In an effort to reduce Poland’s dependence on Russian gas, and ultimately enhance the country’s energy supply security, national incumbent PGNiG is building an LNG import facility on its Baltic coast. However, the facility, which is set to be completed by 2011, could face numerous setbacks.

Polish annual gas demand is expected to increase from 15.6 billion cubic meters (bcm) in 2008 to 16.4bcm in 2009, with indigenous production accounting for approximately 5bcm, or 30%, of total gas consumption. The deficit would normally be expected to be filled mainly by Russian imports, which account for around 70% of Poland’s total consumption.

However, because of supply disruptions over the past two years, growing uncertainties regarding Russian gas supplies and the pending Nord Stream pipeline from Russia to Germany that will bypass Poland, the country needs urgently to make strategic investments in securing its gas supplies.

Poland has looked at a number of options for bolstering its gas position, including pipeline projects with the Ukraine, Denmark and Germany. However, liquefied natural gas (LNG) is the preferred alternative, as it will give Poland an added degree of flexibility to cope with future supply or demand shocks. Although the importance of gas to the Polish energy mix makes interruptions to the LNG project unlikely, there are a number of significant risks involved.

Firstly, investing in an LNG project does not guarantee that there will be LNG to fill the import terminal. Indeed, a number of established Western European gas markets have experienced delays and investor withdrawals due to difficulties in securing long-term supply contracts. Like most other European LNG investors, PGNiG is in discussions with Algeria’s Sonatrach. However, until a supply contract is signed, supply risks remain high.

To maintain unfettered control of the project, which it is estimated will cost E400 million, PGNiG intends to be the sole investor; however, the company may not be able to bear this burden alone, especially if costs escalate. Primary suppliers such as Sonatrach are looking to establish themselves in downstream gas projects, and involving such a partner would greatly mitigate the project’s supply risk. It would also provide a partner to contribute towards unforeseen cost escalations.

The project represents a major step for PGNiG, which is clearly seeking to become an LNG player. It is also a major achievement for Poland, as it will become the first EU accession member state with an LNG facility.

Further Reading: Gas Market Profile: Poland