Expert Views on Lithuania, Ukraine at the FT European Gas Summit

Despite the crisis in Ukraine, the gas industry must take decisions on the basis of rational assessments, rather than in the wake of political bickering. Europe is indeed drifting away from the Golden Age of Gas and the only way to support development of this energy source is to make it more price competitive. 

As simple as it could seem, this was the most important view emerging from the FT European Gas Summit. The message is quite clear and indisputable when it concerns Western Europe, but it is somehow more counterintuitive speaking about countries that are taking strong decisions to stave off Russia’s attempts to impose once more its sphere of influence.  

According to panellists, it all comes down to market forces also in Ukraine and Lithuania. The two countries’ passionate behaviours recently made newspaper headlines for their strong stance against Russia, but their business decisions don’t seem irrational at all. 

UKRAINE CAN SURVIVE ALSO WITHOUT RUSSIA

“We are not signing any non-binding contract with Gazprom,” Andriy Kobolyev, Naftogaz’ Chief Executive Officer, commented. 

According to Kobolyev, Kiev has already put aside €3.1 billion to pay debts with Gazprom and it is ready to clinch a deal, but it is not willing to compromise on the nature of the contract. A non-binding contract would increase uncertainties, rather than settling existing problems. 

Ukraine does not want Gazprom to take unilateral decisions, eventually stopping gas supplies. On this, Naftogaz will not throw in the towel, despite Ukraine and Russia already agreeing on prices, volumes and other details.

All in all, there is still room for a deal and negotiations will continue next week in Brussels.

“We agreed on two prices: one for the winter and one for the summer. I am not speaking about them before we sign the contract,” Kobolyev said.  

Some commentators said that Kiev is fast-running into a cement wall and it could have then to pay for its brave behaviour. But Kobolyev does not see things in the same way. According to him, the country can survive the winter, making use of the gas stored in its UGS facilities and importing energy from Europe.

“Now Ukraine is getting all its gas from Europe,” he said, arguing that siphoning off gas is not in Ukraine’s interest. In that case, Russia would stop its supplies through the country, making it more complicated for Kiev to import from Slovakia. 

According to the CEO of Naftogaz, Bratislava is now its only source of gas and Kiev has already put in place mechanisms to stop any eventual theft of gas directed to Europe. To make its winter strategy more consistent, the country is also promoting a change in behaviour of the local population. 

“People are changing attitude to gas consumption,” he noted.

This measure would help the country to survive the winter. In this sense, signing a risky deal would be even worse than importing gas from Slovakia, while waiting for the final judgement out of Stockholm. According to Kobolyev, the final judgement is expected “not earlier than 1 year,” with hearings starting shortly.  

LITHUANIA BETS ON LNG

European LNG facilities are almost empty. According to Russian experts, any new investment in LNG does not therefore make any sense. Nonetheless, Lithuanian authorities claimed the Klaipeda LNG terminal is completely rational. 

“Russians are really good people, but it is really difficult with them... If you want to negotiate with Russia, you need a terminal,” Rokas Masilius, Lithuania’s Minister of Energy, commented on Thursday during the conference.  

Lithuania, which does not produce any energy resources, is about to see its terminal coming on stream next week.  

The LNG gave Vilnius a good position to renegotiate gas prices with Gazprom. In May, Lithuania claimed a victory in the tug of war with the Russian company. As a consequence, the country is now paying around 20% less.  

“I don’t know how supplies from Russia will change in the future. We are all human beings and human beings react,” concluded Masilius.

Possible confrontations remain around the corner.

SO WHAT?

Many commentators said that Ukraine and Lithuania have been irrational. Others said the same of Brussels and of its position on the South Stream project. 

But there is something missing. As the case of Lithuania clearly shows, rational decisions have to take into consideration costs and prices, but also the wider consequences of oil and gas projects. 

In this sense, it will take commentators some time to understand whether Brussels’ strategy is paying out or not. What is sure is that European companies will be more attentive not to waste money, to embark on remunerable projects with a low risk profile. 

Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci