UOKiK NS2 Decision: ‘Alternative Facts’ & ‘Sanctimonious Hypocrisy’ [GGP]
Executive Summary
- The UOKiK decision imposing fines on Gazprom and five Western companies in conjunction with the Nord Stream 2 pipeline project (‘NS2’) is based on market facts, which are false without exception. Since we find it hard to believe that a competition authority is unaware of the true state of the markets, we choose to call them ‘alternative facts’, deliberately put forward to justify its obviously politically motivated decision. To add insult to injury, the alternative facts are presented in sanctimonious hypocrisy fashion (“… It is astounding that Western corporations fail to understand…”). The description of the European gas markets, meanwhile embedded in a global gas market, is simply wrong. The depiction of the Polish gas market is misleadingly false. While the UOKiK assumes the role of ‘headmaster’ for the European Union, Poland continues to obstruct integration of its gas market into the Single European Gas Market by multiple ‘non-physical entry barriers’ including anti-competitive practices such as e.g. ‘predatory pricing’. The UOKiK would thus be better advised to clean up the foreclosed Polish gas market in front of its own doorsteps.
- The UOKiK’s assertion that Europe is dependent on Russia, and such would be exacerbated if NS2 were completed and became operational, is ‘yesterday’s news’. Yesterday’s news because it hinges on market circumstances prevailing in 2009, the year of the so-called ‘Ukrainian gas crisis’, thereby ignoring the fundamental changes that have occurred since then.
- Price formation in the European gas markets is predominantly performed by traded hubs, with no remaining price-setting power for importers. The Northwest-European market, where gas-on-gas pricing prevails with 95%, is meanwhile a ‘transnational market behaving like a single price zone’. While the Czech Republic, Poland’s CEE neighbor, is part of it, Poland is not, although it could.
- The Dutch TTF has established itself as the almost universal price benchmark also for other parts of Europe beyond the Northwest-European market. Some 75% of all European gas trades (a record 3,657 TWh in October 2020) are transacted on the TTF.
- Moreover, the TTF has evolved as a global price benchmark e.g. for would-be LNG sellers. Global commercial operators monitor the spread between the American Henry Hub and the TTF as well as e.g. the Asian EAX respectively. They are continuously looking for where they can achieve the highest netback.
- This means that the TTF, and thus Europe, can send out ‘price signals’ into the global gas market, e.g. price spikes if a major source of supply for Europe fails, be it for technical reasons or by an attempt to exercise political blackmail.
- The so-called ‘LNG revolution’ (IEA) has fostered a global gas market with an ever increasing quantity of destination-flexible and even destination-free LNG (IEA: ~500 bcm/a in 2025), ready to respond to attractive price signals on short notice. The pandemic causing cargo cancellations and terminal underutilization has not reduced, but amplified the response capabilities: significant quantities of LNG were – similar to practices known in the oil market - put into ‘floating storages’ (LNG tankers), ‘locked and loaded’ to respond to any attractive price signal.
- Europe avails of significant import infrastructure capacity far beyond its import needs. Besides an extensive, well interconnected pipeline grid, the LNG re-gas capacity comprises some 220 bcm/a, i.e. more than the entire Russian supplies to Europe. It can thus accommodate LNG in large quantities should the need arise.
- The availability of abundant destination-flexible global LNG affords Europe the best of two worlds: Pipeline gas and LNG compete, keeping prices low. At the same time, LNG sets the maximum achievable price for pipeline gas: LNG acts as the ‘policeman’.
- Hence European security of supply has transformed from once ‘bilateral physical dependency’ into a ‘functionality of global price signals’, which renders the UOKiK assertions of dependency on Russia ‘yesterday’s news’.
- Also infrastructure resilience tests, particularly the stringent ones performed by ENTSOG in its Union-wide SoS simulation report 2017, confirm, in a variety of scenarios, that dependency on Russia is, particularly also for Poland, a myth.
- The ENTSOG scenario simulating a complete disruption of Nordstream (1) at the Greifswald receiving station causes no supply curtailment anywhere. The ENTSOG scenario simulating the disruption of all Russian imports via Ukraine (i.e. emulating the 2009 gas crisis) reveals that Nordstream (1), carrying 55 bcm/a, alleviated a thus far existing European concentration risk: up to 120 bmc/a (>50%) of Russian imports via one single transit corridor, namely Ukraine.
- The UOKiK’s assertion of Poland’s dependence on Russia can hardly stem from ignorance, but rather appears to be made ‘against better knowledge’, rendering it ‘fake news’ based on ‘alternative facts’.
- Poland scores well under ACER’s ‘market health metrics’ by boasting five different sources of supply and even more delivery-/interconnection points.
- Also with regard to the so-called residual supply index (‘RSI’), computed by dividing the sum of existing supply capacities minus the largest source (Russia) by domestic consumption, Poland scores well with RSIs >100%.
- In the (unlikely) event that Yamal East-West transit flows would, as a consequence of both NS1 and NS2 being fully utilized, be diminished or subside completely, and thus also the possibility of Yamal virtual reverse flow, Polish independence from Russia would not be affected.
- This conclusion is also confirmed by ENTSOG’s scenario #2, ‘Disruption of all Imports via Belarus’: no supply disruption whatsoever transpires for European Member States at large and also not for Poland.
- While the UOKiK asserts that NS2 is ‘dividing Europe’, it is in fact Poland which is working hard to ‘divide’ Europe. While having locked up its market to the West and pursuing its aspiration of becoming a ‘pivotal hub’ to the East, it sits like a ‘cork in the bottle’ between the transnational Northwest-European market and Poland’s eastern neighbors.
What else can be more divisive than Poland preventing its eastern neighbors from becoming part of the – nearly completed - ‘European Henry Hub’?
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- The UOKiK’s assertion that Gazprom, if NS2 became operational, might be in a position to ‘increase end-consumer prices’ (in Poland and elsewhere in Europe), is a populist statement lacking any understanding of how markets work. Gazprom is an importer at the wholesale market level. End-consumer prices can only be affected indirectly by means of procurement cost. Whether, however, Gazprom or any other importer has price-setting power on the wholesale market, depends on the price formation prevailing. Since hubs are the price setters, there is neither a direct nor an indirect possibility for Gazprom to increase wholesale prices, let alone end consumer prices.
- Professional wholesale traded market price impact assessments (e.g. by ewi), conclude reduced wholesale traded market price levels for Europe at large if NS2 volumes became available in the market. Absent NS2 volumes, more LNG would need to be imported at elevated prices. The European welfare benefits according to ewi range between € 7.9 billion (in a low global LNG Demand scenario) and € 24.4 billion (in a high global LNG demand scenario) annually.
- Ewi concludes, for Poland alone, welfare benefits from NS2 volumes coming to market of € 0.4 to 1.3 billion. This of course only, if Poland would drop its entry barriers towards the Northwest-European market.
- The author, taking a less granular approach than ewi, but rather looking ‘holistically’ at the European wholesale traded markets at large, arrives at a much larger number: If Russian NS2 gas were rebuked, Europe would have to compete for much larger quantities of global LNG with Asia on a permanent basis. The average Asian price premium (prevailing for a long time before October 2018) comprised some 3.3 $/MMBtu (i.e. ~10 €/MWh). The respective welfare loss (or, conversely, welfare benefit if NS2 volumes would flow) for European citizens could amount, in a high global LNG demand situation, to some € 50 billion per year.
- The debate around the ‘Navalny incident’ is ‘misguided’. While unequivocally an inexcusable crime, an NS2 ‘construction stop’ demanded by populist politicians would punish the wrong targets. Gazprom, however, could easily increase its booking of Ukrainian transit capacities and continue with undiminished gas supply levels. It would thus have to be an embargo of substantial quantities of Russian gas imports (and not an NS2 ‘construction stop’) which would ‘really punish’ Russia, if politically deemed expedient. The consequence would be elevated wholesale traded market prices in the range indicated above. Moreover, in order to avoid collateral damage to transit countries (e.g. Ukraine, Poland), such punishment should then aim at delivery points exclusively hitting Russia, i.e. Greifswald (Nord Stream 1) and Lubmin (NS2).
The somewhat startling conclusion is thus that those most urgently demanding ‘punishment’ should, if they are serious, be pushing hard to expedite NS2 completion in order to increase the ‘punitive leverage’.
- ACER observes stronger interdependence of hubs and further convergence of sourcing costs. Poland, however, stands out negatively with exceptionally high spreads versus the TTF benchmark on average hub price levels and even more so on day-ahead (i.e. spot price) divergence. Its hub still scores poorly in ACER’s category of ‘emerging hubs’.
- Gazprom is meanwhile ‘price-taker’ in the European wholesale traded markets. Its average LTC prices essentially trail, at somewhat higher levels than average traded prices, the TTF. Gazprom’s auction platform ‘ESP’ has made up more than 14 bcm of sales ‘lost’ through down-nominations by long-term contract customers in 2019. The ESP products on offer comprise all manner of traded products. The prices are essentially matching TTF prices, at times even lower.
- The UOKiK asserts that the high investment costs for NS2 would cause price increases for end consumers. Also this assertion is embarrassingly wrong: Since the achievable price for an importer is the wholesale traded market price, such price is a ‘given’. The costs of transport cannot affect such achievable price. Rather, they affect, just as other ‘upstream costs to ship to market’, only the well-head netback of the producer.
- The UOKiK’s assertion that Gazprom would, e.g. by means of NS2, impose ‘territorial restrictions’ and (unilaterally) ‘increase prices’, deliberately ignores the 2018 DG Comp/Gazprom settlement, in which Gazprom committed to the contrary. For Poland, being the only Member State challenging the settlement in court since it had wanted a hefty fine to be imposed on Gazprom, it is distasteful and probably ‘ultra vires’ to anticipate breaches of such commitments and impose fines ‘in advance’.
- Poland has not removed its multiple ‘non-physical entry barriers’: it continues to obstruct free cross-border trade, does not embrace the fair and competitive liberalized European market practices and even tolerates anti-competitive behaviour.
- The economically prohibitive storage obligation continues to apply, keeping international traders out of the Polish market. Despite the EC eventually serving a ‘Reasoned Opinion’ in November 2019, Poland has only proposed to ‘gradually ease’ the storage obligations for LNG imports, conveniently ignoring that all LNG re-gas capacity had already been booked on a long-term basis by incumbent PGNiG.
- The retail market, in 2018 qualified by the author as a ‘commercial no-go area’ due to the prevailing predatory pricing practices of incumbent PGNiG, tolerated by the Polish regulator (and obviously also by the UOKiK), saw PGNiG’s market share ‘increase’ in 2018 and 2019. The Polish regulator explains that ‘several’ new entrants ‘ceased operations’ and PGNiG stepped in as the ‘supplier of last resort’. The ‘commercial no-go area’ has thus claimed its first victims.
- Poland has made significant progress in further diversifying its supply sources. The 10 bcm/a Baltic pipe project, supported by lavish EU subsidies, is well under way. Moreover, the LNG terminal Świnoujście is being expanded from 5 bcm/a to 7.5 bcm/a and yet another LNG terminal (8 bcm/a) is planned to be erected. Poland will thus shortly avail of non-Russian import capacities way beyond its own import needs, in pursuance of its dream to become a ‘pivotal hub’. There is no evidence that the asserted dependence on Russia is, e.g. by means of ‘tacit coercion’ or otherwise, standing in the way, quite the contrary.
- Poland has been very successful in reversing its true role in the European Energy Union, namely ‘culprit’ by obstructing market integration and tolerating anti-competitive practices, into ‘victim of Russian dominance’, thereby collecting substantial amounts of EU subsidies, i.e. European tax payers’ money.
- The current transport arrangements regarding Russian gas imports, particularly the Ukrainian transit accord (with those capacities not booked liable to be mothballed or even completely decommissioned in the not too distant future), ride on the ‘tacit optimism’ that NS2 will be completed with only ‘minor delay’ despite all objections and troubles including American sanctions. Due to this ‘tacit optimism’, the respective capacity arrangements are ‘tightly stitched on edge’, without any remaining ‘buffer-capacity’, catering for seasonal cold spells, to speak of. With NS2 not completed, e.g. another ‘beast-from-the-east’ could easily cause a supply crunch and in consequence price spikes up to levels required to attract sufficient quantities of global LNG.
Nonetheless, Poland is going out of its way to still derail the project entirely, or at least delay it as long as it can. It is annoying that Poland, falsely pretending to be ‘victimized’ by Gazprom via NS2, might instead ‘hurt’ European citizens at large if a supply crunch arises and prices go through the roof. It would then be the European citizens dearly paying for the Polish foolhardiness.
Last but not least, Poland is also, by any action aiming to protract or even derail NS2, damaging the efforts of the gas industry to reduce emissions along the entire gas value chain: NS2 would bring about significant quantities of CO2equ reductions (~11 million tons per annum) compared with continued Ukrainian transit.