Trouble Looms for Baltic Storage Facility

Latvia’s Incukalns underground natural gas storage facility might become loss-making and close down, according to some of the senior managers at Conexus Baltic Grid, the country’s transmission system and storage operator.

“The Incukalns facility might be closed if a solution on financing its operational costs is not found soon. Costs could be cut by scrapping the entry-exit charges on the borders with Lithuania and Estonia – an issue that the Baltic States are trying to agree on – or making the largest gas consumers pay for its maintenance, i.e. employing the model that Lithuania has taken with its liquefied natural gas terminal in Klaipeda,” the company's head of corporate strategy, Janis Eisakas, said late April.

Last year the facility was only 60% of capacity and the future outlook is uncertain, he said. So closing it would not be something extraordinary, and the same pattern is seen all over Europe, he said. There is so much spare capacity in the high pressure networks that shippers have not had to pay as much as before for seasonal storage.

The 1bn-plus m³ Latvian gas market was officially liberalised mode on April 3 with the gas transmission duty being handed to Conexus Baltic Grid, a newly set up company following the unbundling.  

High transportation and storage tariffs – at nearly €2/MWh – explain why Klaipedos Nafta, operator of the Klaipeda LNG terminal, and other gas traders in neighbouring Lithuania have not signed an agreement with Incukalns, Eisakas believes. He blames the high costs of Klaipeda LNG, socialised across major users, for the problem.

Major gas users in Lithuania pay about €65mn/yr for the Klaipeda LNGT maintenance, whereas the Incukalns underground natural gas storage would require €25mn/yr.

Klaipeda: security fatigue?

(Credit: Hoegh)

“Unlike Lithuania, we now need to get that €25mn from the market. It makes a huge difference for us,” he suggested. “There is no political will in Latvia to burden consumers. The best thing would be to fill up the facility, but the likelihood that it will ever be as full as before is very slim.”

It is not the first time that Incukalns representatives have complained of looming uncertainty. In mid-March 2017, Conexus Baltic Grid’s representative Sandra Adamsone said the facility may be closed owing to high operational costs, deterring new clients. The current developments suggest that gas will only be stored based on market principles and the desire of shippers to cut their costs of supply, she said then.

According to her, it would mean less gas stored in the facility, meaning others would have to pay more; if this did not happen then it would have to close.

Unifying the Baltics

One of the ways to decrease the Incukalns storage price for the suppliers would include scrapping the cross-border gas transportation tariffs at the borders with Lithuania and Estonia.

At present, Latvia has one of the highest standards in infrastructure for supplies of natural gas in Europe – 207%. If Incukalns closes. this indicator will drop to 51%, she said. Some experts are calling the bluff of Conexus Baltic Grid representatives, saying they want to downplay its value. “The Incukalns gas storage facility is very valuable and the interest in it is still high,” Latvian energy expert Dmitrij Smirnov told NGW.

Meanwhile, Reinis Aboltins, a Latvian energy expert affiliated with the Latvian legislature, Saeimas, told NGW he had spoken to senior managers at Conexus Baltic Grid recently and they sounded concerned about the future of the Incukalns facility.

“It seems they are worried that free gas market principles negatively affect it. It seems they cannot guarantee a minimum volume of gas for storage in Incukalns, i.e. 700mn m³ (of gas) which would prevent it from malfunctioning. Ideally, they need 1.2bn m³,” he said.

Although there is speculation that the Incukalns gas storage facility might be put on sale separately, the expert doubted it as it would affect the ability of Conexus Baltic Grid to operate the system, he said. He said it was regrettable that Latvia, Lithuania and Estonia have not yet hammered out a single policy on the gas entry-exit fees to turn the three states into a single hub.

Linas Jegelivicius