Patriot games
What if the worst were to happen? Though perhaps unlikely, a financial crisis such as the one Russia experienced in 1998 is certainly conceivable. A diplomatic chill could also spell trouble for Poland. Relations with Russia are at a low ebb, after numerous trade disagreements and heightened tension over the Ukrainian crisis and Chechnya.
Recently, in response to the refusal of some heads of former Soviet republics to come to Russia in May to celebrate the end of World War II, Albert Makashov, a Russian parliamentarian and former general, said: "Russia will get over this latest insult. Very soon, patriots will shut off the gas and oil pipelines. We'll be selfish and think of ourselves."
That may be hyperbole or overzealous patriotism, but it strikes at the core of Poland's energy problem. Its sources simply aren't diverse enough, and as long as Poland is addicted to Russian oil, it can never claim energy independence.
The friendship flow
The Druzhba (Friendship) pipeline is Poland's main oil artery. It stretches from Russia into Belarus, where it splits into two branches. The northern branch quenches Poland's 430,000-barrel-a-day thirst, and sends the rest of its one million daily barrels on to Germany.
That's just a fraction of Russia's output. Production has steadily increased over the past few years, to 8.5 million barrels a day at present, making Russia the world's second largest oil producer. By 2007, production should be ramped up to 9.5 million barrels every day. With an oil giant such as this right next door, some believe there's no need to worry about the flow running dry.
But therein lies the rub. According to Russia's own Ministry of Economic Development and Trade, Russia's output growth will grind to a halt in 2007, when all of Russia's known resources will be tapped. Without more investment in exploration and infrastructure, production will stagnate while world demand balloons.
Monopoly meddling
A report by the International Energy Agency - the OECD's energy policy arm - blames interference by state-controlled monopolies with discouraging investment. "The clash between private sector and monopoly dominance is clearly visible in Russia's oil sector," the report says, adding that there is a "need for regulatory and fiscal reform ... to enhance the investment environment."
Yet due to recent high prices, oil giants such as Conoco-Phillips, BP and Shell have begun to invest in Russia despite fears of government meddling - a decision they may now regret. Just last week Russian authorities slapped a bill on TNK-BP, British Petroleum's Russian venture, for some $935 (zł.2,966) million in back taxes. That's enough to make oil majors think twice before bringing their expertise to the Russian sector.
Adding to worries, a breakdown in delivery due to the Yukos scandal in January sent regional oil concerns scrambling for new sources. The industry came through unscathed, but the scare was a wake-up call for those who believed Poland's energy supply was secure in Russian hands.
Diversifying the portfolio
So where can Poland look to diversify its oil portfolio? Some suggest increasing imports of North Sea oil through the Naftoport terminal in Gdańsk, while others look to OPEC countries, from which Poland imported no oil last year. Prime Minister Marek Belka's trip to Libya in January, as well as recent visits by various officials to Saudi Arabia, seem to indicate that the government is interested.
However, while most of the rest of the world buys Brent or US light crude, PKN Orlen, Poland's dominant oil company, buys Russian Ural crude, which some believe to be of lesser quality than the better-known Brent. That reputation means it comes at lower prices, allowing Orlen to refine cheaper oil and sell the resulting product at market prices. Due to a record Ural/Brent differential last year, Orlen recorded its highest ever profits.
"The basic question is: What about economics? The most beneficial for PKN Orlen is imports from Russia, and everybody knows it. There is no mystery in this," said Orlen vice president Jan Maciejewicz.
Thus, there is little incentive for Orlen to find new sources, and the government cannot force them to. As Economy Minister Jacek Piechota told reporters last month: "Ministries do not negotiate trade agreements."
The Odessa issue
So perhaps the best prospect for diversifying Poland's oil supply is the expansion of the Odessa-Brody pipeline. After being put on hold for several years, the plan looks ready to be realized, with Ukrainian President Viktor Yushchenko meeting with President Kwaniewski last week to set up a working group to push the project forward.
"Now there is no problem of oil, there is no problem of financing. The greatest challenge is to coordinate all the parties involved," declared Yushchenko.
The Odessa-Brody line transports Caspian Sea crude oil from the Black Sea marine terminal in Odessa through Ukraine to Brody on the Polish border. At the time of its construction in 2001, it was expected that the line would be extended to Płock and eventually Gdańsk, allowing Caspian crude oil to be transported directly to Poland.
"It is extremely important for us as a country to have such an independent pipeline to Polish refiners' works," says Włodzimierz Ostaszewski, the director of the Polish Chamber of Liquid Fuel.
"[The extension] is also important for other potential consumers," said the speaker of the Sejm, Włodzimierz Cimoszewicz. "It means that Caspian Sea oil can be transported to Western Europe." Many EU states are highly dependent on OPEC for their oil, and the Odessa-Brody extension would give them easy access to an alternative source.
Role reversal
However, in September last year, due to the lack of supplies coming from oil companies on the Caspian Sea shelf (or due to alleged Russian pressure), Ukraine decided to reverse the direction of Odessa-Brody. The extension to Poland was scrapped, and Russian tankers were allowed to pick up the oil at Odessa, exporting it to Mediterranean countries, and pocketing the profits.
Since then, Ukraine has complained that Russian oil companies are not living up to their obligations. The companies signed contracts to send nine million tonnes of Russian oil annually through the pipeline for three years, but the actual amount is around half that, leading to suspicions that there was an ulterior motive to the reversal.
Oleksiy Ivchenko, chairman of Ukraine's oil and gas monopoly Naftohaz Ukrainy, put it bluntly: "The only reason for reversing the direction was to thwart the originally intended use," he told Ukrainian newspaper Zerkalo Nedeli. According to him, the move was unnecessary, since the Dnipro line, which is shorter, runs in the same direction and currently operates at only 42-percent capacity, could have been used for the same purpose.
"This is pure business," says Ostaszewski. "If I were the Russian authorities, I would also try to do as much as possible not to lose [European clients]." Nearly 30 percent of the crude destined for Russia's foreign customers flows through Poland - a strong incentive to discourage international competition.
Coming online
Now Ukraine's new administration, under President Yushchenko, has shifted Ukrainian policy, and wants to implement the original plan. According to Polish pipeline operator PERN, the extension will require a zł.2 billion investment, and would be ready to come online within three years. They also estimate that the pipeline could transport 15 million tonnes a year, nearly matching the amount that Poland refined last year - 17 million tonnes.
Ukraine even has a plan B waiting in the wings should the pipe extension be thwarted. President Yushchenko last week told daily Gazeta Wyborcza that if the pipe project fails, a refinery could be built in Brody, near the Polish border.
However, Ostaszewski warns that there could be one other stumbling block. "We have no guarantee that the price will be similar to today's price of crude oil from Eastern countries. If we have extremely higher prices than today, [the extension] will not work; it will be empty."
But most expect the price issue to be worked out in further political discussions. As Wojciech Tabi, chief executive of PERN said in an interview with Reuters last month: "This pipeline will certainly be built - the only question is when. Ukraine needs it, Poland needs it, and Europe needs it."
Andrew Kureth
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