GIF Inside Story: Poland in search of new gas supplies

Additional reporting by Kaja Sillett

LONDON (ICIS)–Polish incumbent PGNiG signed a heads of agreement (HoA) for a potential 20-year supply of LNG from US-based Sempra Infrastructure, the companies announced on 16 May.

The non-binding agreement covers 3mtpa in total – 2mtpa from Sempra’s planned Cameron LNG Train 4 expansion and another 1mtpa from Sempra’s second greenfield project, Port Arthur LNG in Texas.

The volumes would be delivered to Poland’s planned Gdansk LNG import terminal, according to PGNiG. The import terminal has a 2027/2028 start date, according to Poland’s transmission system operator (TSO) GAZ-System. PGNiG previously held an HoA with Sempra for 2mtpa from Port Arthur that was terminated in July 2021 due to project delays, instead focusing on offtake from Sempra’s Cameron Train 4.

Poland has accelerated efforts to secure new gas supply deals after Russian producer Gazprom halted all deliveries under its existing long-term contracts with PGNiG at the end of April. This was a response to PGNiG refusing to comply with the new payment method set up by Russian president Vladimir Putin at the end of March.

PGNiG is Poland’s largest oil and gas company, dominating the industry from exploration to storage as well as transmission and trading. The company accounts for over three quarters of Polish gas acquisition.

During the past several years Poland has been vocal about its plans to make a clean break with Russian gas and not to renew PGNiG’s 26 year-long Yamal piped supply contract with Gazprom. The contract expires at the end of 2022.

PGNiG has been planning to partially backfill the end of Russian supply with LNG contracts with two such agreements starting in 2023 making slow progress.

Non-Russian supplies

Prior to the invasion, PGNiG had an existing 5.5mtpa in future US LNG contract with volume on a Free on Board (FOB) basis from previous agreements with US developer Venture Global.

Volumes will be delivered from both the 10mtpa Calcasieu Pass plant in Louisiana, which is now in the commissioning stage, and the second Plaquemines LNG project, which is under development.

Venture Global took a final investment decision (FID) on 25 May to develop the first 13.33mtpa phase of its second LNG project, Plaquemines LNG, and the associated Gator Express pipeline. The developer originally expected FID for the project in late 2021.

PGNiG also has active LNG contracts with US-based Cheniere and UK-based Centrica for nearly 1.7mtpa on a delivered ex-ship (DES) basis.

These add to PGNiG’s long-term contract with Qatargas for LNG supply, in place since 2018.

According to PGNiG’s expectations back in 2021, once all long-term contracts begin, deliveries of US LNG to PGNiG will total 9.3bcm/year.

Another supply opportunity for PGNiG came from the 10bcm/year Baltic pipe project, due to link Poland with Norway and Denmark. The pipeline is scheduled for partial commissioning by October 2022 and full commissioning by January 2023, according to the project operator.

In 2017, PGNiG booked enough capacity on the pipeline to replace 80% of volumes currently supplied by Russia.

However, PGNiG has only secured enough long-term supply through the pipeline to fill around 45% of its reserved Baltic pipe capacity in 2023. The gas is sourced from its own and Danish production.

In 2020, PGNiG signed a long-term contract with Danish utility Orsted for supply of 6.4bcm Danish North Sea gas through the Baltic pipe between 1 January 2023 and October 2028, translating to around 1.1bcm/year. Weeks after the deal was announced on 21 October, operator Total delayed the resumption of production from Denmark’s largest natural gas field Tyra by a year to June 2023.

Tyra has been shut down for redevelopment since autumn 2019 and is responsible for 90% of Danish domestic gas production.

Orsted holds a number of take-or-pay contracts with producers in the Danish North Sea but has increasingly turned away from oil and gas towards renewables. The PGNiG contract gives the Danish incumbent a firm buyer of these volumes in the long term.

Orsted said in December last year a delay to the resumption of Danish gas production from the Tyra field means delivery to PGNiG will likely start later than January 2023.

When asked about the possibility of further supply contracts through the Baltic pipe being signed, a PGNiG spokesperson did not comment, highlighting instead that the company aspires to build up its presence in the Norwegian Continental Shelf as well as its trading capability.

NCS production

PGNiG also has equity stakes in a number of producing fields on the Norwegian Continental Shelf (NCS).

The company forecasts its NCS output to reach to 0.94bcm in 2021 and has confirmed that the entirety of its NCS production will be transported to Poland via the Baltic pipe from 2022 onwards.

PGNiG Upstream Norway plans to produce an additional 0.5bcm of natural gas in 2022 bringing the overall output to 3bcm. The increased gas production comes from three reservoirs: Skarv, Gina Krog and Duva.

Going forwards, PGNiG Upstream Norway intends to produce 2.5bcm of gas in 2023, 100mcm more than previously forecast.

In 2024, the PGNiG Group’s production on the Norwegian Continental Shelf may reach 2.9bcm, 0.3bcm more than expected so far.

However, delays to US LNG project funding and the restart of Danish gas production may leave Poland more exposed to the spot market from 2023 than initially intended.

ICIS analysis from last year highlighted that PGNiG’s NCS production, based on their 2021 guidance, and the long-term supply deal with Denmark would result in imports through the Baltic Pipe account ing for only 20% of the retiring Gazprom contract’s annual volume.

This contractual supply gap, unless filed with other deals, will necessitate increased activity from PGNiG on the European spot market to plug the gap.

Evidence of increased spot activity can be observed in the LNG market. A total of 14 incoming cargoes have been procured on a spot basis according to year-to-date figures. Only 12 arrived across 2021.

Pipeline and LNG infrastructure will allow PGNiG to draw from both markets to source spot volumes.

Only 25% of PGNiG’s Baltic pipe capacity is tied to its own production and the Orsted agreement, leaving around 6bm/year to be used for short-term buying or perhaps other long or mid-term supply deals.

PGNiG told ICIS at the end of 2021 that its use of the Baltic pipe will depend on the outcome of its portfolio optimisation, taking into account prices on hubs and the LNG market as well as demand in Poland and Central and Eastern Europe.

Poland can also physically source German gas directly via the GCP point on the border between the two countries, as well as the Czech Republic.

Russia’s export capacity to Germany was expected to double to 110bcm/year on completion of the Nord Stream 2 pipeline but the launch has been suspended following Russia’s invasion of Ukraine.

On the demand side, Poland could face rising gas consumption from fuel-switching in the power sector if it wants to move away from a heavy reliance on coal.

Coal’s position as a domestically produced resource, independent of Russia, has helped it remain a key energy source in Poland.

Poland imports about one fifth of its coal, 75% of which has historically come from Russia. Some 9.4m tonnes of coal from Russia was imported in 2020. Poland discontinued imports of Russian coal from 15 April 2022 following a decree signed by the President. Alternatives to Russian coal come from the US and Mozambique, a spokesperson for the Szczecin-Swinoujscie port contacted by ICIS said.

In 2020, coal accounted for 50% of Poland’s total electricity generation while gas was responsible for 9%. In 2021, coal retained its 50% share while gas dropped 1 percentage point to 8%.

ICIS EU Long-Term Power Analytics anticipates that gas-fired electricity generation will overtake coal by 2026. Modelling shows 56TWh will be produced by gas that year compared to 42TWh. In contrast, ICIS expects gas to produce 2TWh in 2022 compared to 92TWh from coal.