With Russia playing cat-and-mouse with Europe over gas deliveries, the need to diversify energy supplies has never been greater. However, the deadlock over the planned pan-Baltic liquefied natural gas (LNG) terminal demonstrates how difficult it is to win broad international agreement, especially when the economics are uncertain and Russia holds many of the aces.
Cut off from European gas networks because of their Soviet history, and thus fully dependent on Russia for gas, the Baltics have long been earmarked for an EU-backed LNG terminal.
Under the EU’s first stress tests for the energy sector released this October, which anticipate the potential impact of Russian gas supply disruptions, Finland and Estonia were named as the most exposed, even though neither was affected by the Russia-Ukraine gas wars that cut off several eastern EU states in 2006 and 2009.
However, disagreement over the location of the LNG terminal has prevented progress towards this goal, forcing Estonia, Latvia and Lithuania to turn to Brussels to make the decision in 2012. "Estonia or Finland" came the reply. That only opened the door to more bickering between Tallinn and Helsinki.
Then in June, with concern over Russia's dominance of the region's gas markets growing, the pair chanced their arm and proposed two terminals to the EU: Paldiski in Estonia, to be built by Estonia’s Alexela Energy; and Inkoo in Finland, to be built by Finland’s Gasum.
The Finnish project would depend on building Balticonnector, an 80km pipeline to carry gas across the Gulf of Finland to Estonia. Gasum plans to build that link with Estonian pipeline operator EG Vorguteenus.
Months after voicing its disapproval, the European Commission finally put its foot down on September 30, publicly informing the project companies that it would not raise funding to cover the extra cost. The same day, Gasum announced talks over cooperation with Alexela had broken down.
Both the Finnish economy ministry and Alexela admitted that this will further delay a pan-Baltic LNG plant. However, both the Estonian company and Gasum insist they plan to continue with their individual projects. "We are planning to go on with our project, but other solutions have to be found," Alexela Energia board member Marti Haal told Baltic News Service.
Gasum’s communications director Olga Vaisannen tells bne that the company will "now go forward on [its] own. We've done a lot of work already."
Question of economics
The Finnish company aims to use the LNG not only to supply Finland and the Baltic states, but also to supply the northern Nordic regions that pipelines do not reach.
Ironically, Gazprom is an indirect participant in both the Inkoo and Balticonnector projects. It is a 25% shareholder in Gasum and it is also involved in Vorguteenus via its shareholding in Eesti Gas, Estonia’s dominant gas company. Other shareholders in Eesti Gas include Finland's Fortum (partially owned by the Russian giant) and Russian independent gas producer and trader Itera.
Estonia says it hopes that the regional terminal will be built, and sooner rather than later. Thor-Sten Vertmann of the Estonian Ministry of Economic Affairs, tells bne: “Our view remains unchanged: Estonia is interested in the most cost-effective, quick and independent solution."
However, there are now serious questions over the economic viability of any project to build one pan-Baltic LNG platform, let alone two. Annual demand in the three Baltic states adds up to no more 5.5bn cubic metres (cm). Add Finland, and consumption still only just passes the 9bn cm mark. Both Gasum's project and Alexela's plan for a terminal across the water at Paldiski are working on capacity of 4bn-5bn cm.
"Estonia and Finland actually have little need of an LNG platform," says Andres Mae, an independent Estonian energy analyst. He points out that with shale oil and wood playing a large role in the pair's energy mix, gas consumption is relatively low. Meanwhile, Finland has a favourable gas contract with Gazprom to 2025.
Moreover, Gazprom is in a position to limit Latvian and Estonian demand from any LNG terminal, because of its ownership interest in both the country’s pipeline and distribution networks. Lithuania has forced the unbundling of the gas pipeline from the distribution network, but Estonia and Latvia are still working on it.
Estonia has ordered the Vorguteenus pipeline operator sold by the end of the year, and in June warned Eesti Gas shareholders – Gazprom, Finland's Fortum (partially owned by the Russian giant) E.ON and Russian independent Itera – over their failure to sell.
Latvia has spoken about unbundling, but is likely to face stiffer resistance from Gazprom because the country contains the region’s strategic storage facilities.
Floating a solution
Furthermore, having tired of waiting for a pan-Baltic platform to offer leverage against Gazprom, Lithuania will launch its own floating LNG facility by the start of 2015.
The "Independence" will offer 3bn cm capacity, which will satisfy the country's full demand, though it is unlikely to quit buying cheaper pipeline gas altogether. Lithuania already won a 20% discount on its expiring contract with Gazprom, and is using its new-found leverage in negotiations on a new deal covering 2016 onwards.
Surprisingly, analysts say they know of no comprehensive study into the potential effect of the Lithuanian platform on the wider Baltic gas market. "It's still unclear if a pan-Baltic LNG plant could be economically viable," Mae sums up. "We're yet to understand the impact of the Lithuanian platform."
Gasum says the Lithuanian terminal makes EU aid even more essential. "The level of EU support needs to be serious for the pan-Baltic LNG project to happen," says Vaisannen.
Support from Brussels is "absolutely vital" for Inkoo – with both the Finnish and Estonian LNG projects estimated at around €500m – the Gasum director adds, noting that plans for the final location and financing could be in place as early as mid-2015. Gasum has said previously it is in no rush, with the current EU funding round running to 2019.
Gasum and Vorguteenus have also applied for EU funding on Balticonnector – which is due to cost around €100m – and "should find out the response at the start of next year," says Vaisannen.
In October, the European Commission did flag up the Baltic region as a priority in a report on progress in building European gas and power networks. But these kind of costs and the bitter competition between Finland and Estonia might eventually persuade all sides to simply make do with the Lithuanian terminal. "The prospect of EU funds is likely to push through a pan-Baltic LNG terminal eventually," suggests Mae, "but not if Estonia and Finland continue to compete for the location. In such a situation the Lithuanian terminal will work as an additional supply channel for the three Baltics."
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