A Baltic bust-up over energy

By bne IntelliNews April 23, 2012

Ben Seeder in Riga -

As Vilnius firms up plans to construct a floating gas terminal at the port of Klaipeda, its relations with Riga on energy matters appear to be worsening.

On April 18, Lithuanian Energy Minister Arvydas Sekmokas told local news of plans to cede up to 20% of the shares in the proposed liquefied natural gas (LNG) terminal at Klaipeda to suppliers of gas or equipment, and earlier said Norway's Statoil could supply LNG to the terminal.

The developments at Klaipeda have angered Latvia, which wants to build a large LNG near Riga to supply the whole of the Baltic states. That project is part of an EU-wide policy to reduce the region's reliance on Russian gas and eliminate the so-called "energy islands" in the Baltics - where the gas markets in the Baltic States and Finland have no alternative gas suppliers.

Riga has accused its larger neighbour of acting unilaterally and ignoring an agreement to let the European Commission mediate on the dispute of where to site the regional LNG terminal. Lithuania in turn accuses Latvia of being too close to Gazprom, which meant Riga has delayed finding alternative gas providers and moving to comply with the EU rules that mandate a separation between gas suppliers and ownership of gas pipelines.

Latvian Minister of Economics Daniels Pavluts called for "Baltic solidarity" on the issue of LNG, but also pointed out that the Lithuanians had yet to present clear information about the true cost of their LNG project, who would buy the produced gas, and how the project fits into the regional gas strategy. Pavluts claimed Lithuania's gas transport infrastructure from Klaipeda is lacking, and that further investments would be needed if Lithuania wanted to supply other countries from the terminal. "At the present time, the gas transmission infrastructure from Klaipeda is insufficient. My understanding is there is a plan to build a larger pipeline from Klaipeda towards Vilnius ... but I have yet to hear details about how this could be paid for and by whom," he said.

Pavluts argued the Latvian proposal makes more economic sense than Lithuania's proposal. "Due to that storage capacity [at Incukalns], the gas transmission network that was built in Soviet times extends out from Incukalns like a web. So our transmission capacity from that area is high and sufficient to supply the other countries without the need for extensive upgrades to the existing transmission system or new pipelines," he said. "Having one project for the entire Baltic states would be much more viable than having multiple smaller terminals. I think it would be sad if we ended up with small and expensive terminals in all three countries."

Too crowded

Other concerns about the Lithuanian project include whether large industrial consumers would be able to buy gas from the terminal. Nitrogen fertilizer producer Achema, which accounts for roughly a third of all gas consumed in Lithuania, is locked in a supply agreement with Gazprom until 2015. And, according to Lithuanian media reports, companies there are also concerned about a draft law proposed by the Energy Ministry that would require some large industrial consumers to buy up to 25% of their gas demand from the Klaipeda terminal.

Arvydas Sekmokas declined an invitation for an interview, and Ministry spokesperson Donata Malinauskaite did not answer emails seeking clarification on the subject.

Lithuania, after its dispute with Gazprom over a law seeking to "unbundle" gas suppliers from the gas transmission company, currently pays around $490 per 1,000 cubic metres (cm) for gas - the highest of the Baltic states. The country is 100% reliant on Russia for gas imports, and after the closure of the Ignalina nuclear plant, gas comprises around 80% of its electricity generation energy mix.

Sekmokas and other Lithuanian politicians claim they moved ahead with their own terminal because the dependence on Russian gas means the country can't afford to wait for Latvia. Pavluts labelled these claims as "nonsense". "Latvia has been criticized by its neighbours that we haven't moved on the Third Package at all - and that is one of the reasons I decided to move now - we need to send a signal to our neighbours that we can be trusted - that the claims that we have sold out to Gazprom and are on a leash are nonsense," he said.

The EU Third Package - the directive that requires gas suppliers to be "unbundled" from gas pipeline companies, was now law, he said. "The start of the unbundling process in Latvia is imminent... It is a vicious circle - you cannot really liberalise the gas market until you have an alternative gas supplier, and alternative gas suppliers won't want to invest until the dominant gas supplier releases control of the gas pipelines. This is why I have decided to act now," Pavluts said. adding that he has prepared an action plan on unbundling, and this will be reviewed by the Latvian Cabinet in coming weeks.

However, analysts in the Baltic region are sceptical of Lithuanian claims that multiple terminals could co-exist in the region on a commercial basis. "The only reason these projects are being split apart... is there aren't only business considerations behind these projects. Every country wants to have its own terminal with its little flag flying on top of it, to be able to say to their electorate 'I have secured our LNG supply'," says Thibault Normands, director of Latvia-based energy consultancy Eastern Intelligence.

Cheaper gas coming from the east through the existing pipeline network would continue to pose large commercial threats to any LNG project in the Baltic States, particularly when large resource developments in Russia, such as the Shtokman gasfield, come onstream and impact gas prices.

He also says it makes little sense for Lithuania to engage in shale gas production while investing hundreds of millions of euros in an LNG terminal. "When the shale gas boom started in the US, it hurt a lot of the LNG operations there. In Lithuania, as soon as you start producing shale gas, then you are going to render your investment into LNG - not useless - but you are going to lose a lot of money there," he says.

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