The Politicization Of European Gas

In April, the EU awarded two sets of funds designed to strengthen Polish gas security. It granted €128 million ($144 million) from the European Regional Development Fund for the expansion of the Swinoujscie LNG plant, and €243 million for the construction of the Baltic Pipe gas pipeline, which will connect Poland with Norwegian gas supplies.

The LNG plant expansion will raise Polish LNG import capacity from 5.0 to 7.5 Bcm a year, while Baltic Pipe will provide an import capacity of 10 Bcm/yr. Given domestic gas production of around 4 Bcm/yr and planned increases, by 2023, Poland should be able to meet all its gas demand from non-Russian sources, ending the need to renew its current contract with Russia's Gazprom, which expires in October 2022.

Poland is also developing new or expanded interconnections with Lithuania, Slovakia, Ukraine and the Czech Republic. The planned Lithuania-Poland pipeline will open a second route for LNG imports into Poland and perhaps beyond via Lithuania's 4.1 Bcm/yr Klaipeda LNG import terminal.

Gazprom will have lost the minor Baltic states' gas markets and about 11 Bcm of exports to Poland, in addition to the loss of the Ukraine market, which imported no Russian gas last year for its own use. Formerly, Ukraine imported more than 30 Bcm/yr of Russian gas.

LNG imports

LNG - notably US LNG - will be a major means of replacing Russian gas. Poland's national gas company PGNiG has existing contracts for 2.7 Bcm of long-term LNG imports from Qatar and in the last year signed for a total 9 Bcm of additional long-term contract gas with US LNG project developers Venture Global, Cheniere and Sempra Energy.

To meet these future commitments, Poland is considering the construction of a second LNG import terminal in the Bay of Gdansk for around 2024-25, with a capacity of 4.1-8.2 Bcm/yr. Another option would be a further expansion of Swinoujscie's regas capacity to 10 Bcm/yr.

In reality, PGNiG's LNG commitments in the medium term are lower, as most of these deals rest on the construction of US LNG projects which have yet to receive final investment decisions. PGNiG is committed to 3.4 Bcm of LNG up to 2022 and then 4.7 Bcm from 2023. The additional 5.44 Bcm depends on the construction of the Calcasieu Pass, Plaquemines and Port Arthur LNG projects.

Pipeline politics

Baltic Pipe is expected to be complete in 2022 and has received strong support from the European Commission in contrast to the concerns expressed over Russia's Nord Stream II pipeline, which suffered its latest delay in March when Denmark - a key partner in the Baltic Pipe project - asked Gazprom to consider a different route through Danish waters.

While the 55 Bcm Nord Stream II pipe has faced substantial hostility, the bi-directional Baltic Pipe, which will connect with Norway's EuroPipe II and run through Denmark to Poland, was designated as a Project of Common European Interest, widening the subsidies it could receive. The contrast in fortunes between the two pipelines reflects the politicization of gas transportation infrastructure in Europe.

Projects similar to Baltic Pipe failed three times in the past because no economic case for a pipeline could be established. Russian gas piped to Poland via existing infrastructure can be priced lower than either imported LNG or gas piped via new infrastructure from Norway. Moreover, Poland is already connected to Norwegian gas supplies via Germany's GasPool hub and investing in greater flow capacity from Germany to Poland along the existing route would be a cheaper option than the $1.5 billion to be spent on Baltic Pipe.

Baltic Pipe's bidirectionality makes little sense either as it is hard to imagine a scenario in which the flow of gas might be reversed. Denmark is expected to remain a small gas exporter itself until 2035, becoming an importer only in 2020-22 while the Tyra platform is reconstructed. Baltic Pipe won't, in any case, be complete until the end of this period. Nonetheless, part of the justification for the project was that it will allow Denmark and Sweden access to LNG via Swinoujscie.

A further weakness in the project is its tie-in to Norway's EuroPipe II, which implies that throughput through the northern part of the currently 25 Bcm/yr EuroPipe II can be increased and that Norway can raise its own output to fill the extra capacity. Investment may also be required for additional capacity at the Karsto gas processing plant.

However, Norway's Petroleum Directorate (NPD) earlier this year forecast gas production in 2019 at 119.5 Bcm, rising to a peak of 121.4 Bcm in 2022. Norway's gas transportation system has a capacity of about 120 Bcm a year, while the Snohvit LNG plant has a capacity of 5.7 Bcm/yr, implying little excess to spare. The NPD added that while production would be high and stable over the next five years, resource growth was not sufficient to maintain high levels of output after 2025.

The calculation must be that the existence of spare transportation capacity will stimulate offshore exploration. Norway's gas transmission company Gassco has approved and will take responsibility for the spur line from EuroPipe II to Denmark.

But if there is no extra gas and no additional capacity via EuroPipe II, Baltic Pipe will only serve to divert Norwegian gas supplies to Poland and away from the German market, as EuroPipe II makes landfall at Dornum in Germany. This, ironically, would only make the case for Nord Stream II, which will also make landfall in Germany, stronger, particularly as output from the Netherlands' giant Groningen field falls. Poland hopes that it can build a gas hub for central and eastern Europe based on multiple entry points, but a hub will only evolve if the market need for it exists - and the only market in Poland is currently the highly-politicized buying strategy of PGNiG.