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Baltic Pipe delay to push Poland back into Russia’s arms

  • July 21, 2021

The Danish Environment and Food Appeals Committee on May 31 revoked an environmental permit for the Baltic Pipe project, due to fears over damage to local bat and mice populations. The permit was issued in July 2019 for the 210 kilometer (125-mile) -onshore section of the Baltic Pipe gas pipeline on Danish territory.

The pipeline is planned to link Norwegian gas fields with Polish consumers from October 2022. The move is a setback for Poland’s long-term and cross-party plans to shift away from dependence on Russian gas.

The longer and more controversial Nord Stream 2 gas pipeline that would bring Russian gas to Germany — the main reason why Warsaw has pushed so hard to finish the Baltic Pipe project — also struggled to gain permission to lay in Danish waters.

Observers say the delay also potentially gives Moscow leverage in future gas contract negotiations or could be used in talks about the construction of a so-called energy bridge linking any future nuclear production in the Russian exclave of Kaliningrad and the EU electricity market.

Warsaw-based think tank Polityka Insight has reported that Hungarian state-owned MVM is also interested in investing in the Kaliningrad project. 

“Russia will use the delay as leverage and could seek to push ahead with a project to build a nuclear plant in Kaliningrad and an energy bridge, linked to the EU electricity markets,” Robert Tomaszewski of Polityka Insight told DW. “Poland could be urged to join as a way of inducing preferable gas contracts,” he added.

Baltic Pipe is planned to link Norwegian gas fields with Polish consumers from October 2022

Looking away from Russia

The section of the pipeline is one of five intended to enable the transport of gas from Denmark’s west coast to south-east Zealand.

The Baltic Pipe project is a €1.6 billion–€2.1 billion ($1.9 billion–$2.5 billion) joint venture between Polish firm Gaz-System and Danish firm Energinet. It includes a 275 km-long Baltic Sea pipeline between Poland and Denmark and a connection to Norway’s Europe II pipeline in the North Sea.

The 10.2 billion cubic meter (bcm) a year-capacity pipeline was slated to be completed by October 2022, just before Poland’s state-controlled oil and gas company PGNiG’s long-term import contract with Russia’s Gazprom is slated to expire. 

Supply diversification away from Russian gas has been Poland’s long-stated aim, prompting it to develop LNG (liquified natural gas) terminals and other interconnections.

At the start of 2018, PGNiG signed agreements with Gaz-System and Energinet for gas transmission services between 2022 and 2037 worth 8.1 billion zlotys (€1.8 billion, $2.1 billion).

Poland has an annual consumption of about 20 bcm of gas, a figure that is growing as the country shifts from coal to gas-powered power plants. PGNiG bought 9 bcm of Russian gas in 2020.

Bracing for delays

Initially, Energinet decided to suspend the construction but later said the Environmental Protection Agency had no objections to plans to resuming construction of part of the project on the Danish inland section. Energinet said it may start work on the overground line through the island of Zealand, the eastern part of the island of Funen and part of the overhead line from the west coast of Denmark to the Nybro gas terminal.

According to its estimates, the complete implementation of the Baltic Pipe project may be delayed by three months, but the company hopes to have full transmission capacity by the end of 2022.

PGNiG pivots

PGNiG CEO Pawel Majewski stressed that PGNiG is ready to continue buying gas from the East. “If the price is attractive, we can buy gas from that direction,” he said. 

Piotr Naimski — the government’s point man in the energy sector — is politically responsible for the pipeline and has for years made assurances that gas from Russia will not be needed in Poland after 2022.

Russia, in the meantime, remains open to continue supplying Poland. “Poland is our reliable counterparty with which we cooperate a lot,” Gazprom Export chief Elena Burmistrova said last month.

The delay to the pipeline has caused concern among some observers, including the US. “We were disturbed to see the stoppage to that [Baltic Pipe] project on environmental grounds,” Matthew Boyse, Deputy Assistant Secretary at the US State Department, said during an Atlantic Council webinar.

“The expectation is that the permits will be back on track and there will only be a 3-month delay. This will result in additional costs; I saw those reported at about €80 million,” Anna Mikulska from the Center for Energy Studies at Rice University told DW. 

According to Prime Minister Mateusz Morawiecki, the pipeline could be delayed by six months.

Marian Kaagh, vice president of projects at Energinet, said the Environmental Protection Agency estimates that it will take 7-8 months to obtain a new environmental decision.

Poland will stay on its gas supplies diversification course and should not have to rely on Russian gas after 2022, Mateusz Kubiak, an oil and gas expert with Warsaw-based consultancy firm Esperis, told DW.

Others agreed. “Delays were expected and both Copenhagen and Warsaw want to finish the project. I think October 1, 2022 is a realistic deadline,”  Tomaszewski says.

Boosting LNG supply

According to SP Global Platts Analytics, Poland would need other pipelines to operate at full capacity or would likely be in the market for more Russian gas in the event that the Baltic Pipe project is delayed.

“LNG was already in our forecast model as being well used and the other routes’ current firm capacity is not an equal replacement for the Baltic Pipe,” it said, referring to existing flows from Germany, the Czech Republic and Ukraine.

“The Baltic Pipe delay would contribute to Polish gas balance tightness post-2022, but it is not the only factor — even if the pipe were to start as planned on November 1, 2022, only 2 bcm is understood to have been contracted to flow through it, that is just one-quarter of the booked capacity of 8 bcm,” Katja Yafimava from the Oxford Institute for Energy Studies, told DW. 

“It is difficult to see how this price would not be competitive—and therefore, attractive—as under the terms of Gazprom’s commitments to the EU made in 2018, Gazprom would not be able to sell its gas at the prices whose level would be divergent from those of western European hub prices,” Yafimava says.

Warsaw will likely then accelerate the expansion of the 5 bcm/year LNG terminal at the nortwest Baltic port of Swinoujscie, whose regasification capacity is to be increased to 6.2 bcm/year in 2022-2023 and further to 8.3 bcm/year from 2024.

PGNiG says Poland’s existing interconnectors already make it possible to satisfy a “significant part” of domestic gas demand with supplies from the south, the west and Ukraine. 

Polish Prime Minister Mateusz Morawiecki signed the Baltic Pipe Project in 2019

Mixed supplies

However, thanks to a diversified natural gas supply infrastructure, Poland will be able to substitute for potentially lost supply from the Baltic Pipe by buying spot or on a basis of short-term contracts, including with Gazprom, Mikulska says. 

“Those are and will be much more palatable for Poland, particularly given the fact that the prices will be much more competitive than Poland experienced under the Yamal [the existing gas pipeline linking Russia and Germany via Poland] contract,” she says.

The additional infrastructure will also give Poland bargaining power and make any contract terms reflect the realities of a competitive market rather than a contract negotiated under Gazprom’s position as a dominant supplier, Mikulska adds.

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