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

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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