Natural Gas Supply in Europe, A Case Study of Poland

by Pierre Jouvellier

In the ENERPO Newsletter from September 25, 2015, Lina Nagell and Henrik Vorloeper reported on the progress of the new LNG terminal in Poland: “The LNG terminal at Swinoujscie is likely to reach full capacity in 2018. Jan Chadam, head of state-owned Polskie LNG, which will operate the terminal, said he is confident in securing more supply contracts to push the terminal to close to its full capacity of 5 bcm by 2018. The project is part of Poland’s attempt to diversify gas imports and to achieve independence on Russia”. The statement of Chadem seems to be a political one. I decided to make some calculations and see if the terminal would allow for competitive alternative supplies.

European Gas Strategy : A Brief Characteristic

According to the European commission, the EU imports 53% of the energy it consumes. Import dependence for natural gas is higher; 66% of Europe’s natural gas is imported. 39% of imported gas is coming from Russia. It is often argued that European dependence on Russian supplies is a security of supply concern.

The degree of dependence differs throughout Europe: Western European countries such as France, United Kingdom and Italy are   less dependent than Central and Eastern European countries. This difference can be explained by energy mixes and energy policy choices. For instance, France primarily uses nuclear plants for electricity generation, while Poland and Germany have to rely on coal and natural gas in this sector.

In terms of supply options, 85% of Europe’s gas imports are delivered by pipelines: from Russia (160,6 bcm in 2014) and Algeria (25,5 bcm in 2014). The remaining 15% are brought in form of LNG from Qatar (23,7 bcm in 2014) and Nigeria (5,8 bcm in 2014).

LNG has been one of the top priorities for Europe in terms of diversification of supply options: the number of LNG receiving plants has considerably increased throughout the past decade in Spain, France, Belgium, the UK. Now Poland has joined this group. By building new LNG terminals, European buyers wants to take advantage of spot prices   and flexibility (both favourable for the buyer in conditions of LNG oversupply of the past years). An opportunity to decrease its dependence on Russian gas pipeline gas supplies is another justification.

In these conditions of integrating gas markets, lower demand outlook for European gas market and progress in liberalisation of the European gas market, could LNG imports actually become a viable solution to provide for flexibility of imports? To answer this question, let’s have a look at the Polish case.

Poland: A Case Study

According to Gazprom, “Poland is the oldest buyer of Russian gas and supply from Russia meets 60% of Polish demand for gas”. In 2014, 9,1 bcm were sold to Poland. Some of the stronger voices in favour of supply diversification are coming from Poland.

In order to evaluate the competitiveness of supplies to Poland, I have compared LNG deliveries from Qatar and pipeline deliveries from Russia.

For calculating the cost of LNG from Qatar, I used data from Nexant and ERI RAS: the cost of production at various fields, and standard liquefaction and regasification fares in Qatar and Świnoujście (est.) respectively. Then I used the transportation cost focmula for 98,5% vessel capacity, standard unit freight cost, as well as Suez transit. Depending on the source of gas, the final price in Poland after regasification at Świnoujście LNG terminal would vary vary between 3,50 and 6,31 USD per MMBtu. Considering that the current spot price of 6,95 USD per MMBtu (Oct 5, 2015, 11:01 EDT), this seems to be competitive (it is important to mention that rents/margins are not included in this calculation).

Regarding Russian gas pipeline supplies to Poland, I also used data from Nexant and ERI RAS on extraction (operational fields in Western Siberia as well as Nadym-Pur-Taz and Yamal) and transportation costs (UGSS and Nordstream). The cost of Russian pipeline supplies to Poland is between 2,53 and 5,14 USD per MMBtu, if we are adding the new fields with higher cost of extraction. It is striking that extraction   costs for Nadym-Pur-Taz and the rest of Yamal are so much higher than extraction costs in traditional fields in Western Siberia, that gas from some Russian fields brought to Poland by pipeline is more expensive than LNG delivered from e.g. North Field in Qatar.

Notably, the current price of Russian gas sold to Poland is 9,73 USD per MMBtu. This means that Russian gas from old fields is still very competitive from a cost perspective, but is sold at a price much higher than current spot price as well as possible cost-based gas brought via sea routes from Qatar.

What we may conclude overall is that the European gas market cannot only rely on LNG imports for several reasons: there is insufficient storage capacitiy; the number of LNG tankers is low; and the strategy of full reliance on the spot market is overall unwise. So obviously, Europe needs Russia to balance its gas demand. However, LNG trade, the decrease of gas demand in Europe (among other factors caused by accelerated introduction of renewables), and the European will for diversification of gas supply routes can significantly reduce Russia’s market share. Russia, whose export dynamics heavily depends on European demand, has to penetrate new markets such as China in order to secure its gas export income.