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Prepared by the
Institute for the Analysis of Global Security

February 29, 2008
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Poland's energy security: Dealing with Russia

Dependence on Russian crude oil and natural gas as well as government control over the oil and gas sectors best summarize Poland's energy situation.

Poland is highly dependent on Russian crude oil and natural gas. Russian imports meet 95% and 45% of Poland's annual demand of 23 mln tonnes of oil and 14 bcm of gas respectively, while domestic oil and gas production stands at 4% and 30% of consumption.

The government plays a leading role in the oil and gas sectors. The Treasury possesses directly: 84.75% of shares and the golden share in the largest Polish gas company PGNiG S.A.; 10.20% and the golden share in the largest Polish oil company PKN ORLEN S.A.; 6.93% and the golden share in the second largest Polish oil company Grupa LOTOS S.A.; 100% in the Polish gas transmission system operator GAZ-SYSTEM S.A. and 100% in the Polish oil pipelines operator PERN "Przyjazn" S.A. The Treasury also possesses indirectly through the firm Nafta Polska S.A., 100% shares of which belong to the Treasury: 51.91% of shares in Grupa LOTOS, 17.32% in PKN ORLEN and 100% in the Polish petroleum logistic system operator OLPP Sp. z o.o.

Tense relations with Russia

Relations between Russia and the previous Polish government, that was in power from October 2005 to November 2007 and consisted of the Law and Justice Party, the Self-Defence Party (the party was in the government from May 2006 to July 2007) and the League of Polish Families (in government from May 2006 to August 2007) were tense. Several oil and gas issues also contributed to the tense relations.

The previous government viewed dependence on Russian oil and gas a serious threat to Poland's energy security because Russia openly admitted in its Energy Strategy to 2020 that oil and gas could be used to ensure Russiaís interests abroad. The Polish government's fears were intensified by disruptions in oil supplies from Russia to Poland in 2007 and disruptions in gas supplies in 2004 and 2006. Moreover, a refinery in Mazeikiu (Lithuania) purchased by ORLEN in 2006 also experienced disruptions in oil supplies from Russia. Russian companies were interested in purchasing the refinery but they lost to ORLEN. The refinery was purchased in May 2006 and in July 2006 the transport of Russian oil to Mazeikiu via the Friendship pipeline was stopped because Russians claimed that the pipeline needed urgent repairs. It is likely that the transport of Russian oil to Mazeikiu will not be resumed.

The Polish government strongly opposed the Russia's flagship project - the North European Gas Pipeline (NEGP). The government stated that the NEGP construction would diminish Russian oil and gas transport to Poland, therefore, it constituted a serious threat to Poland's energy security. Moreover, the government considered the NEGP an ecological threat to the Baltic Sea.

Diversification (2005-2007)

The previous government made diversification from Russian oil and gas a priority of its energy policy. As a result, several diversification projects were strongly supported by the government.

In October 2007 PERN "Przyjazn" (Poland), Ukrtransnafta (Ukraine), Klaipedos Nafta (Lithuania), GOGC (Georgia) and SOCAR (Azerbaijan) signed an agreement establishing a new consortium, Sarmatia, responsible for the Odessa-Brody-Plock-Gdansk project. The goal of the project is to transport oil from the Caspian Sea through Azerbaijan to the Supsa port (Georgia), then by oil tankers to Odessa (Ukraine), from Odessa via the Odessa-Brody (Ukraine) pipeline to Plock and Gdansk (Poland) and finally from Poland to European and international markets. The project is in the design phase. No contract for oil supplies from the Caspian Sea has been signed yet. The transport of oil from the Caspian Sea to Poland is expected to start in 2011. Beforehand, the Odessa-Brody pipeline will be expanded to Poland. The expansion works are expected to begin in 2009.

A letter of intent concerning the Baltic Pipe construction was signed between PGNiG and Energinet.dk in May 2007. Via the pipeline Norwegian gas would be transported from Denmark to Poland as well as Polish gas and probably also Russian gas to Denmark. The final decision on the Baltic Pipe construction will be made in 2008.

The project of PGNiG concerning the liquefied natural gas (LNG) terminal construction in Swinoujscie (Poland) is under way. The project is in the design phase. According to PGNiG, the investment execution phase could start in 2008 and finish by the end of 2010. No contract with suppliers of LNG has been signed yet. The final decision on the terminal construction will be made in 2008.

In October 2007 PGNiG purchased 15% interest in three exploration and production licenses in Skarv, Snadd and Idun fields in the Norwegian Continental Shelf. According to the Norwegian Petroleum Directorate, these fields are estimated to contain in total: 15 mln tonnes of crude oil and condensate, 5.8 mln tonnes of natural gas liquids and 35.8 bcm of natural gas. Oil and gas production from these fields is expected to begin in 2011.

In the February 2007 Policy of the Government of the Republic of Poland for the Petroleum Industry the previous government emphasized the need of the Polish oil companies to get access to oil fields abroad. However, in this area no significant project was implemented.

Russian fear factor

The previous government invoked the fear factor attached to potential significant involvement of Russian companies in the Polish oil and gas sectors as the reason to maintain government control over the sectors.

According to the March 2007 Policy of the Government of the Republic of Poland for the Gas Industry, the further privatization of PGNiG was stopped because the government feared that new shareholders would block the diversification projects.

The privatization of the petroleum industry also did not take place because the government was afraid of a hostile takeover. In the February 2007 Policy of the Government of the Republic of Poland for the Petroleum Industry it was stated that the actual shareholder structure of ORLEN and LOTOS prevented a hostile takeover of the Polish refinery industry.

Emergency stocks increased

The previous government paid much attention to the oil and gas emergency response systems. In October 2007 Poland was invited to participate in the International Energy Agency (IEA). Poland will become a member of the agency after the ratification of the Parliament. The main argument of the previous government in favor of the accession to the agency was that it would ensure oil supplies in case disruptions in oil supplies from Russia occurred. As a result of the accession, emergency stocks, a release of which is decided by the Minister of Economy, were increased.

At the moment, the oil emergency stocks in Poland equal 80 days of consumption of which 14 days worth are held by the government and 66 days by companies that produce or import crude oil, liquid fuels or liquid biofuels. By the end of 2008, the emergency stocks held by companies will increase to 76 days of consumption. As a result, the level of 90 days required by the IEA will be attained.

The IEA does not require its members to hold natural gas and LNG emergency stocks. However, the previous government decided that both natural gas and LNG are vital to Polandís energy security. As a result, the natural gas emergency stocks were increased and the LNG emergency stocks were created. The natural gas emergency stocks in Poland are held by companies that import natural gas and the LNG stocks by companies that produce or import LNG. Natural gas stocks equal 11 days of import and by the end of 2012 will increase to 30 days of import. LNG emergency stocks equal 3 days of consumption and by the end of 2009 will increase to 30 days of consumption.

The new government - a new energy policy?

In November 2007 the new government of the Civic Platform and the Polish People's Party was established. It has not published its energy policy yet. However, Donald Tusk, the new Prime Minister, introduced his government's general viewpoint on oil and gas issues.

It is likely that the new government will continue to support the diversification projects. Tusk admitted that his government highly appreciated some diversification projects supported by the previous government but added that some changes could be introduced.

It seems that the new government will change Polish policy towards Russia. Tusk said that his government would pay more attention to improving relations with Russia because the lack of dialogue was good neither for Poland nor Russia.

The new government may also diminish its control over the oil and gas sectors. Tusk announced that in Poland in 2008 there would be a rational decrease in the number of national companies.

Conclusions

While establishing its energy policy, the new government should take into account issues critical to Poland's energy security.

Good relations with Russia are of fundamental importance. Russia will remain the largest supplier of oil and gas to Poland for many years to come. For two years Russia has been perceived as an enemy and not as a partner. At the same time, other European countries signed a few important contracts with Russian companies, e.g. in November 2007 Eni S.p.A. and OAO Gazprom agreed to set up a joint venture for the pipeline construction that would transport Russian gas to Italy and Austria via Bulgaria.

Poland's energy security should not be solely contingent on supplies from Russia. It is critical for Poland's energy security to move the projects supported by the previous government from design to execution. For example, the Odessa-Brody-Plock-Gdansk project dates back to 1991 and since then the project has been limited to political negotiations and business plans.

Energy security is not only about reliable supplies but also about supplies at prices that will not endanger economic stability. Oil and gas supplies from Russia are cheaper than supplies from other countries. For example, oil supplies from Kuwait and Colombia purchased by LOTOS in 2006 and 2007 were much more expensive than supplies from Russia. Therefore, political and security factors of the diversification projects should be balanced with economic factors.

The emergency response system is vital to energy security. However, it is only a supplement to actions that ensure long-term reliable supplies.

The questions of whether government control over the oil and gas sectors in Poland improves or diminishes energy security should be considered. Andreas Golombek, the president of Lurgi S.A., an engineering company in the areas of the refinery and petrochemical industries, says: "Instead of long discussions on energy security, fast investment decisions should be made. The fast decisions could not be made by politicians but only by businessmen." However, the fear highlighted by the previous government regarding potential significant involvement of Russian companies in the Polish oil and gas sectors should not be neglected.

Adam Kopysc, oil and gas analyst.


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