Additional natural production from unconventional accumulations will enhance energy security of Poland.
Gas is increasingly important in power generation
Poland's power generation sector relies heavily on coal – according to Energy Regulatory Office (ERO), coal and lignite accounted for 88.6% of the total electricity production in 2012, and their share is not expected to change in the near future.
The Climate and Energy Package, as adopted in 2008, requires Poland to increase to 20% the share of renewable energy in Poland's energy mix and to reduce greenhouse gas emissions by 20% until 2020. Consequently, the natural gas will be increasingly important in electricity generation, as it emits less carbon than coal and offers better grid balancing flexibility.
The approaching end of the transitional period for the Directive 2001/80/EC on the limitation of emissions of certain pollutants into the air from large combustion plants, that Poland has been granted by the EU Accession Treaty, is an additional factor that urges Poland to expedite its efforts to reduce greenhouse emissions. The Directive requires Poland to embark on new capital projects. In line with the transitional periods, Poland will have to reduce its sulfur dioxide, nitrogen oxides and particulates emissions by 31 December 2015, 31 December 2017 and 31 December 2017, respectively.
These new deadlines mean that Poland has to reduce its greenhouse gas emissions on a year-by-year basis. This has a direct effect by increasing interest in natural gas, as evidenced by the ongoing installation of gas-fired units, for example those of the Stalowa Wola Heat and Power Plant.
New natural gas-based capital projects enhance power grid security and help to ensure compliance with the EU requirements, but increases the reliance of Poland on gas imports.
The importance of natural gas is even more prominent if we look at energy mix in the context of the total primary energy and the role of natural gas in the chemical industry. Moreover, power losses and consumption in transmission must be taken into account.
Poland's natural gas consumption and sources of supply1
Natural gas consumed in Poland is both imported and produced from domestic fields. According to ERO, Poland consumed 14.43 billion cubic metres (bcu) in 2012. Imports amounting to 11.26 bcm accounted for a majority of domestically consumed gas (72.1%).
Domestic production of 4.31 bcm (according to URE's data) accounted for 4.31% of gas consumed in Poland in 2012. Gas production was stable in Poland with a slight upward trend from 2009 to 2011: from 4.1 bcm in 2009 to 4.22 bcm in 2010 and 4.33 bcm in 2011, increasing by approx. 5% in that period.
At the same time percentage share of domestically produced gas was decreasing due to increasingly higher total gas consumption. According to ERO, in the years 2009 – 2012 total gas consumption in Poland amounted to: 13.28 bcm, 14.41 bcm, 14.38 bcm and 15.43 bcm, respectively, increasing by 16% over that period. As a result of this significant increase, the share held by domestically produced gas in the total gas market fell by almost three percentage points from almost 31% (30.9%) in 2009 to approx. 28% (27.93%) in 2012.
According to ERO, the total gas supply from other countries included imports from East Europe and intra-Community deliveries from Germany and the Czech Republic. Imports from East Europe had been delivered under a long-term contract made between Polish Oil and Gas Company Joint Stock Company (PGNiG SA) and OOO Gazprom Export ( Gazprom) – the so-called Yamal contract.
In 2012, 9.01 bcm of natural gas were purchased under the contract. That volume accounted for approx. 82% of the total gas imports to Poland and 58.4% of the total gas consumption. Gas imports from the east were supplemented by gas deliveries from Germany and the Czech Republic. In total, they amounted to 1.98 bcm and accounted for 18% of the total gas transmission volume to Poland2.
Energy security
Domestic gas production should be increased for several reasons. In addition to social aspects, such as new jobs, revenues from royalty, real estate tax or CIT, additional gas production from domestic fields will strongly enhance Poland's energy security.
According to the definition proposed by the Energy Law, energy security is the capability of national economy to satisfy current and prospective users' demand for fuels and energy in a manner that is technically and economically viable and in compliance with environmental protection requirements3. The definition does not address directly the issue of energy self-sufficiency, i.e. the necessity to satisfy fuel and energy demand from domestic sources. The practice of interrupted fuel and energy supply, as well as the need to negotiate contractual provisions in monopoly conditions, being blackmailed with discontinuation of deliveries, clearly demonstrate that energy security should be based on domestic infrastructure facilities and resources. In the case of natural gas, in-country gas storage facilities and domestic production capacities are of key importance.
In recent years, Poland and (albeit to a smaller extent) the entire EU had been affected by several crisis events arising from discontinuation of gas supply from the eastern direction. A strong reliance of Poland on gas supply from a single direction and a single producer (Gazprom) compounded the problem.
Poland's economy was affected by three gas supply interruption events: in February 2004, January 2006 and January 2009 (in the latter case, deliveries had been interrupted for as long as 21 days). All of these crisis events occurred in winter seasons when the demand for gas is at its peak. Adverse effects of interrupted gas supply from Russia have been mitigated by using the existing transmission, storage and production capacities. Gas deliveries from the storage facility in Mogilno were particularly helpful, but in the absence of any alternative (foreign or domestic) sources even they could not compensate for the interrupted supply.
All of the aforementioned gas supply crisis situations had direct effects on the Polish economy, both in a short term – as supplies to industrial customers have been curtailed – and on a long tem basis.
The long-term adverse effects are two fold: first, the supplier imposed new less advantageous terms of supply so that Poland has to pay a higher price for the imported gas. The second, often undeservedly neglected effect is shaken credibility of Poland's economy, especially from the perspective of chemical and gas-based power generation sectors, which attract less investment that expected as a result of the failure to secure uninterruptible gas supply.
How domestic production enhances energy security
Domestic production means above all control of supply. In addition to enabling long-term energy policy and minimized interruptible supply risks, domestic gas resources can be used on a short-time basis in emergency situations. As evidenced by the crisis of 2009, domestic gas resources may even help to balance supply: under an agreement signed by POGC and Gaz-System, national transmission grid operator, additional volumes of gas were delivered to the grid from gas wells owned and operated by POGC.
Considering that domestic production accounts for less that 30% of the total gas demand, its significance in terms of energy security is not high, but more domestically-produced gas will minimize the risk of interrupted supply from the East by lessening the reliance on the imports and the ability to inject additional gas volumes should other sources of supply default.
Other issue, as important as supply control, is that alternative independent gas supply sources help to negotiate better gas purchase contracts with other suppliers by ensuring a stronger bargaining position, as evidenced by the events of 2004, 2006 and 2009. This is particularly true for Gazprom that enjoys a monopolist position in the Polish gas market.
In addition to a lower price, the ability to market more domestically-produced gas will help to negotiate better prices with other suppliers. Domestic gas production will enhance energy security in terms of security and uninterruptibility of gas supply. Moreover, it comes at a lower price.
Shale gas and the energy security in light of supply crises
Considering aforementioned information on the scale and diversification of Poland's gas market, the magnitude and adverse effects of the aforementioned crises in gas supply to Poland were compounded by the unavailability of alternative gas supply sources (including domestic ones and foreign suppliers other than Gazprom).
The commissioning of LNG terminal in Świnoujście will considerably improve Poland's situation, it should not guarantee a perfect security. Considering that the LNG market is still under development and high gas prices prevailing in Asia, energy security should not be based solely on the gas terminal in Świnoujście.
In order to improve gas supply security, gas supply should be based on three pillars (in addition to storage facilities): besides gas imports from the East and LNG, it is necessary to increase natural gas production in Poland. Shale gas should be the new source of supply. At the current status of operations it would be unrealistic to expect a high rate of production, let alone gas export to the European markets, but improving the gas supply mix with additional 2 bcm from domestic production is possible. It should be noted that even a relatively small volume of additional deliveries will improve our energy security.
Additional domestic production will serve as a buffer in the event of recurrent gas supply interruptions (like that of 2009), and in the context of imminent negotiations of the Yamal Contract and related agreements4. Quite possibly, only domestic production may prevent negotiation of new contracts in a crisis situation caused by interrupted gas supply. The role of shale gas production should be properly defined also in this aspect.
author: Antoni Fałkowski
References:
- Sources: after www.ure.gov.pl – bsee Bilansie Zasobów Złóż Kopalin w Polsce published by PGI-NRI for more detailed data on domestic production
- Source: Energy Regulatory Office (ERO)
- Art. 3. 16 of Energy Law dated 10 April 1997
- Trade contract made between POGC and OOO Gazprom Export will expire in 2022. The transmission contract between POGC and EuRoPol GAZ SA will expire in 2022. The transmission contract between Gazprom Export and EuRoPol GAZ SA will expire in 2019. Contract for operator of the Polish section of the Yamal Pipeline made between GAZ-SYSTEM SA and EuRoPol GAZ SA will expire in 2019
