Energy game changer: Klaipėda LNG terminal and the Baltic states

Lithuania's floating LNG storage vessel was built in South Korea
R.Dačkaus ( nuotr.)

Lithuania’s recent liquefied natural gas (LNG) supply deal with Norway’s Statoil is relevant not only for Vilnius, but for all three neighbour Baltic countries. The gas contract will supply Lithuania’s new Klaipėda LNG terminal, beginning in December 2014 when operations commence. LNG will be a game changer for the Baltic states: bringing more energy security to the region, diversifying gas supply, improving the bargaining position in light of Gazprom over the gas contracts, enabling a play on the spot market, and further reducing political vulnerability vis-à-vis Moscow.

For nearly 25 years post independence, the Baltic states have been completely dependent on Russia for sources of gas as well as their routes for delivery via Soviet-era pipelines. Because the Baltic energy sectors were intricately linked to Russia for sources and routes and were virtually isolated from the rest of the EU, they have faced high vulnerability as ‘energy islands’. Despite the vulnerability, very little had been accomplished over the last two decades by the Baltic capitals to increase diversification other than issuing proclamations and memoranda. Domestic political conditions including entrenched interests groups, weak institutions, poor regulatory framework and lack of political will have been the main causes for the lack of substantive progress. Despite membership in the EU and NATO since 2004, energy dependence remained the ‘Achilles heel’ of national security for Estonia, Latvia, and Lithuania. The Klaipėda LNG terminal will enable Lithuania and its neighbours to access alternatives to Russian gas and will serve as the flagship for Baltic efforts to successfully address their persistent energy vulnerability.

Lithuania’s Klaipėda LNG Terminal, unlike traditional stationary terminals, relies on floating storage and regasification technology. Lithuania will rely on a “floating” terminal – a ship as long as three football fields that will anchor at a jetty in the harbor, unload LNG carriers and turn the liquid back into gas to be pumped ashore. The strategic importance of this project could not be overstated for Lithuania and the Baltic region. In order to start operations as planned this December, terminal construction proceeds 24 hours a day. The reason for this is very clear – with an operational LNG terminal for the first time in Lithuania’s history, the country would be the first Baltic state capable of buying gas from world markets rather than solely relying on Gazprom via Gazprom pipelines.

About one billion cubic metres of gas is expected to be pumped in the first year of the Terminal operation, with the expectation that annual capacity would double or triple to 2 to 3 billion cubic metres shortly thereafter. This capacity could meet Lithuania’s annual gas consumption, which in 2013 was 2.2 bcm. In addition the terminal will also improve the region’s gas security as the Klaipėda LNG terminal would be able to meet roughly 75 percent of Lithuania’s, Latvia’s, and Estonia’s total gas demand. For now, the five-year contract between Lithuania and the Norwegian company Statoil will provide only 0.54 bcm of gas annually. This is an estimated minimum capacity at which the Klaipėda LNG facility needs to operate to pay for itself and meet roughly one fifth of annual Lithuania needs. Gas companies will supply the remainder of the fuel using non-binding agreements (twelve such agreements have been signed).

Even if the LNG market remains less economical than long-term contracts with Gazprom, the mere presence of the floating LNG terminal would, strengthen Lithuania’s bargaining position vis-à-vis Gazprom for long-term contracts. This has already been demonstrated when Lithuania in May 2014 re-negotiated its gas contract and for the first time since declaration of independence received a price cut. Gazprom agreed to cut Lithuania’s gas price to $370, a reported discount of about 20 percent. From July 2014, Lithuanian consumers can expect to pay 15-24 per cent less. One of the potential future economic benefits experts anticipate from the Klaipėda LNG terminal would enable Lithuania to take advantage of favourable gas price fluctuations in the spot market, especially if the US shale gas revolution and a glut of LNG in the global gas markets persist.

The Klaipėda terminal would not only prevent Russia from threatening gas cut offs, but also deprive Moscow of the opportunity to raise gas prices as a means of exerting political concessions. Once the LNG terminal is operational, the effects of Gazprom’s theoretical gas embargo on Lithuania are greatly reduced as Lithuania could cover its short-term demand via LNG. However, the risk of a gas cut from Moscow remains in the long-term, particularly as the tensions between Russia and the West intensify.

The other Baltic states of Latvia and Estonia will benefit from the Klaipėda terminal due to the newly enhanced gas interconnector between Latvia and Lithuania and Latvia’s newly modernized Incukalns gas storage facility. Moreoever, in August Poland and Lithuania submitted joint applications for the co-financing of the Gas Interconnection Poland-Lithuania (GIPL) project. Planned to be finished in 2020‒2024, it would also contribute to enhanced gas security in the region and an opportunity to trade gas from the Klaipėda LNG terminal to Western markets. Lastly, the planned offshore gas pipeline Balticconnector between Finland and Estonia and plans for the accompanying LNG terminal could serve to further improve the energy security of the region, and particularly, Finland, which is deemed to be among the most vulnerable EU states to a Russian gas cut-off.

The Klaipėda LNG Terminal can be the important catalyst for energy cooperation between the Baltic states. Over the past decades the three states have often competed on energy projects and the potential EU funds, thus failing to solve their common energy dilemmas together. The Baltic energy markets are small and will require cooperation in the future to implement strategic projects in the gas, nuclear, or renewable sectors. The Klaipėda LNG terminal in this sense will be the first litmus test to determine if three Baltic countries are able to cooperate and efficiently use new tools decreasing energy dependence on Russia.

Agnia Grigas (Ph.D, University of Oxford) is the author of The Politics of Energy and Memory between the Baltic States and Russia (Ashgate 2013) and a Fellow at the McKinnon Center for Global Affairs at Occidental College in Los Angeles.

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