A bracing year for the Baltic states [NGW Magazine]

This year has brought oversupply and with that came low spot prices. The Baltic states have taken advantage of this and have tried talking down the price of LNG. “The market was glutted and the existing and new LNG projects will grow capacity in 2021 that goes far beyond steady demand growth, creating market volatility,” a former head of Lithuania's energy regulatory commission (VKEKK) Vidmantas Jankauskas told NGW.

In the long run he believes the prospects for LNG are brighter than for other fossil fuels because of the former’s relatively lower cost, accessibility and lower emissions from combustion. But “most important, LNG has become easy… Many had written gas off as a commodity of the past, but with the transition to a clean energy experiencing setbacks, gas will be around for a while, perhaps longer than many thought,” he said.

Lithuania is leasing the floating storage and regasification unit Independence in Klaipeda from Norwegian Hoegh. This year has seen the LNG buyer make vigorous attempts to force Norwegian Equinor to lower the price. The Lithuanian energy ministry on November 12 proposed to the incoming government that it reduces the LNG terminal's maintenance costs by halving the number of LNG shipments that Ignitis, the country’s state-owned energy company, buys from Equinor every year. That would leave it just two.

If the new centre-right cabinet approves that, then the costs for consumers to secure the terminal's minimum operation are expected to drop from around €25mn this year to €6.5-7mn in 2021, according to the ministry. Under the formula, it would be Ignitis that would end up paying the bulk of the losses from purchasing contractual but expensive gas from Equinor.

According to the ministry, the Klaipeda LNG terminal's commercial users will buy at least 10 large LNG shipments in 2021, half the number it bought both this year and last. So it believes there's no need for Equinor shipments to maintain the terminal's operation. The energy minister, Zygimantas Vaiciunas, has called the Equinor contract “not flexible” after he failed to hear from the Norwegian government on his request to mediate and amend the contract.

Under the contract signed in 2014 and revised in early 2016, Lithuania has committed to buy the minimum amount of LNG – four large vessels a year – necessary for the operation of the 2.9mn t/yr floating storage and regasification unit, Independence, in Klaipeda for ten years. The renegotiated annual LNG quantity from Equinor has gone down from around 5.5 TWh to 3.6 TWh and it expires late 2024.

Ignitis said in November it had itself opened negotiations with Equinor on LNG price reduction. In a bid to lower the LNGT maintenance costs and collect more revenues from terminal users, the Independence operator Klaipedos Nafta (KN) has almost tripled its regasification tariff to €0.35/MWh this year from €0.13/MWh in 2019.

Klaipeda Nafta keeps costs down

KN said early November it had selected the winners of tenders for commercial, legal and technical services. They will advise the company on the selection of the most economically and technologically advantageous FSRU and its operating model after the FSRU lease contract expires in late 2024. The winners are Holman Fenwick Willan (the legal experts); Quality Energy Developments Consulting (the commercial experts); and DNV GL (the technical experts).

“All the steps that KN is taking are aimed at slashing the LNG terminal operating costs and making the facility users bear a heavier burden. As KN is getting ready to take over the terminal from the Norwegians – the lease expires at the end of 2024 – KN’s priority is to lower costs,” energy market analyst Naglis Navakas told NGW.

KN’s commercial head of LNG Jurgita Silinskaite-Vensloviene hailed Independence as one of the most efficient LNG terminals in Europe. Its utilisation rate is 50% but it accounts for about 70% of the gas imported into the country this year.

“Very competitive LNG prices globally have led to a significant increase in the demand for LNG – Klaipeda LNG terminal users have also successfully used the opportunities provided by the infrastructure in Klaipeda to purchase energy resources at the most favourable market prices. This is reflected in the 27% increase in regasification at the LNG terminal during the first 9 months of the year, reaching 16.4 TWh,” she said.

According to her, the new gas year began with six terminal users – there were five in 2019-2020. “The beginning of the gas year is also positive – this year and during the preliminary LNG terminal capacity allocation procedure, significantly more LNG terminal capacity was reserved for the gas year starting on 1 October: 8.4 TWh compared with 5 TWh last year. The launch of Balticconnector at the beginning of the year has also contributed to higher demand for LNG in the region and for the capacity at Klaipeda LNG terminal,” she said.

From January 1 2020, the prices on the Finnish gas exchange, she says, have approached the prices of the Baltic countries, although a couple of months before the start of the connection operation, the difference was as much as €10/MWh.

For the coming calendar year, she said, 14.626 TWh of the LNG terminal’s regasification capacity has already been booked, which is a “serious indication” of the terminal’s high utilisation rate for the new year. The allocation is well up from 5 TWh – 18.8 GWh/d – allocated on an annual basis for the 2019-2020 gas year

“The potential of LNG is really great, both in terms of energy interconnection projects being developed in the region and in terms of small-scale LNG operations, which are being driven by the goals of a climate-neutral economy in the EU,” she said.

KN believes that new opportunities in 2021 will also grow as the small-scale LNG market develops and legislative initiatives, such as Lithuania’s Alternative Fuel law, its climate change programme and Future Economy DNA take effect.

The Alternative Fuel Law passed its first reading in mid-September and, if endorsed by the new-composition Parliament, it will go into effect from July 1, 2021. The law envisages renewable energy taking a 15% share of Lithuania’s transport sector, thus tackling the pollution.

Lithuania’s Future Economy DNA plan is part of the EU’s €150mn Covid-19 impact relief scheme to help Lithuania tackle the economic consequences of the coronavirus.

Another direction that Lithuania is looking at is the Gas Interconnector Poland Lithuania. Lithuania has already completed 52% of construction work, Lithuania’s gas transmission operator Amber Grid, said in early November.

A 35-km section has already been filled with gas, with a total of 72 km, or almost a half of the pipeline, planned to be filled by the end of the year. Amber Grid CEO Nemunas Biknius said the operator expects the GIPL construction work to be 60% complete by the end of the year, with the entire project to be finished by late 2021. 

Estonia, Latvia see market growth

Eesti Energia, Estonia’s state energy company, said that the creation of a single tariff zone within Finland, Estonia and Latvia and the start of Balticconnector were the most important events of the year.

“Gas demand in 2020 took two major shocks. First, from the unusually warm 2019/2020 winter, which caused less-than-normal consumption for heating. And second, from Covid-19-induced lockdowns last spring, which pushed economic activity – and industrial gas demand – further down. These two hits brought summer gas prices not only in the Baltic states but around the world to the levels unseen since 1990’s,” Eesti Energia told NGW.

Asked what factors would affect the market next year, he singled out the kick-start of operations of the first LNG terminal inside the Finland-Estonia-Latvia tariff zone at Hamina, Finland, next April. “Another important event to take place in 2021 will be certainly the completion of the GIPL construction. It will affect the gas flows in the Baltic states. Many players also hope that Balticconnector will finally reach its normal transmission capacity in 2021,” he said.

Another thing to watch out for in 2021 will be Latvia’s Incukalns underground gas storage which will be marking its first year of operations under new rules which can impact gas prices in winter seasons starting from 2021/2022.

Latvia’s Conexus, the country’s gas transmission system operator, said the “extremely low gas prices” were the most remarkable event of the year, raising demand for Incukalns storage capacity to the point that it was “full by early spring,” Conexus told NGW.

Throughout 2020, all the available Balticconnector capacity was fully used to take gas to Finland. All in all, during 10 months of 2020, Finland received almost 7 TWh of gas, which, compared with the total volume of pipeline gas, is about 30% of Finnish market demand, the Conexus spokesman said.

In 2021, the ongoing trend of the “greening” the gas business will be a factor among other things to influence the company, Conexus said. With the respect to legislation, amendments to the Latvian Energy that are slated for approval in 2021 have to be taken into consideration.

“If enacted, they will introduce regulations for issuing of Guarantees of Origin for gases and the required framework for the development of the renewable gas market. Also, we expect harmonisation of the national standards regarding injection of the biomethane into gas grid with EU ones,” the Conexus official said.