Poland is working to diversify away from Russian energy supplies through near-term liquefied natural gas (LNG) import terminal construction and long-term shale natural gas development. But two additional developments will affect Russia's position in Poland's (and, by extension, Europe's) energy sector: the renegotiation of natural gas prices with Russia by major European energy companies and implementation of the EU Third Energy Package.
Pricing Negotiations
Changes in Western Europe's energy picture have forced Russia to re-evaluate its pricing structure with many of Europe's leading energy firms. In 2010-2011, the majority of Russian state-owned energy company Gazprom's Western European customers renegotiated their natural gas contracts, and several companies — including Germany's Wingas, France's GDF Suez, Austria's Econgas, Italy's Sinergie Italiane and Slovakia's Slovensky Plynarensky Priemysel — obtained discounts early in 2012. Stratfor sources in Moscow say some firms are paying in the low $300s per thousand cubic meters (tcm), while the average price in Western Europe reportedly dropped below $410 per tcm in January.
However, with the exception of Slovakia, most Central and Eastern European countries have not enjoyed this discount. The region does not have the bargaining power of Western Europe, so Gazprom is less likely to compromise. For example, Polish state-owned natural gas firm PGNiG pays an estimated $500 per tcm, approximately 25 percent more than the estimated average price charged by Gazprom in Western Europe. Until Poland's LNG terminal in Swinoujscie is completed, PGNiG will not have as much leverage as Western European companies (nor the friendly relationship with Russia of Slovakia, which benefits from its status as a major distribution hub).
In November 2011, PGNiG sought to change its contract with Gazprom through an arbitration court in Stockholm. Other energy suppliers have pursued this course; Italy's Edison won a case in June 2011 that saved the company approximately $200 million per year. However, Gazprom recently said it could lower prices by 7-10 percent in exchange for larger purchases from customers, including PGNiG. Despite its application to the court, PGNiG has said it is willing to negotiate with Gazprom over this latest proposal. The push and pull between Russia and Poland over natural gas will be quite visible in the near future.
The Third Energy Package
The European Union's Third Energy Package unbundles energy production, transportation and sales, and it, too, is affecting European energy dynamics. The union wants both Russian and European energy producers to allow independent producers access to energy infrastructure in order to spur competition and lower prices. The package also has a geopolitical purpose: to break Gazprom's hold over European energy supplies and distribution. To achieve this, it will encourage European and Russian competitors to force Gazprom to give up its exclusive access to Europe's main natural gas pipelines.
The primary effect in Poland of Third Energy Package implementation relates to PGNiG, which has a dominant position in the natural gas sector, and the Yamal pipeline. This process began when Polish State Treasury-owned Gaz-System assumed the rights to operate the Yamal pipeline from EuRoPol Gaz in October 2010, and Poland announced plans to prepare several rules for nondiscriminatory access to the pipeline, as required by the EU Energy Commission. These rules require expanded use of "existing cross-border capacity by new market players" and the construction of new natural gas interconnectors and LNG degasification facilities. Energy plans such as the construction of interconnectors between Poland and the Czech Republic and Slovakia — as well as the Baltic region's plans to construct another LNG terminal — are important to watch, though these plans face many obstacles and full implementation is not expected for another two to three years.
Outlook
2014 will be a key year in Poland's relationship with Russia, since that is when Poland will begin weaning itself from Russian natural gas via its LNG import terminal. In the longer term, shale natural gas development could also radically change Poland's energy situation, but it is still unclear whether shale natural gas will be the boon Warsaw hopes.
In the meantime, the next two years will be marked by negotiations between Poland and Russia over pricing disputes and the complex implementation of the Third Energy Package. Poland will also explore other future energy projects, such as a Poland-Lithuania pipeline and shale natural gas development in the Baltics.
Moscow is well aware of Warsaw's energy strategy, and the Russians will work to counter Poland's diversification efforts and maintain its leverage in the country. Russia could compromise with more favorable natural gas prices, which would still give Gazprom hefty profits while retaining some strategic value for Russia. But Russia could also develop a more aggressive energy policy toward Poland and the region and work to undermine their energy diversification plans in other ways.
Poland does not make up a large part of Russia's energy export market, but it is a strategic part. Elsewhere in Europe, Russia is deploying its strategy and tactics (such as construction of the Nord Stream and South Stream pipelines and the purchasing of utility companies in downstream markets) to solidify its position in the European energy sector as much as possible. Several factors will determine which country can employ a more effective energy strategy. The result could have implications that reach far beyond the realm of energy.
