Estonia’s First LNG Terminal. What Can the Country Learn from Lithuania’s Experience with LNG at Klaipeda?

by Vreni Veskimägi

The recent rush in Estonian Prime Minister Taavi Rõivas´ willingness to agree on the construction of the first Estonian LNG terminal on poor terms and expertise is a politically motivated decision and should not be called the success for Estonians that some politicians claim it to be. The Estonian Prime Minister reported after meeting with Finnish Prime Minister Alexander Stubb on November 17 that two LNG terminals will be built – the bigger regional terminal in Finland and the smaller LNG terminal in Estonia. The underwater “Balticconnector”, which would connect the two countries´ gas systems, is also planned. The one and only argument that is used by Mr. Taavi Rõivas and most Estonian politicians is that the LNG terminal is necessary for the energy security of Estonia, i.e., to reduce Russian gas imports, and there is no time to wait for the construction of the project to start. The decision-making does not include technical experts, engineers, energetics, economists, but only politicians, who have been throwing the “energy security” argument across the table for weeks now (Luts: 2014). How can such a big project with high capital investment costs be decided without adequate expertise? There has been practically no media coverage on recent gas demand in Estonia, on the LNG overcapacity in Europe or on the extent to which the Klaipeda “Independence” terminal has come at the expense of Lithuanian gas consumers. Estonian politicians have overlooked, if they looked at all at, the future LNG trends and have not turned a critical eye toward the Klaipeda LNG terminal. The ongoing rush towards building an LNG terminal to Estonia has missed four important signals that should have been taken into consideration: decrease in Estonian gas demand, European LNG infrastructure overcapacity, future LNG trade towards Asia and mostly, the real price of Klaipeda LNG for Lithuanian gas consumers and the project´s viability.

The ongoing rush towards building an LNG terminal to Estonia has missed four important signals that should have been taken into consideration: decrease in Estonian gas demand, European LNG infrastructure overcapacity, future LNG trade towards Asia and mostly, the real price of Klaipeda LNG for Lithuanian gas consumers and the project´s viability.

Falling Demand

In the coming years, we will see a net reduction in consumption levels of gas in Europe. A study by the Oxford Institute concludes that the European gas demand will be in decline at least until 2020 (Honore: 2014). According to the Russian Academy of Sciences energy Outlook for 2040, “This is seen particularly clearly in the European Union, which by 2040 will have reduced its consumption of gas by almost 50 billion cubic meters (bcm) as a result of both sluggish economic growth against a backdrop of active energy conservation and, to a greater extent, of policies aimed at the promotion of alternative fuels” (ERI RAS Outlook: 2014). The Outlook expects that the EU will be using all possible tools of energy policies to decrease the share of gas in the EU energy mix (ERI RAS Outlook: 2014). Within the last seven to eight years, the gas demand in Estonia has been falling significantly: from 1 bcm it has become a little over 0.5 bcm per year. According to the recent study by the Oxford Institute, gas demand in Estonia will be further falling to 0.3-0.4 bcm per year in the coming decades. A similar trend can be seen in Finnish gas demand projection, which also sees a gradual fall in natural gas demand (Dickel et al.: 2014).

With a poor and further decreasing gas demand in the market, there is no use of making such an investment and then pay additional money for the operation and maintenance costs of the terminal

To some extent, this rapid fall in Estonia’s gas demand has been triggered by the subsidization of the usage of local fuels and the gradual increase in natural gas excise duty by the Estonian Government, despite the fact that natural gas is the least polluting fossil fuel used in Estonia so far. Today, the excise duty is 23.45 euros per 1000 cubic meters, but it will be increasing in the next 3 years by 20 percent each year. This means that by 2017, the excise duty for imported natural gas will be 40.52 euros per 1000 cubic meters. For Estonian gas consumers, this does not only mean higher costs for higher excise duty, but also higher sales tax related to the increase in excise duty of natural gas (Matsalu: 2014). This kind of Governmental taxation politics definitely does not promote or foster a well-functioning, competitive gas market in Estonia. Moreover, nobody wants to invest in the market, which is shrinking due to the Government’s actions. With the further falling natural gas demand, it is hard to understand for whom this planned Estonian LNG terminal with a probable capacity of 1.2 billion cubic meters is being built in such a rush. With a poor and further decreasing gas demand in the market, there is no use of making such an investment and then pay additional money for the operation and maintenance costs of the terminal, which will presumably be heavily underutilized like all other European LNG terminals.

LNG Overcapacity in Europe

Recently in Europe and the Baltics, we have seen the rapid development of LNG infrastructure. For quite some time, all the Baltic States were lobbying hard for EU funding to build LNG terminals at their ports. Lithuania managed to reach an agreement with Statoil to build a floating LNG terminal in Klaipeda. The Klaipeda LNG terminal with the storage vessel named “Independence,” is now the first LNG infrastructure in the Baltics. Estonia and Latvia are both interested in building their own terminals. Estonia is especially interested, having recently reached the aforementioned compromise with Finland on the construction of two LNG terminals and the underwater pipeline connecting them, Balticconnector. However, the Estonian LNG terminal project has not been evaluated adequately and the real potential and necessity of the LNG terminal is still unclear.

According to a Reuters report, “Europe potentially has enough LNG import capacity to meet over a third of its annual demand, with just 16 percent of the current regasification capacity of 207 billion cubic metres (bcm) utilised in the first eight months of this year”

The total capacity of EU LNG terminals is around 207 bcm per year, whereas on average only 22% of this capacity is used (Schuppe: 2013). This means that all LNG terminals in Europe are underutilized and there is no urgent need to build one in each Baltic country, especially when there is also the possibility to connect the Baltic gas systems by pipelines. According to a Reuters report, “Europe potentially has enough LNG import capacity to meet over a third of its annual demand, with just 16 percent of the current regasification capacity of 207 billion cubic metres (bcm) utilised in the first eight months of this year” (Eckert: 2014). It is impractical and unnecessary to keep on building large and expensive LNG infrastructure, when we have already seen the market forecasts of falling gas demand in Europe. In the coming decades, most LNG trade will be heading towards Asian regions, where the real energy hungry consumers are located. Moreover, according to the Russian Academy of Sciences, Europe will be decreasing its reliance on LNG while increasing its reliance on pipeline gas.

The LNG trend towards Asia

The LNG trade is more and more heavily turning towards Asia region, which according to BP forecasts will experience an explosive increase in natural gas imports. The Asian demand will triple in the coming decades and will be led by energy hungry countries like China, India, South Korea and Japan. According to the Russian Energy Outlook for 2040, “Growth in gas consumption for the period to 2040 is mainly provided by the developing countries, whose demand will increase by 90 percent over 30 years. In some regions, the increased demand for gas is dramatic in nature, with China alone increasing its consumption by 620 bcm (Figure 1.) This is more than such major gas-consuming markets as Europe or Russia consume now. Other developing countries in Asia and the Middle East, where gas demand will double by 2040, also show impressive growth, as does Africa, where it will triple” (ERI RAS Outlook: 2014). So the slowing growth in gas demand in Europe will make the region less attractive to overseas gas suppliers. Due to the weak demand, there will not be growth in gas prices in Europe. Europe´s own production of natural gas is falling as well and this leads to increasing reliance on imported gas. Europe will possibly see an increase in net imports of gas via pipeline, which means that by 2035 the gas imports through pipeline will account for 51 percent, which is significantly higher than today´s 37 percent (BP Outlook: 2014). This means that in the future even less LNG capacity will be used compared to now. In spite of this, many countries, supported by the EU Commission, are planning to build more LNG terminals, like Estonia is.

Figure 1. Gas demand growth of regions and major countries 2010-2040, Baseline Scenario.

Lithuania and the past 10 years of nonsense

10 years ago, when Lithuania was becoming a member of the European Union, it had to shut down its Ignalina nuclear power plant under orders from the European Commission. The Ignalina nuclear power plant was an important and cheap source of electricity for Lithuanians as it covered over 70 percent of the country´s electricity demand until it was ordered to be shut down in two phases: 2004 and 2009 (World Nuclear News: 2010). Due to that, Lithuania had no other options but to rely more on imported Russian natural gas. Soon after, the EU Commission started to pressure Lithuania into reducing its imports from Russia by unbundling the transmission system operators from the producers, and investing in alternative sources of gas supply as suddenly Russia was no longer a “reliable” or safe supplier of gas (Hyndle-Hussein: 2014). This EU Commission strategy does not make any sense, because its decisions are conflicting with each other.

Even the former Energy Minister of Lithuania Leonas Asmontas has called the Klaipeda LNG terminal one of the biggest political failures in the Lithuanian energy sector.

Now, Lithuania has finally built an LNG terminal but its future viability is still uncertain. The current deal with Statoil for the next five years of importing 540 million cubic meters of gas to the Klaipėda LNG terminal annually is just the minimum capacity at which the terminal needs to operate in order not to make losses (EurActiv: 2014). Even the former Energy Minister of Lithuania Leonas Asmontas has called the Klaipeda LNG terminal one of the biggest political failures in the Lithuanian energy sector. Mr Asmontas gave his point of view on the new LNG terminal at a round table discussion by the Zalgiris National Resistance Movement, “First of all, those who talked about cheaper gas should be punished in some way. Then all those people who see that they have been deceived will be satisfied.” He went on by admitting that “the idea about terminal is good in general, it is always good to have additional gate. Every house has two doors to come in and out. The terminal indeed could have been a certain “exit” if something happens to the Russian gas supply. The vessel could have been smaller, older with new equipment for some LTL 500 million (EUR 145 million). And it would be ours. But now we will spend around LTL 2 billion (EUR 579 million) to rent for 10 years. Then we will probably buy it for more than LTL 500 million (EUR 145 million)” (Vaida: 2014). Lithuania has satisfied EU requirements in terms of energy politics, but it seems that these demands have been inadequate rather than lucrative for Lithuanian energy consumers, whose expenses will be discussed in more detail later.

Klaipeda LNG: Is it really a success for Lithuanian gas consumers?

Thank you for ‘Independence´ Lithuania”, said Latvian Prime Minister Laimdota Straujuma at the welcome ceremony of the very first liquefied natural gas terminal (LNG) of the Baltic States (Pakalkaite: 2014). Naming the LNG infrastructure “Independence” seems to echo some kind of ghost of the past, not so much a practical necessity. In most media reports, the new Klaipeda LNG terminal is portrayed as some kind of life buoy that was urgent for the independence of Lithuanian people as well as for all the Baltic States. Though it seems highly unlikely that an average Lithuanian gas consumer feels somehow more independent now than before. Probably, the only thing that a Lithuanian consumer feels is that he or she is now obligated to buy 25 percent of his or her gas consumption from the LNG terminal (Mäe: 2013). The fact that Lithuanian gas consumers are now forced by law to consume 25 percent of their gas in the form of LNG means that without this obligation, the LNG terminal would not succeed or be profitable. “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.” (Starikov: 2014).

The fact that Lithuanian gas consumers are now forced by law to consume 25 percent of their gas in the form of LNG means that without this obligation, the LNG terminal would not succeed or be profitable.

Also, promising cheaper gas prices thanks to the LNG terminal could just be called fooling your own people. According to the recent news, the price for the LNG bought from Statoil is actually at least 10 percent higher than the price of the gas imported from Russia. This might also be due to the fact that while Litgas, Lithuanian natural gas trading company and LNG supplier, was still negotiating the price of future LNG supplied by Statoil, Gazprom cut its gas price close to 20%. (LNG World News: 2014). According to Russian Deputy General Director of the National Energy Security Fund Alexey Grivach, in the summer, the gas prices of Norwegian LNG and Russian pipeline gas are about the same; whereas in winter, the price of Norwegian LNG will be considerably higher. “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 be 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,” said Alexey Grivach (Starikov: 2014). This means that even if Lithuania buys all its gas from Norway, it will still be the consumers who pay the additional money. It is true that the LNG import possibility has given a better bargaining position for Lithuania in negotiation with Gazprom, but it seems that most of it has come at the expense of Lithuanian consumers.

Klaipeda LNG terminal is not able to operate in environment of fair competition

It is very likely that in winter times when the demand for gas is at its peak, the prices of imported LNG in Lithuania will be higher than the prices of Gazprom gas. These price differences point to the idea that the construction of Klaipeda LNG terminal is not based on economic reasons and it does not seem to function in conditions of equal and fair competition. According to one official from the gas industry, in order for the Klaipeda terminal to be able to operate, all gas consumers in Lithuania are obligated (Lithuanian law stipulates that 25% of the country’s gas consumption must come from LNG) to pay for the construction and operation costs of approximately 21.5 euros per 1000 cubic meters of gas whether they buy their gas from the LNG terminal or not. There is also an obligation to buy LNG for all the companies that produce or sell energy at concerted prices (set by the Lithuanian Competition Authority) even if the price of pipeline gas from Russia is cheaper. The previously mentioned companies will pay for the more expensive gas and the costs of the terminal at approximately 27.3 euros per 1000 cubic meters of gas. In addition, there will be charges for transferring this gas into the grid, approximately 15 euros per 1000 cubic meters. To put all these charges together, a company buying and using LNG has to pay 63.3 euros per 1000 cubic meters, which is added to the market price of LNG.

The price of the imported LNG in Lithuania will not be cheaper than Russian gas.

This all means that despite the promises of the politicians, the price of the imported LNG in Lithuania will not be cheaper than Russian gas. In fact, LNG is likely to be much more expensive compared to pipeline gas. Comparing the LNG with the pipeline gas leads to another difficulty for Lithuania, the costs of 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” (A. Starikov). The conclusion is that the Klaipeda LNG terminal is not able to operate in fair competition and this will in turn have a negative effect on the competitiveness of Lithuanian produced goods in global market.

Conclusion

It remains to be seen whether or not the Klaipeda LNG terminal is a success for Lithuanian gas consumers, even though there are many facts and arguments that point to the opposite. As the Klaipeda terminal is the first LNG terminal in the Baltic States, it should be taken as a test case by other Baltic nations, especially Estonia, which has recently been lobbying hard for its own LNG terminal. The Klaipeda LNG terminal is the case from which Estonia could learn; and after they have learned, they can make a decision weighing all the options and possible consequences carefully. There is nothing wrong with having alternatives. Alternatives are important and necessary but Estonia has no reason at the moment to aggressively cut itself off from Russian gas, as Gazprom has always been a reliable gas supplier for Estonia in terms of prices and volume of supplies.

Alternatives are important and necessary but Estonia has no reason at the moment to aggressively cut itself off from Russian gas, as Gazprom has always been a reliable gas supplier for Estonia in terms of prices and volume of supplies.

It is wrong to make such a big decision without including engineers, energy specialists, economists and other experts in the decision-making process; moreover, including such people would make it less likely that the final decision is politically motivated. Experts in the field of energy can provide adequate information and evaluations about the necessity and profitability of the potential LNG terminal in Estonia to prevent the country from repeating the possible mistakes made in Lithuania.

Vreni Veskimägi is a master’s student in the ENERPO program at European University at St. Petersburg.

Sources

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