PGNiG: Natural Gas Release Programme

PGNiG SA, which has a monopoly position in the Polish natural gas market, has recently published its view on the Natural Gas Release Programme. The concept of the programme presented by PGNiG discusses two issues - namely, the functioning of the natural gas market and the implementation of the programme.

Market regulation

The main assumptions of PGNiG's model require, among other things, the following necessary modifications to the mechanisms used to regulate natural gas prices in Poland:

• a proposal that PGNiG conclude a voluntary agreement with the president of the Energy Regulatory Office (ERO) which would require the parties to comply with the principles set out in such agreement until December 31 2015. The regulatory agreement would govern, among other matters:
  • the methodology to be used in the calculation of natural gas prices offered by PGNiG under the programme; and
  • the indexation method to be applied to natural gas prices offered by PGNiG under the programme for consecutive quarters up to December 31 2015;

• a system of auctions in which PGNiG would sell its natural gas for a price calculated for the programme, in accordance with the method set out in the regulatory agreement;

• an administrative decision by the president of the ERO exempting PGNiG and other sellers of natural gas from the obligation to submit tariffs for approval in relation to non-domestic (institutional) users; and

• maintenance of the obligation to submit tariffs for approval in relation to domestic end users, with the assumption that the wholesale price applicable to such users will be in accord with the regulatory agreement.

The provisions of the regulatory agreement would be fully consistent with the provisions of the detailed model for the implementation of the programme.

Implementation model

The implementation model contemplated by the programme provides that PGNiG would auction up to 70% of the total volume of its natural gas - based on data for 2011, this would amount to up to 9.4 billion cubic metres a year. Auctions would guarantee public and equal access to all interested parties.

PGNiG would not participate in the auctions, but they would be open to PGNiG's subsidiaries, including the distribution system operators, the storage system operator, energy producers and trading companies. Natural gas would be available at the virtual point located in the transmission system of the transmission system operator (ie, OGP Gaz-System SA).

Gas auctions would be available in the form of annual contracts for delivery in 2013, 2014 and 2015. PGNiG proposes that the contracts be structured as follows:

• Flat deliveries of annual tranches of 10,000 megawatt hours (approximately 1 million cubic metres) of natural gas will be deliverable in 2013, 2014 and 2015, with the delivery commencement date to be January 1 of each year.

• Supply would be continuous.

• The delivery price (in the first quarter of 2013) would be determined by the relevant auction, whereas in subsequent quarters the price would be indexed in accordance with the method defined in the regulatory agreement.

Contracts would provide for a physical delivery obligation and a physical receipt obligation, thus requiring the delivery or receipt (as appropriate) of 100% of the natural gas volumes under the contracted. PGNiG's proposal is based on the same method as that used in the trading of electricity on commodity exchanges.

Auctions would be organised with the help of the relevant commodity exchange. In accordance with guidelines issued by the president of the ERO, natural gas would be offered in five auctions, to be held at regular intervals of two weeks. Up to 1.9 billion cubic metres of natural gas (approximately 14% of the market share) would be made available in each auction. A secondary market, on which participants in the auctions would be able to trade natural gas freely, would be operated by the relevant commodity exchange after each auction.

Parties would be able to enter into bilateral over-the-counter contracts on the secondary market, as is the case in all developed natural gas markets. However, conclusion of such contracts would be possible only after the receipt of a decision from the president of the ERO exempting the relevant parties from the trading tariff approval regime.

The initial asking price in an auction would be based on a wholesale price reflecting PGNiG's average cost of acquiring natural gas from all sources, including:

• costs of import;

• costs of producing domestic natural gas (ie, costs of extraction, along with a due return on capital employed);

• costs of maintaining compulsory stocks in accordance with applicable laws;

• fees collected by the transmission system operator for pumping natural gas into the transmission system; and

• PGNiG's wholesale margin.

PGNiG would like to introduce discounts on the wholesale price in order to encourage potential bidders to buy natural gas at auction. The discount available would be equal to PGNiG's wholesale margin.

The initial asking price in the auction system would be modified to reflect the level of demand. PGNiG's proposal foresees a system of periodic adjustments to the asking price of gas offered at auction, which is intended to help PGNiG avoid losses (ie, to cover the actual costs of acquiring gas), but also to avoid a situation in which PGNiG would otherwise generate an unwarranted profit on wholesale trading operations.

In PGNiG's opinion, the date for implementation of the programme will depend the market's legal and organisational readiness for it; however, the programme should be implemented within two to three months of the signing of the regulatory agreement with the president of the ERO. This transition period would be required to allow participating parties to make appropriate preparations, especially to sign any agreements that are required with the transmission system operator and the commodity exchange. PGNiG assumes that the necessary organisational changes and changes in law will be made within a timeframe permitting the delivery of gas offered under the programme to commence on January 1 2013.

This article was prepared by Rafal Hajduk, a partner and head of Warsaw based energy team at Norton Rose Piotr Strawa and Partners LP  and Hubert Moryson-Kowalski, Associate at Norton Rose Piotr Strawa and Partners LP.  For further information, please contact Mr. Hajduk or Mr. Moryson-Kowalski by telephone (+48 22 581 4900), fax (+48 22 581 4950) or email (rafal.hajduk@nortonrose.com or hubert.moryson-kowalski@nortonrose.com).