Poland: Putting Politics and Security before Economics

Summary

Polish natural gas monopoly PGNiG has announced that it is purchasing ExxonMobil Corp.'s stake in three exploration licenses off the Norwegian coast. The move, along with other plans currently being negotiated, clearly indicates that the Kaczynski government is moving to cut Poland's dependence on Russian natural gas supplies. As relations between the countries continue to deteriorate, the move also shows that the Poles -- like the Russians -- are willing to make deals based not on economic costs, but on politics and security.

Analysis

Poland's state-owned natural gas monopoly PGNiG announced March 1 it is purchasing ExxonMobil Corp.'s 15 percent stake in three exploration licenses off Norway's coast. As part of the agreement, Poland has a right to a percentage of the natural gas produced in the fields. This deal, along with a few others that are currently in the works -- including a planned liquefied natural gas terminal in Gdansk and a planned pipeline from Norway to Poland -- is a clear sign that the Kaczynski government is moving to cut Poland's dependence on Russian natural gas supplies. Moreover, given the government's vehement feelings toward all things Russian, the move shows that the Poles are willing to put politics and security ahead of economics.

Poland is purchasing ExxonMobil's stakes in the Skarv and Snadd fields on Norway's continental shelf, entering into a consortium with BP, Royal Dutch/Shell, Norway's Statoil and Norsk Hydro. It is PGNiG's first international acquisition in the upstream sector, and it will be good experience for the firm. The fields, which already are being developed, are estimated to hold 36 billion cubic meters (bcm) of natural gas -- and Poland has opted to secure a percentage of those supplies for itself.

Poland imports approximately half of its 13 bcm annual consumption of natural gas from Russia, with the rest coming from domestic production. The Russo-Polish relationship, however, has been deteriorating since the passionately anti-Russian Kaczynski twins took office as president and prime minister in 2005 and 2006. Once in office, the twins led a witch hunt to root out any communists and their sympathizers, replaced much of the Cabinet (many times), scrapped the Soviet-era intelligence community and began negotiations with the United States over a missile defense base in Poland.

During this time, the relationship between Poland and Russia has deteriorated -- and the tit-for-tat list of actions has grown. Russia, for example, has erected trade barriers against Polish agricultural products, while Poland has sabotaged the European Union's relationship with Russia by vetoing any potential agreements between the two.

In the energy sector, Russia's Gazprom suspended cooperation with PGNiG on the Yamal-Europe pipeline because Poland rebuffed Gazprom's request for lower transit fees. Russia also has plans for large and expensive projects that would strategically send their supplies to friendlier neighbors. One such project is a large natural gas pipeline, Nord Stream, through the Baltic Sea to Germany, completely bypassing Poland -- which vehemently opposes the line. Costs for this project, however, are estimated at $5 billion (the Russians say $3 billion) and it remains undecided who will front this money. So far, Russia has been able to maintain the upper hand in the feud because it controls such a large portion of Poland's energy supplies. That, however, is precisely the situation the Kaczynskis are taking steps to alter.

Poland also is in talks with the Norwegian government to build a pipeline from natural gas fields off the Norwegian coast to Poland via Denmark. On one hand, there already is considerable infrastructure linking Norwegian fields to Denmark, so the lines would just need to be continued on to Poland. PGNiG, however, lacks experience in this type of technology and would have to rely on its Norwegian counterparts for the construction through the Baltic Sea to Poland. At the very least, the negotiations show that Poland is willing to shell out the money for projects abroad.

Other projects on the table include a deal with Gaz de France to help construct a liquefied natural gas terminal in Gdansk, Poland. The project would cost a whopping $4 billion to $5 billion -- but once completed would allow Poland to secure supplies from almost any foreign (non-Russian) supplier in the world.

Poland historically has allowed the high cost of taking on energy projects to outweigh its feelings about the Russians -- and perhaps for this reason, the last three governments avoided severing ties with Russian suppliers. Indeed, it would be much less expensive to continue importing natural gas from Russia than to assume the financial burden of these projects. The Kaczynskis, however, are taking a page from the Russian manual -- though they would never admit it -- in valuing political strategy and security far above economic practicality.
Source:stratfor.com