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.