Model of the LNG Terminal in Swinoujscie (source: http://member.zeusintel.com)

Project ARES Vám tentokrát prináša článok o vplyve Ruska na energetickú bezpečnosť štátov Vyšehradskej skupiny (V – 4). Priveľká energetická závislosť štátov V – 4 na Rusku predstavuje podľa mnohých analytikov závažný bezpečnostný problém. Tento článok obsahuje analýzu, do akej miery súčasné projekty v strednej Európe dokážu znížiť energetickú závislosť štátov V – 4 na ruskom zemnom plyne. Poľsko bolo vybrané v danom príspevku ako prípadová štúdia. Článok je uverejnený v anglickom jazyku.

Importance of the natural gas and the North – South Corridor Project

The energy dependency on the Russian natural gas is considered to be one of the most important security issues of the V – 4 states. The natural gas will remain strategic commodity for the EU states during the next decades in the 21^st century. According to the EU commissioner for energy G. Oettinger the natural gas “will remain critical for the transformation of the energy system. Substitution of coal (and oil) with gas in the short to medium term could help to reduce emissions with existing technologies until at least 2030 or 2035. In power generation the scenarios of the European Commission's Energy Roadmap 2050 show that the share of gas will remain high” (Oettinger, 2012). Well, we can see that the natural gas will remain the strategic commodity for the V – 4 states as it can help to attain the EU goals, it can help to reduce the emissions in the power generation. Moreover, not only the energy sector needs the natural gas. That commodity has often more strategic importance for the chemical, iron, steel and machinery industry. For instance, in the case of Polish consumption in 2009, 1,961 mcm of the natural gas were used for transformation, which includes generation of electricity. But much more gas, 3,885 mcm, were used for the chemical, iron, steel and machinery industry (Poland, 2012). Large Polish chemical companies like Zaklady Azotowe Tarnow (ZAT) need the natural gas as a key commodity for production of chemicals (Zakłady Azotowe w Tarnowie-Mościcach S.A. seated in Tarnów, 2012). Well, as we can see, the natural gas is strategic commodity not only in the energy sector but also in the other fields of industry like production of chemicals. That´s why we decided to focus our attention on the natural gas as a key commodity in our article.

But the question is: Will Russia remain the main supplier of the natural gas for the V – 4 states in the future? Are there other alternative suppliers? We decided to choose Poland as a case study because Polish territory can become very strategic for the energy security of every V – 4 state. The planned system of gas pipelines called North – South corridor will interconnect the V – 4 states (See Map 1).

Map 1: North - South Corridor (source: http://gs-press.com.au)

It will lead from northern Polish town Świnoujście (See Map 2) through the Central Europe to the Croatian port Adria. Thanks to the LNG terminal in the northern Polish port Świnoujście Poland will be able to give non – Russian LNG gas for the other V – 4 states. The construction of the LNG terminal in Świnoujście should be completed in 2014 (Strike Hits..., 2012). But to which extent will the project reduce the Polish dependence on Russian gas?

Map 2: Location of the LNG terminal in Świnoujście (source: http://www.hydrocarbons-technology.com)

Analysis of Russian – Polish Relationship through the Interdependence Theory

The “gas” relationship between Russia and Poland will be parsed through the interdependence theory. Many analysts often parse the energy relationship between Russia and the EU states as a geopolitical conflict. For instance, the US geopolitic analyst Z. Brzezinski called Russian Nord Stream pipeline project bypassing Central and Eastern Europe project as initiative to “separate Central Europe from Western Europe” (Kramer, 2009). It means that according to this view Russia tries to build Nord Stream pipeline with the goal to bypass Central and Eastern Europe with the goal to put the regions under unilateral dependence. That means more political pressure and geopolitical control of the regions by Russia. In this way, economic interests are subordinated to the political interests. But we must realize the EU member states need Russian gas but on the other hand Russia needs the EU member states to buy its gas. Russia needs the EU money paid for gas to use it for modernization. For that reason the Central Europe isn´t geopolitical area in which Russia and the West compete each against other but it´s part of the EU as an important export market and source of income for Russia. Well, if we do not parse the relations through the scope of geopolitical conflict we can see the dependence is mutual and because of that Russia can´t afford serious political conflict which could be militarized (Krejčí, 2012). That´s why we decided to choose the interdependence theory.

According to the theory the dependence between states is mutual. That´s why both states are interdependent. The interdependence brings about costs for participants when they try to change the state of interdependence (Keohane, Nye, 2001). That means both states are sensitive and vulnerable towards changes in the relationship. “Sensitivity” means the extent how „do the changes in one country bring costly changes in another” supposing that the affected state hasn´t altered its own policy yet to change the situation of interdependence (Wendt, 1999, s. 343). In the field of energy security it means, e.g.: a) If the Russian gas flowing through Polish Yamal – Europe pipeline decreases, the immediate costly effect for Poland will be loss of profit resulting from the transit fees paid for gas transported to the West, to Germany. In this case, Poland is affected state. b) In case of decrease of gas consumption by Poland Russia will lose income for the sale of gas. In this case, Russia is affected state. “Vulnerability” on the other hand means “an actor´s liability to suffer costs imposed by external events even after policies have been altered” by affected state to change the situation of interdependence (Crane, Amawi, 1997, s. 127). In the field of energy security it means, e.g.: a) The projects of Poland and the other EU states to reduce dependence on Russian gas will increase vulnerability of Russia as the Russian Federation is dependent on income for the sale of gas. b) Poland will be vulnerable by projects of Russia to find alternative pipeline routes like Nord Stream which bypass the Central European territory. We must realize that the states needn´t be equally interdependent. They can have different degree of vulnerability. That´s why the interdependence can be assymetric. The extent of vulnerability depends on availability of viable alternatives. That means the state with more alternatives is less vulnerable. Less vulnerable state is in better bargaining position because it´s easier for it to leave the relation of interdependence and find alternatives (Keohane, Nye, 2001). For that reason, the key question to understand the future role of Russia in the energy security of Poland should be: Which state is more vulnerable?

Qatari Gas, Contracts with Russia and Vulnerability of Poland

The LNG terminal in Swinoujscie has a great potential to reduce too much dependence on Russia, to reduce both sensitivity and vulnerability of Poland. The LNG terminal will enable to import non – Russian gas that´s why it will connect Poland, but also the other V – 4 states, with the global gas market. Polish gas company PGNiG and Qatari gas company Qatargas signed a 20 – year contract in 2009 for the purchase of 1.5 bcm LNG gas per year since 2014. Moreover, the prices of LNG gas are cheaper than the natural gas bought from Russia - “industry estimates for LNG are currently in the $290 – $350 per tcm range, while Poland pays $500 per tcm for Russian natural gas – trillions of cubic meters” (Poland's energy sector..., 2012).

Emir of the state of Qatar Sheikh Hamad bin Khalifa al Thani during the meeting with Polish President Komorowski (source: http://www.thenews.pl)

We must also say that the LNG terminal with North – South corridor will connect Poland and the other V4 states directly with spot markets in Western Europe and in the rest of the world. The LNG gas is often bought in those spot markets. Two – thirds of the import capacity of the LNG terminal in Swinoujscie “will be reserved for cargoes imported on a spot basis” (Poland LNG terminal..., 2012). The advantage of the spot market is the fact that the gas is bought for immediate delivery and price is not linked to oil. It means the prices aren´t dependent on oil by comparison with long – term contracts signed between Poland and Russia. The price is determined on basis of market conditions. In the case of oversupply the prices are driven down. We can compare prices for gas bought in TTF spot market in the Netherlands on the one hand and oil – linked price for gas bought from Russian company Gazprom on the other hand between 2008 and 2009. As we see on the graph (See Graph 1), the price for gas bought in the spot market was lower than the price for gas bought from Gazprom.

Graph 1 (source: http://ftalphaville.ft.com)

As we can see, the project of LNG terminal in Swinoujscie seems to be a certain alternative in relation to the Russian gas. It can bring cheaper LNG gas to Poland and the Central Europe. On the other hand it´s impossible to reduce the whole vulnerability of Poland if Russia decides to radically change the relation of interdependence by alternative projects like Nord Stream. Qatari LNG and spot market contracts can´t simply replace Russian gas and long – term contracts. Qatar is not so reliable supplier for Poland. We must realize Qatar´s LNG passes through the Strait of Hormuz. Tensions in that region over Iran´s nuclear programme have increased during the last years, as we see. Well, in the case of serious international political and military crisis in the region the majority of LNG gas imported to Western Europe will be interrupted. “87 percent of the LNG imported into the North – West Europe in 2011 came from Qatar´s two liquefaction plants” (Schaps, 2012). We must also say that the spot market in the Western Europe was glutted with LNG gas from Qatar in 2008. Qatar was forced to sell its LNG to the Western Europe because it had originally planned to sell it to the USA. But thanks to the new shale gas deposits in the United States the Qatari LNG was no longer needed for the USA. Qatar was forced to sell it to the alternative customer, Western Europe. That´s why there was oversupply in the European gas spot markets, thanks to the Qatari gas as well, which led to the reduction of prices (Careful what..., 2012). That explains why the costs for gas in spot markets between 2008 and 2009 were lower by comparison with the oil – linked price for Russian gas. But the situation in the spot markets can change, they are unpredictable. The oversupply of gas is not guaranteed in the future.

Location of Qatar (source: http://i739.photobucket.com)

On the other hand, long – term contracts signed with Russian company Gazprom “guarantee gas supplies in the required volume for the buyer and allow the seller to foresee demand for years in advance”. But “in the spot markets buyer can be exposed to a gas deficit during a peak in consumption as spot contracts stipulate no guarantees of supplies in the future. This unpredictability may lead to dramatic leaps in prices”. Moreover, the long – term contracts signed with Gazprom are dependent on oil. Price for Russian gas correlate with price of oil within a six-month lag that´s why the buyer can predict the sum six months in advance (Common misconceptions..., 2011). That´s why the long – term contracts are more predictable as for price and enable stable supplies by comparison with spot market contracts. For that reason it´s clear Poland still needs stable supplies from Russia. Polish gas company PGNiG signed a long – term ten – year contract with Russian Gazprom in October 2010 to import 11 bcm since 2012 (Poland's energy sector..., 2012). As we can see, Poland is highly vulnerable. It´s very risky for it to leave the state of interdependence with Russia. Non – Russian gas suppliers like Qatar and spot market contracts are too unreliable and unstable to radically reduce dependence on Russia.

The Europeanisation of the Issue of Dependence on Russia and Vulnerability of Russian Federation

As for Russia, we must take into account the European context. As Poland is member of the EU and the area of energy is shared competence between the Union and the member states, we must take the EU framework into account (Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community, 2007). Poland has tried to europeanise the issue of too much dependence on Russian gas. That´s why we must analyze how the europeanisation has influenced the relation between Poland and Russia.

In our case, the europeanisation means the ability of state to shape the EU policy by projecting/“uploding“ national preferences whilst simultaneously still being shaped by the EU level pressures. That means it´s bidirectional process, the member states “externalise their national foreign policy positions into the EU level”. But on the other hand the states´ behaviour is limited “within the structural constraints of EU membership”. The states need to respect the norms and values of the EU (Maltby, 2012).

Poland tried to europeanise the issue of energy dependence in 2006 after the dispute between Ukrainian company Naftogas Ukrainy and the Russian Gazprom. Poland proposed the European Energy Security Treaty on the EU level. According to the treaty „...a threat to the energy security of one of them will be considered a threat to the energy security of all of them. Consequently, in the event of a threat to the energy security of one or more of them, the other Parties – acting together or separately - will afford the Parties threatened all aid and assistance at their disposal, excluding the use of armed force“ (Proposal for a European Energy Security Treaty, 2006). As we see, that meant some kind of collective security treaty in a non – military way because a threat against one state meant a threat against all of the member states. But this attempt of Poland to europeanise the issue wasn´t successful because Russia was excluded from the mechanism and the other EU member states demanded to include Russia. Austria and Germany emphasized cooperation and interdependence rather than confrontation with the Russian Federation (Roth, 2011).

Former EU Commissioner A. Piebalgs (source: http://www.europeanvoice.com)

But Poland was successful later to europeanise the issue of dependence in the case of Lisbon Treaty, negotiated in 2007. Even the former EU Energy Commissioner A. Piebalgs „thanked particularly for the contributions and the interest in this matter by Poland“ (Piebalgs, 2006). According to the Article 87 of the Lisbon Treaty “the Council, on a proposal from the Commission, may decide, in a spirit of solidarity between Member States, upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy” (Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community, 2007).

Thanks to this solidarity clause the issue of energy dependency was europeanised. As we mentionned, europeanisation means that not only states shape the EU policy but the member states are simultaneously being shaped by the EU level pressures. The pressure on the EU level was the fact that Poland had to accept the role of Russia in the EU energy security mechanism. The EU and Russia established common institutions like the early warning mechanism for the „evaluation of potential risks and problems related to the supply and demand of natural gas“ (Memorandum on a Mechanism for Preventing and Overcoming Emergency Situations, 2011). They also established EU - Russian Gas Advisory Council with the goal to analyse development in the gas sector and make recommendations. Piotr Grzegorz Wozniak, Under-Secretary of State, Ministry of Environment of Poland also became member of the council (EU-Russia Energy Dialogue, 2012). 

But it doesn´t change the mere fact that the energy dependency was europeanised thanks to the solidarity clause. The clause introduced the EU solidarity mechanism in the case of gas flow interruption from Russia. Concrete measures were also included in the treaty in the article 176 A with the goal to reduce sensitivity and vulnerability of Poland and the other European states resulting from too much dependency on Russia. The EU policy on energy “shall aim, in a spirit of solidarity between Member States, to ensure the functioning of the energy market, ensure security of energy supply in the Union, promote energy efficiency and energy saving and the development of new and renewable forms of energy and promote the interconnection of energy networks” (Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community, 2007).

As we can see, Poland was successful to europeanise the issue of dependency on Russia. Thanks to that fact the bilateral dispute between Poland and Russia can become conflict with the EU. In the case of interruption supplies to Poland Russia will be perceived as unreliable partner to the EU. For that reason, the EU could decide to find other suppliers. The EU could also be forced to develop extraction of its own sources. For instance, Poland is said to have quite large sources of unconventional gas, so - called shale gas. It could export it to other EU states. According to Poland's Geological Institute "even with the lower estimates, unconventional gas could satisfy domestic demand" of Poland "for 35-65 years" (Lower Poland shale gas..., 2012).

Russia is very vulnerable because it could lose its vital markets for exports if the EU decided to receive alternative suppliers or to develop extraction of local sources like shale gas. It´s very hard for Russia to find alternative strategic markets for its natural gas. If the EU decided to leave the state of interdependence, Russia could find two possible energy hungry customers: USA or Asia. However, as we mentioned, the USA discovered new deposits, it “has over a century's supply of gas, half of it stored in shale and other “unconventional” formations. It should also spread, to China, Australia, Argentina and Europe” (Fracking great, 2012). That´s why the dependence of the USA on foreign natural gas was reduced to a great extent and it could become important exporter of gas. For instance, Japan is interested to buy the US shale gas (Kumar, V. P., 2012).

Source: http://blogs-images.forbes.com

The other possibility is Asia with its growing economies like China. But there are a few problems concerning China. “China, the biggest energy consumer, is exploring its own shale reserves and hesitating to accept a pipeline from Russia. Gazprom’s shipments fell about 14 percent so far in 2012“ (Shiryaevskaya, 2012). Moreover, the most important exporters to China, as for LNG, are other states than Russia, mainly Australia, Qatar, Indonesia and Malaysia. Those four states exported 79 percent of LNG to China in 2011 (China LNG import sources, 2012). As for natural gas trasported through pipelines, Chinese oil and gas corporation CNPC signed Memorandum of Understanding with Russian company Gazprom for two pipeline proposals in 2006, one from Russia to northwestern China and second route to the northeastern China. But the problem is the fact that both states haven´t agreed on a price for the gas yet (China, 2012). The main problem, as for relations with China, is the characteristics of contracts which hampers to develop energy cooperation betwen both states. “China will not pay Asian oil – indexed prices, as Russia demands, or even European oil – indexed prices. It wants something closer to European spot prices, which Russia will not entertain” (A liquid market, 2012).

As we mentioned sooner, the EU states like Poland are willing to pay oil – linked prices within long – term contracts. We can see Russia has nowadays no reliable alternative. Due to the fact that the Polish dependence on Russian gas is europeanised, Russia can not afford to be in serious conflict with Poland. Conflict with Poland means conflict with the EU that´s why Russia is too vulnerable to make great pressure on Poland.

Conclusion

We can conclude that the interdependence isn´t assymetric. Thanks to the EU dimension the interdependence is mutual. Through the case study of Poland we can see Russia will probably preserve the most important role in the energy security of the V – 4 states. Poland is too vulnerable because it´s not able to find reliable and stable alternative suppliers. On the other hand, Russia isn´t in better bargaining position. If it stops gas flows to Poland and puts pressure on Poland with the goal to demand higher prices, e.g., the conflict will be europeanised, it will be the conflict with the EU. The EU could decide to find other suppliers and to develop extraction of local sources of gas, like shale gas. Russia is too vulnerable if the EU decides to leave the state of interdependence because the Russian Federation hasn´t other available alternative buyers than the EU. It needs the EU as a vital market. That´s why Russia can´t afford to put too much pressure on Poland with the goal of bargaining better contract conditions because it doesn´t need serious conflict with the EU.

Of course, it doesn´t mean that Poland and the other V – 4 states should give up diversification efforts. LNG terminal in Świnoujście and North – South gas corridor will help Central Europe to connect with global and Western European gas spot markets. Non – Russian gas, like Qatari LNG, bought in spot markets too, can be good alternative for Central Europe, which can force Russia to reduce price for gas. On the other hand, as we mentioned, Poland and the other Central European states can´t radically reduce dependence on Russia. They need long – term contracts signed with Russia, price of which is oil – linked. The supplies of gas within those contracts are more stable and prices are more predictable than the contracts and prices in the Western spot markets. That´s why we reckon the discussion within the V – 4 shouldn´t be about the question: Which are the possibilities to reduce the dependence on Russian gas? Instead, the question should be: To which extent is it secure to receive Russian gas through the long – term contracts and to which extent is it secure to receive gas from global and Western spot markets? The combination of both ways is available solution because prices in the spot markets can be much more lower in the case of oversupply. On the other hand the long – term contracts enable more stable supplies at more predictable prices.

Some parts of the article were originally used by the author for the paper written within the international conference Tantamount in Diversity.

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