Poland’s PGNiG Wins Gas Price Dispute With Russia’s Gazprom Worth $1.5 Billion

How will Poland’s victory in gas price dispute with the Russia’s Gazprom affect the future dynamic of energy supply in Europe?

By Julia Benbenek

On March 30, 2020, Poland’s largest distributor of natural gas, Polskie Górnictwo Naftowe i Gazownictwo (PGNiG), announced that it won an energy-supply price dispute with the Russia’s Gazprom. The dispute had lasted for five years, and it was decided by the Arbitral Tribunal in Stockholm. The ruling found that Gazprom had been overcharging Poland for its gas supply and established a new price formula for future energy imports. As Jerzy Kwieciński, President of the PGNiG SA Management Board, summarizes: “The Arbitral Tribunal has sided with PGNiG, thus confirming that the price of gas in the Yamal Contract failed to reflect the price level on the market and was overstated.”

The initial price of gas had been set by the Yamal Contract. This contract was concluded between Poland and the Kremlin on September 25, 1966. The Yamal Pipeline, which runs through Belarus, provides Poland with approximately 10.2 billion cubic meters of gas (bcm) annually; this is more than half of Poland’s annual consumption of 18 bcm. The contract includes a ‘take-or-pay’ clause which requires PGNiG to pay for a minimum of 8.7 bcm annually, even if it does not need such a quantity. PGNiG claimed it was paying more than its Western counterparts. Consequently, on November 1st, 2014, PGNiG submitted a price review request, asserting that the price set by the contract did not reflect the market price level.

A map of the Yamal Pipeline (Source: https://commons.wikimedia.org/wiki/File:Yamal-europe.png)

The new price formula covers the period from when the price review was submitted to February 29, 2020. Jerzy Kwieciński describes the formula as such, “the Tribunal changed the calculation formula for the price of the Russian gas by tying it very closely to the price level on the European market, which for PGNiG means a huge improvement of the terms of our gas imports”. Gazprom will be required to pay back PGNiG for the total amount it overcharged over the 5-year period. In a statement, Gazprom Export said it had received the Stockholm arbitration ruling and was analyzing it. It also mentioned that, “It is still too early to provide any estimates of the size of the potential payments.” However, PGNiG estimates that Gazprom will have to provide a refund of nearly USD 1.5 billion.

This decision marks yet another setback for the Kremlin’s Gazprom. In June of 2015, it announced plans for the construction of the Nordstream 2 Pipeline which would directly connect Germany to Kremlin gas supply. However, the Nord Stream 2 project is facing sanctions by the U.S. Furthermore, PNGiG has announced a declaration of intent to terminate the Yamal Contract; the agreement will remain in effect until December 31st, 2022.

Throughout the past couple of years, PNGiG has been striving to diversify its energy supply. From 2015 to 2019, the share of natural gas from Gazprom in Poland’s overall gas import fell from 87% to 60%. To replace Kremlin energy imports, PNGiG has been purchasing greater quantities of liquified natural gas (LNG) from Qatar, the U.S., and Norway. Furthermore, Poland plans to construct an additional gas pipeline to Norway which would connect it to gas reserves in the North Sea.

The Arbitral Tribunal’s decision to rule in Poland’s favor protects Poland’s energy security and paves the way for PNGiG’s further diversification of energy supply. In light of the ruling, Jerzy Kwieciński announced ambitious plans for PNGiG: “Diversification of gas supplies remains our constant priority, therefore we plan to use the funds we will recover from Gazprom to purchase new hydrocarbons deposits. We will also invest in new business areas related to the integration of the domestic heat market and the development of a zero-emission energy source system.”

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