Poland’s Role in a Shifting Central European Energy Space

Greater energy security is always slow in coming — consisting more of the sum of small yet significant steps, rather than instant, giant leaps forward. So, while the long-term outlook for Poland’s energy security appears quite promising, the road there will be anything but troubled-free.

Poland is currently in the midst of at least three energy projects — at varying stages of development — which, if implemented successfully, could bring about major changes to the Central European energy landscape. Their actual significance and the stakes involved become clear in the broader context of the differences and similarities between the energy needs and strategies of the members of the Visegrád Group (V4). And there are good reasons why the U.S. government and business community should reflect on what avenues would maximize the chances of these projects’ success.

First is nuclear power. Poland is still a Central European outlier in this area as, unlike all other V4 members, it does not currently include nuclear power in its energy mix. However, the Polish coal monoculture as a source of electricity generation on the one hand and the need to meet greenhouse gas (GHG) emission limits on the other makes this situation unsustainable in the long term. Poland’s first nuclear power plant is already delayed (which is not necessarily rare for this industry), but it is notable that the Polish government and state-owned energy entities did not back away from the project following the Fukushima disaster of 2011.

Crucially, introducing nuclear power into the country’s energy mix, while still a rather distant prospect, could equip Poland with valuable flexibility in meeting its growing energy needs. It would also herald a rebirth of the Polish nuclear industry, thus boosting the rationale for U.S.-Polish cooperation on nuclear safety and creating new opportunities for the U.S. nuclear industry in the region, irrespective of the outcome of the ongoing search for a company to build the reactor.

Next is the liquefied natural gas (LNG) import terminal which is being constructed in Świnoujście, in the northwestern part of Poland and is scheduled to be completed in 2014. Its actual impact can only be measured in the context of Europe’s so-called North-South gas corridor. When it comes to natural gas supply, Central Europe’s woes are driven by 1) the near-full dependency on Russia as a supplier (the Czech Republic has managed to make a small, but nonetheless notable crack in this ceiling), which significantly affects the pricing levels and the logic of contractual arrangements; and 2) an infrastructure that effectively allows for gas to flow only westward, i.e. from Russia via Belarus and Ukraine.

The terminal in Świnoujście will help alleviate (though not entirely solve) the first problem. That is good news. But what is badly needed is bi-directionality and greater interconnectivity along the North-South infrastructure axis. The new interconnector between Poland and the Czech Republic does not quite get us there yet due to its limited capacity. New pipes — a Polish-Slovak link and even more importantly, given both countries’ storage capacities and needs for reliable gas supplies, a Slovak-Hungarian one — would be crucial. In addition, the North-South corridor is still missing a southern entry point, as the construction of an LNG terminal on the Croatian coast is scheduled to begin only next year.

So far, each of the V4 members has been interested in adding new pieces to this huge gas infrastructure puzzle, although it can hardly be argued that there was some kind of a regional master scheme — or even a single driving force — behind its development. Still, for all the different motivations behind their approaches to natural gas supplies, the V4 countries have sound reasons to support the North-South corridor: the Hungarians traditionally remaining active when it comes to energy security; the Slovaks dreading a possible deterioration of their position as a “freeway” for the westbound Russian gas following the expansion of new transit routes; the Czechs eyeing the whole situation with at least a friendly neutrality, given their relatively better position when it comes to diversification; and the Poles championing the “one for all, all for one” policy with regard to energy security.

The European Union (EU), for which a better integrated natural gas market is but a subchapter of a tighter, competitive energy market, threw its support behind all these projects late last year. That has made them eligible for EU funding, but the European Commission estimates that the so-called investment gap, i.e. the money that would need to be raised from new investors, could be as big as five billion Euros. And in today’s fiscally constrained environment securing large capital investment contributions from private companies has become problematic.

For the United States, a better connected natural gas market in Central Europe would mean the realization of the long-sought goal of greater regional energy security, but only if there actually are enough resources to be moved around. Genuine liberalization will depend on the actual diversification of suppliers. On the one hand, it is becoming increasingly difficult to take Nabucco seriously as an instrument of diversifying Europe’s gas supply. But on the other hand, Central Europe (and beyond, if the V4 countries are able to add further interconnectors to the north and to the south, linking the Baltic and the Black Seas) could become an attractive market for LNG exporters. Whether the United States decides to meaningfully move into the global LNG market is still largely up in the air, but this could well be one additional argument in favor of allowing for greater natural gas exports to non-U.S. markets.

Finally, there is the Polish quest for shale gas, which, if it ends in success, will help bring about the liberalization of gas markets in the region at an even faster pace. Arguably the biggest challenge involved here is ensuring there is sufficient leadership at the political-bureaucratic, business and societal levels until the project is in full swing, probably no sooner than in four years. In the meantime, developing this industry will be a game of moving back and forth, where real or imaginary setbacks intersect with tangible progress. Unfortunately, it is the bad news that seems to travel faster and sell better. Take for instance the recent decision by ExxonMobil to end its exploration of Polish deposits, justified with the “lack of commercial gas flows.” While by no means a make-or-break moment for the industry in general, it has not gone unnoticed by the public. It would be easy to imagine other companies arriving at similar decisions, if for different reasons: in mid-July, another U.S. major, Chevron, delayed a launch of exploratory activities due to public protests.

But while little can be done about unfavorable geology, there are some useful steps that can be taken to address the above-the-surface conditions. First, it is possible to make up for poor gas flows with a well-structured system of royalties, which should be developed together with the industry and could draw upon good examples from various jurisdictions in the United States. Second, it is necessary to develop a sound liaison between the government and the companies based on transparency, and again looking to tried and tested procedures from North America. Bureaucratic and business cultures do not always get along, but this cannot become a reason for a communication shutdown. Finally, it is important to think big. The shale industry works best where and when it can exploit economies of scale. Polish shale plays may become even more attractive when considered within a regional context. Ukraine comes to mind first. Incentivizing cross-border cooperation on resource base assessments and introducing greater freedom of movement for staff and equipment in the adjacent border areas would not cost much. But it could end with yet another Polish-Ukrainian success, perhaps even more dramatic than the recently concluded football tournament.

The promise of enhanced energy security behind each of these projects is considerable, but — and therein lie the challenges — they will require time and deft leadership along the way. Nuclear power will be a novelty for the Polish public, and the opposition could be rather stiff. In relative terms, Poland relies on natural gas to a smaller extent than the other V4 countries, and so the dependency on Russia as a single-source supplier of imports is less acute, too. More so, with new sources of supply such as the LNG terminal just around the corner and the prospect for increased domestic production from shale deposits, Poland’s determination to invest in further meaningful integration as part of the North-South corridor could falter, especially if the new infrastructure projects encounter problems, not least with securing financing. However, given the strategic dimension of the corridor, business logic alone cannot be allowed to dominate. Similarly, the project cannot be allowed to fall to the backburner due to internal political reshufflings or hypothetical cross-border strives. For an external actor such as the United States, this regional dynamic presents both a challenge and an opportunity. It is a challenge, because not all factors that could affect the ultimate success of any of these projects can be shaped by the United States. Yet it is an opportunity too, since it allows the United States to reassert its political clout in the region and encourage Central European allies to carry on with the reforms necessary to enhance the security of their increasingly common energy space. Ultimately, Central Europe’s energy outlook today is remarkably different than just a few years ago, and it could look even more robust just a few years from now — and the United States could play a valuable role as a V4 partner in this transformative process.

Bartosz Wiśniewski is research fellow at the Polish Institute of International Affairs in Warsaw. Poland’s Role in a Shifting Central European Energy Space was published  by the Center for European Policy Analysis