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Energy cooperation in gas sector within Central and Eastern Europe

The aim of this paper is to analyze energy cooperation between CEE countries including realized, currently ongoing and planned projects in gas sector.
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The aim of this paper is to analyze energy cooperation between CEE countries including realized, currently ongoing and planned projects in this sector. Due to size of energy sector, for the purpose of this analysis, topic was narrowed down to project related to gas industry. Central and Eastern Europe countries (CEE) shall be deemed as countries belong to Visegrad Group (V4) which means: Poland, Hungary, Slovakia and the Czech Republic as well as other region states: Lithuania, Latvia, Estonia, Romania, Slovenia and Croatia. All of this countries are also a member states of European Union. These countries apart from the similar geographical location connects a past belonging to the Eastern Block. As a result, an energy markets are very similar and often some interests are similar. These markets are also different from even known from Western Europe, especially from UE-15. All this circumstances, at least in theory, contribute to formation a sub-regional energy networks. In current political situation CEE states are interesting in stronger supply diversification to become most independent from hydrocarbons supply from Russia. Region countries activity in this area is strongly support by EU and is a frequent topic of the meetings in the framework of regional organizations.

Energy security in CEE states

Central-Easter Europe region is not a large consumer of natural gas. This region is responsible for a production of approx. 12 % in EU and approx. 11% of total import. Biggest consumer in region is Poland which consume annualy 18 bcm of natural gas and a lowest is Estonia with 400 mcm per year (IEA Natural Gas Information 2016). Most of countries in region tends stable or slight decrease in gas consumption. However this trend may change in future and grow up due to implementation, by these countries, EU objectives of climate policy and possible reduction of coal production. Nevertheless CEE states have relatively small share in total gas production in European Union and possible increase in consumption would not change essentially the situation in a region. This states play an important transit role - through their territories passes key pipelines delivering gas from Russia to Central and Western Europe - Yamal Europe with capacity at level 33 bcm per year which runs through Belarus and Poland to Germany and Druzbha pipeline with 100 bcm per year (2013 - volume of imports through this pipeline decreased as a result of Ukrainian crisis) towards Ukraine, Slovakia, Hungary, Austria and Germany. Despite of opening Nord Stream pipeline which runs at the bottom of a Baltic Sea bypassing the CEE countries still, through this region will be transmitted most of Russian gas to Europe. Transit role of this region (in particularly Hungary and Bulgaria) could be strengthen due to execution of South Stream pipeline which is planned to run along the bottom of Black Sea from Russia to Bulgaria with a 63 bcm capacity (http://tass.com/infographics/7275). Interest of the region can only endanger by realization of second line of Nord Stream, which probably will be block by the European Commission.

Most of gas contracts sign by region countries are long-term concluded by Gazprom. Mostly there are 25 year contracts usually contains clauses take or pay and prohibition of re-exporting contracted gas (destination clause). That form which binds states with Russian concern, on the one hand guarantee stable gas supply for a long period of time, and on the other hand leads to price "freeze" regardless of market prices and imposes to states unfavorable clauses which must be complied. Therefore, countries in the region are increasingly speaking with one voice seeking to reduce length of this contracts and stronger diversification of gas supply. Part of the actions takes is on their own, also in a framework of projects supported by EU and some by implementing international joint projects. One of the biggest idea of diversification gas supplies is opening a LNG terminal in Swioujscie in Poland. Polish terminal has capacity of 5 bcm per year and with annual consumption at 16 bcm covers the annual demand for gas at almost 30 % and thus country's energy security is increasing. LNG terminal in Swinoujscie is also a one of the elements of many planned regional projects which the most important is North-South Corridor which will be discussed in detail later in this paper.

Another country in region with LNG infrastructure is Lithuania. This country was almost 100% depend on gas supplies from Russia - gas flowing into country by only single pipeline through Belarus. This situation causes that Lithuania was particularly vulnerable to external disturbances of supplies. That is why Lithuanians decided to build LNG infrastructure. LNG terminal in Lithuania is located in Klaipeda and  it is FSRU unit (Floating Storage and Regasification Unit) called Independence. The initial capacity of terminal reach a value of approx. 1 bcm per year and ultimately its capacity can rise to ceiling of 3-4 bcm. Thanks to this movement Lithuanian not only became, in significant way, independent of Russian gas supplies, but in the future, due to the terminal can cover their national gas demand in 100 % and even re-export it to other Baltic countries . Generally it seems that for CEE countries LNG infrastructure is very good alternative to Russian gas. With this technology gas can be buy anywhere in the world thereby bypassing intermediaries and transit states. This is a particular advantage in current tense relations between the EU and Russian Federation. Moreover, prices of LNG are determined commercially on stock exchange type spot (immediate purchase and sale), which contributes to greater market flexibility for buyers. LNG projects was also proposed in Estonia and Croatia.

Background of gas cooperation in CEE states

Different, in terms of geostrategic and economic, energy situation in CEE states to the situation on Western European countries (especially UE-15) affected for a different perception of threats to energy security and various position to the priorities of EU energy policy. The fundamental problem of Central-Eastern Europe is lack of an appropriate number and quality of infrastructural connections with a region and other EU countries, in particular reversible pipelines. There was a lack of consensus about shape of energy policy and cooperation in energy sector. Breakthrough moment in closer vision of energy security of CEE countries and grasp a needs of deeper energy cooperation were Russian-Ukrainian gas crises in 2006 and 2009. As a result of this crisis in 2006, some EU countries, including all CEE states noted a interruption of gas supplies. Romania and Slovakia reported a drop in supplies from Russia about one third, while supplies to Hungary fall down by 40%. Not only CEE states were harmed but crisis also affected Western Europe countries - France was 25-30% down and Italy 24%. Whereas due to crisis in 2009 deliveries were cut off 300 mcm a day for 14 days. Between 6 and 20 January EU countries have been deprived 20 % of gas supplies (30 % of imports), which had serious economic consequences. Losses for the EU and CEE region estimated at 1.6 billion EUR.

First initiative to improve energy security in region was program proposed by Hungary - New Europe Transmission Systems. NETS project involves connection transmission systems of natural gas in Central and South-Eastern Europe through create a common transmission system operator. Ultimately it succeeded only in formation a international oil and gas company with a Hungarian state as a major shareholder . Necessity for greater development of gas infrastructure in CEE region also noticed European Union, which resulted in decision to increase the financial commitment for creation of new interconnectors. Apart from existing support instrument TEN-E (Trans-European Networks for Energy), in 2009 it was created new investments plan - EEPR (European Energy Programme for Recovery), providing investing more than 2.3 billion EUR in interconnection projects in the gas and electricity. It was a first case of purposing form EU budget, so significant funds for project in energy area. Nevertheless countries in the region agreed that these measures are not sufficient and as result after 2009 CEE states spurred cooperation in a construction of new infrastructure connections which was reflected by further advanced projects as well as bringing into service first interconnectors in 2010-2011.

Present gas cooperation in CEE states

Current gas connections between CEE states is not so extensive as in Western countries, but in a past few years can be seen intense efforts to improve current state. In September 2011 Poland and Czech Republic were connected by Stork interconnector. Pipeline of the theoretical capacity of 2,5 bcm per year, due to weakness of distal part of Polish gas system, sends only 0,5 bcm annually. Because of planned project of North-South Corridor, both sides are interested in expanding cooperation in this field. Grid operator from Czech and Poland signed a agreement on construction second line of Stork pipeline and they received 1,5 million EUR under the Connecting Europe Facility Program. Completion of construction of the Poland-Czech Republic interconnection is scheduled for 2018 . North Corridor project gave Poles boost to expansion of gas pipelines network with a closest neighbors. Poland is currently planning a two more interconnectors - with Slovakia and Lithuania. Polish-Slovakia interconnector is planned from 2011. In 2013 European Commission granted the investments status "Project of Common Interest" (PCI) and in 2014 project has been qualified for EU funding in the field of design work within the framework of the financial instrument "Connecting Europe Facility" (CEF). As in a case of Poland-Czech connections this pipeline is intended to be a part of North Corridor and also fulfilling several important functions from a point of view of those countries like: increasing the possibilities for covering the gas demand of domestic customers by creating new modes of transport and new gas sources and securing gas supplies in crisis situations and in the situation of reduced possibilities of supplies from the side of the Ukraine . Gas Interconnection Poland-Lithuania is a proposed cross-border natural gas pipeline that will connect gas transmission systems of Poland and Lithuania. Project is part of the Baltic Energy Market Interconnection Plan Initiative (BEMIP). This interconnector is planned as reversible: pipeline will have a capacity to deliver 2.4 bcm of gas a year from Poland to Lithuania and 1.0 bcm of gas a year from Lithuania to Poland. The project is planned to end the isolation of the Baltic region as Lithuania, Latvia and Estonia are currently not connected to the EU gas system and, as such, form an isolated energy market. As in a case of previous gas pipelines project was included in CEF program.

The aforementioned Baltic Energy Market Interconnection Plan Initiative is an EU program which is designed to help the Baltic states come out of the energy isolation from the rest of the Member States and to assist with the integration of gas and electricity markets of Lithuania, Latvia and Estonia, to the greatest possible independence from Russian energy supplies. Besides key investments which is POL-LT interconnector, Balts committed themselves to take other action in this area, among others, preparation of a regional gas market model in the Baltic states and interconnected gas market with Finland, harmonization of gas measurement units and Connection of the Polish transmission network with the Danish transmission system by 2022. Regarding gas infrastructure connecting the Baltic States, currently there is only one interconnector between Lithuania and Latvia and Estonia from Latvia. Gas pipeline is the oldest pipeline in Latvia built in 1962, therefore the condition of the pipeline is rather poor. Now a pipeline has capacity under a 4,5 bcm per year but due to increasing importance of the interconnection between Poland and Lithuania and LNG terminal in Klaipeda it is essential to enhance capacity between the two countries. New project aims to enhance the capacity to nearly 6.5 billion per year . What is more this pipeline is connected with Latvian-Estonian interconnector, which existed since 1991 and allows to send 7 mcm per day. This infrastructure will be enhanced in order to allow for bi-directional connections at level of 10 mcm per day.  This actions are connected mainly with a plans for closer co-operation between Finns and Estonians and signing a contract for building a gas pipeline Balticonnector connecting this two countries. As we can read in official EU documents about this project: "Together with Estonian-Finnish pipeline Balticconnector, the Enhancement (of LT-EST interconnector) will successfully connect the Finnish, Estonian, Latvian and Lithuanian gas markets, link the region to European energy markets via the GIPL interconnection between Lithuania and Poland and will bring an end to the energy island situation in the Eastern Baltic Sea Region. Enhancement enables the supply diversification with the transfer of globally sourced LNG from Regional terminal to Estonia/Finland or to Latvia/Lithuania. The increase in the security of supply will enhance the regional resilience as well as decrease the costs of disruptions." The Balticconnector pipeline consists of three sections: 22 km onshore pipeline in Finland (including a compressor and custody metering station), 81 km offshore pipeline, and 54 km onshore pipeline in Estonia (including a compressor and custody metering station). The capacity of pipeline will be 2 bcm per annum and it would be cost about 250 millions EUR, of which more than a half is financed by European Commission. Project should be operational in 2020

Despite all measures taken to exit from energy isolation and greater diversification of supplies to Baltic states, still network of connections in this sector is not so satisfying as it could be. Baltic states due of their location and structure of energy imports as well as broadly defined convergence of interests should take action together, as they have a greater chance of success. Unfortunately, it was not always so. For example inability to achieve consensus by the Baltic states on the construction of a joint terminal (which encouraged them by European Commission), forced the Estonian energy companies to develop their own energy projects. Estonians finalized an agreement with the Finnish energy company concerning the construction a gas pipeline Balticconnector and two LNG terminals - in Estonia and Finland. In the case of Latvia, the integration of markets is hampered by the lack of progress in reforming the gas sector, resulting in maintenance of control over Gazprom's gas supplies in country. In 2014 Latvian authorities delayed the liberalization of the market until at least 2017. The dominance of the Russian company effectively blocks the possibility to import the gas from other sources, including the Lithuanian terminal in Klaipeda. Gazprom has in Latvia the strongest influence in the region, and its interests are effectively protected by the gas lobby. In addition, the tendency to liberalization of the market is reduced by a large share of gas in the energy mix of the country.

Among all Central European States efforts to build new interconnections, as well as modernization of existing routes intensified Hungary. This was linked with a clear change in the line of energy policy both internally and externally. New connections secured Hungary against possible interruptions of gas supplies from East, but also allow importation of additional quantities of gas from the spot market. Under the new energy strategy Hungary also take ambitious actions to create in the country an important center of Central gas trade.

Key in this context, were three calls - with Slovakia, Bulgaria, and Croatia and planned with Slovenia[1]. Existing and planned interconnectors in the south of CEE is presented in Table 1.

Table 1. Planned and exsisting gas interconnectors in the south of CEE

Linked countries

Capacity

Reverse flow

Date of operational

Hungary-Slovakia

5 bcm per year

Yes

January 2015

Hungary-Romania

1,4 bcm per year

Yes

September 2010

Hungary-Croatia

6,5 bcm per year

Yes

February 2011

Slovenia-Hungary

2,4 bcm per year

Yes

December 2017

Croatia-Slovenia

3 bcm per year

Yes

February 2019

Romania-Hungary-Austria

About 10 bcm per year

Yes

July 2017

Bulgaria-Romania-Hungary-Austria

23 bcm per year

Yes

August 2020

Source: https://ec.europa.eu/inea/en/connecting-europe-facility/cef-energy/cef-energy-projects-and-actions [access: 27.12.2016]

 

As we can see the CEE states in recent years intensified efforts to improve the gas infrastructure in a region, whose deficiencies were the biggest barrier to development of regional energy market and increase energy security. It was shown that region states is trying to catch up gaps in this area. Construction of number of interconnectors is also a part of larger project which is North-South Gas Corridor.

First and most important part of North-South Corridor project is Baltic Pipe gas pipeline. Baltic Pipe will connect Norwegian gas fields with Danish and Polish market, as well as with other European markets. In the Norwegian shelf, where gas has to be imported, 19 concessions have Polish gas and oil company PGNiG. Estimated capacity of this pipeline is 10 bcm. Currently, a feasibility study is carried out but both sides send a positive signals to the investments. The Baltic Pipe project consists of five key components:

  1. A Danish upstream tie-in from the Norwegian system in the North Sea to the Danish landing point (or the existing Danish upstream infrastructure)
  2. Expansion of the existing west-east capacity in the Danish onshore transmission system
  3. A compressor station placed at Zealand in Denmark
  4. An offshore transmission interconnector from Denmark to Poland with compressor station
  5. Expansion of Polish transmission system[1]

Baltic Pipe will be profitable for both - Poland and Denmark. Thanks to this project Polish side will provide another way of natural gas import which is very beneficial for national energy security. This is a key task for Polish government in the light of agreement in gas supplies with Gazprom which is ending in 2022. For Denmark it is beneficial for two reasons. Firstly, by gas connection with Poland and Polish LNG terminal Danes will gain access to global LNG market. Secondly, Denmark gradually extinguish gas production from fields located in the North Sea, which were responsible for covering about 90 % of domestic demand. Balitc Pipe may be a proper alternative for them to provide a stable supply of natural gas.  However Baltic Pipe will be only a part of larger plan - North-South Corridor. Gas pressed form Norwegian fields by this pipeline would connect Polish LNG terminal and Polish transmission system. Then, thanks to the expansion of gas interconnectors, gas will flow to other countries in the region and ultimately link up with emerging LNG terminal in Croatia. This is one of the most ambitious regional initiative for diversification of gas supplies and consolidation of energy markets in CEE. If this plan will realize CEE region in significant way become more independent of supplies from Russia and thus increase the energy security in a region.

Moreover Poland aspires to become a regional gas hub. Through the territory of Poland carried out already a large-scale transfer of natural gas on a East-West axis (mainly through Yamal pipeline) and implemented projects, like Baltic Pipe, will launch transfer on North-South axis. Poland has also a LNG terminal with annual capacity of 5 bcm upgradeable to 7,5 bcm. Whereas thanks to existing and emerging interconnectors Poland will be able to distribute gas to countries in a region.

However, Polish ambitious to become a regional gas hub are hampered by several factors. Firstly, it is Nord Stream pipeline and planned second line of this. From Russia to Germany under the Baltic Sea is transmitted annually 55 bcm gas per year, which then passes on German territory in land branch of OPAL and NEL gas pipelines and then distribute a gas to South and West of Europe. Planned expansion of Nord Stream by further 55 bcm will make that gas hub project into question. If Russians will transmit annually, by two lines of Nord Stream, almost 100 bcm, gas imported by Baltic Pipe will be no more profitable because of lower prices of Russian gas. Similar threats causes a decision of European Commission to increase use of OPAL gas pipeline by Gazprom from 50 to 80%. Such a decision would mean stronger competition for Polish LNG terminal with the same economic reasons as in the case of Nord Stream. So far a decision to build a second line and increase the capacity of OPAL has been suspended due to the efforts of Polish energy companies and Polish government. Certainly it can be conclude that Russian Gazprom, which is the main subject of these projects, will be pressed on both Germany side and EU institutions to agree investments by arguing that they have a commercial nature. In addition the another challenge for Polish will be expansion of national system of gas storage.

Conclusion and recommendations

As has been pointed energy cooperation in gas sector among CEE region for many year remained at low level. Compared to the Western Europe countries transmission infrastructure showed a significant deficiencies that prevented a consolidation of gas market in the region. Main causes of changes in perception of region countries were gas crises in Ukraine in years 2006-2009 and current war in the east of this country and tense relations between EU and Russia. CEE states have begun to intensify efforts to stronger diversification of supplies and for closer cooperation with nearest neighbors. Countries in the region realized that often to different goals of Western Europe the greatest benefits may draw from working with a single region. The objectives of energy policy in CEE states in majority of cases are similar and have a common denominator - become independent form Russian gas supplies. To such purpose this countries have different perception in understanding the risk flowing from East. As recent events shown Germany, but also other Western states, treat energy cooperation with Russia as a commercial. Meanwhile, the CEE countries perceive Russian actions as political that which are aimed at taking away transit state status. Moreover, in the interest of Russians is maintain the greatest possible monopoly of gas supplies in individual countries, because it provides ample opportunity of geopolitical pressure.

Future actions of region countries should focus on the further development of interconnectors and earliest possible implementation of North-South Corridor concept in order to enhance EU market integration and creation of a regional market. Furthermore  CEE countries should increase their efforts to establish a single system of hub-based pricing in the EU, that is, a system that is the same for all gas buyers, with differences in prices reflecting either transportation costs or entry/exit tariffs. This very competitive price formation mechanism would work against the strategy of suppliers that try to link the price of gas to oil prices in their contracts[2]. Looking at the broader perspective CEE states actions will put to the test European solidarity. Already we can see a clear differences in perception of goals still not formed Energy Union. This can be seen in particular on the example of Member States approach to issue of Ukraine. On the one hand EE signed an association agreement with Ukraine, but in the other hand Germany with in line with European Commission sign a agreement about Nord Stream II, which basically eliminates Ukraine as transit country. Region countries consolidation in aspect of energy cooperation, will strengthen the position of individual states and region can become almost completely player on European gas map.

 

[1] http://en.gaz-system.pl/nasze-inwestycje/integracja-z-europejski-systemem/baltyckibaltic-pipe/ [access: 05.01.2017]

[2] North-South Gas Corridor - Geopolitical Breakthrough in Central Europe, The Polish Institute of International Affairs, Warsaw 2013

[3] K. Proninska, The impact of energy..., p.48

 

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