THE WARSAW INSTITUTE REVIEW

Date: 4 December 2019    Author: Paweł Musiałek

Three Seas Gas Initiative. Is it possible?

Natural gas trade is possibly the most promising area for cooperation within the entire Three Seas Initiative. The infrastructure currently under construction will be an important factor in the further integration of the entire region. Despite all this, it is still vital to remember that states taking part in the Initiative see their own role in the integrated gas market differently to one another, and some of the ideas proposed by them promote competitiveness over cooperation. If Poland wants to become and important gas hub in the region, it needs to change its logic from the defence paradigm into the market one. This change will only be possible after year 2022, when all pipeline upgrades are completed, and the Russo-Polish gas supply contract expires.

What Not to Make of the TSI

The recent discussions regarding the Three Seas Initiative (TSI) often seem illogical. People discuss what the TSI seems to be rather then what it really is. The TSI critics often underline that the Initiative is nothing but a geopolitical block, that will be anti-Russian and anti-German at its core and will therefore strive to implode the European Union from inside. It is also claimed that due to its conservative beliefs and an embedded hate towards Brussels, it was the Polish Government that came up with a cunning plan to take Warsaw out of the EU and build an alternative European alliance. The Three Seas Initiative is often compared to the Intermarium Initiative, that was conceived during the Second Polish Republic and was aimed to be an important military alliance. Critics are quick to point out that any of such ideas are not only dangerous but also unreal. They are also keen to point out the differences in the approach towards Russia and the United States amongst different Central and Eastern European states (CEE). This in turn is supposed to showcase that the idea of the TSI is built on unstable grounds.

What is also interesting is that those opposing the TSI are often aided by unlikely friends – the supporters of the Initiative. They themselves often underline the need for Poland to build an anti-German political block in this part of Europe as the interests of Warsaw and Berlin tend to clash more and more often these days. The CEE states seem to be an ideal partner for such a bloc as they, just like Poland, need more autonomy, that for now is very much being limited by Germany. The TSI is therefore nothing more than a well-planned ‘grand strategy’ idea. This interpretation of the whole TSI idea comes from the ‘geopolitical awakening’ of the Polish public debate, especially in the realm of the internet where any ‘grand strategy ideas’ skyrocket in popularity immediately after publishing.

What is the TSI really?

Unfortunately for both TSI critics and flawed supporters mentioned above, the Initiative is something completely different. It is an informal platform that allows for a better coordination of regional cooperation in some of the most crucial areas, namely those which can benefit all TSI member states. The Three Seas Initiative was designed to be a framework for projects, majority of which will be infrastructural, and which aim to more closely integrate the North and the South, and not only East and West as it was happening before. The focus on infrastructure is intentional and comes from the historical issues within the region – namely the policies of the Soviet Union that wanted to integrate the CEE states only with the one central state of the USSR (Russia) while at the same time avoiding a regional cooperation too close for its liking.

The coordination of cooperation within the TSI mainly focuses on a joint project implementation and the allocation of political power in order to make them more powerful and better heard of in the EU. Having said that it is clear that the Initiative is but a project coordination effort and not a ‘Union within a Union’ idea. This should come as no surprise as, since its very beginning, all actors related to the TSI underlined the complimentary character of the idea, both within the Union and in the region as such. Such a modus operandi was chosen by the member states of the TSI because it was much more realistic than any wishful thoughts of building a solid political bloc that will have a common stance of all international political issues. Those who invented the Initiative very much believed in the saying to ‘make haste slowly’, and rightly so.

Amongst the most crucial areas for cooperation within the TSI are things such as: businesses and entrepreneurship, economic propellers, transport and energy cooperation mainly in natural gas. Spotdata, in their recent report focusing on the investment needs of the TSI states, calculated that the region requires as much as 290 billion Euro worth of road, rail, waterway and air-related investments and over 97 billion Euro in energy infrastructure projects, 28 billion Euro of which would be for regional-scale investment.
Therefore, the TSI serves not only as a mean to help choose projects that will have the greatest benefits to all its members, but also helps in securing funding for them. Because the EU funding remains on of the key ways of funding the TSI promoted projects, all its member states are also members of the European Union. Other methods of securing funds include the Three Seas Fund that will serve as leverage for the selected infrastructural projects. This method is similar to the global trend of finance diversification with regards to infrastructural projects where 30% to 40% of funds comes from public sources and the rest is provided by private investors. The Three Seas Fund is therefore aimed at combining public and private funding for TSI projects.

Gas Cooperation

The cooperation in the field of natural gas does seem to be the most attractive area for cooperation within the TSI. Amongst the multilateral projects that have been agreed upon during the Bucharest 2018 TSI summit were the: Poland-Latvia gas interconnector, the Bulgaria-Romania-Hungary-Austria gas interconnector, the Eastrig Pipeline, the Romania-Hungary-Slovakia connector, Adriatic Pipeline, Baltic Pipe Pipeline with the expansion of existing Polish pipelines, the Poland-Slovakia as well as Poland-Czechia connectors and an LNG terminal on the island of Krk. All of the abovementioned projects are aimed at enabling a free, uninterrupted transfer of gas between the CEE nations, mainly between the North-East vector. The building of so many gas connectors is no coincidence and has been the priority of interregional cooperation in this area for many years. This is because the CEE region is still very much unintegrated with regards to gas infrastructure. Several years ago, the biggest threat connected with this was the over-reliance on the Russian gas. Nowadays this problem means that the region is unable to fully use the benefits of the common gas market that is slowly emerging in the EU. As much as the standardisation of the gas market (including gas prices) in the Western Europe is very advanced, the CEE area still needs more time to catch up. The greatest consequences of this are that the gas prices are higher for customers in the CEE area. Yet, it is important to remember that despite the price differences being still visible between the Western and Central-Eastern Europe, the extent of those variations is much lower than it used to be several years ago.

Building the North-South Corridor

The North-South Corridor consists of several different parts. Some of these are already complete, some are currently in construction and some are still only in the planning and concept phases. From the Polish side, the most important part of the Corridor was the competition of the Swinioujscie LNG Terminal in 2015. Another milestone will be reached in 2022 upon the completion of the Baltic Pipe pipeline alongside with all necessary infrastructure that will allow for the distribution of Norwegian gas throughout the whole of Poland as well as its transfer all the way to the Polish southern border. A further extension of the existing Swinioujsce LNG terminal is also planned alongside with the installation of the floating LNG terminal in Gdansk.

Furthermore, the construction of the Poland-Slovakia gas connector (Strachocina-Velke Kapusany) has already begun and is set to be completed by 2021. It was also in the 2019 that all necessary permits have been given out for the construction of the Poland-Lithuania pipeline. Discussions regarding the construction of the Poland-Ukraine gas pipeline are currently at a remarkably developed stage. The one gas interconnector that seems to be the most problematic is the Poland-Czechia pipe (Stork II). Although its planning went alongside the Poland-Slovakia interconnector, not much progress has been made since 2015. Poland has been clear that it was interested in building a connection with Czechia only after the Baltic Pipe pipeline is complete which should happen sometime in 2022. The competition of the Czechia-Poland pipeline earlier creates an undesired possibility that the gas reaching Poland would come from the Russian Federation via the Nord Stream 2 pipeline and its land-based portion called the Eugal pipeline that would run along the Polish-German border and into Czechia. The ceasing of the construction efforts to build an interconnection with Czechia means, that Slovakia will shortly become the main gateway for transporting of natural gas from Poland and to the South of Europe. This at least is how the Polish side expects matters to go.
Slovakians are also keen on formally confirming this plan, saying that the need for such pipelines is both valid and considerable as it would serve as a backup in case the Russian Federation chooses to cease the transfer of gas through Ukraine, which at the same time accounts for several percent of all the gas consumed by the Slovaks. Several days after the inauguration of the construction efforts, the Slovak operator of Eustream presented a feasibility study for the Eastring project that is intended to connect Slovakia with Hungary, Romania and Bulgaria and that employs the Poland-Slovakia interconnector that is currently under construction. According to Eustream, the Eastring project could become the main source of gas diversification in the CEE. This project is an important attempt to save the position of Slovakia as an important transit point for gas passing through the East and to the West, after the transit of Russian gas through Ukraine and Slovakia is terminated. It is worth mentioning that if this concept ever comes through, the transit of gas does not necessarily have to run through the North and into the South. Instead, a reversed direction transit is also possible. What is more, the gas being pumped into Bulgaria and then being transferred to Slovakia via Romania and Hungary could also potentially be of Russian origin coming from the newly built Turkish Stream pipeline. It is therefore becoming clear, that despite being faced with the same problem – the lack of sufficient infrastructure, the regional cooperation in the field of gas in the CEE is not easy, mainly due to various projects proposed by different nations that often exclude or compete with one another.

Who Will be the Main Gas Transit?

If the above-mentioned ideas would to come true, the Poland-Slovakia Interconnector could soon face the same problem as the one with the Poland-Czechia pipe. The core of the problem lays in the dilemma regarding who should be the main exporter and the main importer of the natural gas? According to the plans of the Polish Government and the main Polish gas operator (state owned), the connections with both Czechia and Slovakia are to be used for exporting natural gas from Poland and all the way into the South of Europe (as well as the Eastern Europe via an interconnector with Ukraine). As such, the Polish national operator – Gaz System – could earn a revenue for transferring gas either directly from the LNG terminal or from the Baltic Pipe pipeline. Thanks to this the Polish Government could not only receive additional income on the pipes but also lower the cost of transiting gas for Polish recipients. This may prove problematic as Poland’s southern neighbours also would like to build their own positions as important gas exporters, especially when considering the fact that for years they have been doing just that but in a way that was considerably more efficient than Poland, earning much more than Warsaw did. Furthermore, any import of gas from Czechia and Slovakia and through Poland is not welcomed as these states do not have their own natural resources meaning that any natural gas coming from them is most probably going to be of Russian origin. The main goal of the Polish government when building interconnectors is to gain independence from Russian gas and not to receive the same Russian resource but through an alternative route.

The Basic Dilemma – Security or Market

We have touched upon the main dilemma, that is related to the Polish aspirations to become a gas transit hub in the CEE with the help of the TSI. If Poland will continue to sort gas according to its origin, it will be extremely difficult for Warsaw to become a gas hub as this would significantly disrupt the rules of the game as set by other V4 nations. The dislike towards the import of Russian gas in Poland is understandable, especially considering the diversification strategy that is currently in place. The construction of LNG terminal or the gas connection with Norway required Poland to sign long lasting contracts that were of crucial importance for the issuing of investment loans to Warsaw. When combining this with the ongoing Jamal Contract that is set expire in 2022, the Polish gas leader PGNiG has a large quantity of gas in its portfolio that needs to be sold off to different states, if Poland wants to avoid financial charges. The opening of the Polish market for other providers, at least before 2022 would create a risky situation when PGNiG could not sell all the gas that it would receive. It is precisely because of that, that the Polish Government currently only views any gas cooperation with its neighbours in the ‘selling’ and not ‘importing’ terms. This is the effect of having to operate within the boundaries of energy security logic that dictates that any free market cooperation should be subjected in such a way that the infrastructure building plans can be completed, that otherwise would not have been completed on the free market but which are crucial for the maintenance of optimal security levels in terms of gas transits.

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The creation of gas hub in Poland, where gas from the entire region would be redistributed requires a complete opening from the Polish gas market, where gas is treated as a commodity and not a strategic resource that can be heavily regulated. Only when the gas in Poland will not be subject to sorting in accordance to its country of origin and when it will be able to freely circulate both ways in between Poland and its neighbours – and it will be then that our country will have any realistic chances for increasing the profits it makes on transiting gas. At this point it is important to underline that the astonishing pace for the development of gas infrastructure in Poland that begun several years ago has significantly increased the Polish energy security. This creates room for the change of Polish paradigm from the logic of energy security into the logic of the free market. In effect, 2022 is set to become a symbolic end to the security paradigm in Poland. It is then that the long-lasting Jamal Agreement that provided Poland with Russian gas will also finally expire. On the same year, the extended LNG terminal in Świnoujście will also be completed as well as the Slovakia-Lithuania-Ukraine interconnector and the Baltic Pipe pipeline. Furthermore, another LNG terminal, a floating model in Gdansk, is also planned to open at the same time. As each of the abovementioned investments are materialised, Poland will have a model diversification of gas infrastructure in place that will not only ensure its energy security but will also become a key player in gas transit market in the whole region. By 2022, Poland would then have an capability to amass as much as 50 billion cubic meters of natural gas annually with an usual consumption of only 18 billion cubic meters in the same time scale.

In order for the transit capabilities to be used to export gas, Poland requires not only the competition of the previously mentioned investments and a full opening of Polish gas markets for foreign imports (current Polish legislation is a serious obstruction to that idea). What it really needs is a transit system that will be more attractive when compared to its greatest competitor – the German system where there is a liquid gas stock in place, allowing customers to buy whatever quantities are required. We should also remember that Czechia, Slovakia Ukraine, Austria and other Northern European state will have the ability to import gas not only through Poland but also through Germany, which thanks to Nord Stream and Nord Stream 2 pipelines wishes to become the major gas wholesaler for most European recipients. It will be the price and not the Russian origin of the gas that will ultimately decide which of the transit route will be selected by wholesalers and recipients in the region. The final price of gas consists of not only the value of the resource itself, but also all the transit tariffs that the gas companies pay for the transportation of gas from the entry point of the given system, and all the way to the exit point of the receiving customer. It certainly will be the second of the two issues that will pose a serious problem as the transit tariffs are dictated by the cost incurred by the transit operator during the construction of each pipeline. The more investments there are, the higher will be the cost that the operator will need to cover and that in the end will dictate the charges put on the users of each network – the gas trading companies. These companies will in turn shift these costs on the final receivers of their gas. The key question related to the attractiveness of gas coming from Poland is closely interlinked with the height of the transit tariffs after all planned pipelines and interconnectors are constructed. It can be speculated that Poland might not become an attractive place to sell natural gas to from Czechia or Austria since these two nations have very well-developed connections with Germany and can therefore import gas directly from Berlin. The export of gas to Slovakia and Ukraine is far more realistic, especially when the transit of Russian gas through Ukraine will finally be shut. Such a scenario means that the ceasing of any planning and construction works on the Stork II interconnector may be ad calendas grecas, since there is no solid argument supporting its existence both from the security or market perspective.

It should therefore be noted that one of the key factors that will influence the final financial balance of an investments conducted by the Gaz System will be the regional demand for natural gas. Any opportunities for the re-export of gas from Poland will be feasible only if the regional demand rises significantly. If this does not happen, then Poland will be faced with a threat of the newly build pipes being ‘dry’ and unused, becoming just an emergency use option that cost Polish gas customers millions.

Summary

For the last 30 years it was the main aim of the Polish natural gas-orientated policies to diversify its directions since a considerable time frame in which we had been heavily dependent solely on the Russian gas. This meant that the deregulation of the Polish market was being delayed since the absolute priority was given to the investments focusing on the energy security that were built by the Polish operator and guaranteeing long-term gas providing contracts by the Polish gas leader – the PGNiG. Poland is already not dependent on Russian gas anymore, but the full comfort will only be enjoyed in 2022 when all infrastructural projects aimed at interconnecting Poland to other states’ gas lines will come to fruition.
From 2022 (which will also be the year when the Russo-Polish gas contract expires) Poland will be able to change its paradigm and start treating gas more as a commodity rather than a strategic resource. If the planned Polish investments in the North-South vector are supposed to pay off (even partially) then it is crucial that a better reputation about Poland as a potential hub for gas transit is established requiring the full opening of the Polish gas market and the ceasing gas sorting practices according only to its country of origins. It is worth noting that even the undertaking of all necessary steps will not definitely guarantee that Poland will be able to earn more on transiting gas, because Poland will be competing against Germany that has much stronger resources than its neighbours to the East. Secondly, the CEE region is currently experiencing the emergence of competitive gas-related projects. It is not yet certain whether the Polish vision for the regional cooperation in gas will come out to be the most attractive, yet it would be wrong to claim that Poland is not in the lead to a considerable, even definite extent.

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