March 20, 2013

Connecting the Baltic States to Europe’s Gas Market

On 27 March, International Centre for Defence Studies held a seminar to present a recently published paper on how to facilitate emergence of a free-market trading system for natural gas in the Baltic Sea region, which will deepen the Baltic states’ economic integration into the EU and help the EU establish a single and unified energy market. The event attracted high-level international interest from political and business leaders (including at the ministerial, ambassadorial, and CEO levels), as well as other representatives of the academic, diplomatic, and media communities in Tallinn.

On 27 March, International Centre for Defence Studies held a seminar to present a recently published paper on how to facilitate emergence of a free-market trading system for natural gas in the Baltic Sea region, which will deepen the Baltic states’ economic integration into the EU and help the EU establish a single and unified energy market. The event attracted high-level international interest from political and business leaders (including at the ministerial, ambassadorial, and CEO levels), as well as other representatives of the academic, diplomatic, and media communities in Tallinn.

02.04.2013
On 27 March, International Centre for Defence Studies held a seminar to present a recently published paper on how to facilitate emergence of a free-market trading system for natural gas in the Baltic Sea region, which will deepen the Baltic states’ economic integration into the EU and help the EU establish a single and unified energy market. The event attracted high-level international interest from political and business leaders (including at the ministerial, ambassadorial, and CEO levels), as well as other representatives of the academic, diplomatic, and media communities in Tallinn.
ICDS director Ambassador Matthew Bryza presented a summary of the arguments in the recent ICDS policy paper entitled “Connecting the Baltic States to Europe’s Gas Market”. The study, co-authored by Bryza and ICDS Research Fellow Emmet Tuohy, argues that the Baltic states can strengthen their own energy security and their integration with European Union gas networks by working in tandem with the European Commission to develop the physical and regulatory infrastructure required for natural gas trading hubs to emerge in the Baltic region. Bryza further stressed that such cooperation will also help the European Union achieve two of its core strategic goals: establishment of a unified European energy market and completion of a Europe that is whole and free.
The study argues that the EU should designate three key infrastructure objects as “projects of common interest” thereby making them eligible for EU funding. As Ambassador Bryza stated, these crucial projects include: building the GIPL pipeline to connect the Polish and Lithuanian gas transmission systems; expanding the capacity of Latvia’s Inčukalns storage facility and restructuring its ownership; and constructing a regional LNG terminal to Estonia linked to Finland by pipeline. Taken together, these projects will lay the foundation for a regional trading system for natural gas where market rather than monopoly forces will determine prices, leading to greater security of supply and lower prices for consumers. At the centre of this approach is the EU’s own objective of diversifying supplies of natural gas and decreasing the influence of dominant monopolist suppliers like Russia’s Gazprom, which currently supplies 100 percent of the natural gas consumed by the three Baltic states and Finland.
Bryza highlighted the central debate at the moment over the location of the liquid natural gas (LNG) terminal that will provide the crucial, near-term diversified supply of natural gas for the region. Noting that Finland and Estonia are the leading candidates for this EU-supported LNG terminal, he argued that Estonia’s proposed projects at either Muuga or Paldiski enjoy key advantages over the proposed terminal in Inkoo, Finland, such as the Estonian projects’ higher capacities and freedom from Gazprom participation (The Russian firm holds a 25% stake in Gasum, the Finnish developer of the Inkoo project.) A further disadvantage of the proposed terminal at Inkoo is that Finland has contracted all of its natural gas supplies with Gazprom through 2025, meaning the Finnish side will lack a commercial incentive to proceed expeditiously with the new terminal. Bryza concluded by voicing support for a governmental ownership role (though not control) in the Estonian LNG terminal to ensure the facility functions according to free-market rather than monopolistic principles.
Next, Minister of Communications and Economic Affairs Juhan Parts presented the Estonian goverment’s views on the issue of gas market restructuring. He stressed that the government fully supports the paper’s (and the European Union’s) vision of an integrated natural gas market, and was optimistic about the possible growing role of natural gas in the energy mix of Nordic countries. According to Parts, gas could substitute for other fuels in providing district heating, in developing more environmentally- friendly road transport, and in generating electricity. Minister Parts underscored the need for new legislation—most important, in his view, on the unbundling of natural gas import and distribution pipelines—to prevent monopolist suppliers like Gazprom from restraining the growth of free-market pricing and arbitrage. He added that, among the governments of the region and the EU as a whole, there is widespread agreement on the proposed investment package for the three natural gas infrastructure projects highlighted in the paper; the problematic issue is the location of the regional LNG terminal in either Finland or Estonia. Parts predicted that a consensus agreement on this issue will be reached.
The ambassadors of each of these countries—Finland, Latvia, Lithuania, and Poland—then shared the perspectives of their respective governments Ambassador Aleksi Härkönen of Finland echoed Parts’ optimism that an agreement on the location of the LNG terminal will be reached. He also assured listeners, that the “minority shareholder” in the Inkoo terminal project, Gazprom, will not be able to exert its market power through the ownership in terminal project given the Finnish government’s 45 percent stake in Gasum. Ambassador Neilas Tankevičius of Lithuania shared his country’s difficult experience with Gazprom in response to Lithuania’s implementation of EU directives under its “Third Energy Package” to unbundle natural gas import and distribution pipelines. He stressed that Gazprom had charged Lithuania a politically determined natural gas price that was significantly higher than the price offered to Germany as a way to punish Lithuania for proceeding with EU directives that weaken Gazprom’s monopoly power. Ambassador Tankevičius underscored the urgency Lithuania feels in diversifying its supplies of natural gas away from 100 percent dependence on Gazprom, and pointed out that the proposed national LNG terminal in Klaipėda will complement rather than compete with the regional LNG terminal in either Estonia or Finland. Latvian ambassador Kārlis Eihenbaums continued by arguing that Latvia enjoys “ a position of luxury” due to its Inčukalns storage facility, on which Latvia, Estonia, and northwest Russia draw to meet peek natural gas demand in winter. Concerned about completing connections within the region, the Latvian government believes that a decision on the LNG terminal location must be reached soon. Echoing his colleagues, Ambassador of Poland Grzegorz Poznański concluded that the region must develop links with EU gas markets in Poland, Germany, and the North Sea basin, where free-market trading of natural gas at trading hubs was already leading to lower prices.
In an extensive question-and-answer period, the participants’ debate focused primarily on issues of the commercial viability of the infrastructure projects. Gasum CEO Antero Jännes argued that the Gazprom share in Inkoo presented no threat to security of supply, citing the Finnish government’s direct and indirect (via Fortum) ownership stake in his firm. EG Võrguteenus head Sergei Jefimov questioned Parts’ assertion that gas could substitute for other fuels in areas such as electricity generation, noting that gas is far more expensive than locally-produced biomass in Estonia; the minister responded by pointing to monopoly power as the cause of high gas prices, and predicted that the price would go down precisely as a result of the construction of a new LNG terminal connected to Finland and thereby to a regional market of 10 bcm.
To conclude the event, Minister Parts strongly argued in favour of Estonia as the location of the LNG terminal on the basis of three key criteria: ensuring the terminal is free of any influence of a monopolist gas supplier; economic viability; and political consensus. He explained that the lower cost and significant degree of private investment in the Paldiski project meant that it would require less EU financial support than the Inkoo project. Parts reiterated his government’s strong support for an Estonian LNG terminal, predicting Elering and the Port of Tallinn would join the project and provide the degree of government influence required to ensure the project operates according to market principles.
This program brief was drafted by ICDS intern Mart Raamat.
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