The end of energy resource imports from Russia?

Read our dossier "Ending Russia's war in Ukraine: Are we using all economic and energy policy options?"

The temptation to take advantage of relatively cheap oil, coal and gas is great. The global economy was built on these resources. Poland and other European Union countries were slow to decarbonize, diversify supply and introduce renewables. Europe and Russia have developed an energy interdependence over the years and the West deluded itself into believing that by doing business with Putin it was buying peace. This was done with public support because price was important factor to the consumer. Russia has been a supplier of cheap energy resources for years, while reaping great benefits - revenues from fossil fuels account for as much as a third of Russia's budget.

In such a dynamically changing situation we see necessity in preparing for any of the following scenarios:

1. The European Union, including Poland, will give up imports of Russian raw materials.
2. Putin will make a decision to stop the supply of energy resources to the West.
3. Blocking SWIFT will make it more difficult to buy raw materials.
4. Rising commodity prices will limit the opportunities to use them.

Even in the event of de-escalation or a quick end to the war, the continuation of the current energy policy will no longer be possible. Poland will not act alone. Sanctions are being introduced by the entire EU, so the repercussions will affect the entire EU economy. In this article, we focus only on Poland - being aware that it is only a piece of EU’s security of energy supply puzzle. 

While hoping for a better tomorrow, we must prepare for the worst.

How energy-dependent are we on Russia?

Over the past 20 years, Poland has paid over PLN 900 billion for imports of energy resources from Russia. In recent years, we have recorded one of the largest increases in fossil fuel imports among the EU-27 countries. However, while the total costs and volumes of imported raw materials have been growing, our import dependence on Russia has been decreasing. For over a dozen years, Poland has been pursuing a strategy of diversification of gas and oil supplies. Investments in the LNG terminal and Baltic Pipe pipeline have significantly strengthened our position. Over the last few years, coal imports have increased the most. We write in detail about long-term trends in fuel imports in this article. 

Currently just under half, 46%, of our energy needs are met by imported energy resources. Poland produces 3% of oil, 20% of gas and 80% of coal it consumes[2].

Coal

As domestic production and imports have fluctuated in recent years due to economic and supply factors, Poland imports about one-fifth of the coal it consumes. Domestic coal is used in power plants to produce electricity and in district heating. Therefore, blocking coal imports should have no impact on maintaining the stability of electricity supply.

The dominant supplier of coal to Poland is Russia, whose share in 2020 was 75%.

Most of the imported resource is used for local heating purposes. As much as 60% goes to households. Another 15% is supplied to small heating plants - mainly in eastern Poland. 22% is purchased by coking[3] plants. The main reason for importing coal is its high quality parameters and competitive pricing.  

In terms of total consumption of Russian coal, Poland is not the largest importer of this raw material in the EU, as shown in Fig.

However, Poland is EU’s leader in using coal for household heating. And it is those households that consume mainly Russian coal.

 Elimination of Russian coal from Poland, if properly prepared, would probably not jeopardize the security of heat supply, let alone electricity supply. It can be assumed that most households have coal reserves. Heating plants have a statutory obligation to maintain stocks for at least 30 days. Temperatures are mild, the heating season is about to end. The bigger challenge will be to ensure a stable supply of heat and electricity next winter. In the final section of this article, we make recommendations on how to mitigate the potential negative effects of sudden interruption of Russian coal supplies. 

Gas

Poland extracted nearly 5 bcm of natural gas in 2020, much of it nitrogenous gas. However, domestic production consists of only one fourth of our gas consumption. The rest is imported. Currently, 55% of gas imported to Poland comes from Russia. The main consumers of gas are industry, households and the heating sector.  

Poland currently consumes approximately 20 bcm of natural gas. The capacity of gas storage facilities in Poland is 2.9 bcm[4]. The LNG terminal was commissioned in 2016 and its capacity reaches 5 bcm. It is currently undergoing expansion, which will increase the terminal's capacity to 7.5 bcm.

The construction of the Baltic Pipe gas pipeline is underway and is expected to be completed by the end of 2022. Thus, Russian supplies will be replaced with gas imported from the Norwegian Continental Shelf. The capacity of this connection will amount up to 10 bcm, which is as much as our current annual supply from Gazprom. Overnight interruption of gas supplies from the Russian direction may be a great challenge for industry, the power sector and households. However, it is worth remembering that in connection with the expiry of the Yamal contract at the end of this year, we will stop importing gas from the East.

Crude oil

Oil is the primary petrochemical product used to produce gasoline, kerosene, gas oils, paraffin, petroleum jelly, asphalt, and mazut.

More than 70% of petroleum products are consumed by transport (mainly road transport), with the rest going to households and to industry for non-energy purposes.

In 2000, Poland was dependent on Russian oil supplies in 93% - currently it is 65%[5]. The volume of imported oil from Russia has hardly changed and, despite diversification, still amounts to over 16 million tonnes annually. 

For several years, we have signed contracts with other oil suppliers - Saudi Arabia, the United States, Norway. Polish refineries are already technically adapted to process crude oil other than Russian. Again, as in the case of gas and coal, diversification is possible by sea. Naftoport in Gdańsk is prepared to take in large volumes. But this does not mean that it will be easy to move away from Russian oil. The oil market is dominated by the OPEC cartel, which in the OPEC+ format, i.e. with Russia, is able to exert more active pressure on prices than ever before. A short-term shift away from oil is impossible without triggering a major economic and social shock. But the world already dealt with a similar challenge in the 1970s.

Summary and recommendations

Urgent action and mobilization of society, the energy sector and industry is necessary to minimize the negative effects of the energy crisis on Poland. Russian attack on Ukraine completely changed the context and conditions for the functioning of the economy - we will all have to bear the costs of the war in Ukraine. Winning with Russia in Ukraine significantly reduces the risk of escalation of the conflict to whole of Europe and the rest of the world. Actions need to be taken now - some will have a short-term impact, some will have an effect further on.

Campaigning on energy efficiency

• A nationwide campaign to promote energy and fuel savings: aimed at the public[5], dealing with heat, electricity and transport fuel. A sense of solidarity, cooperation and positive mobilization of the public is important.
• Preventing misinformation: regular input of reliable data on the stocks of energy resources, the functioning of the national electricity system and heating plants. Informing about the directions of supply and value of resources contracts. It is necessary to prevent the outbreak of panic, which will contribute to the disruption of supply and demand.
• Energy efficiency in buildings: e.g. replacement of windows with energy efficient ones, led light bulbs, support for the purchase of efficient equipment - e.g. energy-efficient refrigerators, thermo-modernisation (combined with replacement of heat sources) financed through dedicated grants. 

Security of supply

• Conduct stress tests of critical EU energy infrastructure.
• Close coordination on operational security of the electricity and gas system with EU operators.
• Reliable and systematic review and planning for replenishment of energy resources.
• Preventive actions: preparing power companies to take energy curtailment actions: e.g., lowering the temperature in the district heating network by 2 degrees, activating DSR in case of an emergency, preparing power rationing and temporary reduction in power supply.

Market transparency

• Preventing chaos in the fuel market: preparing a plan to limit sales of fuel, gas, coal.
• Urgently deal with ETS market manipulation: limit the role of financial institutions to being intermediaries between the ETS market and covered installations.

Closing the generation gap and accelerating fossil fuel substitution

• Prioritizing the development of renewable energy: the more RES in the system, the less coal and gas consumption. It is necessary to urgently unblock the development of wind energy and continue to support PV. This is key to improving Poland's energy security.  Mobilise DSOs to improve RES integration in the grid.
• Accelerate the development of heat pumps: increasing subsidies before the next heating season will bring quick and concrete results - reducing household coal consumption.
• Accelerate the development of electromobility to reduce future demand for petroleum products; develop charging infrastructure for electric cars.

Strategies

• Urgently prepare an industrial decarbonization strategy and implement it within a specific timeframe. Support energy efficiency and deployment of hydrogen technologies.
• Continue and accelerate the diversification of natural gas and oil supplies.
• Prepare a Polish gas strategy: aimed at systemic limitation of the role of natural gas in key sectors of the Polish economy.
• Make a decision on nuclear power in Poland.

International cooperation

• Take the initiative of regional working groups composed of representatives of neighbouring countries to monitor and cooperate on the security of supply – at a Ministerial level with the participation of the EC and ACER and ENTSO-E and ENTSO-G. Use EU legislation to enhance resilience and solidarity in gas supply.
• Close cooperation between Poland and international institutions in order to normalize the situation on the global oil market; strengthening of the International Energy Agency reserve system.
• Convening, by Poland’s initiative, a European Union conference to begin a strategic discussion on restricting imports from Russia by all EU countries.

A sudden cessation of fuel supplies will shock the European economy and threaten the stability of supply. However, Russia has declared war on Ukraine, deliberately confronting the West. In the background is, among other things, an attempt to maintain Russia's position as a supplier of fossil fuels to Europe.

No one doubts that under normal circumstances policy redefinition and energy transition should take place in a planned manner. But today, with the war in Ukraine, the stakes are at an all-time high.

Stopping coal imports from Russia is possible, for gas we need several months. Oil it will be the most difficult, but it is already necessary to take measures that will bring results in the long term.

No matter what, we are facing many months - if not years - of very high commodity prices. Therefore, we need to significantly accelerate the energy transformation towards renewable sources. While we write about Poland, this discussion must take place throughout the whole of the EU. In the midst of the crisis, in the face of the war in Ukraine, a new, courageous energy strategy of the European Union must be forged.

This article was first published on 28 February 2022, republished with authorisation from Forum Energii and kindly supported by Heinrich-Böll-Stiftung Warsaw office. The authors thank the cooperation of Piotr Kleinschmidt and Tobiasz Adamczewski.

[1] Reuters, https://www.reuters.com/markets/europe/russias-oil-gas-revenue-windfall-2022-01-21/
[2] Based on CSO data, 2021: import dependency = imports/domestic consumption; https://stat.gov.pl/obszary-tematyczne/srodowisko-energia/energia/energ…
[3] Based on IDA data, 2021, https://polskirynekwegla.pl/sites/default/files/StPu/01/2021.09_import%20i%20przyw%C3%B3z%20(acquisition%20inin%C4%85trzunijne)%20on%20the%20area%20of%20Poland%20.pdf
[4] Ukraine has diversified its gas supply directions in 2 years. After the annexation of Crimea in 2014, it has not bought Russian gas since 2016.
[5] Forum Energii, https://www.forum-energii.eu/en/blog/import-paliw-kopalnych
[6] For example, reduce the temperature at home, take the streetcar, bus, train, bike to work, turn off unnecessary appliances.