Ukraine and Poland could integrate gas markets, but more investment needed – report

LONDON (ICIS)–The Ukrainian and Polish gas markets could become further integrated once Poland ends its long-term supply contract with Russia’s Gazprom in 2022, according to a report by USAID, a leading development agency.

The document found the two markets could work on joint projects to allow enhanced cross-border flows and more flexibility for traders active in both countries.

These products would include:

– Increased cross-border capacity by enhancing the existing capacity at the Drozdovichi interconnection point and potentially reviving flows on the Ustilug-Hrubieszow pipeline which has a capacity of 1.2milion cubic metres (mcm) per day but has not been in use for the last 10 years
– Creating a bundled product for cross-border interconnection capacity
– Allowing Ukrainian storage facilities to be used by Polish companies which are required under law to hold gas in storage
– Reducing transmission tariffs and simplifying the transit regime for Ukrainian companies expecting to import gas from Poland’s LNG terminal or from the German gas hub
– Offer a discounted transmission tariff for the use of Ukrainian storage to increase their utilisation
– Simplification of the licensing regime for traders in Poland
– Establishing a fully-fledged gas exchange in Ukraine

The report found that as Poland is committed to ending imports from Russia when its long-term contract expires in 2022, physical flows from Ukraine to Poland may decrease significantly from 2023, as this gas transits through Ukraine.

SUPPLY RISKS

This may lead to supply risks both for Poland and Ukraine.

In Poland’s case, the country’s gas demand is set to increase thanks to its commitment to replace coal with natural gas for electricity generation.

In Ukraine’s case, the supply risk is linked to the fact that some of the volumes that are now transited from Russia into Poland are re-exported back into Ukraine either in physical mode or on an interruptible basis in backhaul following the launch of a virtual interconnection point in 2020. However, once physical flows to Poland decrease or stop from 2023, Ukraine may not be able to import in virtual mode and would depend on physical imports.

The report recommends the establishment of firm capacity on the Ukrainian-Polish border from 2023, but notes that more investment is needed both in Ukraine and in Poland.

It found that subject to investments, the Ukrainian transmission system GTSO would be able to off-take 6 billion cubic metres (bcm) annually. GTSO is expecting to undertake major reconstruction works on the Drozdovichi cross-border point and the Komarno compressor station to allow firm entry capacity of up to 20.5mcm/day.

Currently the firm exit capacity from Ukraine stands at 4.7bcm/year while the interruptible capacity stands at 1.7bcm/year.

The capacity from Poland to Ukraine is at 5bcm/year but is offered only on an interruptible basis.

To increase the cross-border capacity, Poland would also have to carry out works on its side of the border, but the report found that there is no evident plan by the Polish grid operator, Gaz-System, to establish firm capacity, which may limit the cross-border capacity offered on this border.

RULE ALIGNMENT

Another critical recommendation relates to the alignment of rules and in particular the simplification of the licensing regime in Poland. Polish law does not allow the granting of licenses for trading on the internal market for Ukrainian companies. This means companies looking to source gas in Poland would have to establish a subsidiary in Poland or another EEA (European Economic Area) country.

If the two recommendations are addressed, the two transmission operators can create a bundled product for cross-border interconnection.

Meanwhile, both Ukraine and Poland can work to reduce tariffs and simplify transit requirements to allow Ukrainian companies to access LNG via Poland’s existing infrastructure and from Germany.

The report found that by establishing bundled cross-border capacity and using swap trades between Poland and Germany, Ukrainian traders could have access to German-sourced gas at attractive prices.