Damp squib for Finnish gas [NGW Magazine]

Finland is preparing for the opening of its gas market from 2020, following the launch of Balticconnector, a gas pipeline that will connect Estonia and Finland.

But the key players in the Finnish gas market are more wary about the prospect of liberalisation than excited about it, while an analyst believes that Gazprom is anyway limited in its ability to extract monopoly rents.

The Finnish gas market is a separate island, and Finland has no gas transmission connections to other EU countries. At present, all gas consumed in Finland is imported from Russia via two parallel pipelines.

Although the gas connection with the Baltics means Finland now has the option to replace Gazprom’s pipeline gas with LNG, the Russian monopoly is expected to hang on to the Finnish gas market for years to come.

“Russian Gazprom is a dominant gas market player in the Baltic region [Latvia, Lithunia and Estonia] and Finland too, and it will retain its strong positions in the region, and also Finland, after the liberalisation of Finnish gas market,”the senior vice-president of Finnish gas company Gasum, Jouni Haikarainen, told NGW.

The state-owned company enjoys a monopoly position in the Finnish gas market, selling around 23 TWh/yr. But when a pipeline linking Finland with Estonia opens up in 2020, it will end Finland’s status as a gas market island dependent on Russian supplies. It will also have to unbundle its gas transmission network from the group’s commercial business to comply with EU regulation.

“Reduced regulation and, consequently, competition in the market will create new opportunities both for customers and traders. With Balticconnector at work, we will have the possibility of using underground gas storage in Incukalns, Latvia; and the liquefied natural gas terminal in the Lithuanian seaport of Klaipeda. Yet it remains to be seen what the impact of the pipeline will be on the market,” he said.

“It is too premature to say that the pipeline will significantly reduce the influence of Gazprom on the Finnish gas market after the implementation of the gas interconnector project,” he said. 

He also shared some of the apprehensions he has with regard to the strict EU gas market regulation that Finland will have to abide  by soon. 

“The new requirements can be complicated for local market players and consumers too, because they were used to operate under different rules until now,” Haikarainen said.

The EU’s third energy package requires Finland to unbundle its natural gas sales and transmission network into separate businesses when the capacity of an alternative import source exceeds a 25% limit. Combined, Klaipeda’s LNG terminal in Lithuania and the transmission network in the Baltics fulfil the limit set for an alternative import source in the Baltics and Finland.

He also has concerns that, even lumped together, the four countries constitute a small market. “They will continue shrinking, a result of the enactment of strict climate policies. It is becoming increasingly hard for gas markets, including Finland’s, to compete with biofuels and all the renewables out there,” he said. 

Notably, natural gas accounts just for a mere 7% of the total primary energy demand in Finland. Unlike in other EU countries, gas use in Finnish households is very limited. The natural gas grid covers just the southern and south-eastern parts of Finland, the sparsely spread population and the lakes making it uneconomic to build an extensive grid serving more of the population.

Gasum gave up the implementation of the Balticconnector project in late 2015 as the project was not seen to be commercially viable. However, the situation in the Finnish gas market has since changed significantly, with the Finnish government opting for carrying out the Balticconnector project after receiving funds from the EU.

No escaping Russian gas affordably

There are other things for the Finnish gas market boss from Gasum to watch out for, too. Although the Baltic States in general have attempted to diversify their supply sources in recent years, and the Klaipeda LNG terminal in Lithuania is an asset in this respect, the proximity of Russia and the quantities of gas it has at its disposal have made it difficult to sever ties with Gazprom.

For example, Lithuania saw recently an increase in Gazprom gas imports: the Russian giant took 54% of the Lithuanian gas market in 2017, a rise from 40% in 2016. 

“The actual number of gas supply sources will remain limited as long as Russia’s Gazprom retains gas export monopoly in Finnish and other neighbouring gas markets, which seems to be the reality for quite some time. There are no alternative suppliers competing with pipeline gas exports from Russia at any of the Russian border points,” Haikarainen said. 

In similar vein, the CEO of Balticconector Oy Herko Plit told NGW: “Gazprom cannot be expected just to go away with the opening of our gas market. However, the launch of  the Balticconnnector pipeline at the end of 2019 will significantly diversify our gas sources. Yet, I agree with the rest: it remains to be seen how the market players will react to it and how the market will be after 2019 when the gas flows through the pipeline.”

To the suggestion that the liberalisation of the Baltic gas markets in the end had little or no effect on Gazprom’s influence in Latvia, Plit noted that, in order to get the most out of the pipeline, more was needed than the pipeline itself: in other words, the full integration of the Baltic gas markets into the Western network. 

The sales manager at Finnish technology provider and system integrator Sarlin, Niilo Rossi, told NGW, he was “optimistic” that changes to the Finnish gas market will bring a “very interesting future.” But like others, he sees a lot of uncertainties, chief of which is, how will the market react? “Only time will tell, but I believe the result will be good. It will definitely bring more competition and service providers to the market, and at the end of the day, even higher customer satisfaction,” he said. 

Is the game worth the candle?

Mikhail Krutikhin, a partner in the independent RusEnergy consulting agency in Moscow, was blunt, telling NGW: “Nothing will really change” in the dominant position of Gazprom in Finland unless the country can “significantly” switch from natural gas to liquefied natural gas. Finland’s first LNG import terminal was opened in Pori in August 2016.

“Most Finnish gas consumers are hooked on the Russian gas monopoly via long-term (gas supply) contracts and the liberalisation does not affect them, so the opening of the market is a mere symbolic, formal move,” he said.

According to him, there are simply no new gas customers there who can negotiate better gas supply conditions, following the EC’s Gazprom anti-trust ruling last spring.

Under the deal, Gazprom agreed to make deep concessions to the way it has always done business in central and eastern Europe.

Specifically, Gazprom agreed to change how it negotiates gas prices with countries in central and eastern Europe, in an effort to create a more competitive market. Customers now have the right to ask for a price review if they believe they are paying Gazprom higher prices than on western European gas hubs.

Gazprom also agreed to drop clauses restricting customers’ ability to sell gas across borders and create opportunities for more gas to flow to the Baltic states and Bulgaria.

Nevertheless, the Russian expert agrees that larger LNG availability in Finland can dent Gazprom’s hegemony after 2020. 

“If the Finns  use the full potential of the Estonian/Finnish pipeline, develop good working relations with the Klaipeda LNG terminal and employ the capacities of the Incukalns underground gas storage along the way, then the game will certainly get more interesting, and more challenging to Gazprom. Until then, it makes no sense to speak of Finland’s gas market liberalization,” the Russian expert concluded.