Tim Gosling in Prague -

Poland and Lithuania signed off on a link connecting their gas networks on October 15. The interconnector should end the Baltic region's status as an 'energy island,' which leaves it dependent on Russia, by the end of 2019. The agreement has stoked Lithuania's confidence in its ongoing face off with Moscow over energy.

The Gas Interconnector Poland-Lithuania (GIPL) has received strong backing from the EU as part of its bid to link gas markets and thus improve energy security across the bloc. Thanks to their recent history inside the Soviet Union, the Baltic states currently have no infrastructure links to the rest of the EU, which has allowed Russia to dominate the gas markets, giving it political leverage on the side.

GIPL will open the way for Lithuania, and neighbours Latvia and Estonia, to source gas from alternative suppliers within the EU. Vilnius also sees it as a vital prop to support its liquefied natural gas (LNG) terminal. The first alternative to Russian gas launched at the start of the year, but Lithuania needs to utilize more of the terminal's capacity in order to lower the burden of its costs on domestic consumers. It hopes to do that by exporting more gas to European markets.

The political leaders of the three Baltic states and Poland signed a joint declaration to complete the €558mn interconnector at an EU summit in Brussels. The bloc will pay €305mn of that on the "priority project". 

"A central element of the EU's Energy Union strategy is bridging missing links in the energy infrastructure," the European Commission said in a statement. "The participating states are committed to work together also in the future to further reinforce the region's integration into the EU's internal energy market."

Work on the 534km connection has been steadily progressing, despite some dispute about how to divvy up the final bill. Poland and Lithuania finally agreed on the financial structure of the project in September.

Initial capacity on the route will offer the Baltics the potential to import 2.4bn cubic metres per year (cm/y) via Poland. The trio consumes around 5bn cm/y. Meanwhile, capacity in the other direction will total 1bn cm/y.

The Polish and Lithuanian gas grid operators embarked on a project to gauge demand for gas flowing through the link in early August. Lithuania granted an environmental impact assessment a few weeks later.

The EU is hoping to see regional cooperation – traditionally a troublesome issue that has derailed many joint projects – continue to help link the Baltics to the rest of the bloc. It is pushing for a regional LNG terminal and strengthened power links with Scandinavia and Poland, amongst other projects.

"Gas and electricity infrastructure in the eastern Baltic Sea region is not sufficiently interlinked requiring further efforts to end the energy isolation of the Baltic states and to integrate the region into the European network," the EU executive statement continues. 

European Commission President Jean-Claude Juncker said: "Today's signature is about European solidarity. It is about leaders taking responsible decisions to increase our security and strengthen our resilience. Today we have done much more than bringing the energy isolation of the Baltic States to an end. We have brought the region further together. Today we have agreed on European infrastructure that will unite us, instead of dividing us."

Hardball

Lithuania has led the fight to free the region from Gazprom's dominance, and the progress of the key link offers it extra confidence to maintain its confrontational stance with Moscow.

The country will not start talks on a new long-term gas supply contract with Russia until 2016, the CEO of state gas importer Lietuvos duju tiekimas (LitGas) told parliament, local media reported on October 15. Given that Lithuania's current contract with Gazprom expires at the end of 2015, the claim by Mantas Mikalajunas appears designed to reiterate that Vilnius feels it has the leverage to drive a hard bargain with the Russian gas giant.

Gazprom was previously the only supplier in the Baltic region, however Lithuania launched an LNG terminal at the start of the year following years of bitter fighting with the Russian company. It also has strong backing from the EU, which is currently probing Gazprom for over-charging states in CEE, including Lithuania, as well as restrictive clauses in contracts.

With the additional pressure from an arbitration suit from Vilnius, Gazprom handed Lithuania a 20% discount on the current contract last year. The Russian company has also paid compensation. That has seen Lithuanian officials suggesting since that the country may not need to agree a contract with Gazprom at all, but could survive on its LNG imports and pipeline spot markets.

Lithuanian President Dalia Grybauskaite claimed ahead of the launch of the LNG platform that the country would be able to survive without Russian gas entirely. The 'Independence' would "give a lot of leverage and freedom in decision making," she said in October 2014. "Nobody will be able to blackmail or force us to pay the political price."

Lithuania has time to wait to see if the EU case will soften Russia up a little more, not to mention allowing the poisonous atmosphere between Moscow and the West to improve. The head of state power company Lietuvos Energija claimed in June that the conditions of the existing contract gives the country enough gas to last until the end of 2016, or possibly longer.

However, a bid to make do without any Russian supply looks ambitious. Lithuania consumes about 3bn cm/y of gas. The LNG terminal currently has contracts for just 0.5bn cm, and there's little to indicate a boost is imminent. With "market conditions unclear, LitGas has booked the same capacity for 2016," Mantas Bartuska, CEO of Klaipeda Nafta - the state-owned operator of the facility - told bne IntelliNews in the summer.

Meanwhile, Russia also has leverage. The LNG terminal is hugely expensive to run given that it uses just 15% or so of its capacity. Gazprom appears to be blocking Lithuania's bid to expand the operation by exporting to other Baltic markets and to Ukraine via Belarus.

That puts an extra focus on GIPL. The link will offer Lithuania access to the European gas network for the first time, expanding its potential customer pool hugely.