Doubts linger as Poland signs gas deal with Norwegian consortium

“As a major international company PGNiG would have to agree to a clause related to paying compensation for loss of earnings in the event of the deal being canceled.” – Igor Muszyński, White &Case
By : Greg Goodale

   As the Polish and Norwegian prime ministers gather in Oslo Sept. 23 to oversee the signing of a controversial gas export deal, industry observers again warned that the potential financial penalties of a new Polish government pulling out of the deal after the Sept. 23 elections – as is feared – could strike a major blow to cash-strapped gas monopoly Polish Oil and Gas Company (PGNiG) and further dent the growing budget deficit.

   “There are general legal provisions that allow parties in a deal such as this to seek compensation for all costs incurred in concluding the agreement and also from expected profits not received as a result of its cancellation,” said Krzysztof Gołyński, an attorney at law firm Linklaters & Alliance.

   Prime Minister Jerzy Buzek and Norway’s Prime Minister Jens Stoltenberg met at Oslo’s Radisson hotel to oversee the signing of the deal between GFU, a consortium of Norwegian oil companies headed by Statoil, and the PGNiG, said Oivind Ostang, the Norwegian prime minister’s chief press officer. He said details of the deal would be announced later the same day.

   The deal is reportedly for 74 billion cubic meters (bcm) of Norwegian gas to be exported to Poland starting in 2008 and lasting for 16 years and worth about $11 billion. The deal will also cement details of a pipeline connecting Denmark to the town of Niechorze in northwest Poland. PGNiG announced its decision this week to issue bonds worth E450 million to finance the project.

   Wiesław Kaczmarek, widely seen as the next treasury minister, said his party, the Democratic Left Alliance (SLD), which is set to win September’s elections, would seek to overturn the deal with the Norwegians. SLD said estimates for growth in gas demand in Poland are dependent on the transformation of the domestic power sector from coal- to gas-fired fuel.

   Of Poland’s approximately 11 bcm of gas consumption per year, about 65% is imported from Russia and the 70% increase in the price of gas last year has led to the increased need to diversify supplies.

    “As a major international company PGNiG would have to agree to a clause related to paying compensation for loss of earnings in the event of the deal being canceled,” said Igor Muszyński, a lawyer at White & Case. “I don’t believe they would be able to finance this investment with debt if they don’t have those type of provisions.”

   Critics also point to the so-called “take or pay” conditions in the Norway contract that would limit Poland’s ability to sell unused gas to third parties. If demand does not grow as forecast to about 18 bcm in 2010 from the present 11 bcm, this could prove expensive for the Polish side.

   For the Norwegians, this is also an important sticking point as the main section of the pipe connects Norway to Germany, a take-or-pay clause giving Norway reassurance that Poland cannot undercut the price of Norwegian gas sold on third markets.