What Russia needs most is cash for bombs

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Whatever the sales channel, prices begin to fall with the end of the gas winter as a rule. This change occurs from the beginning of April, with prices remaining at a moderate level until October. This is what we expect this year as well, however, the level of prices will be substantially higher than in autumn 2021.

What is the situation now with the European underground gas storages? Were they also affected by the prices as well?

In Poland, for example, we oblige each importer by law to store its natural gas in underground storages. Thus, our storage facilities are completely full with gas every year, approximately more than three billion cubic metres. Other EU countries have not imposed such obligations on their importers and traders. That reflects a high level of trust among some European Union countries regarding the Russian gas supplies. Germany, Austria and to an extent the Netherlands have either sold or passed the business operation of their gas storage facilities to Russian companies and storages where controlled by the Gazprom subsidiaries up to the Russian invasion to Ukraine on February 24th. As a result of such policies, we observed a gas crisis in Europe at the end of 2021, when there was high demand for natural gas. The underground gas storage facilities were either empty or half full.

Do you believe the issue of Nord Stream 2 to be completely finished? Is it a dead project?

It is important to emphasise that the problem with Nord Stream 2 is not over. Russia is very unpredictable. Its main partner, Germany, has issued some contradictory statements regarding the situation with the pipeline. For the moment, the launching of Nord Stream 2 does not comply with EU energy law because the gas supplier and the pipeline operator cannot be the same legal entity. Germany’s energy regulator certifies the pipeline operator, which must be a fully independent legal entity – both with regards to capital ownership and organisation. Therefore, the German chancellor’s claim that he withheld the certification of the Nord Stream 2 pipeline operator not only contradicts the EU legal system, but is also irrelevant. This is because the EU certification scheme is not involved with government procedures. In other words, such certification cannot be granted at all, as it contradicts EU energy law. Surely, Russia wants to isolate Ukraine from being a gas transit country by launching Nord Stream 2. Thus, if we assume that they will be able to launch this pipeline, as the Russians are behaving very unpredictably and Germany’s political position is very unclear, it will be technically possible to stop the transit of gas via the Gas Transmission System of Ukraine within three days.

From my experience, Russia can totally ignore any gas transit contract even if it is legally binding until 2024. They will simply violate it without worrying about the legal consequences, disregarding even the declarations made by former German Chancellor Angela Merkel. She has talked about guarantees given to her by the Russian side regarding continued gas transit via Ukraine until the contract expires in 2024.

Will the EU stay united in its opposition to Russian gas and how long could this last?

Unfortunately, statements from some EU officials that “by the end of 2022 the purchase of Russian gas will be reduced by two-thirds”, are only declarations. It is difficult to say when this will actually happen. It is not enough to simply reduce imports, but to substitute Russian gas with the same volumes of natural gas from other suppliers. I wish I knew what European politicians and the leaders of large energy companies are actually thinking and how this will affect their decision-making. This is particularly true with regards to the representatives of Germany, France, Belgium and the Netherlands. Generally, it takes about five to six years to withdraw from one supplier and to get a replacement that would not fund Russian armaments and warfare in Ukraine. In other words, to diversify supplies with different sellers and routes that will work to the limits of available infrastructure, including LNG.

However, this must be a unanimous decision taken by the European Commission and must be strictly adhered to by all member states. Right now, there is no consensus in the EU on this issue when looking at the positions of Hungary or Germany. This does not mean waiting for others in the meantime. In fact, each European country can and should develop its own gas production in the near future. However, Germany has not produced natural gas from its domestic gas fields for nearly four years. Instead, they have relied on Russian supplies and on the concept of Energiewende (the German policy towards renewables and green energy – editor’s note). Of course, this is a rhetorical question, does Germany not need these domestic resources? This is clearly a bad move as eventually someone will get access to this natural gas…

What is the policy of Poland in this regard and what are the other possible sources for Polish gas supplies?

Alternative supply routes include natural gas from the Norwegian shelf via the Baltic Pipe, as well as liquefied natural gas via the Świnoujście LNG terminal and the planned Gdańsk floating storage regasification unit. In addition, the interconnector with Lithuania may be used for gas supply, but only if it comes from Lithuania’s Klaipeda LNG terminal, not Russian sources.

If Europe is backing out of Russian supplies, which countries could become new clients for Russian gas?

As soon as Russia begins to lose its gas market in the EU, Chinese companies will be able to become new parties as buyers. They can absorb large volumes of Russian gas, even if it requires additional gas transmission infrastructure that Russia is ready to invest in. In addition, Japan and South Korea could become new markets for Russian LNG. What Russia needs the most is cash for buying or producing bombs, missiles, submarines and fighter aircraft.

When Russia leaves the EU gas market, who will enter it?

Norway will certainly enter the European natural gas market with an increased market share. Other countries like the United Kingdom, the Netherlands and Denmark – who are operating gas wells on the North Sea continental shelf – can also enter the EU market. It should be noted that natural gas exploration and production infrastructure on the North Sea shelf is carried out in compliance with the highest environmental standards. I would like to mention that during my leadership at the Polish company PGNiG, we even invited Ukrainian companies to join partnerships in one of our fields that we explored, or had access to under legal concessions in the North Sea continental shelf. Ukraine may also independently take part in Norwegian tenders or the exploration and production of natural gas fields in the North Sea.

In your opinion, what does the Ukrainian gas transmission system face in the near future?

The problem with the Ukrainian gas transmission system is that a large number of small towns and industries are connected directly to the main gas transmission pipelines and not to the distribution pipeline system (gas distribution networks) as it should be. Nevertheless, the last five years have shown very positive results for the energy sector in Ukraine. The country has improved its regulatory field and embarked on an infrastructural transformation. The main pipeline system is now independent from the market of distribution and trading. Also,  enhanced domestic production of gas and oil is very impressive and should continue. It is important to emphasise that Kyiv now has a very good opportunity to take advantage of help from the United States. Through American investors, Ukraine could complete the modernisation of its gas transmission pipelines and unbundle them from the gas distribution network. But it is very important to complete this unbundling not only formally, but also physically – according to market rules. This was the message sent during President Joe Biden’s March two-day visit to Poland, which was not covered by the media.

If we talk about alternatives to Russian gas transit via Ukraine, today there are two options. The first involves the transit of natural gas from the Black Sea shelf, which is rich in natural gas and oil. However, its transit is currently impossible due to Ukraine’s lack of access to the shelf. The second alternative is transit from existing LNG terminals in Europe (French, Polish, possibly German), or Norwegian piped gas via Poland. Looking at the Polish option, detailed negotiations with the Polish side and the participation of Lithuania will be necessary. It is obvious that such trilateral cooperation should take place in the context of the newly built GIPL (gas interconnection between Poland and Lithuania) interconnector. The commissioning of this interconnector is expected this year. Such cooperation should also result in liquefied natural gas being supplied through Polish and Lithuanian LNG terminals to Ukraine. As an alternative, Germany noted the possibility of a natural gas supply to Ukraine from the planned LNG terminal in Brunsbüttel.

However, if we talk about cooperation with Poland, there is a need for a concrete agreement with the Polish side. This is not necessarily true regarding the administration but instead the private companies, which may not be such an easy process. I may also mention Slovakia. However, this is unlikely as the Slovaks have an agreement with the Russians that they will be supplied with gas through Nord Stream 2 via OPAL and the Czech Republic if gas transit through Ukraine is stopped. Again, Russian gas is not an option.

It is critical for Ukraine to develop its natural gas exploration and production and not only within the country. Today, Ukraine could take advantage of a favourable climate and apply for any exemptions for natural gas production in places such as the United States. This could also happen in many other countries, but the US is openly supporting Ukraine to a noticeable degree. It is an opportunity not to miss. Imagine the headlines in the media in the near future – “Ukraine has received ten licences for natural gas production in Pennsylvania or Texas…”

In the end, let me recommend that Ukraine needs a new gas strategy. A domestic one, without copying any particular pattern from any other country. Early results are already promising. However, they were interrupted by Russia’s military aggression. Legally, the EU regulations are market oriented and reasonable, but business savvy Ukraine deserves a strong internal, national energy policy just like what we in Poland developed for gas (unfortunately not for oil) some 20 years ago. We did not wait for anyone to do it for us.

Piotr Woźniak is the former president of Polskie Górnictwo Naftowe i Gazownictwo (PGNiG), Poland’s largest gas company. He previously served as minister of economy and in the ministry of environment.

Mykola Voytiv is a senior project manager at Reform Support Team at the ministry of energy of Ukraine.

energy, Poland, Russia, Ukraine, War