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Earnings

Missile deal threatens Russian-Polish energy ties

WARSAW (Reuters) - Poland must brace for possible trouble with Russian gas and oil supplies after Warsaw angered Moscow by agreeing to host parts of a global U.S. defence missile shield, analysts say.

A deliberate interruption in supplies may not be on the cards but Poland is likely to have a hard time renegotiating long-term contracts and convincing Russia to keep using it as a transit country.

Russia, which supplies 95 percent of Poland’s oil and nearly half of its gas, has warned it would respond with more than just a diplomatic protest to the missile deal -- a project Moscow opposes as a threat to its own national security.

The warning last week contributed to the biggest jump in oil prices in three months at a time when investor fears about security of supplies have been rekindled by the conflict in Georgia.

“Antagonizing Russia could impact the reliability and prices of supplies,” Preston Keat of Eurasia Group, wrote in a note.

“Mid-level managers in several (Polish) companies have expressed to us their serious anxiety about the implications of the missile shield deal -- they know the Russian energy supply chain just got a lot more vulnerable.”

Being punished by Russia is nothing new for Poland, which dreams about an escape from the energy dominance of its former communist overlord.

In 2006, Russia shut the Druzhba (Friendship) oil pipeline to Lithuania’s Mazeikiu refinery after it was bought by Poland’s PKN Orlen, citing a leak. But analysts saw political motives after Lithuania had rejected Russian bidders.

Reliability of Russian supplies have been under question since 2006, when a pricing dispute led Moscow to cut off gas flows to transit country Ukraine with knock-off effects for the European Union. Europe gets a quarter of its gas from Russia.

Analysts say the missile shield deal, that Poland agreed to join after Russia’s military move against Georgia, will worsen already strained political and energy ties between Warsaw and Moscow, although an immediate cut in supplies is unlikely.

“It would be counter-effective for Russia from an economic point of view,” said Tamas Pletser, ING analyst in Hungary. “On the other hand, Russia wants to increase its political influence using energy and political issues dominate the economic ones.”

Tight global supplies and rising prices have strengthened Russia’s position, already the holder of the world’s biggest gas reserves and seventh largest oil deposits.

ALTERNATIVES

Polish government officials play down the security of supply threat but companies’ recent actions reveal growing fears.

PKN Orlen, Poland’s largest refiner, said earlier this month it will continue to buy oil through the spot market, importing more crude via the Gdansk seaport to diversify supplies.

“Russians openly speak about shutting down the Friendship pipeline after 2012 due to technical reasons,” Jacek Krawiec of PKN’s management board told a Polish paper in early August. “We have to be ready to receive supplies only by sea.”

While finding alternatives to Russian oil, sometimes at a higher cost, is not as challenging for Poland, analysts are more worried about the future of gas supplies.

A contract with RosUkrEnergo, controlled by Russia’s gas export monopoly Gazprom, expires at end-2009 and Poland’s gas monopoly PGNiG is preparing for tough talks to extend the deal.

The Poles are worried that Gazprom may force them to renegotiate another long-term contract that runs until 2022 at a higher price, like it did in 2006 when Warsaw had to agree to a 10-percent hike to secure extension of the RosUkrEnergo deal.

“This (the missile shield deal) will certainly not make the negotiations any easier,” said Jonathan Stern of the Oxford Institute for Energy Studies.

In a bid to reduce dependence on Russia, the Polish government last week made a planned liquefied natural gas (LNG) terminal on the Baltic coast a priority project.

But analysts say relief is not due before 2012-2013 as PGNiG has not secured any LNG supplies so far.

Warsaw also fears that a planned Nord Stream pipeline due to pump Russian gas under the Baltic Sea to Germany would isolate it and have joined forces with the Baltic countries to oppose the project, seeking EU backing.

But the EU’s inability to put together a coherent energy policy which provides security of supplies for countries from the Soviet bloc adds to the problems, analysts say.

“In the event that Russia uses its oil supplies to put pressure on Poland, it will provide a test case for the EU as to how far it will go to support Poland,” said Dieter Helm of Oxford University.

Additional reporting by Anna Mudeva in Sofia and Patryk Wasilewski in Warsaw, writing by Anna Mudeva

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