economic context should count. To implement the idea of Poland as a gas hub, the cost of bringing gas must be competitive with the price at which companies from the CEE region can import gas from Russia, the German stock exchange or another source. This will only happen if commercial contracts signed by PGNiG with companies from Russia and Norway are competitive with contracts signed by other gas companies. At present, the price of gas bought from Gazprom and Qatargaz, is higher than the prices on Western Europe exchanges, which makes it necessary to revise the concept of PGNiG’s foreign expansion. The question remains about the market situation after 2022, when the Yamal contract will terminate. The construction of the Norwegian gas pipeline by this time should result in much more favourable conditions for gas imports from Russia after 2022, so if the Norwegian contract is attractive, the prospect of foreign expansion is open.