05-09-08 Following hostilities in the Caucuses, the implications for European energy security are continuing to play out. While it remains an open question as to whether Central Asian reserves will be "off limits" with regards to Russian influence on supply routes, European states are taking action closer to home to reduce dependency on Russian gas.
Poland currently occupies "pole" position in this race.

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Poland is looking to increase upstream activity in Norway and branch into North Africa. The state has also decided to speed up construction of its proposed Swinoujscie LNG plant on its Baltic coast as a "strategic investment" two days after putting pen to paper on the US missile defence deal.
The fact that Russia halved the amount of oil it sends to the Czech Republic through the "Friendship" pipeline following Prague's willingness to host a radar base for the same defence system, underlines Russian sensibilities to the missile project, and the fact that it is still willing to use oil and gas for political purposes as first seen when it cut off gas to Ukraine in 2006.

The slight snag for Warsaw is that the Swinoujscie terminal will not be ready until 2011 at the earliest. The terminal is expected to have an initial import capacity of 2.5 bn cm, to be upgraded to 7.5 bn cm further down the line in conjunction with a new 200 km "Baltic Link" connecting Niechorze in the northwest of Poland to Rodvig in Denmark. This should reduce Russian leverage over Poland in the future, but Poland will still be heavily dependent on Russian gas supplies, in terms of both volume and geography.
Equally, although coal remains the current mainstay of Polish electricity generation, the second phase of the EU Emissions Trading Scheme could make coal generation more expensive in future.

A number of other states are starting to look afresh at LNG as a potential path to offset Russian dependence. In particular Germany has been actively pursing bilateral Algerian supply deals should "ostpolitik" turn sour. The point is not to reduce overall reliance on Russian gas (this remains a structural reality) but at the very least, to open up more potential supply options while complicating Russian-North African relations.
However, LNG is unlikely to hold all of Europe's energy security answers. LNG supply-side constraints are showing little sign of abating due to contractual wrangling inhibiting upstream investment, and Middle East, Asian and African producers using more and more gas to fuel domestic growth. The fact that PGNiG has had little success in negotiating supply contracts with Algeria, Kuwait, Qatar and even Iran merely underlines the difficulties that LNG can have upstream, while also failing to attract downstream investment in the Swinoujscie plant from Gaz de France or Sonatrach.

Rather than focusing on LNG, the EU would be better off looking at the root of the problem: a fragmented gas market. This has allowed Russia to discriminate among European importers, leaving small countries in central and Eastern Europe highly exposed. A single market would allow Europe to bargain with one voice, a position the European Commission would covet highly.
However, even if Europe were to move towards a genuinely integrated internal gas market and reduce bilateral pressures from key suppliers in the east (Gazprom) and south (Sonatrach), this would probably be too little too late for PGNiG. Despite the political rhetoric from Warsaw, the state-run company is likely to remain committed to the Bernau-Szczecin pipeline, which is designed to transport Russian gas entering Europe from Nord Stream to Poland, due to commence 2009-10. For Poland, physical supplies will inevitably continue to trump political demand.