Ben Seeder in Riga -

As the developers of Lithuania's liquefied natural gas (LNG) terminal discussed possible supply deals in the US last week, the Baltic country's biggest gas users revealed they are considering mounting a legal challenge against the project.

Lithuanian Minister of Energy Arvydas Sekmokas said he expects to have agreements to supply the terminal with LNG in place before the end of this year, and confirmed that Rokas Masiulis, chief executive of project developer Klaipeda Nafta, met with US LNG major Cheniere on September 10 as part of supply negotiations. Masiulis has also met executives from other potential LNG suppliers, including Spain's Fenosa, BP, Shell and Norway's Statoil. "Our goal is to sign gas supply contracts in the near future. That would be very important for the further implementation of the entire project, because supply contracts always go hand-in-hand with construction," Sekmokas said.

But even as Sekmokas highlighted the rapid development of the terminal ahead of his country's October 14 general election, large industrial gas consumers were telling bne they are considering mounting a legal challenge against the project.

The main issue for them is the Law on the LNG Terminal, passed by the country's parliament on June 12, that sets out the legal and financial basis for the LNG terminal, and requires large gas consumers to purchase a minimum of 25% of their supplies from the terminal. According to Joachim Hockertz, deputy CEO of Lietuvos Dujos, the country's main gas distributor, the law is merely designed to rescue the economics of the LNG project. "The law heavily distorts the gas market and could serve as a deterrent to competing gas infrastructure projects, like the GIPL (Gas interconnection Poland-Lithuania) project," he says.

Hockertz claims that if the full costs of the LNG project are passed on to gas consumers, gas transmission tariffs could treble from current levels. "Klaipeda Nafta's business plan foresees that a major part of the LNG terminal costs will be socialized, by burdening all transmission system users," he says.

One of the reasons that the costs of the LNG project are so high is the Lithuanian government moved ahead with plans to develop the terminal without garnering assistance from its Baltic neighbours, Estonia and Latvia. Another reason is Klaipeda Nafta's deal in March with Norway's Hoegh LNG to supply a floating LNG re-gasification unit to the project, he says. "The deal with Hoegh is paying LTL1.8bn (€521m) over 10 years, and that is just for rent, we don't end up owning the unit after that time. It was a very expensive deal for Lithuania... I understand they overpaid," he says.

Petitioning the EU

Lithuania's biggest consumers of gas, led by fertilizer producer Achema and the Lithuanian District Heating Association (LDHA), confirm that they have petitioned EU Energy Commissioner Gunther Oettinger, who arrived in Vilnius on September 14 for discussions with the government.

According to Vytautas Stasiunas, president of the LDHA, a body representing 31 heating and power producers across the Baltic nation, the LNG law "distorts the market" and contravenes basic European laws on competition. In a letter to Brussels addressed to Oettinger and to Joaquin Almunia, the commissioner for competition, Stasiunas said the law also enables the government to "cross-subsidize" the activities of the terminal by passing on its costs to all Lithuanian gas consumers in the form of higher transmission tariffs. "The association expresses concern... on the distortion of competition, the equality of market participants, and the freedom to choose a supplier that this LNG Law raises," he wrote in the letter in August. The result, he said, would be significantly higher gas prices for the Lithuanian population.

Lithuanian fertilizer group Achema, whose gas purchases account for around half of total gas consumption in the country, confirmed last week it had also petitioned the European Commission over the law. "We are exploring the legal options, we have held discussions with the government and we have contacted the European Commission about this very unfair law," said Valdemaras Vareika, general director of Achema.

He said he had projected that earnings at the fertilizer plant could collapse after 2016, if it is required to pay for a large share of the LNG's construction and operating costs through higher gas transmission tariffs. "This law is a very big problem. In the worse-case scenario, I estimated the additional costs could be over LTL100m," he said on September 14. "If they [the European Commission] do not do something about this, then we will consider action ourselves."

In response to the criticism, Lithuanian Prime Minister Andrius Kubilius has defended his government's stance on the LNG law, saying the mandatory 25% purchase rule would make the project commercially stronger and provide a bulwark against Russian gas market dominance. "The reason for this mandatory purchase is to ensure the energy security of Lithuania. If there is no LNG terminal, we have only one monopoly supplier of gas in Lithuania," he told bne on the sidelines of the LATO conference in Riga on September 14.

Storing up problems

Lietuvos Dujos' Hockertz says the development of and access to gas transmission and storage infrastructure is also shaping up to be another stumbling block for the Klaipeda LNG project.

He confirms that construction has started on a 138-kilometre pipeline with a diameter of 400 millimetres (mm) from Jurbarkas to Klaipeda, at an estimated cost of €50m. This new line, which will be operational in 2013, alongside an existing pipeline, would be used to transport gas from the LNG terminal into the Lithuanian transmission system. But he said the problem is if the government decides to build the largest of the various options on the LNG terminal a 4bn cubic metres a year (cm/y) facility, then this pipeline would be insufficient in terms of transmission capacity. "If they go with a 4bn cm/y terminal, then we need a 700-mm pipe, which costs €10m more, but it is already too late - we have bought the [400-mm] pipes already and we can't send them back," he says.

Another problem is storage capacity. According to Klaipeda Nafta's published business plan, the terminal will include storage capacity of 170,000 cm, which will not be sufficient if a large-capacity LNG terminal is built, Hockertz says. A deal must be struck with the Latvians to make use of the 2.3bn cm-capacity Incukalns storage facility, he says. "I have asked Klaipeda Nafta, what they intend to do about storage, and they answer that they'll send the gas to Latvia. Then I ask them if they have spoken to the Latvians about this yet - and they don't have answers," Hockertz says.

Latvia, which is still smarting from Lithuania's decision to bypass efforts to build a regional LNG terminal, is unlikely to greet any such request warmly. In a strongly worded letter sent in the summer to the Lithuanian government, and copied to the European Commission, Latvia's Minister of Economics, Daniels Pavluts, criticized Lithuania's "unilateral" approach to the LNG terminal. He also requested the Lithuanian government explain how the 25% mandatory purchase rule included in the LNG law "could not... be considered a severe market distortion."

Daiga Grube, spokeswoman for Pavluts, tells bne that no reply had been received yet from the Lithuanian side. But the 25% mandatory purchase rule could only negatively influence other gas infrastructure projects in the Baltic region, she says, such as Poland's plan to build an LNG terminal at Swinoujscie, or other projects, such as the GIPL consortium. "Restricting Lithuania's 25% market share for other suppliers raises concerns about the overall market liquidity and viability of large infrastructure objects," she says in an email.