Energy independence: is Lithuania getting away with state aid?

The European Commission and the European Court of Justice are currently considering state aid complaints against Lithuania. The outcome could have repercussions for every gas consumer in the country and massive ramifications for one company in particular.

Achema is the largest fertilizer producer in the Baltic states, and part of a group that employs 4,500 people. The company manufactures nitrogen fertilizers, dry fertilizer mixtures and liquid fertilizers for outdoor and indoor plants, all requiring gas as a raw material. So much, in fact, that Achema is by far the largest gas consumer in Lithuania, using approximately half the natural gas produced in the whole country.

Ongoing debates of EU reforms in the field of energy and energy security should also include the problems of the LNG Terminal in the port of Klaipėda.

The European Commission and the European Court of Justice are currently considering state aid complaints against Lithuania. The outcome could have repercussions for every gas consumer in the country and massive ramifications for one company in particular.

Achema is the largest fertilizer producer in the Baltic states, and part of a group that employs 4,500 people. The company manufactures nitrogen fertilizers, dry fertilizer mixtures and liquid fertilizers for outdoor and indoor plants, all requiring gas as a raw material. So much, in fact, that Achema is by far the largest gas consumer in Lithuania, using approximately half the natural gas produced in the whole country.

Achema was imposed to pay the levy between 2013 and 2015 while it did not use the terminal at all.

Before 2013, Lithuania was entirely dependent on a Gazprom pipeline for its gas supply. In the interests of energy security Lithuania set up its own liquefied natural gas (LNG) terminal in the port of Klaipeda and imposed a levy on all gas users to make this economically viable. This levy, established by the LNG Terminal Law of 2012, falls disproportionately on Achema: the company was imposed to pay the levy between 2013 and 2015 while it did not use the terminal at all. From 2013 to September of 2017 the LNG Supplement amounted to €187 million, and Achema alone has paid €73 million — 39 percent of the national figure. The funds raised are transferred to Klaipedos Nafta, a state-owned company, to run the terminal.

Ramunas Miliauskas, Achema’s Chief Executive Officer, explains why the company is contesting the Commission’s decision not to declare this illegal state aid.

How is the LNG terminal at Klaipeda currently funded?

Klaipėdos Nafta is the project development company for the terminal. The supply of gas through the LNG Terminal is carried out by LITGAS, a Lithuanian state-owned natural gas trading company.

Since 2012 the LNG Terminal Law has imposed a levy on all users of the natural gas transmission system. This levy is transferred to Klaipedos Nafta, as state aid, to finance the costs of building and operating the terminal and related infrastructure. The law also requires certain energy producers to buy allocated minimum quantities of natural gas from the terminal.

In 2015 Lithuania extended the law even further to cover LITGAS’s costs as well. This levy makes up any shortfall between the price, higher than the market rates, LITGAS pays its supplier, Statoil, and the price at which it sells it. This guaranteed fixed profit for the terminal creates a situation where LITGAS does not bear any risk.

The funding of Klaipedos Nafta was first assessed by the Commission in 2013 and found to be state aid. But the extension of the levy to cover LITGAS has never been notified to the Commission.

Are there other options?

Yes, Achema planned to set up its own terminal in a public-private partnership in 2008, but the government pulled out after the economic crisis and the Commission was not even informed. We then planned a new project in the Smelte Peninsula in 2012, but this was refused by the government and by the Port of Klaipeda, which recommended using the premises of Klaipedos Nafta. No suggestion of implementation of another terminal was made.

In a worst-case scenario, Achema would have seen a price reduction of somewhere between 3.5 to 7 percent. However, the project was refused by Lithuania, because, according to the government, the LNG Terminal would provide sufficient natural gas to cover Achema’s needs. So, Achema was not only prevented from reducing its costs, but has since been obliged to pay even higher levies.

Ongoing debates of EU reforms in the field of energy and energy security should also include the problems of the LNG Terminal in the port of Klaipėda.

The European Commission and the European Court of Justice are currently considering state aid complaints against Lithuania. The outcome could have repercussions for every gas consumer in the country and massive ramifications for one company in particular.

Achema is the largest fertilizer producer in the Baltic states, and part of a group that employs 4,500 people. The company manufactures nitrogen fertilizers, dry fertilizer mixtures and liquid fertilizers for outdoor and indoor plants, all requiring gas as a raw material. So much, in fact, that Achema is by far the largest gas consumer in Lithuania, using approximately half the natural gas produced in the whole country.

Achema was imposed to pay the levy between 2013 and 2015 while it did not use the terminal at all.

Before 2013, Lithuania was entirely dependent on a Gazprom pipeline for its gas supply. In the interests of energy security Lithuania set up its own liquefied natural gas (LNG) terminal in the port of Klaipeda and imposed a levy on all gas users to make this economically viable. This levy, established by the LNG Terminal Law of 2012, falls disproportionately on Achema: the company was imposed to pay the levy between 2013 and 2015 while it did not use the terminal at all. From 2013 to September of 2017 the LNG Supplement amounted to €187 million, and Achema alone has paid €73 million — 39 percent of the national figure. The funds raised are transferred to Klaipedos Nafta, a state-owned company, to run the terminal.

Ramunas Miliauskas, Achema’s Chief Executive Officer, explains why the company is contesting the Commission’s decision not to declare this illegal state aid.

How is the LNG terminal at Klaipėda currently funded?

Klaipėdos Nafta is the project development company for the terminal. The supply of gas through the LNG Terminal is carried out by LITGAS, a Lithuanian state-owned natural gas trading company.

Since 2012 the LNG Terminal Law has imposed a levy on all users of the natural gas transmission system. This levy is transferred to Klaipedos Nafta, as state aid, to finance the costs of building and operating the terminal and related infrastructure. The law also requires certain energy producers to buy allocated minimum quantities of natural gas from the terminal.

In 2015 Lithuania extended the law even further to cover LITGAS’s costs as well. This levy makes up any shortfall between the price, higher than the market rates, LITGAS pays its supplier, Statoil, and the price at which it sells it. This guaranteed fixed profit for the terminal creates a situation where LITGAS does not bear any risk.

The funding of Klaipėdos Nafta was first assessed by the Commission in 2013 and found to be state aid. But the extension of the levy to cover LITGAS has never been notified to the Commission.

“Achema was not only prevented from reducing its costs, but has since been obliged to pay even higher levies.”
Are there other options?

Yes, Achema planned to set up its own terminal in a public-private partnership in 2008, but the government pulled out after the economic crisis and the Commission was not even informed. We then planned a new project in the Smelte Peninsula in 2012, but this was refused by the government and by the Port of Klaipeda, which recommended using the premises of Klaipedos Nafta. No suggestion of implementation of another terminal was made.

In a worst-case scenario, Achema would have seen a price reduction of somewhere between 3.5 to 7 percent. However, the project was refused by Lithuania, because, according to the government, the LNG Terminal would provide sufficient natural gas to cover Achema’s needs. So, Achema was not only prevented from reducing its costs, but has since been obliged to pay even higher levies.

“Lithuania only needs around 2 billion cubic meters a year and this massive overcapacity has not been disclosed to the Commission.”

Is the current terminal being run efficiently?

No, the terminal has huge overcapacity. The current terminal handles 4 billion cubic meters per annum and all 3 Baltic states need only 3.2 billion cubic meters. The excess is sold to Estonia and Latvia at market prices.

The Commission took Lithuania’s statement that there is a need for an annual capacity of 4 billion cubic meters at face value. In reality, Lithuania only needs around 2 billion cubic meters a year and this massive overcapacity has not been disclosed to the Commission. Instead, the country provided some extremely exaggerated statistics from a sole source: the Lithuanian Department of Statistics, and told the Commission, without any direct evidence, there was a market failure in Lithuania.

We believe it breaks the directive on public procurement and that it does not fit in the official energy strategy of Lithuania, which should promote alternative energy sources, not just LNG.

What is the impact of this on Achema?

This heavy financial burden reduces our profit margin and hinders investment, damaging the sustainability of the whole group. This jeopardizes 4,500 jobs and places the company at a significant competitive disadvantage with its competitors, at EU and global levels.

About 75 percent of Achema’s total output is exported. To a broader extent, it also increases the prices of the products sold to farmers in the U.K., France, Germany, or Belgium.

What is the future outlook?

Technically, the terminal is a Floating Storage and Regasification Unit (FSRU) under a 10-year lease from Hoëgh LNG. Three years of that lease have already passed, but the government is working on a plan to extend it. It’s also worth noting that Klaipėdos Nafta is appointed, without objective criteria, to run the project for 55 years.

In addition to three legal complaints for infringement of state aid, public procurement and energy law with the Commission, Achema has lodged an appeal for the annulment of the original Commission state aid decision with the European Court of Justice. The Commission has now until October 19, 2017 to respond.

NOTE: The opinions expressed in this article are solely the author’s and do not represent those of EN.DELFI by the Lithuania Tribune or its staff.