[NGW Magazine] Baltics accept Gazprom’s gas

This article is featured in NGW Magazine Volume 2, Issue 11

By Linas Jegelevicius

The fate of Gazprom in the Baltics – first reviled for behaviour, now resignedly accepted as a supplier of reasonably-priced gas – shows diversification can be a luxury. 

Russian gas monopoly Gazprom is flexing its muscles as never before in Europe, even though there are calls to dilute its power with US LNG and for it to be fined for its past anti-trust behaviour. 

The gas giant’s supplies to Europe and Turkey reached an all-time record in 2016: deliveries of 179.3 bn m³ were 19.9 bn m³, or 12.5%, more than the year before. As the company’s share in Europe’s gas consumption grew to a record high of 34% in 2016, the rouble-denominated profits soared by 21%, year-on-year.

Yet the more robust the pose that Gazprom strikes, the more uneasy the Baltics feel, especially with the green light to Nord Stream 2 which the region perceives as an arm of Russia’s geopolitical influence and a primary danger to Ukraine.

“Indeed, it seems the notion we felt (in Europe) that Gazprom is Russia’s geopolitical tool is waning. Commerce is taking over (fears),” Arvydas Sekmokas, a former energy minister of Lithuania, told NGW.

Russian oil and gas analyst Mikhail Krutikhin and a co-founder of the RusEnergy consultancy in Moscow, said more bluntly: “The politicisation of gas trade is over, we see the reverse trend now: its depoliticisation.” 

For the fearful Baltics, it means that the region will have to continue to deal, although reluctantly, with the Russian gas supplier for the foreseeable future – in Q1 2017, Gazprom sold Lithuania 2.5 times more than in the same period last year. Second, the company is keeping a foothold in the unbundled Latvian gas market – Gazprom boasts a 34.1% stake both in the Latvian gas company, Latvijas Gaze, and its demerged company, Conexus Baltic Grid, the transmission system operator – and the Russian monopoly is the only source for natural gas in Estonia. 

“Considering that Gazprom was allowed to implement Nord Stream 2 project, the claims it has for Opal capacity and TurkStream, it’s hard to argue that Europe is resisting Gazprom in its endeavors and or preventing it from implementing energy-based geopolitics,” Romas Svedas, former  deputy energy minister and now an independent energy expert, said.

Echoing this view is Virgilijus Poderys, the chairman of the energy committee in the Lithuanian parliament. He is convinced that TurkStream “purely” serves Russia’s wish to pressurise southern Europe. “It is evident that TurkStream is a mirror image of the South Stream project that was supposed to cross Bulgaria. It seems to be aimed at bypassing gas transmission systems of central and eastern European countries. With the project in place, Russia, will bypass not only them but also the European Union’s Third Energy Package and its key requirements for the separation of gas supply and transmission activities,” he said.

Speaking of the Baltics, after the exertion to drive Gazprom out of the region’s gas market for good, especially so in Lithuania, the region – and Lithuania, a key plaintiff in the EU’s Gazprom antitrust probe , too – is cosying up with the increased flows of Russian gas.

To the surprise of some energy experts, Gazprom this year has recaptured 34% of Lithuania’s gas market. Lithuania’s state energy holding Lietuvos Energija (Lithuanian Energy), which supplies gas to households and industrial customers, is set to purchase around some 2.9 TWh or around 34% of its gas needs from Russia; and the fertilizer manufacturer Achema, the Baltics’ single largest commercial gas consumer, plans to buy about 9 TWh, or two-thirds of its gas needs, from Gazprom. It has complained about the costs of the Lithuanian LNG terminal, which have been socialised across consumers and so made gas more expensive. 

Meanwhile, Gazprom’s total in the Lithuanian gas market this year is expected to hover at around 55%, up from one-third in 2016, but it is expected to remain below its 2015 market share of over 80%. 

“Europe believes it has done much to rein in Gazprom, which has responded with some flexibility in the trade. To call on everyone now to put more pressure on the Russian company would not make much sense,” Sekmokas, the former minister, admits. The EU antitrust settlement announced in March 2017 includes greater contractual freedom for countries dealing with Gazprom. 

The remedies to tame the Russian behemoth also include removing restrictions on customers re-selling gas across borders, ensuring that gas prices are tied to competitive benchmarks. Gazprom will also be barred from taking undue advantage of infrastructure which it has obtained from customers by having leveraged its market position in gas supply. Under EU rules, if found liable for competition breaches, Gazprom can face a fine of up to 10% of annual sales. 

In Gazprom’s case this could be nearly €83bn ($88.5 billion), cash it does not have. The one company to have published its objection to Gazprom’s settlement was the Polish former monopoly, PGNiG, which was given an extension of over a week to submit its lengthy response to the EC.

It fell short of specifying a figure that Gazprom should be fined but it did say that its own claims against Gazprom went back to when Poland joined the European Union in 2004n and thus became entitled to its protection from abuses of trade. The changed behavior of gas buyers has also contributed to the thaw in relations with the Russian company. The buyers no longer seem daunted by supply cuts and the security of supply issue is often deemed now of secondary importance, at least in the “mature” European markets. 

A sign of this more relaxed attitude of European consumers is their enthusiasm for larger than ever quantities of Gazprom’s gas – now comparatively cheap – and their lack of appetite for LNG. That shows rational, commercially-driven behavior, analysts say. Some of them believe that Europe’s dependence on Russian gas supplies is relative and not critical for the 28-member bloc. Besides, the highly publicized LNG exports from the US are still very limited, another big setback for Gazprom’s opponents.

The EC fine, if imposed, all agree would hurt Gazprom palpably, but the indications are Europe will not want to strain relations with the supplier, as its own reserves run down or production is capped. “I am sure Gazprom will get away largely unscathed. Europe is flirting with Russia as it always has (flirted). Although sanctions against Russia remain, the trade of gas is liberated.”  

Sekmokas, of Lithuania, insisted. Svedas claims that both Nord Stream2 and TurkStream are redundant projects, and so Gazprom’s determination in pursuing them, in light of the EU’s attempts at decarbonising, should make one concerned.

“The Gazprom expansion is not what the EU has aimed at,” says Svedas. “Both projects are questionable from the standpoint of law, but, for some reasons, the legal intricacies have been solved in Gazprom’s favor. The EC is too lenient to the Russian monopoly and furthermore it satisfies most of Gazprom’s wishes,” he said.

He believes that, if Russia manages to implement all the planned gas projects, Europe will end up being in the noose of Gazprom’s criss-crossing gas pipelines.

As many European companies eye the multimillion gas projects as an opportunity to rake in a lot of money, they stifle the grumblings of individual countries. “There is hardly anything Lithuania can do alone,” Lithuania’s observers say. Concurring with the Baltic pundits that Gazprom will evade an EU penalty, Krutikhin claims Gazprom is doing the right things. “If it showed even more flexibility to the European customers, its chances in the market would look even rosier,” he said. “The politicisation of the market is now in the past and it is all about trade – the way it should be.”

Agreeing, Dmitri Smirnov, a Latvian gas expert, says that replacing Gazprom is possible neither in Europe in general, nor in the Baltics in particular. “In the latter, I see its positions weakening, yet Gazprom’s gas supply in the region’s total gas demand will most likely hover above 50%. That’s pretty impressive, considering the efforts to curb its activities here,” he told NGW.

Linas Jegelevicius

Public tires of funding LNG

Lithuania’s energy minister Zygimantas Vaiciunas met with the vice president of the European Commission (EC) Maros Sefcovic responsible for the European Energy Union May 24. Discussions included the long-term security of gas supply in the region, the necessity to ensure further smooth financing of the decommissioning of Ignalina Nuclear Power Plant, and the linking of the Baltic States’ power systems with that of Poland, the ministry said May 30. They also discussed the regional LNG import terminal question and long-term gas supply. Vaiciunas said that in May the prime ministers of the Baltic States would go on a tour of potential locations for additional LNG terminals in Estonia and Latvia as well as visit the sole functioning one at Klaipeda. There is also an LNG terminal functioning further down the coast to the west, in Poland, plus a small one to the north, on Finland’s west coast at Pori.

While there is demand for more LNG bunkering, further LNG import terminals in the region are unlikely to receive funding from the EC, given the comparatively low use made of the present one, which is a floating regasification and storage vessel leased from Hoegh at a cost to Lithuania’s industrial gas consumers. The EC has turned down one funding application from Estonia. Latvia also wants to have one. It was noted during the meeting that the EC supports the idea of regional terminals and encourages the Baltic States to seek the economically most rational solution to ensure security of supply for the entire region, the ministry said. The EC is co-funding the subsea BalticConnector pipe, expected to connect Estonia and Finland in 2020.