Finding common ground in the Baltics [NGW Magazine]
The Baltics’ unity is cracking up once again – Latvia, Lithuania and Estonia cannot agree on rules and conditions under which a common Baltic gas market should be operating. In a vivid example of lingering disagreements between the neighbours, Lithuania’s prime minister Saulius Skvernelis was blunt on his visit to Tallinn in early June when asked by reporters about a common gas market: “There is no answer yet if Lithuania will join it with other regional countries.”
Although the countries signed an agreement on the introduction of a common gas tariff zone as of 2020, which is an important step to implement plans in time to create a common market by 2022, there are several reasons for the failure.
First of all, there are disagreements with regard to the inter-transmission system compensation mechanism, partly concerning the sharing revenues of the Baltic transmission system operators (TSOs).
“Lithuania is seeking an agreement on integration conditions that are fair and balanced for all countries participating in the common market and have no negative economic impact on any party involved. However, under the current conditions Lithuania would suffer significant financial losses,” the Lithuanian energy ministry told NGW.
The spokesman said that in February, Lithuania proposed an interim solution for 2020-2021, whereas a long-term solution on the functioning of the common regional gas market would be applied from 2022. The main point was that transmission tariffs on the interconnection point between Lithuania and Latvia would be zero by next year.
“Lithuania would set the tariffs for the entry capacity products from Belarus at the same level as the Finland-Estonia-Latvia entry/exit zone. A discount would be applied at the entry point from the LNG terminal in Klaipeda to the Lithuanian entry/exit zone,” the spokesman said. But Latvia disagrees, claiming a zero tariff is not in its interest.
“Lithuania remains open to the idea that a separate cost-benefits analysis should be performed by an independent body such as the European Commission. Such analysis would determine, what would be the most balanced and correct inter-transmission system mechanism to expect from the perspective of all four countries’ TSOs,” he said.
“When it comes to Lithuania's membership it is not a question of whether, but when, and on what terms it will join the common gas tariff area with Latvia, Estonia and Finland,” he said.
Among other obstacles, a source in Lithuanian energy market pointed out to NGW, is Lithuania’s demand that it keep the money it receives from gas transit to the Russian region of Kaliningrad. The sum is in the range of €12-15mn/yr.
The clashes among the small Baltic nations distract from the extent of the progress they have made in forming a common gas market. For example, the electronic trading platform for Baltic gas, GET Baltic, has just announced it will enter the Finnish gas market and thereby establish a one-stop-shop for natural gas trading in the region.
Both Lithuania and Latvia are set to enhance the capacity of their joint gas transmission pipeline, if the European Union allocates the requested €4.7mn it needs. If the project is implemented, the capacity of the interconnector will go up to 130.47 GWh/day in Latvia (now it is 67.6 GWh/day) and up to 119.5 GWh/day in Lithuania (now it is 65.1 GWh/day).
“The realisation of the project would make it easier for gas markets to tap the Klaipeda liquefied natural gas terminal, the Incukalns underground gas storage and, from 2022, the Polish and Lithuanian gas interconnector (GIPL),” Lithuanian TSO Amber Grid told NGW.
A 2018 feasibility study on the Lithuanian and Latvian gas transmission capacity increase showed that both countries will need more transmission capacity when the gas interconnectors between Finland and Estonia and Poland and Lithuania will be built.
Importantly, ramping up the gas transmission capacities will facilitate market access for Klaipeda LNG terminal, Latvian Incukalns storage facility and GIPL by 2022.
And when it comes to the Klaipeda LNG terminal – Lithuania’s poster child for energy independence and security but detested by its many critics – the prospects of the facility look rosy. The terminal is set to double its LNG volumes once gas pipelines to Poland and Finland open after 2021, turning the Baltic port into a regional supply hub.
Against that promising backdrop, the Baltic countries’ squabbles over the terms may look petty; but there is much more at stake, experts say.
Rytas Staselis, a Lithuanian energy expert pointed to the rivalries between the market participants. “The Latvians and particularly Estonians are still irked by the fact that Lithuania operates a liquefied gas terminal it sees as regional. There are still expectations, especially in Estonia, that the topic of a regional Baltic liquefied natural gas terminal will pop up anew in the future,” he told NGW. Yes, the terminal has had a positive impact on the gas market, he says; but the prices are too high for it to to be able to stimulate a competitive Baltic gas market. “In 2015, a Latvijas Gaze vice-president told me bluntly that the Klaipeda LNG terminal had been a significant factor in negotiating the price of Gazprom gas for Latvijas Gaze, yet Latvia does not want to share the costs Lithuania incurs in operating the facility. As a result, the price of the gas at the terminal is uncompetitive, especially so in winter with low gas prices on spot markets. The fact that state companies are in charge of the market also contributes to the drag in drawing common rules and conditions for a single Baltic gas market,” he said.
The former head of Lithuania’s energy pricing and control commission, Vidmantas Jankauskas, also pointed to the disagreements over the Klaipeda LNG terminal.
“The main problem is its rigidity in terms of price and the accessibility. To make it look better, Lithuania should open the terminal to third parties, not only to Norwegians, but this is hardly possible for a state company. Besides, the Lithuanians are not happy with the Latvians either. They say the Incukalns gas storage tariffs are too high, while at the same time the Klaipeda LNG terminal deserves a special treatment owing to its importance in the region,” the expert told NGW.
Meanwhile, Jurijs Ozolins, a Latvian energy expert, says the common Baltic gas market is “formally” working. “We have the ever increasing flows of gas through the local interconnectors, the gas for the Klaipeda LNG terminal is stored in Incukalns, the Baltic gas exchange GET has entered Finnish market and so on. What the Baltics need is simpler trading conditions both for traders and customers, establishing a system similar to that functioning in the Baltics’ electricity market. The necessary infrastructure for a joint Baltic gas market is in place, but the disagreements who, how, when and where the countries can use it and how to share the responsibilities and the profit too, are still there indeed. I believe things will be worked out over time if local politicians stop claiming that some countries in the Baltics are more important than the others,” he told NGW.
Market needs more demand: Belyi
The objectives of a competitive gas markets in the Baltic states are often impeded by a low level of gas demand in the region, according to Andrei Belyi, a Baltic-based academic and consultant. This is therefore the ideal time to promote new uses for gas and to bring in greener substitutes for naturally-occurring methane.
Low gas demand represents an impediment for a diversification, he told NGW in June, and stimulating new gas demand, particularly for transport and power generation, will be crucial to market development.
This is the “the key prerequisite for the security of supply as well as to allow the penetration of green gases, such as biomethane and even hydrogen, into the transport sector,” he said. “Green gas could displace diesel on land; and the CO2 emissions can be cut by 40% or more and sulphur to zero by switching from marine gasoil to gas at sea. In recent years, gas has regained a positive image as the energy transition fuel.”
Estonia has already had success in this, with biomethane used in compressed natural gas (CNG)-fuelled vehicles. In 2018 as much as 40% of CNG-fuelled transport ran on biomethane. The share of CNG in the market will increase and the share of biomethane will increase accordingly, he said. “It may also be argued that the permitting system would increase biomethane use even more and further support the development of a circular economy since biogas is often produced from biodegradable waste. In this context, biomethane might even be prioritised over electric vehicles,” he said.
The new entry-exit zone linking Estonia, Latvia and Finland is a durable institution that will allowing gas to gas competition in the region to intensify. But for it to reach its full potential, a competitive market must be developed and the national competition authorities need to play a bigger role. Thus far, many industrial stakeholders complain that state-owned companies continue to dominate the markets.Even the privatised incumbent in Estonia Eesti Gaas now accounts for 90% of Estonia’s gas trade, up from 77% in 2015.
In the context of the new entry-exit zone, Latvian underground storage in Incukalns will becomes pivotal in seasonal gas supplies to Estonia and further to Finland through the Balticconnector.
And LNG will bring further flexibility, more even than underground storage, with its ability to deliver gas at any time, he said. Plus, with container-based LNG transport, gas can also be delivered to off-grid areas. Competitive pricing and third-party access at LNG terminals are necessary conditions for a competitive regional gas market.
It can further be argued that the Lithuanian FSRU has not contributed to a genuine regional LNG market as the price is too high. The fees payable to Hoegh are very unfavourable compared with the charter rates applied before the collapse of 2016. Nowadays, LNG can be delivered by container from Poland – US LNG is stored there in Swinousjce, or from Russia. Hence, there is already some market diversification and there is the potential for a genuine market to emerge.