[NGW Magazine] Baltic States Fail to Unite

The three Baltic states remain at loggerheads, each wanting an expensive additional piece of gas import kit. But only Lithuania can physically take US cargoes, even if Russian pipeline gas makes more sense.

The otherwise ordinary summer season has been eventful for the Baltic energy sector: the prime ministers of Lithuania, Latvia and Estonia met three times in attempt to hammer out a joint stance on the Baltics‘ gas policies; gas market unbundling has attracted more companies looking to grabs some of the action; and Lithuania’s Klaipeda LNG terminal took delivery of the first US LNG delivery from Cheniere Energy August 21.

Lithuania expects another US LNG batch in mid-September under a contract signed between LDT and Gas Natural Fenosa in July. LDT also signed a deal last year with Koch Supply & Trading, another US gas trader, for LNG supplies throughout 2017. The company has this year delivered two LNG shipments, each of 150,000 m³, one from Norway and one from Nigeria.

But market participants doubt if Lithuania can drive out Russia's Gazprom from the local gas market. Gazprom boasted last week of having increased gas sales to Lithuania in the first half of this year, compared with the same period last year. After a slip in previous years, Gazprom has bounced back to the top position on Lietuvos Energija’s gas supplier list.

"This is the first, but certainly not the last US shipment. Given the market situation and the development of the market, we can expect an increasing amount of these shipments…The US LNG  we received is currently cheaper than Gazprom's gas,” Lithuania's energy minister Zygimantas Vaiciunas said, choosing his words carefully when asked a question on Gazprom at a news conference in Klaipeda. According to the minister, the US cargo will further increase the energy independence of Lithuania and the whole region.

The headline grabber of the earlier weeks, however, was the visit by Russia's president, Vladimir Putin, to the Russian exclave of Kaliningrad, sandwiched between Poland and Lithuania. He urged Belarus to redirect the transit of its oil products from the Baltics to Russian seaports. If Belarus obeys, the Lithuanian seaport of Klaipeda, where Belarusian cargoes comprise 40% of the entire reloading, as well as the Latvian ports of Riga and Ventspils, would all be effectively crippled – and the reverberations would be felt at the Klaipeda LNG terminal, too if the port authority hikes the fees. And Klaipeda Nafta is also a major tax payer in Lithuania. 

Looking for now on the bright side, however, Lithuania, meanwhile, hopes the market trends will play into its hands as more gas on the international markets means more options and, importantly, lower prices for the small Baltic country.

"Reviewing the first half year, I can infer that the so-called LNG supply excess being predicted for the last couple of past years has not been there. Gas prices in the first half year were higher than last year, but lower than the year before, year-on-year," said the interim director of Litgas, Vytautas Cekanavicius. Litgas is the wholly-owned subsidiary of Lietuvos Energija, the country‘s state-controlled energy holding company.

"As Lithuania buys LNG internationally, the higher than usual competition, which we see now, works for us. The larger is the gas glut, the better are the conditions for us," Lietuvos Duju Tiekimas (LDT), the trading arm of Lietuvos Energija, told NGW.

Europe-bound LNG imports have risen 10% during the year’s first half, year-on-year, owing to the colder temperatures in the winter and the hotter weather in May and June, according to the LDT chief. As more LNG capacity comes on stream, while demand languishes relatively, more and more LNG will be forced into Europe, with the inevitable consequences for the price.

Having fully liberalised gas market will allow Estonia, Lithuania and Latvia – the latter finished unbundling its gas market only last April– to seek out new business opportunities. Having won a contract to build a temporary LNG station in Druskininkai and supply gas to the southern Lithuania, Estonia's small-scale liquefied natural gas supplier JetGas is also considering expanding into other Lithuanian towns and selling gas to industrial customers in Latvia, too.

Janek Parkman, a member of the management board at JetGas, says that gas for Druskininkai will come from a LNG reloading station in Klaipeda, but it does not rule out buying LNG from other sources.

"Our first priority would be to get LNG from Klaipeda, but we have some alternatives available. If for some reason Klaipeda doesn't work out, we can take it from Poland or Russia as well," Parkman said. "We are looking for places to build stationary LNG stations elsewhere in Lithuania, but not only there. Our main target would be industrial customers, LNG filling stations for trucks and buses, for example, so this is our business concept for the moment," he added.

The company expects to sign agreements by the end of the year. JetGas is also expanding in Latvia and plans to deliver the first LNG cargo to an unnamed Latvian company in September.

Market reforms

Envisioning potentially a lucrative business, Lithuania‘s Achema – a fertilizer producer and also the Baltics‘ single largest commercial gas buyer – announced this month it is setting up a secondary enterprise, Achema Gas Trade, to trade gas in the region.

Achema has long lambasted Lithuania's government for forcing it to buy gas from the Klaipeda LNG terminal and to heavily contribute to its support in other ways too. At the start of the year, the producer has signed a contract with Russia‘s Gazprom for the year – the deal is said to be for 870mn m³ of gas – to be pumped to the town of Jonava in central Lithuania, where Achema operates. Achema has said bought gas this more cheaply from Gazprom than has LDT.

Meanwhile, Latvian gas utility Latvijas Gaze has spun off a new company, Gaso, for its distribution business, separating it from gas sales in order to comply with European Union competition rules known as the Third Energy Package. Aigars Kalvitis, Latvijas Gaze's CEO, expects to put it to action this November late last year, Latvijas Gaze split off a natural gas transmission and storage operator, Conexus Baltic Grid, ahead of the full market liberalization in April.

Yet the Baltics have some hurdles to remove along the way to a cohesive vibrant regional gas market.  Amid the rift between Lithuania and Estonia on the location of a regional LNG terminal – the former insists the Klaipeda LNG terminal already serves the purpose and the latter points to a 2012 study commissioned by the European Commission, which says that a regional LNG terminal should be built near the Northern Baltic Sea shores of the Gulf of Finland – the sides this summer have cleared some of the obstacles.

Having met three times – first in Paldiski in Estonia, which is a probable regional LNG terminal construction site, then in Klaipeda in Lithuania and at Latvia’s Incukalns gas repository most recently – the three prime ministers are said to be about to ink a deal on the Baltics‘ liquefied natural gas (LNG) market, including building a regional LNG terminal.

Private or public risk

It was Lithuania which made concessions, agreeing that an Estonian LNG terminal can seek the status of a regional LNG facility along the Klaipeda LNG terminal. Estonia has vehemently bristled against state aid for the Baltic LNG infrastructure – the Klaipeda facility is supported with taxpayer's money.

After the Incukalns meeting, Estonia's prime minister Juri Ratas said that he had ironed out the differences with his Lithuanian counterpart, Saulius Skvernelis, with both agreeing that a regional Baltic LNG terminal would have to adhere to market rules. Yet despite previous rebuttals from Brussels, Lithuanian officials are hopeful that a joint position of the three Baltic nations will boost their chances of securing European Union (EU) support to the Lithuanian LNG terminal in Klaipeda and so buying out the LNG jetty Independence from Norway’s Hoegh LNG before the lease contract expires in 2024.

The Baltics also want the European Union finance rehabilitation of the Incukalns facility as well as, possibly, the construction of a medium-size LNG terminal in Paldiski – even though the Estonian LNG project was denied EU funds earlier this year.

For Vidmantas Jankauskas, the former chief of Lithuania‘s energy regulator, VKEKK the quests are effectively all about the same thing – attracting by hook or by crook EU funds to realise the ambitions of each  Baltic state.

"Brussels has always said it will support a regional LNG terminal. Unless the Baltic states of Lithuania, Latvia and Estonia agree where it has to be, it is hard to expect the European Commission‘s money. The bottom line, however, is this: does the EU need so much LNG infrastructure so close together?“ Jankauskas asked. "Especially with gas demand decreasing significantly? It will see new lows once the waste-to-energy co-generation power and heat plants in Lithuanian capital Vilnius and Kaunas – the latter is only a mere 100 km away – are built. In addition, we have the EU-supported Gas Interconnector Poland-Lithuania (GIPL) in the offing, so it all boils down to another question: does the EU have a clear energy strategy in the region? More importantly, does Lithuania have one?” the expert asked.

The output capacity of the 94-MW, €160mn Kaunas plant, which will use 200,000 metric tons/yr of local municipal waste to produce heat for the city district heating network, is expected to be 70 MW of heat and 24 MW of power.

The similar Vilnius €345mn facility, to which EU allotted €150mn, involves a biomass boiler with output capacities of 70 MW power and 174 MW heat.

The expected capacity of the €471mn GIPL pipeline is 2.3 bn m³/yr but could be expanded to 4.5 bn m³/yr. The pipeline is slated for late 2019.. 

“The unbundling of the Baltic gas market has enlivened it with the old and new participants of it competing for a slice of the pie. This is exactly what we saw with the liberalisation of the region’s electricity market a couple of years ago. However, the EU energy decision makers ought to remain resolutely neutral and not give in to requests by either side but instead see what suits the whole region’s interests best,” the Lithuanian expert emphasised to NGE.

Linas Jegelevicius