CEEP's Olechnowicz: Eastern Europe Should Jointly Negotiate US LNG

Natural Gas Europe had the pleasure to speak with Paweł Olechnowicz, CEEP's Chairman of the Board of Directors and President of the Management Board of Grupa LOTOS.

During a two-day conference organised by CEEP about US LNG, we spoke of gas cooperation between Europe and the US. "We see there is a strong potential for a win-win situation, in which American companies acquire stable business partners, and European consumers benefit from a more diversified and competitive energy markets. That is why we would like to convince the US that their gas would help us all to strengthen our transatlantic alliance" he said during the interview, adding that LNG contract should remain flexible and last no more than 3 years. In the interview, he also advocates the need for a platform through which countries in Central-Eastern Europe could jointly negotiate gas contracts. 

Central Europe Energy Partners (CEEP), together with LNG Allies and A.T.Kearney, organised the first Europe-US LNG Roundtable. What is your position on US LNG coming to Europe. Do you see it as likely? Will LNG come to Europe or go to Asia?

The LNG issue is part of a broader energy action programme. Central Europe Energy Partners, as a think tank, is focused on energy security and energy efficiency in Central Europe. We believe both of these – security and efficiency – may not be achieved without proper infrastructure. That is why we recently released the “Completing Europe” report, which we presented in Istanbul in November 2014. It argues that energy, transportation and telecommunications challenges for the eleven countries in Central Europe have to do with infrastructure.

We strongly advocate a holistic approach to that challenge. We believe the key to the continent’s energy security is the North–South Corridor that would integrate the different and still largely separate economies between the Baltic, Adriatic and Black seas. In this context, we are not calling for money, but for a stronger partnership in Europe. We need common positions for further developments to tackle the weaknesses of Europe and a common voice to strategically play together.

Indeed, LNG is crucial in this plan, as in this field Europe is still overly dependent on a single supplier. This has already started to change, with Norwegian gas playing more important role in the market. The trading alliance with the US would definitely strengthen this process. US is becoming a gas heavyweight and could become Europe’s strategic gas partner.

You are basically saying that Europe could also pay slightly higher prices for US LNG with respect to what it pays to existing suppliers, as it would have positive ramifications as Europe would then have a stronger bargaining power?

The more players we see in the European gas market, the more competition we have. This definitely influences prices in a positive way. I believe that the only way to make the European market more efficient and more resilient is through competition. That is why, so far, we did not even start discussing prices, focusing rather on administrative and legislative actions that need to be addressed to facilitate the transatlantic gas trade. At this point, our role is to effectively find new sources of supply. I am sure the market will take the proper care of prices.

In this context, my question is: why would US LNG come to Europe? Why should it not go to Asia, where gas prices are higher?

It is a strategic issue. We see there is a strong potential for a win-win situation, in which American companies acquire stable business partners, and European consumers benefit from a more diversified and competitive energy markets. That is why we would like to convince the US that their gas would help us all to strengthen our transatlantic alliance.

Yet, before that, we need to enhance our LNG receiving and gas pipeline infrastructure. This process has already started. Lithuania has recently commissioned its LNG terminal. We will soon have one in Poland. Investment programmes – including the North–South Corridor from Poland, via Czech Republic, Slovakia and Hungary, to Croatia, Bulgaria, Romania and Ukraine – will allow us to have a network that can allow diversification in the whole region. That is also important for the US as it broadens and secures the demand base for their resource.

You touched upon important points. Obviously infrastructures are important and obviously you need gas supplies for these infrastructures. Do you think that long-term LNG contracts could bring about the right price signals that could convince American companies to prefer European customers?

Long-term contracts, ranging from 5 to 15 years, are rather history. For me, long-term gas contracts should last a maximum of three years. We need to build up a network of Central European companies interested in the US LNG. They could team up and create a platform to negotiate common contract durations and prices for gas, which should be delivered to different clients in various European countries. These negotiations should be based on the changes occurring in the market.

We have to create a partnership model that takes into account and foresees unexpected but potential events, such as military actions or weather conditions. We cannot allow these kind of events to impact our energy markets. This trading group should take into account also these possible disruptions and negotiate with American companies ways to secure gas based on market conditions. In this sense, we should strike the right balance between our energy security and American needs in terms of pricing. 

You are saying that Central European countries should recognise their common positions, define their common regional interests so that those interests could converge into one single voice. Then, the countries should share their expertise to increase their ability to negotiate and, doing so, attract LNG at the lowest possible price. Right?

Absolutely. This would allow us in Europe to obtain the lowest feasible price, which might be competitive with existing contracts. 

I see your point and I think the initiative is well-thought and well-designed. However, I see some problems in this strategy. For instance, let’s imagine that Gazprom – that maintained high prices over the last years – decides to decrease prices. Its gas would then become cheaper than US LNG. A second argument related to this. We saw what happened in Lithuania with the Klapeida LNG terminal, which brought about lower prices as it increased Vilnius’ bargaining power. Despite this advantage, though, Gazprom partially adapted to the new market conditions and its gas then became cheaper than gas delivered to the LNG terminal. That also raised some concerns among several companies, which said that they were basically forced to buy gas from Klapeida when Gazprom’s gas was then cheaper for them. In other words, in your speech, I see some problems with Russian ability to be flexible enough to be competitive in different market conditions. Gazprom could easily pull competitors out of the market. No?

Russian pricing strategy is always hard to foresee. However, I am not sure whether Russia would be willing to make its gas cheaper than the US LNG at all cost. Even if they did, how long would they be able to subsidise their gas production? That is not the point. Let me reiterate: we do not wish to eliminate Russian gas from our market. We welcome it as an important supplier. Our aim is to be more diversified and not to change one dependency onto another.

At the beginning of the interview, you mentioned telecommunications and technology. Don’t you think that Europe should strive to achieve independence in other fields well? In other words, should Europeans try to decrease their technological dependence in the energy sector, but also in the telecommunication and IT sectors?

Absolutely. This has already been placed on the negotiation table. The EU and the US are discussing these issues quite extensively. In the energy sector, for example, innovative technologies apply also to the coal industry.

Speaking about shale gas in Poland, what is your view on this? 

We started with a strong focus on legislation. It took the government and the industry some time to draft a framework which would be attractive to investors. We are still working on it. It takes time. In the US, they started working on it in 1975.

You have two backgrounds: an economic background and an engineering background. According to your perspective, what is the major hurdle for shale gas developments in Poland: economics or engineering?

Both. Developments need money. Investments for the exploration phase do not come without risk. That is why Poland should be economically strong to create a budget and attract investors in the country. The country should work both on the legislative framework and incentives for the industry to decrease the engineering risks.

To conclude, Federica Mogherini said the results of the presidential election in Poland and the local elections in Spain sounded alarm bells. The High Representative of the European Union for Foreign Affairs and Security Policy said that the two elections are eye-openers. She argued that European institutions should re-think their project, and make it more coherent with the needs of all the countries. What’s your point on this?

We have to respect voters. They expressed their need for a change. I do not think there will be any negative ramifications on Poland’s ties with Europe. In my opinion, 25 years after the fall of communism, we are wise enough not to damage our key relationships. We have to be ready for changes. What will they look like? Time will tell.

Sergio Matalucci 

Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci