Nicholas Watson in Prague -

Germany is causing a bit of a stink in Central Europe with its decision at the end of August to vote against an €80m EU subsidy toward building a terminal to receive liquefied natural gas (LNG) gas at the port of Swinoujscie near the German border in northwest Poland.

Ostensibly, Germany's concerns centre on the environmental impact of the LNG terminal, arguing that exhaust fumes from the terminal could pollute the environment on the other side of the border as well, something that would contradict the environmental impact analysis performed by Poland's state-owned gas transmission system operator, Gaz-System, which owns the terminal operator Polskie LNG. "Our analysis shows that the investment will not have a cross-border impact," Malgorzata Polkowska, a spokeswoman for Gaz-System, told Polish daily Dziennik Gazeta Prawna.

As is its right under the United Nations Economic Commission for Europe's "Espoo Convention", Germany is demanding a cross-border environmental impact study, which, Poland's deputy finance minister Mikolaj Budzanowski was quoted by newswires as saying on August 30, would invalidate the terminal's construction permit and the environmental decisions, and delay construction, due to start in September, by at least two to three years.

Perhaps not coincidentally, this review of the potential cross-border impacts under the Espoo Covention is the same means that Poland has used to try to hold up construction of the Russian-German Nord Stream gas pipeline, which is why so many Poles are questioning Berlin's real motivations for blocking the subsidy.

Nord dream

In January, Gazprom started building the first pumping station at the mouth of the first of two parallel pipes that will run from northwest Russia to Germany, carrying a total of 55bn cubic metres per year (cm/y) of Siberian gas from 2011 into the heart of Europe without having to cross those - in Russia's view - troublesome transit countries like Ukraine and Poland. This is a big victory for Russia, which was forced to spend more than $130m in surveys and route planning, as well as national environmental-impact assessments in the Baltic Sea region to secure permission to build the Nord Stream undersea pipeline.

However, doubts have already been cast on the economic viability of Nord Stream, which is being built by a consortium of Gazprom, Germany's E.On and BASF/Wintershall, the Dutch Gasunie and France's GDF Suez. The cost of building the pipeline has grown from €4.5bn ($6bn) to €7.4bn, at a time when demand for gas in the EU is falling due to the economic downturn (European gas demand fell by around 6.4% in 2009, according to Eurogas) and competition to piped gas is growing from alternative sources such as LNG and unconventional gas.

Hence suspicions amongst Polish analysts and the local press that Germany's fears are less about the environmental impact and more about the impact the terminal could have on its pipeline.

The Swinoujscie LNG terminal is planned to be operational by 2014 and will have an initial annual capacity of 5bn cm/y of gas (from Qatar, among others), with the possibility of expanding that to 7.5bn cm. Given Poland currently consumes 13bn-14bn cm/y of gas, of which 4bn comes from domestic fields and the rest from Russian imports, in one fell swoop it would become almost wholly independent of Russian gas.

Polish fears about Germany's real reason for blocking the grant "seem credible and unsurprising given the level of Russian influence in both Berlin and Brussels," says Marek Matraszek, founding partner of CEC Government Relations in Warsaw. "It is to [Russian Prime Minister Vladimir] Putin that I would look as the ultimate 'sponsor' of this initiative.

Even so, analysts say it should prove only a temporary stumbling block for Polskie LNG, which in July signed a €742m contract with a consortium led by Italy's Saipem to build the terminal. Deputy Finance Minister Budzanowski said Poland has already satisfied the concerns about the environmental impact with the European Commission, which is due to decide on whether to co-finance the LNG terminal by the end of September. In a worst-case scenario, Budzanowski told newswires Poland would consider building the terminal without EU funding.