October 6, 2014

LNG and the Gulf of Finland

Reuters/Scanpix
A worker turns a valve at the Nesvizhskaya compressor station some 130 km (81 miles) from Minsk January 9, 2009. Ukraine has given verbal agreement for the deployment of international gas transit observers, the chief of the Russian state-controlled gas export monopoly Gazprom, Alexei Miller, said on Friday.
A worker turns a valve at the Nesvizhskaya compressor station some 130 km (81 miles) from Minsk January 9, 2009. Ukraine has given verbal agreement for the deployment of international gas transit observers, the chief of the Russian state-controlled gas export monopoly Gazprom, Alexei Miller, said on Friday.

Although the crisis in Ukraine has finally made all of Europe acutely aware of the need to diversify natural gas supplies and reduce dependency on Russia, outside of Lithuania there is still little progress towards that direction in the other two Baltic states and Finland. All four countries are, for the moment, still fully dependent on Russia for their natural gas imports. While Lithuania has almost finished its floating LNG terminal in Klaipėda, the long-awaited regional LNG terminal in the Gulf of Finland is no closer to completion than it was before Russian troops entered Crimea.

Although the crisis in Ukraine has finally made all of Europe acutely aware of the need to diversify natural gas supplies and reduce dependency on Russia, outside of Lithuania there is still little progress towards that direction in the other two Baltic states and Finland. All four countries are, for the moment, still fully dependent on Russia for their natural gas imports. While Lithuania has almost finished its floating LNG terminal in Klaipėda, the long-awaited regional LNG terminal in the Gulf of Finland is no closer to completion than it was before Russian troops entered Crimea.

In fact, after the announcement last Tuesday that the regional project has been “indefinitely postponed”, the prospects of its completion have receded even further. After almost a year of continuous negotiations, all parties involved—the Estonian and Finnish governments, the European Commission, and commercial partners Alexela (EST) and Gasum (FIN)—finally acknowledged that a compromise is nowhere to be found. The disagreements that lead to this stalemate were complex and varied. Quite understandably both of the two countries wanted the terminal to be built on their shores, but even the compromise option of two separate ones on both sides of the Gulf, proposed in February (and initially rejected by the Commission), was unable to satisfy all parties.
Neither of the two companies, Alexela and Gasum, found building smaller terminals particularly attractive from a commercial perspective. Moreover, the two companies are at a rather different state of readiness when it comes to launching the project—with Alexela practically shovel-ready but with Gasum not even certain about where to build yet. While the Estonian side has been arguing that the sooner the terminal is built the better, especially considering the current political situation in Europe, Gasum, having a binding supply contract with Gazprom until 2025, is taking a much more relaxed approach to the situation, to say the least. Gasum marketing manager Olga Väisanen argues that since the current EU financing round lasts until 2019, there is no need to rush ahead with the project. Meanwhile, the CEO of the 25 percent-Gazprom-owned company Johanna Lamminen has pointed out that Russia has been delivering to Finland for the last forty years “without any problems.”
So where to go from here? Arguably, the finalization of the Klaipėda terminal will already enhance the energy security of the region to some extent; however, it cannot satisfy the gas demand of the Baltic countries, let alone Finland, without considerable infrastructure investment in interconnectors.
Thankfully, the European Commission did approve funding for Balticconnector, a pipeline connection between Estonia and Finland—a move with much more significant and lasting potential consequences. While the three Baltic states consume a mere 5 billion cubic meters (bcm) annually as of 2013 (a figure that has been dropping considerably in recent years), a direct connection to Finland would in effect create a single market with annual demand approaching 10 bcm—a far more attractive commercial prospect. Furthermore, with the pipeline connection between Poland and Lithuania, GIPL, expected to begin operation in 2019, the four countries will thereby not only gain access to North Sea basin supplies at spot-market prices (as opposed to the oil-indexed price of pipeline imports from Russia), but also to the Świnoujście LNG terminal in Poland opening next year.
All in all, while all hope is not lost for the long-awaited regional LNG terminal, the core focus should be on connecting the Baltic States to the rest of Europe. That means that the first task in hand should be completing both the Finland-Estonia and Poland-Lithuania interconnections as soon as possible, as well as modernizing the pipelines within and among the three Baltic states themselves. These countries can thereby pave the way for the emergence of a truly competitive market for natural gas—the surest way of reducing Russian leverage and eliminating the status of the region as an “energy island” within the European Union.

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