POLAND TO SIGN LONG-TERM GAS DEAL WITH RUSSIA

C O N F I D E N T I A L SECTION 01 OF 02 WARSAW 001122 SIPDIS STATE FOR EEB/ESC DOUG HENGEL, S/CEE REBECCA NEFF AND AMBASSADOR RICHARD MORNINGSTAR E.O. 12958: DECL: 11/03/2014 TAGS: ENIV ENRG ETRD PGOV PL SUBJECT: POLAND TO SIGN LONG-TERM GAS DEAL WITH RUSSIA REF: WARSAW 1029 Classified By: Econ Tom Palaia for reasons 1.4 (b,d) ¶1. (SBU) Summary. Prime Minister Tusk's energy committee is expected to approve today, November 4, a new agreement with Russia on gas and transit through 2037. The deal will then go to the Council of Ministers for final approval, probably on Tuesday, November 10. The contract includes a reduced transit fee for Russian gas destined to Germany and a take or pay commitment to supply Poland with eleven billion cubic meters (bcm) per year - equivalent to their current imports or 2/3 of total consumption. The deal has been attacked in the press as jeopardizing Poland's energy security, but its defenders in government and industry do not think it changes much for Poland and frees them to focus on other energy priorities. Yet another long-term deal with Gazprom is certainly a setback for EU energy market liberalization, but it is unlikely to change Poland's energy security priorities or the priority the Poles place on blocking Russia's ability to use energy as a political tool. End Summary. The Details on the Deal -------------- ¶2. (C) Poland has been negotiating over the last ten months to replace lost supplies that had been provided by the now defunct middlemen RosUkrEnergo (RUE),marginalized after Europe's January gas crisis. While details have not yet been released, officials from the MFA and Poland's state-owned gas importer PGNiG, told EconOff that the contract extends existing transit and supply terms and levels from 2022 to ¶2037. On transit, the 15 year extension allows the Polish-Russian consortium that owns the Polish portion of the Yamal pipeline to extend the amortization of the pipeline's construction costs for the life of the new contract. This extension was reportedly dreamed up by PGNiG, which co-owns the consortium with Gazprom and a 4% mixed minority (EuroPol Gaz) partner. The extension allows the consortium to lower transit fees on Gazprom supplies (something the Russians wanted) while maintaining profit margins for the transit company (note: this also protects profits for EuroPol Gaz' small private shareholders, primarily Polish billionaire Aleksander Gudzowaty). ¶3. (SBU) On supply, Poland commits to continue to purchase 11 bcm per year at a price based on the existing nine-month oil price lag common in Gazprom's long-term European gas deals. MFA officials privately note that the "no re-export" clause of the take or pay commitment is still under discussion, but this is largely to calm critics as they do not think the clause poses any problems for Poland. The Critics - Why Trust Gazprom? -------------- ¶4. (SBU) Poland's Deputy Prime Minister/Minister of Economy Waldemar Pawlak was immediately criticized in the media for the long-term deal he announced last week after leading Poland's negotiating team to Moscow. Opponents charge that the long-term take or pay commitment will cost Poland and jeopardizes energy security alternatives. Forced to consume 11 bcm of Russian gas, Poland - critics claim - will no longer be able to justify development of the planned 2.5 bcm/yr LNG facility, support for the Southern Corridor, or other efforts to diversify supply. Also, at the time of the first announcements, agreement on transit pricing and replacement gas for RUE had not been reached, causing people to worry that Poland had backed away from its consistent negotiating position that there would be no deal without a comprehensive deal. But, just a few days later, remaining details were apparently ironed out and the deal was presented to the PM's office. Supporters - What Does it All Mean? -------------- ¶5. (SBU) Plenty of Demand Growth Expected: MFA officials claim the take or pay commitment is not likely to be a problem for Poland despite the complaints of critics. Eleven bcm matches Poland's current imports, which cover about 2/3 of demand (the remaining 5 bcm is produced domestically). Poland is considering a variety of alternatives, including nuclear, to wean itself from carbon-intensive coal which currently fuels 95% of Poland's aging power sector. But gas is the cheapest and quickest way to replace coal and improve Poland's carbon footprint. Given Poland's lack of hydro resources, gas is also an effective way to balance the power WARSAW 00001122 002 OF 002 grid and manage the introduction of renewables such as wind (Poland committed to 15% renewables by 2020 in the EU's 2008 Climate and Energy Package). Plans are underway to build Poland's first pure gas-fired electric generation plants and gas demand is likely to exceed the Ministry of Economy's current modest projections of 20 bcm by 2030. If gas demand were to falter, there is also no reason Poland could not use its planned interconnections to export domestic production, even if that production were to benefit from big shale gas finds in coming years (REF A). The first new Polish EU interconnection projects (beyond limited existing German connections) are planned to be completed with the Czech republic before 2012. ¶6. (C) The PM's energy advisor, Maciej Wozniak, told EconOff that prior to finishing the deal they were able to top off storage, in part thanks to the economic slowdown. The deal should allow Poland to keep storage full (1.7 bcm) and enter this winter with enough to maintain the system through any unexpected supply interruptions. Wozniak, who is a consistent skeptic of Russia, assures us that this does not change Poland's broader energy security plans. On the contrary, he believes this allows Poland to more effectively engage the EU on Caspian outreach, reform in Ukraine, and EU gas solidarity as well as their domestic diversification priorities including nuclear (planned for 2020) and LNG (planned for 2014). Comment: Probably Not Much New -------------- ¶7. (C) Assuming it moves forward, this deal will not likely alter Poland's medium to long-term energy security priorities, nor will it dampen the Poles' enthusiasm for constraining Russia's potential to use energy as a political tool. Russian gas comprises roughly 8% of Poland's total energy demand and the Poles will continue to seek to minimize that share. However, the long-term deal is another blow to EU energy liberalization efforts and hopes to see increased market trading of gas as a commodity. But Poland - with its state-dominated energy sector - has not actively supported EU market liberalization anyway. Despite the criticism, the deal should allow PM Tusk to avoid any messy negotiations before Presidential elections next year, assuming Gazprom holds up its end of the bargain. However, either the Russians or the Poles could still back out of the deal. TULLEY