Poland in July signed a deal with a consortium led by Italy’s Saipem to build an LNG terminal at the port of Swinoujscie, next to the border with Germany. Construction was to start this month but Germany has called for a re-evaluation of the permits.

Berlin asked Poland to carry out an environmental assessment study under the Espoo agreement, a U.N. treaty that handles cross-border environmental concerns, Polish daily Dziennik Gazeta Prawna reports.

Polish Deputy Finance Minister Mikolaj Budzanowski said the demand could delay finalization of the terminal, envisioned for 2014, by two to three years.

“It would also invalidate the construction permit and the environmental decisions,” he told Dziennik Gazeta Prawna.

Budzanowski added that Germany is opposed to EU financing of the terminal.

Poland is eager to finalize the terminal to become less dependent on Russian natural gas imports. Polish observers have speculated that Germany aims to delay the LNG terminal because it would compete with the Nord Stream pipeline under the Baltic Sea, designed to move Russian gas unilaterally to Germany.

The first of Nord Stream’s twin pipelines is scheduled to start operating in 2011. Officials say Nord Stream will eventually deliver up to 55 billion cubic meters of gas per year to Europe — enough for around 25 million households.

Russian President Dmitry Medvedev in April called the $10 billion project a “contribution to Europe’s energy security.” Poland was one of Nord Stream’s harshest critics and is still opposed to the pipeline. Its construction was delayed by a lengthy and difficult permitting process that involved major environmental impact assessment studies.

The companies involved in Nord Stream — Russia’s Gazprom, Eon Ruhrgas and BASF/Wintershall from Germany, Gasunie from the Netherlands and GDF Suez from France — aim to sell Russian gas to Poland, Dziennik Gazeta Prawna writes, adding that the LNG terminal could satisfy at least 30 percent of Poland’s gas needs and make the Nord Stream gas less attractive.

The daily reports that the German government wasn’t satisfied with the environmental impact analysis conducted by Gaz-System, Poland’s state-owned gas grid operator, which green-lighted the terminal saying it doesn’t have a cross-border impact.

The terminal would have a capacity of 5 billion cubic meters of gas per year, with shipments coming in from all over the world, including LNG giant Qatar.

The authors acknowledge the requirement to assess the impact of downstream competition on their conclusions, but there are other factors that may also need to be considered. Chief among these is the strategic context. Though perhaps without full-blooded Member State commitment – or without great effectiveness – the EU, strategically, has sought to engage key external suppliers such as Russia and Algeria (and other neighbouring suppliers) in the process of gas market liberalisation which it has being pursuing for almost 20 years. For obvious reasons – chief among them the ability to capture significant rent from the high willingness-to-pay levels of EU consumers – these external suppliers see little incentive to depart from their dual-pricing policies. The current apparent global “gas glut” – arising from a recession-induced reduction in OECD demand, a large increase in unconventional gas supplies in the US and huge sunk costs in LNG production and export capability – is compelling some flexibility in pricing and supply terms, but it may be viewed as a temporary tactical response until the current supply overhang is worked out of the system.

Faced with this obduracy it makes sense for the EU to develop its policies and this paper endorses one instrument – supporting investment in access to additional supplies – and advances another – internal regional quotas on imports. However, deploying these instruments is a tactical, rather than a strategic, response and there is no guarantee that their deployment would be in the best interests of the Union or of its citizens.

The traditional, long-term, oil price-linked supply contracts broadly imposed volume risk on buyers enjoying exclusive rights to supply and price risk on sellers. Final prices were set close to consumers’ willingness to pay levels and the expected rents were shared between the buyers and sellers. This process secured the required investment in long-lived, specific assets, but it was based on maximising the capture of consumer surplus. The primary initial motivation for EU electricity and gas market liberalisation was to increase consumer surplus – initially in the industrial sector, but, ultimately, for all consumers.

Unfortunately, the current approach to EU market liberalisation is fragmenting EU buyers countervailing market power viz-a-viz external suppliers and is destroying the ability and willingness of internal EU suppliers to commit to reserve (and pay for) production and transmission capacity on a long-term basis. (This applies equally to gas and electricity. And the reluctance of some dominant, incumbent EU players to compete in some national markets – cited by the authors, while acquiring businesses in other national markets and seeking to invest upstream in external supply countries, is a perfectly rational corporate response to this fragmenting pressure.)

In the absence of long-term tradable contracts for production and transmission capacity, full retail competition and short term wholesale markets are incapable of securing the required investment in long-lived, specific assets. Even if the investment were forthcoming, the perceived risk would be high and the cost of capital commensurately high. And, even if they were to benefit from lower prices in the short-term from gas-to-gas competition, consumers would be almost certain to experience higher costs in the medium to long-term either via higher prices or insufficient supplies.

The two fundamental flaws of the EU’s gas (and electricity) market liberalisation process stand revealed. The first is a failure to recognise that the capture of rent (either by external suppliers or internal supply and service providers) is a matter for policy and regulation prior to the introduction of competition. Introducing competition, while this remains unresolved, makes matters worse, not better. The second is a failure to recognise the fundamental requirement for long-term, tradable contracts in production and transmission capacity.

As a result, the policy instruments advanced in this paper – internal regional market quotas to reduce rent capture by external suppliers and public subsidy of investment in access to additional gas supplies, while well-intentioned, address the symptoms and not the cause of the problem.

In the interests of the EU’s economy and of its citizens it would make far better sense to enforce policy and regulation that provide the basis for long-term, tradable contracts in production and transmission capacity. The dual-pricing policies of key external suppliers (which comprises a combination of universal and specific subsidies) will, in due course, fail. A vibrant and competitive EU market will help to accelerate this process and point the way forward.