Russia threatens again to bypass Lithuania with Baltic LNG

By bne IntelliNews November 25, 2013

bne -

Russian state-controlled Gazprom reiterated on November 22 that it plans to build a liquified natural gas (LNG) terminal off the coast of Kaliningrad. The reminder is a clear warning shot to Lithuania, as Moscow and Vilnius struggle to agree a new gas supply contract.

Gazprom said it plans to start shipping LNG to Kaliningrad by 2017, a year or so before it says it will open a Baltic LNG plant. It then hopes to expand underground storage in the enclave - which sits wedged between Lithuania and Poland on the Baltic Sea coast - to 800m cubic metres by 2025, reports Reuters.

Gazprom last mentioned a vague plan to supply Kaliningrad via seaborne LNG when it launched talks with Lithuania over a new contract on gas exports. There are several points of leverage on either side, and talks have not gone smoothly according to Vilnius, which says Gazprom is playing hardball.

The only route for gas headed from Russia to Kaliningrad is via Lithuania, with the Baltic state sending 2bn cm through to the territory last year. While Russia has been waging what has been called a "trade war" by officials in Vilnius in recent months - the pair is also at loggerheads over the competition to lure Ukraine towards either the EU or the Customs Union - Lithuania's foreign minister has flagged up his country's power over routes into the enclave.

Lithuania's gas pipelines were, until the summer, controlled by Lietvos dujos - the national gas company in which Gazprom owns a significant stake. However, Vilnius is in the process of pushing the Russian company out newly spun of distributor Amber Grid, using EU rules as leverage. That is key for Lithuania plans to have its own LNG platform up and running by the end of next year.

Gazprom's reminder that it may seek to implement independence for Kaliningrad gas supplies came just a day after Lithuania received the green light from the EU on state funding for its LNG terminal. That facility should have capacity to handle all of the country's demand of 3bn cm or so. However, the main point for Vilnius is that it will break its current full dependence on Russian gas, thus allowing to negotiate a cut in prices it reports are the highest in Europe.

While the Russian company has plenty of gas around, it currently has no LNG infrastructure in the Baltic. The company did not say how it planned to supply Kaliningrad starting in 2017, given that its only current facilities to transform natural gas into LNG are located thousands of miles away on the Pacific island of Sakhalin in the far east. However, it says it plans to build an LNG plant by the end of 2018, with capacity to turn out 10m tonnes of the frozen gas per year.

However, it said in a report on its investment plans for 2014 that it plans a new LNG terminal to receive the liquified gas by 2017, which will be linked to Kaliningrad's existing gas pipeline near the local underground gas storage facility. That will allow it to deliver gas to local consumers as well as pump it into storage reservoirs, according to Interfax.

Considering the geographical position of the most-western Russian region delivering LNG by sea will "significantly improve the region's energy security," the Russian gas giant said in a statement. The company is currently considering several locations for building the new terminal. Details on exact investments required for the project will be finalized next year, it added.

While the details are vague and could be seen as merely a means to apply pressure on Lithuania, Russia is also seeking to expand its LNG capacity. It says it wants to double its share of the global trade in LNG to 10% by 2020. However, most of the action is seen in the far east, as Moscow hopes to benefit from Japan's move away from nuclear power and China's call to curb the use of coal.

Meanwhile, Gazprom has also recently lost its long held monopoly on Russian gas exports. On November 22, the Russian parliament passed legislation allowing the country's largest independent gas producer Novatek, and state-controlled oil giant Rosneft, to sell LNG overseas.

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