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Energetics
 
  Liquefied Natural Gas (LNG) Terminal for Eastern Baltic (1)

Andres Mäe
2013 06 05

1. Introduction

The discussion about diversification of natural gas supply for the Baltic States needs to be widened. Alternatives are worth to be considered despite the principal decision of the European Commission to build a regional LNG re-gasification terminal into one of the EU member coastal states of the Gulf of Finland. Alternatives are the floating LNG re-gasification terminal in Lithuania and competing fuels. This article is trying to answer the question: Is the building of a regional LNG terminal economically viable?

2. Competing LNG terminal in Lithuania

Regional LNG terminal has been seen as the main possibility to diversify natural gas import for Estonia, Latvia, Lithuania and Finland, which so far have been dependent on a sole supplier - Gazprom.

Several researches [1] supporting the building of a regional LNG terminal are relying on the fresh experience of the price negotiations between the European states and Gazprom where the latter agreed to make a discount for partners having contracts with several suppliers [2].

There are no analyses about the situation where one of the regional states -- Lithuania has already started to build a LNG terminal. Floating re-gasification LNG terminal with a maximum capacity of 4 bcm/a in the ice-free port of Klaipeda will be ready by the end of 2014 [3].

Regional LNG re-gasification terminal planned in Estonia or Finland has similar maximum capacity -- up to 5 bcm/a. The combined capacity of both terminals corresponds to the total consumption of natural gas of Estonia, Latvia, Lithuania and Finland. Both terminals will compete for the same part of fuel consumers. The reimbursement of the planned costs is unclear.

3. Shortage of consumers

The main risk, which every newcomer to the fuel market needs to take into consideration, is the limited amount of consumers in the Baltic States.

The share of natural gas in energy balances of Lithuania and Latvia is relatively big if compared to that of Estonia. In Finland the amount of consumed natural gas is close to the total consumption of the three Baltic States combined.

Long term supply contracts limit the interest of Latvian and Finnish consumers towards re-gasified LNG: Finland’s Gasum contract with Gazprom will end in 2025 [4], Latvijas Gaze has renewed contract with Gazprom until 2030 [5]. The price of imported LNG has to be very favorable to the partners of Gasum and Latvijas Gaze to switch supplier and buy less amount of natural gas from Gazprom.

Imported LNG can be sold in Estonia and Lithuania from the beginning of 2015 since this is the deadline of supply contracts of Eesti Gaas and Lietuvos Dujos with Gazprom [6]. The LNG terminal in Lithuania will be commissioned at the beginning of 2015. Lithuania obliged all natural gas consumers to buy at least 25% of consumed gas from the operator of the re-gasification terminal [7] to guarantee the economic viability of the whole LNG-project. This regulation makes the competition with the LNG terminal in Klaipeda very difficult for a regional LNG terminal located in Estonia or Finland.

There will be a very limited increase of the amount of consumers in the Baltic States during the next five years. Previous forecasts about the increase of the gas consumption have not realized. Before the closure of Ignalina NPP it was predicted that Lithuania must increase the import of natural gas from Russia for the production of electrical energy. In 2010 Lithuania opened the electricity market instead and the gas consumption did not increase as much as predicted (see table).

Table. Natural gas annual consumption (million cubic meters)

 

 

2007

2008

2009

2010

2011

Estonia

1003

962

653

701

632

Latvia

1645

1665

1528

1821

1604

Lithuania

3720

3245

2727

3115

3398

Total of 3B

6368

5455

5139

5637

5634

Finland

4587

4728

4446

4701

4105

Total

10955

10183

9585

10338

9739

Sources: Eesti Statistika, Central Statistical Bureau of Latvia, Department of Statistics of Lithuania, EIA.

The relatively high price of imported natural gas, compared to the price of subsidized renewable fuels (supported by the energy and climate policy of the EU), is the main obstacle for increasing the gas consumption to the pre-crisis level in the Baltic States.

4. Price competition of fuels

In markets without competition between several gas suppliers or producers natural gas competes with other liquid and solid fuels. Consumer behavior in such markets is influenced by comparative price advantage be it based on oil price or subsidies for certain types of fuels.

Therefore the price sensitive consumers in the Baltic States have supplied or are supplying themselves with equipment for power production, which have the capability to use different types of fuels [8]. The possibility to consume cheapest fuel at any moment compensates additional costs of having combustion units for liquid or gaseous and solid fuels [9].

The price competition of fuels in the fuel markets of the Baltic States raises doubts of feasibility of having more than one regional LNG re-gasification terminal. Governments of Estonia, Latvia, Lithuania and Finland have to limit the subsidies to renewable fuels in order to increase the consumption of natural gas and justify the investments even of one LNG re-gasification terminal.

Why do the Baltic States need LNG re-gasification terminal if the consumption of renewable fuels in power production is economically more viable?

5. The price of LNG

The price of imported LNG via regional re-gasification terminal of the Baltic States will probably not differ from the price of LNG in other markets in Europe [10]. The reason is the smallness of the regional market, which makes the creation of a regional price-setting hub unlikely.

It is hoped that the price of LNG will be influenced by the import of natural gas from USA [11]. There are and will be built several LNG plants in the east coast of the US and the first amounts of LNG have been contracted with consumers in the United Kingdom [12]. But these will be transported to Europe only in September 2018 and the price for the LNG might not be different from the price of natural gas supplied via pipelines at that time.

This has at least two reasons. Firstly, the natural gas is a regional commodity and the decreased prices in the US (due to the shale gas boom) will not be transferred to other markets. If shale gas is exported then transport costs will be added and if the gas is exported as LNG the liquefaction and re-gasification costs will be added as well. Secondly, natural gas for heat energy is a seasonal commodity and therefore storing costs will be added.

It is predicted that liquefaction capacity will be doubled in the world by 2020 compared to 2012 [13] but expert opinions differ whether these will be used to supply European consumers [14]. The price in Asia is more tempting for LNG exporters (see Figure) due to the economic growth and increase of consumption there, which is not projected in Europe.

Figure. The price of LNG in Japan, Korea, EU and US.

Source: Quarterly Report on European Gas Markets, DG Energy. Vol 5 issue 4. Fourth quarter 2012.

The European price of LNG cannot not decrease either because of the lower price level will not be encouraging for the producers or exporters. It is predicted that Europe will be the end-market where LNG will be sent if there is excess supply [15]. Therefore the hope for lower LNG prices in the Baltic Sea region is not substantiated.

6. Summary

More than one LNG re-gasification terminal for the Baltic Sea region is not economically reasonable. If the regional LNG terminal is in the common interest of Estonia, Latvia, Lithuania and Finland then it has to be expressed by a political agreement, which obliges the participants to share the costs of building the regional LNG re-gasification terminal. Can we expect such an agreement if the location of the terminal is settled? Otherwise it will be the burden for consumers of one state only.

The Lithuanian LNG terminal is suitable to become a regional re-gasification terminal. Its construction has already started and it is possible to increase its capacity step-by-step. An ice-free port and sufficient pipeline connections with Latvia [16] allow the floating terminal in Klaipeda to balance the role of Gazprom in supplying the Baltic States and Finland with natural gas.

There is one precondition undependent of the location of regional LNG terminal. Latvian government needs to be convinced to unbundle the Incukalns UGS if the current contract with Latvias Gaze comes to an end in 2017.

The alternative is to increase the consumption of renewable fuels in power production. Instead of investing in the creation of a LNG terminal it might be more beneficial to spend the money into building several co-generation power plants or boiler houses working on local biomass in all three Baltic States.


[1] Ramboll Estonia, 'Comparison of LNG Terminals in Paldiski, Muuga, and Inkoo: Compiled Report', Tallinn, March 2010; Booz & Co., 'Analysis of Costs and Benefits of Regional Liquefied Natural Gas Solution in the East Baltic Area, Including Proposal for Location and Technical Options under the Baltic Energy Market Interconnection Plan', Milan, November 2012; ICDS, 'Connecting the Baltic States to Europe's Gas Market' by Matthew J. Bryza & Emmet C. Tuohy, Tallinn, March 2013.

[2] e.g. «Газпром» пошел на скидки, РБК daily, 20.02.2012; «Газпром» снизит цены на газ для Европы на 10%, Vedomosti.ru, 17.02.2012.

[3] Until the end of 2015 when the pipeline connection between Klaipėda–Kuršėnai will be expanded the terminal will work on half capacity (Liquefied natural gas (LNG) terminal. Business plan. AB Klaipedos Nafta, February 2013).

[4] http://www.gazprom.com/press/news/2010/november/article106005

[5]Gazprom Ties Latvia Into Longer Deal, Nefte Compass, 11.02.2009

[6] http://www.gazprom.com/press/news/2013/april/article159722

[7]Lithuania’s gas importers do not want to be forced to buy gas from LNG terminal, BNS, 28.02.2012

[8]e.g. Eraküte viib Jõgeva soojuse tootmise taastuvkütusele, Delfi.ee, 26.03.2013; Fortum: kaugküte on kohaliku katlamaja küttest odavam, Delfi.ee, 09.05.2012

[9] This is and will be affordable only for relatively big or wealthy consumers or energy producers.

[10] In case the LNG is supplied via one of the terminal in Europe (e.g. Zeebrugge) the transport costs will be added (EPRG, The Cost of Improving Gas Supply Security in the Baltic States, Pierre Noël, Sachi Findlater & Chi Kong Chyong, Working Paper in Economics 1204, Cambridge 2014, p. 19).

[11]Veskimägi unistab Ameerika odavast gaasist, Postimees, 26.03.2013

[12] Centrica signs long-term North American LNG export contract with Cheniere, Centrica.com, 25.03.2013

[13]World Energy Forum & IHS CERA, 'Energy Vision Update 2011. A New Era for Gas', 2011, p. 4

[14] OIES, 'The Impact of Globalising Market on Future of European Gas Supply and Pricing: the Importance of Asian Demand and North American Supply', Howard V. Rogers, January 2012

[15] Excess supply of LNG will be caused by the commercialization of the shale gas projects in Asia (mostly in China), shale gas projects in Europe will be commercialized around 2020 and be more modest than expected (JRC, 'Unconventional Gas: Potential Energy Market Impacts in the European Union', 2012).

[16] The expansion of the pipeline connection between Latvia and Lithuania will be finished in 2013(Joint Risk Assessment of Security of Gas Supply of Estonia, Latvia, Lithuania, 2012 pp. 37-38), which enables to store the re-gasified LNG (imported via floating LNG terminal in Klaipeda) in Latvia's UGS and sell it to other consumers in the region (even in Finland after the commercialization of the Balticconnector pipeline between Estonia and Finland).

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