Poland’s first LNG terminal opens to fanfare but faces tough times

Poland’s first LNG terminal opens to fanfare but faces tough times
Swinoujscie LNG terminal.
By William Conroy in Prague June 20, 2016

Amid much fanfare, Poland on June 18 celebrated the commercial launch of Central and Eastern Europe’s first liquefied natural gas (LNG) terminal. But behind the scenes Polskie LNG executives know only too well that the terminal, located in the Baltic Sea port of Swinoujscie, had endured a rough start and faces an exacting future.

The rhetoric and triumphalism were a tad predictable. “Energy security is sovereignty and the first element of building this sovereignty was the idea of creating a gas terminal in Poland,” declared Polish President Andrzej Duda at the launch ceremony of the LNG regasification terminal. The occasion saw the facility named after the late Polish president Lech Kaczynski, whom Duda hailed as a “visionary”. Polish press commentators, meanwhile, saw the breakthrough as the start of a “gas revolution”. Some appraised the LNG terminal as a radical advance in the country’s decades-old ambition of showing some muscle to counter Russia’s menacing use of its gas supply dominance as a geopolitical weapon. 

However, the figures tell a slightly less impressive story. The day before the ceremony saw the arrival of the terminal’s first commercial LNG shipment. Once regasified, the chilled gas cargo of 206,000 tonnes, delivered under a 20-year contract between Qatargas and Polish monopolistic state gas company PGNiG, will translate into 124mn cubic metres of gas for the national grid. Taking Poland’s gas consumption as around 15bn cubic metres a year (cm/y), that’s less than 1%. Qatargas is contracted to deliver 1.4bn cm/y to Swinoujscie. The regas facility, with a capacity of 5bn cm/y, is looking to make up the difference with spot cargoes. And there lies the rub. 

“The last few months saw tenders put out [by PGNiG] for five spot cargoes for June-July delivery to the terminal. They ended up securing just one,” notes Peter Zeniewski, an analyst with the energy consultancy Wood Mackenzie. “Polskie LNG will have difficulties attracting spot cargoes over better-connected yet under-utilised terminals in North West Europe with cheaper regas tariffs. This partly explains the lack of interest in holding long-term capacity at Polskie LNG.”

bne IntelliNews spoke to five analysts prior to day one of the terminal’s commercial life. Each quickly drew attention to the politically driven nature of the €720mn project. To Polish patriots pushing the cardinal and sensitive theme of energy security, naming the infrastructure after Kaczynski has some poignancy: Kaczynski perished in April 2010 when his plane came down in thick fog in Smolensk, western Russia, in a tragedy many in the ruling Law and Justice party still assert was caused by Kremlin sabotage. But it was the then-serving head of state who in 2006 promoted the LNG terminal project in response to the 2005-06 Russia-Ukraine gas dispute, which saw the former cut off pipeline supplies to the latter.

“The US and Australia are ramping up LNG exports and we’re predicting a large world oversupply… [so] the Polskie LNG terminal is a tough sell for volumes,” remarks Zeniewski.

The LNG terminals in North West Europe are much maturer, larger business hubs and unlike the small newcomer can achieve substantial “arbitrage on the price differentials”, Zeniewski notes. “But all that said, an argument is being made among energy analysts on the negotiating power the terminal gives Poland.”

Indeed, as early as May Warsaw showed Moscow it means business. Complaining that Poland paid the highest price in Europe for Russian gas, Piotr Naimski, the deputy economy minister in charge of strategic Polish energy infrastructure, said the government was minded not to extend its long-term Yamal pipeline gas contract with Russia’s Gazprom when it expires in 2022.

“Yes, the terminal is a political and business project,” acknowledges Tomasz Pietrasienski, spokesperson for Gaz-System, the state-owned gas transmission operator and parent company of Polskie LNG. “But to us it is a good business and with supply diversification thanks to LNG we expect consumer gas prices will go lower.” The negotiating weight that would eventuate from the terminal meant it would in no way rebound on the taxpayer, although that was for the politicians to discuss, he adds.

Tamas Pletser, a Budapest-based oil and gas analyst at Erste Bank Group, is also upbeat on the terminal’s prospects. “Looking at LNG market development, this might even work out on commercial terms,” he says. He even foresees a possible scenario in which “Poland could completely turn off the Eastern supply” should the country succeed in building the Baltic Pipe gas pipeline linking PGNiG’s Norwegian Continental Shelf production assets to Poland via Denmark.

Gazprom responds

Very conscious of the imminent Polish move into LNG, on May 31 Gazprom Deputy Chief Executive Officer Alexander Medvedev told Bloomberg in Moscow that Poland – his company’s fifth biggest EU customer – should realise that Russian piped gas would always be cheaper. Referencing an Alexander Pushkin story, Medvedev cautioned: “There is a well-known fairy-tale about an old woman who asked a golden fish to turn her into a Sea Empress, but in the end she found herself back with her broken washtub in front of her.”

To Tomasz Kasowicz, analyst at the brokerage of Poland’s Bank Zachodni WBK, the political brinksmanship is only to be expected, as is some form of more flexible long-term gas supply arrangement between Poland and Russia come 2022. “It will depend on the [available] portfolio mix, but it would be a stupidity to resign altogether from Russian gas supplies,” he says.

Poland, meanwhile, is enjoying its new bargaining chip – and it’s pushing for more. “Northern Corridor” interconnectors will allow the country to pump LNG deliveries right across Central Europe, says the government.

And with the party of the late president back in power, the right-wing and Russia-wary government is already mulling a second LNG regas terminal, a floating facility similar to one that neighbouring Lithuania opened in 2014, a development that ended the Baltic state’s full dependence on Russian gas.

At the same time, Lithuania has struggled to make its platform work commercially, and has provoked the ire of major gas consumers, who have been forced to pay a special charge to support its operation. Polish officials announced on June 20 that a similar levy is being mulled in Warsaw.

"We are working on socializing the costs of terminal," deputy Energy Minister Michal Kurtyka said, according to PAP. The government plans to present a bill that will spread the cost of LNG terminal operations on all users starting next year.