BALTIC ENERGY BRIDGE: POLAND CHEERS FROM THE

C O N F I D E N T I A L SECTION 01 OF 02 WARSAW 001091

SIPDIS

DEPT FOR S/CEE FOR AMB MORNINGSTAR AND REBECCA NEFF,
EEB/ESC FOR DOUG HENGEL AND ALEX GREENSTEIN, EUR/CE FOR
MARY GLANTZ, COMMERCE FOR HILLEARY SMITH

E.O. 12958: DECL: 10/17/2014
TAGS: ENRG ECON EINV PREL PL
SUBJECT: BALTIC ENERGY BRIDGE: POLAND CHEERS FROM THE
SIDELINES

REF: WARSAW 1029

Classified By: Econ Chief Michael Sessums for reasons 1.4 (b,d).


1. (C) Summary. The Polish government (GoP) views Baltic
energy security as important to its regional diplomatic
efforts, particularly to building EU energy solidarity and
managing EU-Russian relations. However, the GoP does not
believe that connecting Baltic energy markets to Poland or
other EU states will directly impact Poland's domestic energy
security. Polish political and national security officials
will continue to cheer on Baltic energy security and vocally
support a range of Brussels and Baltic-based initiatives.
They are unlikely, however, to back up their political
support with finance and new infrastructure, turning instead
to encourage the EU to fund projects that they view largely
as EU/Baltic priorities. End Summary.

Baltic Support Diplomatically Important
--------------


2. (C) The Poles have long pushed in Brussels for greater EU
solidarity in facing what they view as Russia's use of energy
as a weapon. Their arguments for EU energy sharing, regional
storage plans, and emergency response mechanisms lack
credibility without accompanying support for the
interconnections needed to make that solidarity meaningful.
Leaders from all major political parties have consistently
expressed a national security interest in minimizing Russia's
ability to use energy to manipulate Poland's neighbors or
otherwise impact EU security policy. Both for coherence in
their Brussels lobbying and as part of their effort to
contain Russian influence in the neighborhood, Polish
officials vocally support a range of Baltic energy security
plans. Over the past two years, these have included gas and
electric interconnections, nuclear power, and regional
storage facilities. However, Poland has not yet backed up
this rhetoric with related infrastructure investments.

Power Bridge and Ignalina/Visaginas Nuclear Project
-------------- --------------


3. (C) Proposals to link the Polish and Lithuanian electric
grids - the "power bridge" - are at least 10 years old. The
current version of the plan is organized around transmission
of power from a proposed Lithuanian nuclear power plant,
Visaginas, across the electricity bridge and into Poland. PM
Tusk's energy advisor Maciej Wozniak told EconOff that the
Lithuanians, however, have lacked focus during negotiations
in part because they only very recently accepted that the
plant Visaginas is to replace, Ignalina, would close as
promised in Lithuania's EU accession negotiations. (Note:
Ignalina's closure is now slated for the end of 2009).


4. (C) Polish officials express frustration with the lack
of progress and transparency in negotiations on the Visaginas
nuclear project, the electricity interconnections, and
potential gas supply infrastructure. Straight
disorganization aside, they point to secret side deals to
secure additional Russian energy supplies that have impeded
progress (referring to last summer's "BRELL" Agreement).
Finally, officials from MinEcon, MFA, and state-owned power
company PGE all contend that a very large share of Visaginas'
electricity - a share too large for the Lithuanians to accept
- would be needed for Poland to justify the costly power
bridge and grid upgrades required to plug into the project.
With poor commercial prospects, and little relevance to a
self-sufficient Polish power market, the GoP is not likely to
finance the power bridge, regardless of their public
statements of support. The alternative? Economy Ministry
Under Secretary for Energy, Joanna Strzelec-Lobodzinska told
EconOff quite frankly, "If this power bridge is just about
connecting the Baltics to the EU, then the EU should pay for
it."


5. (C) Lit-Pol management, the shell company created to
develop the electricity interconnections and upgrades on both
sides of the border, claim the project to connect Lithuanian
and Polish grids is moving along. They cite declarations out
of Brussels and regional leaders, EU funding commitments from
the 2009 economic recovery package, and recent
reorganizations within Lithuania and the Visaginas nuclear
projects as signs of imminent action. However, they lack
specifics as to how things might be financed or when work
might actually begin.


WARSAW 00001091 002 OF 002


Gas Interconnections
--------------


6. (C) The GoP is equally skeptical of proposals to finance
gas interconnections with Lithuania. Wozniak pointed out
that state-owned Polish gas distributor, Gaz-System, made
inquiries a few years ago as to what commercial interest
existed in the region for interconnections. The company, he
said, did not hear back from the Lithuanians. Citing poor
local infrastructure and weak demand in northeast Poland,
Wozniak and Gaz-System argue that connections to Lithuania do
not make commercial sense. Moreover, gas interconnections,
like electricity, suffer from eastern competition.
Amortizing project development costs into gas rates makes an
interconnection project, particularly a project designed for
one-way emergency use, is expensive compared to existing
eastern sources. Without an energy security subsidy, the
business deal does not add up.

Regional Storage? Shared LNG?
--------------


7. (C) A new LNG terminal planned for the Baltic coast is a
centerpiece of PM Tusk's energy security program. The first
phase, to be completed in 2014, anticipates 2.5 billion cubic
meters (bcm) of annual capacity to fuel growing domestic
demand. The GoP envisions future expansion of the facility's
regasification capacity to serve regional customers,
including the Balts. Various businessmen interested in
potential gas-storage projects encourage that vision and talk
about regional storage facilities based in Poland. However,
according to industry officials involved in the LNG project,
LNG is not yet cost-competitive with pipeline gas,
particularly when new infrastructure costs are priced in.
Poland will finance its LNG terminal with a "security tariff"
on all gas in its system. Storage also comes at a cost.
Similar "security" financing would need to be worked out in
the home markets of potential regional customers.

Comment: Why will Poland finance Baltic security?
-------------- --------------


8. (C) Poland will continue to support, in principle,
connecting the Baltic energy island to the EU as part of its
overarching interest in European energy solidarity and
containing Russian influence over Poland's neighbors and EU
partners. However, this moral support is unlikely to
translate into action and infrastructure unless the EU comes
through with a greater funding commitment or otherwise links
EU support for Poland's own energy priorities to active
Polish participation in Baltic energy security. Further US
encouragement would likely be helpful only if we also linked
Polish action on these Baltic questions to a broader
discussion of Poland's security agenda.
TULLEY