The Qatar of Central Europe? Shale Gas Prospects In Poland and the Region

By Matthew Czekaj

As the parliamentary election season heats up in Poland, the country’s Prime Minister, Donald Tusk, is crisscrossing the country in his “Tuskobus” [link in Polish], highlighting the successes of his government and making campaign promises on behalf of his ruling party, Civic Platform. Over the long term, however, perhaps the most important strategic game-changer achieved by the Tusk government has been to bring the shale gas extraction industry to Poland.

On September 18, Tusk visited [link in Polish] Lubocino in northern Poland where Polskie Górnictwo Naftowe i Gazownictwo SA (Polish Oil and Gas Company – PGNiG) had just torched a flare on one of its gas rigs. This is the second successful production of “unconventional” natural gas – that is, gas trapped in shale rock deposits – in the country; however it is the first well with a real chance of profitability. With a smile on his face, Prime Minister Tusk told reporters that he was “modestly optimistic” that commercial shale gas production in Poland may begin by 2014.

According to a US Department of Energy study, Poland is estimated to possess 5.3 trillion cubic meters of natural gas locked up in its shale deposits – enough to supply the Central European state for 300 years. Warsaw is championing shale gas as the key to breaking the country’s dependence on coal power for electricity generation and on imports from Gazprom, which fills 40 percent of Poland’s natural gas needs. According to Tusk, with success in unconventional gas extraction, Poland would be “gas secure” by 2035 (AFP, September 18). In addition, the Polish government has promised that shale gas would contribute to overall lower natural gas prices in the national market.

Nor would the shale gas boon be for domestic consumption only. With smart investment in north-south pipeline connections, Poland may want to export north to the Baltic States and south to the Czech Republic (Hospodarske Noviny, September 16), for example. According to a study by the Kościuszko Institute, Polish gas may also go to Belarus, Ukraine, Denmark, and even Holland and the United Kingdom. Germany would also be an attractive target, especially after Angela Merkel’s government promised to phase out the German nuclear power industry. However, having to compete with the large volumes of Russian gas coming through the North Stream pipeline might preclude this in the end.

The positive news out of Lubocino is helping to drown out Poland’s other mega-scale energy security project: nuclear power. As PGNiG Strategic Planning Bureau director Marcin Lewenstein [link in Polish] told Wprost24 recently, though atomic power remains full of potential, PGNIG will focus its financial resources on shale gas extraction.

With the success of its first gas-producing well, PGNiG now plans to attempt to drill sideways into the shale. The process of extracting shale gas, known as hydraulic fracturing or “fracking,” has raised the ire of many environmentalists (and Gazprom) and has even been banned in some places – most notably in France. However, the Polish government considers the potential danger to underground sources of drinking water fully possible to mitigate with the right amount of regulation. Consequently, Poland is the second country in the world after the United States to attract international energy companies with a serious intention to drill for shale gas.

Tusk boldly predicted that thanks to shale gas, Poland had the possibility to become energy secure within his lifetime. Yet, mindful of the dangers of a “resource curse,” the Prime Minister announced that government proceeds from shale gas would go into a Norwegian-style national investment fund, which would be used to pay pensions, back environmental projects, and help subsidize counties and districts where fracking is to take place.

Regional enthusiasm for unconventional natural gas extraction is not limited just to Poland. Geological surveys suggest that the massive 405 mile belt of gas fields, which stretches from the Polish coast diagonally to the southeast, likely also extends substantially into Ukraine. Moreover, with advances in fracking technology in recent years, Hungary is also looking to tap what are believed to be large shale gas deposits buried deep in the southeastern corner of the country. Hungary, which uses a disproportionately high amount of natural gas in its energy mix and is almost exclusively reliant on Russian gas for its imports, predicts a breakthrough in shale production by 2015 – not coincidentally the same year its long-term gas contract with Gazprom is scheduled to expire. The Central European country additionally intends to set up a region-wide gas exchange market.

As the US example illustrates, unconventional natural gas extraction has the potential to completely change global energy markets. Within a few short years, fracking doubled US estimated natural gas reserves, turning the country from a net importer to an exporter of gas. Yet, to replicate America’s success in Central Europe, Poland will need to invest many billions of dollars into wells and exploration. Moreover, it will need to avoid any major environmental accidents, which can quickly turn public opinion against hydraulic fracturing. True energy security in the region is still many years away, but at least a piece of it may finally be within grasp.

Poland and Lithuania Scramble to Mend Broken Ties

By Matthew Czekaj

Polish-Lithuanian relations may not have been this bad since the 1920s and ‘30s. At the heart of the current dispute is an issue Warsaw and Vilnius has been struggling with off and on diplomatically since the collapse of the Soviet Bloc – namely, the status and treatment of the Polish minority within Lithuania.

In spring of this year, the Lithuanian government passed its latest language law, forbidding the use of any language other than Lithuanian to be spoken in school during geography, Lithuanian history and world history classes. Furthermore, all Lithuanian language High School matriculation examinations – heavier on Lithuanian literature than at independent minority-language schools – will now be standardized nation-wide by 2013. This law, which came into effect on September 1, has infuriated the ethnic Polish minority living in Lithuania. Teachers from the ethnic Polish schools in Lithuania walked out en masse in protest of the language law at the start of the month. It took an emergency visit from Polish Prime Minister Donald Tusk to talk them down. However, the teachers threaten to return on strike in the middle of September if the Lithuanian government does not repeal the law (Gazeta Wyborcza, September 12).

Ethnic poles number 230,000 in Lithuania, comprising around seven percent of the country’s population. Yet, they have continually been a spoiler in close Warsaw-Vilnius ties. The Polish minority has been allowed certain concessions in Lithuania, including running its own Polish-language schools. At the same time, the ethnic Polish community feels under siege by language laws designed to defend the primacy of Lithuanian in public life. In addition to the education-centric law that came into force in September, citizens of Lithuania are not allowed to spell their names on official documents like passports using letters not found in the Lithuanian alphabet. Warsaw feels [link in Polish] that the Lithuanians are breaking the Polish-Lithuanian Treaty of 1994 and are in breach of the Council of Europe Convention on National Minorities. Vilnius, on the other hand, is very sensitive to questions of its sovereignty and defense of Lithuanian culture.

Due to the education language law, relations have been on a downward spiral for more than a year, but the rhetoric and pressure has really been turned up on both sides in the past several weeks. On September 6, Lech Wałęsa, the famed Solidarity leader and first democratically elected president of modern Poland, turned down [link in Polish] the Lithuanian Presidential Order of Vytautas the Great, which he was awarded this year, noting his “deep concern” over the current situation of ethnic Poles living in Lithuania. Also citing the issue of name spellings, Wałęsa promised to accept the award if Vilnius reconsidered its language laws. The Lithuanian Prime Minister, Andrius Kubilius, countered in a radio interview he gave later, saying that, “Polish authorities do not assess the situation of the Polish minority in Lithuania according to objective criteria,” and are being misled by Polish diaspora organizations living in his country. Lithuanian President Dalia Grybauskaite was much more forceful in her pronouncement on Lithuanian Radio, asserting that the Polish minority is lacking in loyalty [link in Polish] to the state, which enraged members and representatives of the ethnic Polish community. Perhaps most troublingly, the brewing Polish-Lithuanian conflict has been raising nationalistic sentiments. In August, street signs and a monument in Puńsk (Punskas), a majority Lithuanian borough in northeast Poland, were vandalized and covered in graffiti, which included radical Polish nationalist symbols.

Yet, the growing diplomatic crisis seems to have finally woken both sides to the immediate need to smooth over relations between the two Central East European states. President Bronisław Komorowski [link in Polish], whose family derives its roots in Lithuania, spoke of the need to resolve the thorny issues dividing Poles and Lithuanians because of the many shared interests between the two countries. Furthermore, out of Tusk’s visit to Lithuania, the two states formed a joint bi-national committee [link in Polish] to work out the issue over language use in Lithuanian schools. The committee is to include representatives from both countries’ educational ministries as well as members of the Polish minority organizations.

This is a positive and much needed sign for Polish-Lithuanian relations. Indeed, the two countries share a border, but also a number of vital interests. Poland and Lithuania are both very exposed to energy disruptions coming from Russia and Belarus, and need to collaborate closely to secure themselves via oil and gas pipeline connections, joint work on nuclear power and so on. A recent setback in beginning construction of the Poland-Lithuania gas interconnector, in fact, underscores the need for political agreement and cooperation between Warsaw and Vilnius to ensure the project does not slip permanently off the agenda (BNS, September 1). The difficult case of Belarus, a country of intimate concern to both Poland and Lithuania, would also benefit greatly from Warsaw and Vilnius’ ability to coordinate their policies at the highest levels. A final area where the two nations could achieve more together than alone is European strategy toward Moldova. This year, Lithuania chairs the Organization for Security and Cooperation in Europe (OSCE), while Poland holds the rotating presidency of the EU Council of Ministers between July and December of 2011. Since both the EU and OSCE are active in the Moldova-Transnistria peace process as well as encouraging and supporting Moldova’s path toward European integration, more tangible Polish-Lithuanian agenda coordination would be invaluable. Yet, with both giving up their European leadership positions on December 31, the window for joint action is closing. Polish and Lithuanian diplomats will need to hurry.

Moscow’s Financing of Sochi Olympics 2014 Construction Triples Since 2009

By Valery Dzutsev

On September 8, Russian news agency RIA-Novosti reported that the Russian government is increasing its material contribution to the Olimpstroy state corporation from $4.8bn to $10.1bn. Olympstroy oversees construction of facilities for the Olympics and the development of Sochi as a ski resort for 2008-2014. The government’s resolution was posted on the website of federal regulations and administrative acts on September 8 (http://www.itar-tasskuban.ru/news/article?type=city2014&i=14562). In 2009, the government’s material contribution to Olympstroy for the same period of 2008-2014 was estimated at less than $3bn (http://www.rosbalt.ru/main/2009/07/31/659713.html).  

According to the latest government documents, a significant increase in the funding will start this year and will exceed $1.5 billion, instead of the previously planned $0.3 billion. In 2012, over $3 billion will be allocated, instead of $0.7 billion, and in 2013 over $2 billion instead of $0.5 billion. In 2014, the allocation will remain as planned, at $0.1 billion.

The material contribution of the Russian government to Olympstroy is only part of the costs associated with putting on the Sochi Olympic Games in 2014. The overall costs of the Olympics in Sochi are estimated at nearly $30 billion (http://www.bbc.co.uk/russian/russia/2010/06/100607_sochi_budget_inflates.shtml). Current oil prices still allow the Russian government to finance its liabilities in Sochi, but it may become a serious burden if the energy prices fall significantly. As the price of the Winter Games in Sochi rapidly climbs, the government may find it increasingly more difficult to foot the bill over the next three years.

Khloponin Admits Ramzan Kadyrov Fails to Live Up to Russia’s Standards On Personal Freedom

By Valery Dzutsev

On September 8, Alexander Khloponin, Moscow’s envoy to the North Caucasus, for the first time publicly rebuked the ruler of Chechnya, Ramzan Kadyrov. The Chechen youth want more freedom than Kadyrov allows, Khloponin asserted, adding, “The youth in Chechnya lack freedom. They want to be more dynamic. We have some problems with that, it is obvious. I cannot fully agree with many of his [Kadyrov’s] principles. However, we are having a serious dialogue”. At the same time Khloponin dismissed claims that Kadyrov was involved in the killings of his opponents in Russia and abroad (http://gazeta.ru/news/lenta/2011/09/08/n_2001257.shtml).  

Khloponin made these remarks at a meeting with foreign journalists, where he had to show off his fastidiousness about Ramzan Kadyrov’s management methods. It is very common for the Russian leadership to appear more liberal to a foreign audience, than to the domestic one. But at least this can be seen as a sign that Kadyrov with his methods no longer constitute a reason for Moscow to be resolutely proud of him.

The level of power personification in Chechnya has apparently reached the point, where some criminals mimic Kadyrov’s voice to get ahead. On September 8, Gazeta.ru quoted an Interfax news agency report about three Chechens who were sentenced to five year prison terms for extorting money from businesses and bureaucrats by imitating Kadyrov’s voice over telephone (http://www.gazeta.ru/news/lenta/2011/09/08/n_2001049.shtml).

Moscow may dislike Kadyrov for variety of reasons, including his unprecedented level of autonomy from the central Russian government. However, Kadyrov’s critics in Moscow may be particularly emboldened by the Chechen ruler’s inability to prevent brazen attacks in the republic. The latest double suicide attack that took place in Grozny on August 30 is but one example. These attacks may signify that Kadyrov and Russia have reached the limit of their ability to stabilize this republic. Chechnya’s shaky level of stability is unlikely to be surpassed under the present leadership, or as long as their current set of policies continues.

Hungary’s MiGs Up for Sale

By Matthew Czekaj

Those in the market for a used, fourth-generation, Soviet, air-superiority jet fighter need look no further than Hungary. The Central European country is putting up eight of its 24 remaining MiG-29 Fulcrums for tender. The Hungarian government has declared a minimum bid for the package of fighters at no less than 3.46 billion forints ($18.3 million). All bids must be in by September 15, and the deal has to be wrapped up by October.

The announced sale is the final chapter in Hungary’s experience with the MiG-29. The Hungarian air force flew a MiG-29 on air patrol for the last time [link in Polish] in December 2010 and in same month made announcements of plans to seek bids to sell the phased out fighters by spring 2011. Yet, talk of replacing the Fulcrums was raised long before then. In 2007, for instance, Hungary wanted to trade them for Russian Mi-8, Mi-17 and Mi-24 military helicopters (Itar-Tass, October 29, 2007). Hungary initially received 28 MiG-29s, then valued at $800 million, from Russia in 1993, in a deal to pay off Soviet debt to Budapest. Hungary subsequently maintained and modernized them over the next decade despite early pressure to purchase second-hand F-15s from Belgium or F-16s from the US (Rossiyskaya Gazeta, December 6, 2001).

In terms of capabilities and mission profile, the MiG-29 is often compared with US-built F-15s and F-16s. It boasts superior maneuverability at low speeds, is slightly faster than the F-16 and its handling made it a favorite among Hungarian fighter pilots. However, the MiG-29’s performance comes at a cost. Its engines are extremely inefficient and fuel-thirsty. The plane also has a short mechanical lifespan, and spare parts are difficult to come by. The Hungarian air force was often forced to cannibalize some of its MiGs to keep the rest flying. The plane’s acquisition and costly upkeep coincided with steep government cuts to Hungary’s armed forces. Moreover, Hungary’s drive toward NATO membership necessitated military hardware that was more compatible with Western allies. Hence, Budapest ended up purchasing Swedish JAS-39 Gripen fighters to replace its aging MiG-29s.

The Fulcrum can be found throughout the former Soviet Union, Eastern Bloc, the Balkans and in countries that enjoyed close political and economic ties with the USSR during the Cold War. However, the MiG-29 is fast becoming a rarity in Hungary’s immediate neighborhood. A prominent exception to this trend has been Poland, which has continued to purchase and receive [link in Polish] more MiG-29s from its neighbors since the 1990s. Warsaw is now in the midst of modernizing a portion of its own Fulcrums with up-to-date electronics, tracking, navigation and computer hardware – upgrades that will cost 126 million PLN ($43.4 million) until 2014 – despite having invested heavily in second-hand F-16s from the US in recent years. As a result of Poland’s continued dedication to the MiGs, there are increasing rumors that Warsaw may be considering buying the Hungarian planes now up for sale.

A Polish purchase of the Hungarian jets could be good news for the Baltic States. The Balts have no air forces of their own; they rely on NATO overflight patrols, which include Polish MiG-29s. An attack in Baltic airspace would also result in part in an automatic response [link in Polish] from Poland’s Fulcrums. Lithuania, Latvia and Estonia thus have robust Polish air power in their own best interest.

Whether or not Hungary’s ultimately ends up selling MiG-29s to its Visegrad neighbor, it is clear that operation of this legacy Soviet fighter in Central Europe and the NATO alliance will continue for the foreseeable future.