Liquefied gas arrives in Lithuania to emotional welcome

By bne IntelliNews October 28, 2014

Tim Gosling in Prague -


The "Independence" – the first liquefied natural gas (LNG) facility on the southern coast of the Baltics – arrived in Lithuania on October 27. The first shipment of gas to fill this floating storage and regasification unit (FSRU) followed close behind. The ships were met by a gaggle of dignitaries from the president on down – as well as praise from Washington and Brussels – as Vilnius celebrates breaking Russian dominance of the region's gas supply.

The reception was emotional as the FSRU arrived in Klapedia port. Flags and fireworks marked the grey skies as Baltic officials welcomed what they insist is a game changer for the region's energy relations. Attention now turns to Lithuania's negotiations with Russian gas giant Gazprom over a new contract on pipeline gas for 2016 onwards, and the leverage that Vilnius has bought itself.

Vilnius agreed in March 2012 to lease the 170,000 cubic metre (cm) South Korean-built ship from Norway's Hoegh for ten years. Initial capacity of 2-3bn cm a year (cm/y) will offer the chance for Lithuania divert a huge chunk of its 3bn cm/y or so demand away from Gazprom should it wish. The FRSU will launch gas supplies in January.

A Norwegian tanker followed closely in the wake of the "Independence," and is set to deliver Lithuania's first ever LNG cargo on October 28. It carries the first batch of the frozen gas from Norway's state-controlled Statoil, which has a five-year contract to supply 0.54bn cm/y to Lithuania. Lithuania also says it is now able to tap the spot LNG market.

Lithuanian President Dalia Grybauskaite, the driving force behind the project, delivered an emotional speech as the ship docked. "In the twenty-fifth year of its re-independence, Lithuania again stands proud of its strong spirit, courage and political will," she said, according to a statement.

Others lined up to praise the effort. Vice-President of the European Commission Gunther Oettinger said: "Today's event at Klaipeda LNG terminal marks an important milestone by Lithuania to diversify its gas supply sources, ensure competitive gas prices and security of gas supply in the country and the Baltic States region."

US Secretary of State John Kerry called the LNG project "a historic milestone," lauding "Lithuania's strong and sustained leadership and strategic vision," in a letter read out at the ceremony, according to Baltic News Service.

First fruit

That show of support stems from the current drive by Europe to diversify away from Russian energy supplies, with Lithuania being held up as an example to Central and Eastern European states that have left themselves open to pressure from Moscow due to heavy reliance on its gas. The threat that supplies through Ukraine could be interrupted to cut them off once again, following severe problems in 2006 and 2009 has seen the likes of Slovakia, Hungary and Bulgaria reticent to support EU policy towards Russia.

The arrival of the "Independence" is the fruit of Vilnius' vicious three-year fight with Gazprom, which currently supplies 100% of the 3bn cm or so Lithuania consumes each year. That dependence saw the country paying the highest price in the EU for Russian gas, according to officials in Vilnius. 

However, Lithuania has pushed Gazprom out of its stakes in the gas industry completely, leaving it as only a supplier. The key battle was over the pipelines, with the LNG platform unviable while Russia held the reins. 

Vilnius has also worked hard on further leverage. It has a €1bn arbitration suit against Gazprom for over-charging lodged in Stockholm, and has held negotiations over its role in gas transit to the Russian enclave of Kaliningrad, which sits to the west of Lithuania.  

On top of retreating from Lithuania's gas industry, Gazprom handed Vilnius a price cut earlier this year. "We've suffered very high energy prices," said Energy Minister Rokas Masiulis, according to BNS, as he claimed the 23% price cut "has made up for the costs of constructing the terminal four-fold."

However, Lithuania's contract with Gazprom only runs to the end of 2015. Talks are due to start on a new contract from 2016 onwards, and that is the real target for Vilnius. Grybauskaite has been busy insisting in recent weeks that Lithuania will be able to do without Russian gas entirely should it not get a good deal, and reiterated that at the ceremony. However, with LNG a high cost supply option, she suggested Lithuania doesn't "strictly reject Russian gas, especially if it comes at a cheaper and competitive price for us."

Mending fences

The other Baltic states meanwhile are making efforts to catch up with Lithuania. Estonia and Finland announced on October 23 that they're close to agreement on a long-delayed project to build a pan-Baltic regional LNG facility, although they appear to be sticking to a twin-terminal plan that only raises concern over its economic viability and EU support. 

The delayed regional project has only encouraged Vilnius to try to leverage its new facility to effectively take its place. The Lithuanian platform could potentially offer a huge contribution towards the region's total annual demand of 5bn cm - or 9bn cm including Finland - and Vilnius is keen to use the Independence as a regional hub. To do that however, its neighbours will need to follow in its footsteps to free their gas networks from Russian control. 

Estonia has demanded its pipelines be unbundled by the end of the year, but reports missed deadlines by national utility Eesti Gas (owned by Gazprom, Russian gas trader Itera, and Finland's Fortum - in which Gazprom also holds a significant stake). Latvia, meanwhile, has not yet started the process. Riga could see greater resistance from Russia as it hosts Incukalns - the Baltic region's strategic gas storage facilities. Last week Riga suggested it can't afford to buy the 47% stake in utility Latvijas Gaze currently being sold by E.ON

Estonia-based energy analyst Andres Mae tells bne that Latvia risks increased exposure to Gazprom's whims unless it accelerates efforts to free itself from total dependence. The country's infrastructure makes it the only Baltic state unable to host an LNG facility, which means it will not only have to fight Gazprom to free its pipelines, but also bury differences with its neighbours that have come up over the last few years as the three bickered over the location of the pan-Baltic terminal project.

However, the elevated level of concern over Russia due to the Ukrainian crisis should ease the latter challenge. Estonian Prime Minister Taavi Roivas and Latvian Prime Minister Laimdota Straujuma attended the ceremony in Klapedia. Lithuania says it will be able to import about 1bn cm in the first year of operation, and hopes to expand capacity to 4bn cm/y.

At odds with predecessors that openly opposed the Lithuanian project, Straujuma joined in with the praise, thanking Lithuanian for developing the new facility. "Today Latvia is welcoming the liquefied natural gas terminal in Klaipeda," she said, according to BNS. "We are now planning to increase the capacity of the gas pipeline between the Klaipeda terminal and Latvia." Pledging Incukalns will become a key element in the region's cooperation with global energy suppliers, the Latvian PM added: "This will be another important step towards ending the energy isolation of the Baltic states."

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