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Natural gas market

The PGNiG Group plays a key role on the Polish gas market and, as its leader, is responsible for preserving Poland’s energy security. To this end, the Group takes measures aimed at satisfying the steadily growing demand for gas fuel. The PGNiG Group ensures supply diversification by developing domestic deposits and sourcing gas from abroad as the largest importer and supplier of natural gas in Poland. Gas is transported to Poland via an extensive transmission network, with LNG having been fed into the network since 2016. Gas is supplied to end users via distribution networks. The national gas system is complete with gas fuel storage facilities whose purpose is to cover seasonal and daily shortages of gas fuel. In gas fuel trading, the key role is played by the Polish Power Exchange where PGNiG has been the Gas Market Maker since 2013.

Polish Power Exchange

Towarowa Giełda Energii SA - a commodity exchange licensed by the Polish Financial Supervision Authority for trading in electricity, liquid and gaseous fuels, electricity generation and emission volume limits, property rights

The management of the transmission network and transport of natural gas via the national transmission network for delivery to distribution networks (in which the PGNiG Group has a 96% stake) and end users connected to the transmission system is the responsibility of Operator Gazociągów Przesyłowych Gaz-System S.A., a state-owned company. The existing transmission network comprises two operationally interlinked systems, the Transit Gas Pipeline System and the National Transmission System (high-methane gas [E group] and nitrogen-rich gas [Lw subgroup]). With respect to interconnectors, in 2016 activities were taken to:

test and commission for commercial purposes the LNG Terminal in Świnoujście managed by Polskie LNG S.A., a subsidiary of Gaz-System;
continue work on projects involving the construction of interconnectors at the border with Lithuania, Ukraine, Slovakia and the Czech Republic;
carry out market consultations regarding the Norwegian Corridor.

Operator Gazociągów Przesyłowych Gaz-System S.A.

state company whose key role is to handle the transport of gaseous fuels via the transmission network in Poland

Map of existing and planned strategically important cross-border entry points into the transmission system

Source: Gaz-System and ENTSOG

Gas flow

In 2016, imports of gas fuel into Poland rose to 150.1 TWh (up by 13%, or 16.8 TWh), with a 24% year-on-year increase in supply from Poland’s eastern neighbours and a 37% decline in supply from the EU. A vast majority of imported gas, nearly 75% of total flows, originated from countries east of Poland. According to ENTSOG, the Drozdovitse point saw the largest volumes of gas flowing into Poland. As regards imports from the west, the largest flows were recorded at the Mallnow point. The existing cross-border connections at Lasów, Gubin and Kamminke were replaced with a single point called GCP GAZ-SYSTEM/Ontrans. In addition, 2016 saw the first deliveries of liquefied natural gas by sea to the LNG Terminal in Świnoujście. The highest year-on-year growth was recorded at the Hermanowice exit point (Polish-Ukrainian border), where gas exports increased almost six-fold.

ENTSOG

European Network of Transmission System Operators for Gas, association of Europe's transmission system operators

Gas flows at Poland’s gas grid entry/exit points

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Entry/exit point (in TWh)	2016	2015	Δ r/r
Supplies from EU	26.92	42.67	-37%
including Lasów, Gubin (GCP)	4.85	8.03	-40%
including Cieszyn	0.06	0.18	-66%
including Mallnow	22.01	34.45	-36%
Supplies from across Poland’s eastern border	112.08	90.65	24%
including Drozdovitse	48.09	39.03	23%
including Teterovka	0.80	0.79	2%
including Kondratki	28.15	23.70	19%
including Vysokoye	35.04	27.14	29%
LNG regasification	11.14	–	–
Exports to Ukraine (mainly Hermanowice)	10.24	1.56	557%
Total flow	150.14	133.32	13%

Source: ENTSOG

LNG in Poland

In 2016, the Lech Kaczyński LNG Terminal in Świnoujście commenced commercial operations. The LNG Terminal and its infrastructure were built with the involvement of four main partners: Gaz-System, Polskie LNG S.A. (a wholly-owned subsidiary of Gaz-System), the Maritime Office of Szczecin and the Harbour Authority of Szczecin and Świnoujście. Following the completion of the first stage of the project, the terminal can handle annual gas imports of 5 bcm. Should demand for this type of gas fuel grow, the terminal’s capacity may be extended to 7.5 bcm without enlarging the facility itself.

A single shipment of LNG by sea may supply approximately 0.21 mcm of LNG, equivalent to approx. 126 mcm of natural gas. The end product of gas regasification is fed into the national transmission grid via the Goleniów pumping station located over 80 km away from the LNG Terminal. LNG is also transported by tankers to regasification plants or stations located throughout Poland. PGNiG considers LNG deliveries as a means to ensure the security and diversification of gas supply. The Company has reserved some 60% of the terminal’s capacity to receive and regasify approximately 2.5 million tonnes (slightly more than 3 bcm) of LNG annually over the next 20 years.

Distribution system

Distribution services are provided by one major distribution system operator, namely PSG (a member of the PGNiG Group), and several dozen smaller DSOs operating locally whose networks are connected to the system operated by PSG or Gaz-System, the transmission system operator.

Gas storage

PGNiG owns all of Poland’s underground gas storage facilities. The average daily volume of gas withdrawal from Polish storage sites in Q1 2016 was 90 GWh/day, more or less unchanged from the previous year. As at March 31st, 2016, Polish storage sites were filled to 30% of capacity, which means they held approximately 10 TWh of gas. In 2016, gas was injected into storage at an average rate of 135 GWh/day, a 22 GWh/day increase compared to 2015. Before the beginning of the winter season, storage facilities in Poland were filled to over 98% of capacity.

Polish Power Exchange

PGNiG is the leader of gas trading on the Polish Power Exchange (PPX). 2016 was a record year in terms of gas trading volume on the PPX, which reached 114.5 TWh, up 7.1% relative to 2015. The trading volume on the Day-Ahead Market (DAM) and Intraday Market (IDM) for gas was 24.6 TWh, an increase of 76.5% year on year. The Day-Ahead Market saw the strongest growth of 87.4% to 19.6 TWh. The trading volume on the Commodity Futures Instruments Market (CFIM) totalled 89.9 TWh in 2016, a 3.3% decline year on year. It is worth noting that the share of futures in total trading on the natural gas market came close to 78.5%. The growth in spot trading (IDM) attests to the developing deregulation of the market and increased activity by new entrants who use spot transactions to balance their gas portfolios in the short term.

Evolution of volumes and prices of futures contracts for natural gas quoted on the PPX in 2016.

In-house analysis based on PPX data. CFIMg prices are calculated on the basis of the average volume-weighted price of the futures instrument.

Natural gas trading volumes on the PPX in 2015 and 2016.

GWh

In-house analysis based on PPX data.

As at the end of 2016, there were 127 active participants in natural gas trading, a nearly two-fold increase from 2015, with 197 companies holding licences to trade in gas fuels, 20 more than the year before. In 2016, the average spot price of gas was PLN 67.37/MWh, down 24% compared to 2015. Gas prices in Poland were strongly correlated with gas prices in Germany and on other West European gas markets. The difference between spot prices on the PPX and Germany’s Gaspool market shrank from EUR 1.39/MWh to EUR 1.34/MWh year on year. The most significant differences in prices between these markets were observed in Q1 2016.

Gaspool (GPL)

German gas hub, a virtual natural gas trading in northern Germany

Net Connect Germany (NCG)

German gas hub, a virtual natural gas trading in southern Germany

Spot price of gas on the PPX, TTF and NCG in 2016

EUR/MWh

Source: Bloomberg

Trends on the natural gas market

In 2016, prices of gas futures quoted on the TTF declined by 29% relative to 2015. The price plummeted on the back of low prices of crude oil and petroleum products which are used to determine pricing terms in some natural gas import contracts. The European market was flooded with natural gas delivered under flexible import contracts, which generated excess supply and led to declining prices. Prices on the spot market fell 30% year on year. Average prices on the TTF day-ahead market were EUR 13.97/MWh, compared with EUR 19.77/MWh the year before.

Title Transfer Facility

Dutch energy exchange, a virtual natural gas trading point in the Netherlands

Average prices across the main European markets were similar, although there were differences between Continental Europe’s markets and the British hub. For instance, lower prices in the United Kingdom in September were attributable to increased supplies from Continental Europe and Norway as well as high regasification rates.

British hub

National Balancing Point (NBP) - British gas hub, a virtual natural gas trading in United Kingdom

Average monthly spot prices of natural gas at selected European hubs in 2015–2016.

EUR/MWh

Source: ICE – Intercontinental Exchange, EEX – European Energy Exchange

Increased demand for natural gas in Europe was recorded for the third year running. Total demand reached 493 bcm, up 17 bcm from 2015. Demand generated by power plants and combined heat and power plants grew by 13 bcm, to 149 bcm. Households and small business also showed an increased need for natural gas with an aggregate consumption of 192 bcm, up 2% year on year. No changes were observed in consumption generated by the industrial sector. Countries with the most pronounced increase in natural gas consumption were the United Kingdom and Germany, with their demand growing by 6 bcm and 5 bcm, respectively. Over 1447 TWh (135 bcm), representing 54% of last year’s European imports via gas pipelines, originated from Russia. The share of Russian imports increased 15% year on year. Norway emerged as the second largest supplier of gas to Europe, providing 835 TWh (76 bcm), or 31% of total imports. Supply of gas fuel from Norwegian deposits dipped 5% relative to 2015. Exports from North Africa amounted to 423 TWh (39 bcm). The primary factor driving higher imports from Russia was falling crude oil prices. The flexible structure of purchase contracts linked to crude oil prices allowed European importers to increase imports from the East during the slump on the crude oil market and scale back purchases from other directions.

Sources of fuel imports to Europe

GWh/day

Source: Thomson Reuters

The European LNG market also saw certain changes in 2016. The average daily regasification rate was approximately 1.1 TWh/day, down 8% on average compared with 2015. The United Kingdom curbed its demand by 25% year on year, yet the country continues as the undisputed leader with a 27% share in Europe’s total LNG imports. Imports to other European countries remained relatively stable year on year. As at the end of 2016, volumes of gas stored in European gas storage facilities fell to 65% of the capacity. In the corresponding period of 2015, storage facilities were 70% full. In Poland, storage facilities were filled to 77% of the capacity, one of the highest levels among the countries under analysis.

Progress in implementing infrastructural projects on the European gas market

In early September 2015, representatives of Gazprom, Germany’s E.On and BASF Wintershall, Anglo-Dutch Royal Dutch Shell, France’s Engie (former GdF Suez) and OMB signed a legally binding shareholders’ agreement on the construction of the Nord Stream 2 gas pipeline. Pursuant to the agreement, a company will be formed to first build and then operate the gas pipeline, with Gazprom as the majority shareholder with a 51% stake and the remaining shareholders having minority stakes adding up to 49%. Next, an application for the registration of the consortium responsible for building the pipeline was submitted with German and Polish antitrust authorities. In mid-August 2016, the Polish Office of Competition and Consumer Protection concluded that concentration of gas supplies through the pipeline would jeopardise competition on the gas markets of Poland and other CEE countries. Despite these hurdles, in December 2016, the CEO of Russia’s Gazprom, Mr Alexey Miller, announced that Nord Stream 2 would progress as planned and its second leg would be commissioned by the end of 2019. The Turkish Stream project was put on hold in late 2015 after a Russian Su-24 attack aircraft was shot down by the Turkish air force. Following a spell of tensions between Moscow and Ankara, relations between the two countries improved. On October 10th, 2016, Russia and Turkey returned to work on the project and signed an international agreement on the construction of two legs of the pipeline, which are slated for commissioning in December 2019 upon expiry of a transit agreement between Russia and Ukraine. On January 20th, 2017, the act was ratified by the State Duma, and in early February − by the Federation Council. The act on the construction of the gas pipeline was then signed by Vladimir Putin, the last formal approval needed to start the project. As things stand currently, the Turkish Stream has a greater chance of completion than Nord Stream 2 as the former is not subject to the jurisdiction of the European Commission and cannot be blocked like its predecessor, the South Stream.

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Natural gas market

Map of existing and planned strategically important cross-border entry points into the transmission system

Gas flow

Gas flows at Poland’s gas grid entry/exit points

LNG in Poland

Distribution system

Gas storage

Polish Power Exchange

Evolution of volumes and prices of futures contracts for natural gas quoted on the PPX in 2016.

Natural gas trading volumes on the PPX in 2015 and 2016.

Spot price of gas on the PPX, TTF and NCG in 2016

Trends on the natural gas market

Average monthly spot prices of natural gas at selected European hubs in 2015–2016.

Sources of fuel imports to Europe

Progress in implementing infrastructural projects on the European gas market