Traditional gas markets are changing in the Baltics

by Aaron Wood

The Baltic States traditionally have relied solely on Russian gas, as circumstances of both geography and history have prevented them from finding other sources. However, low gas prices following the North American shale boom have made the relatively fungible and versatile LNG more available to nations in need of options.

In the independence fever of the 1990s, the Baltic states scrambled to distance themselves from their Soviet past and establish their own national identity and sovereignty. The Seimas in Lithuania, while often fractured by party disputes, has been able to establish a unified consensus in moving away from reliance on Russian natural gas, and has pivoted towards Europe via accession to the EU. Lithuania first accomplished this through unbundling its electricity utilities and, following a long battle with Brussels and its public, decommissioned a Soviet-era nuclear power plant, switching to gas burning plants and electricity import. While becoming more reliant on natural gas, Lithuania was able to retain energy independence from Russia via Klaipeda floating LNG terminal on lease from Hoegh Ltd.

Estonia recently announced their own plans for an LNG terminal. Funding is hard to come by however, and it seems that for the time being, Estonia will rely on short contracts with Gazprom via the state-owned Eesti Gas in which Gazprom is a 37% shareholder. For Estonia, however, the desire to diversify away from Russian gas is less urgent. Of the Baltic states, Estonia is the least dependent on Russian gas; Gazprom imports make up only 10-15% of the country’s total primary energy mix. In the meantime, Estonia looks forward to the newly established Balticconnector via Scandinavia to provide the extra power they need while gas import options are explored.

Latvia recently broke up its state owned gas company, Latvijas Gaze, in an effort to join the increasingly liberalized markets of the region. The Saeima approved the split in February, and has included provisions mandating that all households be allowed to choose their supplier. Gazprom holds 34% ownership in the company however, and any moves toward using alternate suppliers will have to wait until April of 2017, when Gazprom’s contracted sales monopoly expires. Romans Naudins, the chairman of the economics committee of the Saeima remarked that, “By stipulating effective rules for the natural gas market, we are opening the door to new gas suppliers, thus promoting competition in the sector. This will be beneficial to both the public and businesses, and the opening of the market will ensure a stable and predictable energy policy in future.”

Energy independence is a vital issue for Baltic states overall and enjoys a general consensus as being vital to the hard security of region. Recent developments in gas markets in the Baltic come on the heels of tense geopolitical developments in the region. After the annexation of Crimea, the Baltic states became concerned that another hybrid war like the one in Eastern Ukraine could develop on their territories with the worst case scenario being an invasion by Russia itself. NATO commanders have claimed that based on Russian troop deployment in the area, NATO forces need to be prepared. NATO exercises in the region have increased along with commitments of men, arms, and ordinance over the past year.

The Baltic is challenging the traditional order of gas business in the region by establishing stronger connections to liberalized markets in Europe by integrating into the EU electricity market through EU sponsored projects, unbundling state corporations and searching for alternative supply sources. Gazprom cannot be expected to bow out however. Late last month, Gazprom held a trial gas auction in which it sold 560 MCM of gas to Latvia and Lithuania, followed by a second round from March 15-17. Gazprom’s export boss, Elena Burmistrova, stated that, “The results of the auction demonstrate that there is a niche for gas trade via auctions, and this trading mechanism can successfully work on the Baltic market as well. We are satisfied with these results and will apply this model on other European gas markets.” It appears then, that while the Baltics have made strong moves in their domestic energy policies to move away from Gazprom and reliance on Russian gas, that Gazprom itself will change its strategy in order to remain an important supplier in the region.

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