Russia-Poland Energy Deal Prompts Threat of Legal Action

2010/10/31

STRATFOR

Summary

The European Commission on Oct. 29 threatened to take Poland to the European Court of Justice over an energy deal that calls for Poland to import more natural gas from Russia. The commission believes the deal violates an EU unbundling regulation, though Russia and Poland have said the agreement complies with the requirement. Russia is Poland’s only option in the short to medium term for natural gas supplies, and while the European Union wants to prevent a Russian energy monopoly, its efforts could be backfiring in Poland.

Analysis

Russia and Poland signed a new natural gas agreement Oct. 29 in Warsaw after months of negotiations and delays. The agreement calls for Poland’s imports of Russian natural gas to increase from 7.5 billion cubic meters (bcm) per year to more than 9 bcm and will be in effect from 2011-2022. In response, the European energy commissioner’s office has threatened to take Poland to the European Court of Justice if the agreement does not conform to the EU unbundling regulation, which requires that energy companies separate their production from transportation assets. With the Polish-Russian natural gas deal, the European Commission wants the Yamal-Europe pipeline, which carries Russian natural gas via Belarus to Poland and Germany, to be operated by an independent regulator.

The commission’s insistence that the deal between Poland and Russia conform to the EU unbundling regulation could sour Poland’s relationship with the commission. Until now, the Central European states have considered the commission a potential protector against a Russian energy monopoly. However, Warsaw has already expressed its displeasure at the commission for taking issue with the Russia deal, which brought Poland closer — at least in terms of a working relationship — to Russia.

The agreement between Russia and Poland primarily is a result of economics, rather than politics. Poland’s economy has continued growing, and so has its energy consumption. Furthermore, Warsaw expects to become more reliant on natural gas as it attempts to conform to EU environmental standards that likely will force it to stop using coal for electricity generation. Poland therefore needs more natural gas, and it has turned to Russia, which is a major natural gas provider to Poland and many other Central European countries, to increase its supplies. While Poland has reasons to be wary of becoming even more dependent on Moscow for energy and has touted diversifying away from Russian energy, finding a comparable energy source simply cannot be done immediately. Until Poland’s shale gas development (still in its infancy) and plans to build a liquefied natural gas plant (expected in 2014) come online, Poland will continue to rely on natural gas — which means it will continue to rely on Russia.

But the European Union has been extremely hesitant to accept this deal on the terms it was made. The union wants energy producers — both Russian and European — to allow independent producers access to energy infrastructure in order to spur competition and lower prices. A geopolitical purpose behind the legislation is to break Gazprom’s monopoly by encouraging competitors not only in Europe but also in Russia by forcing Gazprom to give up its exclusive right to pump natural gas through Europe’s main pipelines. The Yamal-Europe pipeline is jointly operated within Poland by Gazprom via a subsidiary, EuRoPol Gaz, and the Polish Oil and Gas Company (PGNiG). Gazprom and PGNiG each own a 48 percent stake in EuRoPol Gaz, and 4 percent ownership is in the hands of a Polish investor. The EU unbundling regulation therefore requires EuRoPol Gaz to give control of Yamal-Europe to Gaz Systema, a Polish independent operator in charge of overseeing access to the Polish natural gas pipeline network owned by the Polish Treasury.

Both Russian and Polish officials announced Oct. 29 that the new deal conforms to EU demands. However, the European Commission has said it cannot verify this until it sees the contract and if it does not see the contract, along with details of how Gaz Systema would regulate the Yamal-Europe pipeline, it will pursue legal action against Warsaw. The commission’s reaction might have been prompted not by the lack of details on the agreement, but by comments EuRoPol Gaz CEO Miroslaw Dobrut made Oct. 27 indicating that Gaz Systema would only regulate whatever capacity is left in Yamal-Europe that is not already used up by Gazprom’s shipments. When asked how much excess capacity there is now, Dobrut said there was none. This is certainly very different from what the EU believes Gaz Systema should be doing, which is allowing third-party producers access to the pipeline. From Gazprom’s perspective, however, giving up control of a pipeline that it invested $15.6 billion in during the 1990s not only makes little business sense, it is tantamount to private property appropriation. And for Warsaw, the commission’s demands are detrimental if compliance means that Poland will get no natural gas.

Poland and Russia have therefore chosen to work around the EU demand. The question is now how far the European Commission wants to take its fight with Russia’s Gazprom and a sizeable EU member state. Warsaw is already irked by EU involvement in the deal. On more than one occasion, Polish officials have pointed out that Germany’s deal with Gazprom over NordStream has not received the same level of scrutiny from the European Union. Essentially, Poland is beginning to see the union not as an ally in its efforts to become energy independent but as a nuisance. Meanwhile, Russia has been accommodating during the negotiations, even choosing to extend natural gas shipments past an Oct. 20 deadline as another sign of the “charm offensive” aimed at Warsaw. Also, Russian oil company Rosneft expressed interest on Oct. 29 of investing in the privatization of Polish energy companies.

In the short to medium term, Poland has no alternative to Russian natural gas. This puts Warsaw in a vulnerable position, and Poland does not need the European Union making it any more vulnerable. Ironically, Brussels’ efforts to break Gazprom’s monopoly could be turning Poland into an appreciative Russian energy customer.

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