Poland wins Gazprom fight over gas prices

By bne IntelliNews November 7, 2012

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Poland secured an apparent victory on November 6 as it became the latest European customer to win an agreement to amend the price formula for its imports of Russian gas. Coming on top of other recent victories by EU countries backed by pressure from Brussels, Poland's success could see more Central and Eastern European states join the push against Gazprom.

Offering scant detail, the Russian state energy giant announced the new formula takes into account "current market prices for gas and oil products." Poland announced it will drop the arbitration case it has filed in Stockholm against the pricing formula in a contract started in 1996 and extended in 2011. The new terms and conditions "reflect changes that have occurred on the European gas market in recent years," Polish state-monopoly PGNiG said in a statement. "As a result, the negotiated pricing formula will also reflect current market prices of gas."

Gazprom added that the amended contract "doesn't question the fundamental principle of the natural-gas trade long-term contracts, the principle of 'take or pay' and the link to oil product prices," insisting that a spot price component will not be introduced. PGNiG said the adjustment will be retroactive for 2011-2012, and add as much as PLN3bn (€728m) to its 2012 operating profit. It will allow it to sell gas to the Polish market profitably, without having to push through in its long-winded battle with the country's regulator over domestic tariffs.

"We found a mutually beneficial mechanism to amend the price of Russia gas, which reflects in a flexible way certain changes that have happened on the gas market in Poland and Europe," said Gazprom's deputy chairman Alexander Medvedev, according to the Wall Street Journal. "The agreements reached confirmed that reliable partners can always find mutually beneficial solutions that maintain a balance of interests."

Alongside many other major European consumers, Poland has been pushing for a change to the pricing formula since the 2008 crisis, which together with the rise of US shale gas has fundamentally changed the European gas market. However, Gazprom's contracts link prices to oil, which has remained at elevated levels, making contracted gas far more expensive than spot gas prices. The take-or-pay element means customers are contracted to pay for certain volumes of gas whether or not they use it.

Gazprom granted a handful of Western European customers - including Germany's E.ON and France's GDF Suez - a price adjustment last year, a move which saw it hand back $2.4bn in the first quarter, with another $1.28bn due by the end of the year. However, states in the eastern end of the EU are far more dependent on Russian gas, and until now, apart from Slovakia, have failed to gain any breaks from the Russian company.

That sees many CEE states paying more for gas than their richer peers to the west, prompting countries such as Poland and Lithuania to accelerate efforts to push Gazprom into lowering prices. Poland, which buys 70% of the gas it imports directly from Gazprom, launched its arbitration suit early this year. "Our country, as a recipient of Russian gas, is from today treated on par with other partners of Gazprom in Western Europe," proclaimed Polish Treasury Minister Mikolaj Budzanowski in a statement. "It's a historic chance for the Polish economy. It's a chance to increase our competitive advantage versus other European economies."

Poland is also pushing to develop its own shale gas reserves (estimated as having the potential to satisfy domestic demand for decades), is building connecting pipelines to import gas from Germany and the Czech Republic, and plans an liquified natural gas (LNG) terminal on the Baltic Coast. Budzanowski claimed that the new deal with Gazprom will only help drive those projects faster. "The agreement means that a strategic company of the treasury, thanks to billions of zlotys saved, will restore profitability and will be able to significantly increase investments in search and production of gas," he said.

The minister also said that Polish consumers will now pay the lowest gas bills in the region, and indeed the news of Poland's success will only encourage others, who are already seeking to press home an advantage since the European Commission launched a probe into Gazprom over alleged abuse of its dominant market position in Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia in September.

Lithuania announced on October 3 that it has filed an international lawsuit against the Russian exporter, seeking €1.45bn in compensation for over-priced gas supplies since 2004. It's likely that others could be tempted to apply to the Sweden-based arbitration panel in the wake of the Polish deal. Czech distributor RWE Transgas won a landmark court ruling stating it does not have to pay fines due under the take-or-pay clause in its Gazprom contract last month. At the same time, other suppliers using long-term contracts in Europe such as Norway, Qatar and Azerbaijan could also face pressure.

Meanwhile, there are hints that agreement could offer to make life easier for other Russian commercial interests in Poland, following suggestions that recent acquisition bids have been blocked by Warsaw. State-controlled Sberbank and chemicals maker Acron have both failed to seal purchases in the country this year. "The agreement demonstrates that Gazprom and PGNiG are capable of finding, through business negotiations, a win-win solution that satisfies the interests of both parties," PGNiG CEO Grazyna Piotrowska-Oliwa said.

Radoslaw Dudzinski, a PGNiG vice-president, insisted that goodwill between his company and Gazprom has now risen and that the Russian giant could even consider co-financing Polish infrastructure projects. The official mentioned a new gas-fired power plant project as well as the second line of the Yamal-Europe gas pipeline that runs through Belarus and Poland to Germany, as potential points of cooperation.

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