Lithuania has completed the energy project that was conceived by its initiators as a means to give energy independence to the republic and possibly the whole region. However, upon closer inspection it turns out that “political” prices on energy resources are better than “economic” ones and this energy independence is more beneficial to Norway than it is to the Baltic states.
All hail LNG
On 27 October Lithuania finally fulfilled its cherished dream of diversifying gas shipments and getting a new energy source, besides Russia. The LNG tanker called Independence (in English) docked in Klaipėda’s port. And the Baltic elites expect it to be an alternative to traditional Gazprom energy shipments. Based on the evaluations in the Baltic republic itself and from foreign countries, this might as well be a second day of independence for the Lithuanian Republic.
Algirdas Butkevičius, Prime-Minister of Lithuania:
“Today (27 October) we declare the de facto beginning of energy independence. I am overwhelmed, as this was one of the most important tasks of our government in recent years. We had no right to be late, even though quite a few puzzles appeared during construction”
Dalia Grybauskaitė, President of Lithuania:
“The liquefied natural gas terminal shows Lithuania’s will and ability to undertake important energy and geopolitical projects. The Independence ship is a real step in ensuring security for the whole Baltic region. Finally, we are an energy self-sufficient state. No one can blackmail us or make us pay a “political price”. We will not depend on Gazprom’s shipments. In the event of shipment interruptions, our LNG terminal can cover 90% of all the gas demand of all three Baltic states”.
The development of the LNG terminal project began in 2009 during the conservatives’ rule, and in 2011 the Lithuanian Seimas adopted the appropriate law. The Independence tanker is the first project of this kind among the Baltic states, and in the Baltic Sea region only Sweden has a terminal like this.
Latvian former Energy Minister Juris Ozoliņš supports his neighbors’ decision and also thinks that Klaipėda terminal will stop Gazprom from dictating its terms in the future. Ozoliņš doesn’t rule out that due to competition, Lithuania will not only supply itself with gas, but also ship it to Latvia.
The Baltic republics’ goal of diversifying energy shipments is also fully supported by the senior cross-ocean partners.
Jim Inhofe, US Senator:
“The inauguration of Lithuania’s first liquefied natural gas (LNG) import facility marks an important step in our European allies’ efforts to free themselves from the grip and influence of Russia, which manipulates natural resources markets to advance its foreign policy agenda. (…) With that in mind, it is now our responsibility to supply their demand with American natural gas (…) smaller countries with relatively little demand like Lithuania could be left without an American option, unable to secure their supplies because they lack the negotiating power required to compete with bigger countries”
The American hawk’s statement was supported by the Lithuania’s Energy Minister Rokas Masiulis who hoped that USA would play an important role in global energy and said that “Lithuania is eagerly expecting liquefied natural gas from USA”
As written in the European Commission’s report on the stability of Europe’s gas systems, the Klaipėda LNG terminal is capable of protecting the consumers in Lithuania, Latvia and Estonia in case of gas supply interruptions.
At the expense of the consumer.
Despite all these loud speeches, the political part of the project is easy to notice: with all the outer appeal of the Klaipėda project, it’s still unknown whether Lithuania will be able pay for their energy “independence” (even with the interest in the terminal from its neighbors, as the European Commission expects).
President Grybauskaitė firmly believes that today Lithuania is overpaying for Russian gas, even with the 20% discount given by Gazprom this summer. The price of $370 seems unacceptable and political to the former head of the Vilnius High Party School of the TsK KPSS Grybauskaitė and she offers the people of Lithuania to buy liquefied natural gas on “market prices”. But instead of the President’s words, let’s look at what do the numbers show.
The gas price for the Lithuanian consumer after the LNG terminal is active will not depend on oil prices, but on the fluctuations of the British NBP spot prices. During the last four months, before the announcement of the Statoil LNG supply deal, the average price on NBP was affecting the gas prices in way that a thousand cubic meters would cost Lithuania $350-390 (let us remind you that Gazprom’s price is $370). And if the contract was signed a year earlier, consumer gas prices in Lithuania would have been $470-540.
Ignoring the economic ambiguity and the open question of final prices on energy resources, in October Lithuanian leaders already signed a deal with Norwegian Statoil for LNG shipments for five years. However this deal won’t cover the state’s gas needs fully. So Lithuania managed to reserve 540 million cubic meters of gas for a year, but in 2013 the gas consumption was around 2.6 billion cubic meters.
Alexey Grivach, Deputy General Director of the National Energy Security Fund (Russia):
“During summer with the best gas prices on spot market in Europe, the price of Norwegian LNG for Lithuania will be around same price as Russian gas, but in winter it will exceed it considerably. The difference will be $100-150 more for a thousand cubic meters, no less. Prices on Norwegian gas are not fixed, they will be based on spot prices on the British hub, but they will added up with additional rates. Even if we assume that Lithuania finds 3 billion cubic meters of gas in Norway, then it’ll be the Lithuanian consumers who must pay the additional 100-150 millions of dollars on top of that”.
In the end, the “political” price of the Russian pipeline gas for Lithuanians is a lot more acceptable than the “economic” price of LNG. Realizing that the taxpayers will choose the cheaper product, Lithuania’s government recalled the communist overcoats and decided to use methods of coercion in the “best” tradition of the recent totalitarian past. That way they obliged the Lithuanian population to purchase 25% of their gas needs from the new LNG terminal by law. The situation of coercion to monthly purchases is not just absurd, but breaks the main argument of market price-formulation and competition, which the Lithuanian elites talk so much about.
Dependence from Independence.
The advantage of Russian gas shipments today is their uninterrupted nature in the needed amounts, also the stability of the price. Overall, the international LNG market is a lot less predictable than the market of traditional gas delivery. And if Lithuanian politicians are capable of obliging their citizens to purchase certain amounts of gas from the new terminal, they can’t cancel the basic economic laws. The energy prices will fall only if the supply will grow faster than the demand. However, the esteemed audit company Ernst & Young’s predictions are disappointing: “It’s expected that demand for LNG will grow sufficiently, especially before 2020. Despite the considerable spread in evaluations, most industry analysts and experts agree that the annual growth will be around 5-6%”
Today gas prices in Asia are significantly higher than in Europe, so to lure an LNG exporter to its terminal Lithuania will have to offer a similar sum. Precisely due to that, only 20% of all liquefied gas terminals were active last year in the EU.
The Lithuanian internal market is rather small and with a lack of export, the LNG terminal can’t be economically profitable. But if Lithuania wants to see Independence as an LNG terminal for the whole region, then the friendly Baltic family doesn’t share those views. The Latvian PM Laimdota Straujuma during her recent visit to Lithuania didn’t mention whether her country will be buying Lithuanian gas, even if it would be cheaper that from Gazprom. Estonia and Finland are looking for an opportunity to create a mutual LNG terminal. In turn, Poland decided to fill their own terminal, which is being built in Świnoujście, with Qatar gas at $600 for a thousand cubic meters to demonstrate their desire to be an independent gas market player like no one else.
A separate difficulty for Lithuania – costs on regasification from the liquefied state. The price of this process is the rental fee of the terminal, paid in full without regard of its active capacity. When working at a fourth of its power, as it is planned for Lithuania, the price of regasification will rise from the usual in these cases $20 to $80 for a thousand cubic meters.
So what are the Lithuanian leaders hoping for when launching this LNG project? In late 2015 Lithuania’s long-term contract with Gazprom expires. During the signing of the new contract Lithuania’s leaders will use the new LNG terminal as a pressure point, again asking for lower prices. However the Russian conglomerate can’t be oblivious to the “phenomenal” competitiveness of Norwegian gas for Lithuania and thus if the price will be lowered, it will be for different reasons: Gazprom needs it, mainly as a bargaining ship in conditions of working within the framework of the Third Energy Package.
Despite the political importance of the Klaipėda project, neither Lithuania, nor its cross-ocean partners couldn’t lobby a profitable contract from any of the LNG exporters. In the end, the only beneficiaries of Lithuanian energy independence today are the Norwegian companies. Realizing this, the Scandinavian investors of BW Maritime already unambiguously announced of their interest in the Latvian Inčukalna underground gas storage and the Norwegian Minister of EEA and EU Affairs Vidar Helgesen warned that gas prices will not go lower if the Russian gas will turn out to be cheaper. “We maintain the principle of not interfering into price-formation”, - said Helgesen at a press conference dedicated to the gas-holding ship arriving in Klaipėda’s port and answering a question on how Norway will act if Gazprom lowers its prices and it won’t be efficient for Lithuania to buy gas from Statoil.
If the Norwegian politicians keep their word then Lithuania, instead of a “second independence day” will get a headache in Klaipėda in the form of expensive gas. Not tasty, but healthy. However the healthiness of such an innovation is doubtful: turns out that the Baltic states desire to be “truly independent” is beneficial only to one country – Norway.
Translated by: Pavel Shamshiev.