by Sean Berwald (@scbenergy)
Klaipeda LNG, Lithuania’s floating import terminal for liquefied natural gas (LNG), has been hailed as a successful project to increase the energy security, diversity, and independence of Lithuanian energy. However, the project has come in a time of limited market diversity, with Russian gas still exporting over 75% of the natural gas needed for the small Baltic state. Historically, Lithuania used its oil terminals as a means of energy diversification and independence. With an overwhelming amount of oil bottled up inside the Russian Federation, these oil import terminals quickly turned into export terminals. Whilst this is not something on the radar of the companies involved, with rising oil prices and the increasing expense of importing LNG, it will make more business sense to use the terminal to export LNG than it will to import LNG. The biggest obstacle to such a proposition is the Lithuanian state and their desire for energy security.
Lithuanian Energy History
Lithuania is almost exclusively dependent on energy imports for its energy needs. According to the EIA, total petroleum production was just above 9.1 thousand barrels per day (MBPD) while consumption rose from previous years to 72.7 MBPD for 2013. This is in contrast to natural gas, which Lithuania produces absolutely none of and imports 3.36 billion cubic meters (BCM) annually, which actually consumed only 2.4 bcm in 2013, an 18.3% decrease from 2012. Lithuania also consumed .387 Million Short Tons of coal bringing the generation of electricity to 3.45 billion kilowatt hours (BKWH) and a net electrical consumption of 9.32 BKWH. However, the total primary energy consumption of Lithuania was 284 trillion British thermal units (BTU), which lands Lithuania ranked 88th in line for top energy consumption. Lithuania’s presence on the energy landscape of Europe is insignificant compared to the EU majors of Germany and France, however its ability to leverage what little relevance it has is bolstered by colourful rhetoric, bold action spurred by convictions, and efficiency of follow-through response after determining a national course forward.
It is clear from the chart below that the rising purchasing power parity (PPP) as a percent of gross domestic product does not correlate to energy use. This is important as it shows the energy intensity of Lithuania decreasing and making its national economy less dependent on energy related issues in general. However, Lithuania’s domestic energy transition to low national use was mainly due to the painful collapse of the early 90s economy that never recovered for the energy and industrial sectors, resulting in new growth sectors like services, retail and a financial sector that has brought jobs and income to many who stayed in the country. The makeup of Lithuania’s GDP has increasingly become resilient to energy politics but that does not change the fact that the Vilnius government still feels the political pressure of Gazprom’s host government in decision making.
Role of Gas in the Energy Mix
For Lithuania, natural gas is by far the most political of major energy resources. Nuclear energy was most talked about until the nuclear plant was shut down due to pressures by the European Union as a precursor to acceptance into the EU. Joining the EU and shutting down the nuclear plants came with a pledge that never surfaced into reality to cover the financial costs of excess natural gas prices from Gazprom. However, after the nuclear plant was shut down, Lithuania became almost exclusively dependent upon natural gas imported from Gazprom. Natural gas maintains a majority share of electrical generation within Lithuania and will remain the primary source of energy for households and businesses in the country for the foreseeable future. Constraints on diversification away from natural gas after the closure of the nuclear plant and having very little petroleum production has caused many to consider renewables as an option. However, the landscape for renewables is limited except for hydropower in Lithuania, which is not a viable alternative due to the small scale of projects, the current state of technological development, and the lack of transmission infrastructure. Coal’s significance is hampered as the Lithuanian population is not generally in favour of utilizing coal more for environmental concerns. Natural gas is the primary energy resource necessary for energy related GDP growth in Lithuania.
Dependence on Piped Gas from Russia
Lithuania’s key problem when it comes to natural gas is with the primary supplier, Gazprom. Gazprom is the national energy company of Russia, and the only exporter of piped natural gas to Lithuania. The company hails from the Soviet days when it was an international state owned company that owned the whole Eastern European network of natural gas pipelines as well as being the main exporter to the original EU members before the collapse of the Soviet Union. The pipeline network was one directional, from east to west, meaning that the energy flowed from Russia as its primary source and out to the former Soviet periphery states of Eastern and Central Europe for export to the EU. Since little has been done to the pipeline network, like adding north to south pipelines that would vertically connect consumers, Lithuania still relies upon the soviet and Yamal-Europe pipeline network that comes from Russia and crosses into Belarus to finally make its way to Lithuania. One major supplier, one main network with few alternative sources of piped natural gas for the region, and absolutely no alternatives for Lithuania. The decision was clear: the nation must find an alternative source of natural gas and LNG was the answer.
Lithuania’s Political Direction towards “Independence” 1996-2014
Lithuania has historically been critical to the Baltics region for energy security since the Soviet era and will continue to be essential to the regions energy decision making and diversity options for supplies. Lithuania had an excess of capacity for electrical generation and pipeline infrastructure during the Soviet period as the USSR would use it as the Soviet Republic that would supply electricity and gas through its nuclear reactors and its pipeline infrastructure to the Baltics and Kaliningrad, the only isolated piece of territory with a heavy military presence for Russia with. Lithuanian independence led to the Kaliningrad region being cut from Russia geographically and as Lithuanian sovereign territory emerged, so did the reality of excess nuclear generation capacity and petroleum refining capacity; Lithuania still has the only refinery in the Baltics. The Lithuanian nation had been dealt a most advantageous hand by the collapse of the Soviet Union.
The Soviet legacy brought with it corruption and complex politics that made Lithuanian energy policy more coherent in stages that led to the Klaipeda LNG project. Lithuania’s management of its energy dependency is most concisely stated by Balmaceda. Most importantly, the actions of the Russian government in the three month oil blockade in April 1990 “…strengthened the political elite’s understanding of energy policy as a crucial national issue, and its resolve to seek a multi-party consensus on reducing the country’s energy vulnerability vis-à-vis Russia….” A significant blow to the energy system of Lithuania in 2006 with the shutdown of the Druzhba pipeline from Russia for crude oil to the refinery, Lithuania was forced to ship oil from the Butinge terminal, located at Palanga which is north of Klaipeda. The loss of revenue from costly ocean borne oil tankers collapsed the revenue of the refinery from $319 billion in 2005 to less than $35 billion in 2009. Lithuania in the mid 90’s played a valuable role in adding financial value to crude oil that was piped to Lithuania from Russia, refined at the Lithuanian Mazeikiu Nafta refinery, and shipped out of the two ports. This helped Lithuania maintain stable, subsidized oil supplies, and still helps Russian oil to be sold as higher grade product from Klaipeda while maintaining petroleum security. The natural gas that was piped to Lithuania was also maintained through a mutual security program for Kaliningrad that basically guarantees Lithuania’s energy security through mutual interest in maintaining supplies. However, the perception to Lithuanian elite and policy makers is a focus on the over reliance, and not the mutual interests that benefit both parties. The nuclear facilities in Lithuania, named Ignalina, ran off nuclear materials only made in Russia at the time, leading to more dependence on Russia for energy resources, even though the issue was rarely raised as a concern in public discourse. However, due to the electrical network being isolated from the EU, the Lithuanian excess capacity was limited by Russia’s united energy system run by RAO UES, which constrained Lithuania’s ability to export electrical generation. The nuclear generation accounted for around 80% of Lithuanian electrical generation from 1994-2004, when the first phase of the nuclear shutdown was implemented. These various events and concerns led to ineffective energy management, overly dependent on nuclear generation, leading to a lack of dynamic energy supply options. Lithuania was put under serious pressure because of all these events to find an alternative. Klaipeda LNG became that alternative.
The Tied Histories of Oil and Gas in Lithuania
The history of oil in Lithuania is centred on the recently mentioned refinery and the two export ports of Klaipeda and Butinge. We no longer hear about oil disputes in Lithuania. This is important as it was an unforeseen conclusion of tumultuous events leading to the use of the oil terminals for export. However, Lithuania made the strategic decision to diversify oil imports through ship borne imports from oil markets that were not under the control of Russia, just as it has done with Klaipeda LNG for natural gas imports. This decision had the intentions of maintaining security of supply without political need attached to Russian oil; the same reasoning for Klaipeda LNG for natural gas security of supply. However, with the increase in prices and the overwhelming amount of cheap oil that could be refined at Lithuania’s refinery and then sent in higher quality out to world markets, there was mutual interest in seeing revenue from those exports. This is where history catches up with reality for the oil and natural gas markets and quality control capacity of Lithuania. Lithuania no longer has problems with oil imports as a political tool for themselves or Russia. Klaipeda LNG holds the high standards needed for LNG across world markets. Lithuania still maintains exports to the Kaliningrad region for gas and oil through Lithuania’s own territory. This mutual interest of keeping the gas and oil flowing was enough for both parties to not rock the boat in international relations but things have changed in recent years. For now, we have natural gas once again a political tool due to the overreliance of natural gas as nuclear generation since the closing of nuclear facilities in the country. The future could hold a very different scenario for Lithuania’s LNG terminal than was initially anticipated.
Klaipeda Export: Why it’s a net positive
Klaipeda LNG as an export terminal is a tremendous opportunity for all parties involved. For companies, and the consumers who actually get the gas, this could lead to a consistent flow of cheaper gas. Lithuania’s agreement with exporting oil products through its terminals comes with strings attached for Russia that maintain a lower cost of oil to the country. This same relationship could potentially be made for LNG exports after Gazprom’s gas is refined to a quality level that is acceptable to LNG tanker specifications. The natural gas glut across the world may exist for one or two years, but macro trends in supply and demand will lead to increased prices of LNG for markets in Asia and Europe. The increase in prices could easily lead to revenue for both Lithuania’s Litgas, the company involved in contracting out natural gas from Klaipeda LNG, and Gazprom. Increased company value for Litgas, Klaipedos Nafta (the operator of Klaipeda LNG) and Gazprom would result in the depolarization of natural gas products and the continued incentive to maintain stable supplies even beyond the Kaliningrad region. However, the Vilnius government has taken an extremely polarizing and heated stance on Russia, leading to expanded tensions between the two nations. This rhetoric bought them good favour with the United States and the European Union, but resulted in a hostility with its energy rich neighbour that has led to a breakdown in political discussion. Time will tell if politics can be overcome from economic incentives as it did with the oil business in Lithuania.
A more thorough assessment of Klaipeda LNG’s successes will be released after the thesis defence of the author, in June.