Lithuania “Extorts” Money for LNG Terminal Maintenance
With an annual need for natural gas at 1.3 million cubic meters, Lithuania’s nitrogen fertilizer manufacturer, Achema, is the Baltic country's largest single gas consumer. It guzzles nearly half Lithuania’s yearly consumption of gas and is now sending calls of distress.
With the country’s LNG terminal and FSRU in operation, the state mandatorily requires all gas consumers, including Achema, to switch from natural gas supplied from Russia's Gazprom to a roughly 10 percent costlier Norwegian gas in the terminal, described by the Lithuanian authorities as a national security guarantor.
While others gave in, the fertilizer producer calls on the Government to stop the “extortion” and has threatened to stop using gas at all in the manufacturing process.
Biggest gas consumer fears bankruptcy
So far, Lithuania’s biggest single gas consumer has come out victorious in legal wrangling against the state over the much-lauded LNG facility in the Lithuanian seaport of Klaipeda.
Well before its launch, Lithuania had sought to contractually obligate Achema to buy 25 percent of its LNG from the terminal, but the European Commission (EC) stepped in after the manufacturer lodged the complaint.
"It has to be a two-way communication, not a unilateral decision by the state," the EC ruled in favor of Achema.
The fertilizer producer was also asked beforehand by the state to meet the country’s “national security interests” and allot a chunk of its earnings for the LNG terminal construction, which Achema also refused.
The case is still in court.
With the setbacks, those in power have hurriedly crafted a new draft of legislation holding all gas-consuming power and heat suppliers in the country, as well as Achema accountable for the annual maintenance of the LNG terminal and FSRU. Approximately $80 million is the yearly requirement.
The largest Lithuanian single gas consumer is asked to chip in with nearly half the amount.
But Ramunas Miliauskas, Achema's director general, says in agreeing to do so, the company will “inevitably” end up filing for bankruptcy.
Especially, with the tepid performance lately: company posted a lackadaisical $1.62 million in profit in 2013 and reported loss last year.
The loss-making was said to be due to the partly halt of production failing to obtain a cut in the Russian gas price.
“In the situation, a single company cannot cover half the LNG terminal costs, especially that we are not getting a single cubic meter of gas from it,” Miliauskas emphasized. He added: “If we are compelled to pay the facility maintenance fee, we would have to do it from our current assets which would be exhausted very soon and the company will need to stop it operations.”
Additionally, by breaching the contractual obligations with Gazprom, the manufacturer’s long-term gas supplier, Achema would face huge fines.
“We want fair treatment”
As the contract with the Russian gas giant is expiring, the Lithuanian CEO told Natural Gas Europe, the fertilizer producer is in talks with “potential gas suppliers” and mulls ad hoc options.
“For us it is all about the economics. We do not repudiate the possibility of buying gas through the LNG terminal in Klaipeda, but we insist on allowing us operate on equal conditions as similar caliber companies operate in Germany, Poland and elsewhere, where state does not meddle into the commercial relations and holds its duty to support large industrialists,” Miliauskas pointed out.
He says Gazprom wants Achema to pay a price calculated according to the old formula, which, pegged to the price of oil, is about $330-350 per 1000 cubic meters of gas now. But speculations abound the fertilizer company favors Gazprom and seeks a better bargain from it.
“Gazprom is one of the largest natural gas market players in Europe and it had the best possibilities to offer the least prices due to the relatively little gas transportation costs,” the company head acknowledged.
As Lithuanian law forbids forceful agreements, he says, the state has to stop to demand Achema to buy natural gas from the Klaipeda LNGT.
“The state, insisting on the necessity to secure the technical alternative of gas supply in the country, had already unilaterally obligated gas consumers to purchase 25 percent of gas from the LNG terminal regardless the gas price. But the enforced duty has been renounced by the European Commission as illegitimate. As all the activity in company is based on law and commercial relations, it is hard for anyone to imagine that a commercial body can be obligated to buy something,” Miliauskas said.
The Achema CEO says he wants to “bring up a public discussion” about the operators of the LNG facility, who called it “profit-making” yet at the outset of the construction, and who now, according to the director general, “try to extort” money for the facility’s maintenance.
“They apply the method to a 1500-employee factory that is 50 years in operation,” the company chief pointed out to Natural Gas Europe.
He said he counts on Lithuania’s Constitutional Court in the dispute and reiterated that “throwing the LNGT operation costs” on the shoulders of “one company” is not just unjust, but also breaches the state’s security.
“It will lead company to a financial crisis if this happens. New local energy projects should not be destroying entire industries which have an international reputation established,” the director general noted.
He hinted Achema mulls among other things terminating the existing contract with Gazprom, suffer penalties from breach of contract, but start buying ammoniac at the end of the day.
“In this case, we’d not need gas at all. Any gas. Do the Lithuanian authorities realize that?” the fertilizer factory head asked rhetorically.
“Prices went up with LNG”
Lithuania’s LNG terminal contains the minimal quantity - 540 million cubic meters - of natural gas now, though the maximum capacity is ca 3 billion cubic meters of gas annually. The daily re-gasification capacity is said to be around 11 million cubic meters of gas.
Against this backdrop and with the shrinking gas consumption in mind, Lithuania is scrambling to find a fix to the plight.
Amendments to the LNG Terminal Law, allowing the Klaipeda terminal’s gas sales oversees are already ready and await the parliamentary scrutiny.
Among the proposals some stand out, particularly the one suggesting South America might be the next buyer for gas from the Lithuanian LNG terminal. The Energy Minister has confirmed the intentions.
Had a gas buyer in the other hemisphere come forward, the Ministry, some sources say, might consider relocating the floating storage and re-gasification facility closer to it.
But the question - who has to cover the facility maintenance costs? - would perhaps become even more acute.
Achema is not the only producer uneasy about the gas from the local LNG facility.
After bills for heating in the Lithuanian capital Vilnius was upped by 7 percent this year, Vilniaus Energija, the heat supplier, said it was a result of more expensive mandatory gas purchases from the liquefied natural gas terminal.
“The part of gas now being bought in the LNG facility amounts to 65 percent, a considerable jump from the previous level,” explained Nerijus Mikalajunas, the spokesman for the heating company.
Like other heat and power producers, Vilniaus Energija has started mandatory LNG purchases from January 1, 2015.
But the gas supplier, Lietuvos duju tiekimas, insists the heat provider has been “inaccurate” with the information.
“The March prices are based on the price the heating company had bought gas in January. But because of the procrastination with gas procurement, Vilniaus Energija did not acquire gas not from us that month, but did so on the gas exchange, where it has paid for it 20 percent more. As the company continued obtaining gas on it until February 12, it will have an adverse affect on the heating bills until the end of April,” says the gas supplier’s statement.
It also says the price of gas will be edging down until the new course of dollar and euro will go into force.
State focused on gas too much
Raimundas Kuodis, a high-ranking official at the Central Bank of Lithuania with a competency in energy issues, told Natural Gas Europe that Lithuania might have done well without the expensive LNGT and FSRU facilities had the authorities focused on gas consumption cuts through improvements of the efficiency of insulation in the Soviet-era housing.
“Lithuania is using natural gas mostly for three purposes: housing heating, heat production and for fertilizers’ production at Achema. Lithuania does not need to use gas for heat production, for example. What the country needs is to boost the heat efficiency in the apartment blocks and make transition gradually to bio-fuels. This should have been done long time ago,” the expert told.
Instead, he says, the Lithuanian authorities took on the costly investments into the LNG terminal and the vessel.
“The whole thing about gas is like dependency on drugs: some people in the legislative chambers and Government cannot see Lithuania without gas.”
With the gas structure well developed and the demand going down, the costs are edging up, especially with the more expensive Norwegian gas.
“But many decision-makers out there seem to be out of touch with the new reality. With the main gas users, economy-savvy municipalities, switching for cheaper bio-fuels, the officials try stick with the LNG terminal and prolong the use of gas by hook or by crook. So the largest gas consumers, like Vilniaus Energija and Achema, for example, are being obligated to take the bulk of the terminal’s costs,” Kuodis said.
Altogether, with the LNGT and FSRU launched, he says, the Gazprom gas price has inched downward, but not the two facilities stand behind it.
“The negotiations, especially, over the latter facility, coupled with the new global energy geopolitics and litigation in the Stockholm Arbitration Court, have forced Gazprom to reduce the price,” the expert said.
“Not economics, but geopolitics rule global LNG market”
Meanwhile, Lithuanian Energy Minister Rokas Masiulis insists Gazprom’s gas price decrease is “artificial.”
However, even some Government officials agree that ordering Achema to buy LNG and cover the terminal maintenance costs is not just unfair, but also do not serve the country’s best interests.
“But Lithuania does not have many options now in that regard, so security issues, especially amid the tense geopolitical situation, comes first,” an official within the Lithuanian Government speaking on the condition of anonymity told Natural Gas Europe.
“With the number of gas consumers on the decline, the state does certainly not have many other options, but requiring the heavyweights like Achema to help out with the financial burden of the LNG facility costs. Talks of our LNG export to South America fall in with the same story as the US LNG imports to Lithuania,” Kuodis said. “It it happens, it will be a symbolic, geopolitical gesture.”
Talking of the globalization of LNG market, the understanding of it is quite twisted, says the Lithuanian Bank official.
“If we were to look at the picture not from the geopolitics, but economics, one would clearly see there is no need for the US LNG exports to Europe if the United States stopped its own gas imports from Qatar, for example, and distributed the domestic gas production evener within the states. That would allow Europe- and Lithuania- deliver gas at cheaper costs from closer, Qatar, for example,” Kuodis pointed out.
The Lithuanian expert says gas infrastructure development in Lithuania has become “an obsession” for many.
“If Achema does not budge and decide to bypass the necessity for gas and buy ammoniac directly, the state will run into a major roadblock,” the expert predicted.
A wrong message
Vidmantas Jankauskas, a Lithuanian scholar and energy expert, believes that Lithuanian authorities have mis-communicated the message on the LNG terminal expectations.
“A suggested “inevitable fall in gas price” is just not seen anywhere. As a matter of fact, the price has done the opposite: for some major gas consumers, like Vilniaus Energija, the heating supplier, went up 30 percent,” the expert said.
Many company heads, he says, he’s spoken to recently complain they will need to go bankrupt soon should they continue buying gas from the LNG terminal.
“Imagine a company anywhere - let’s leave alone in a country size of Lithuania - being asked to put away a whopping 15 million euro and more - not for commodities or services it needs, but for maintenance of a business model that the state deems to be of key importance to the country’s energy security and national interests. That is the case with Achema.”
Soon, the expert says, gas might be replaced with bio-fuels in the country’s housing heating, which, again, bodes nothing good to Achema.
“Only more financial responsibilities, especially with the bids of building bio-fuel-fired electricity generators in Vilnius and Kaunas (the second largest Lithuanian city) taking some real shape,” Jankauskas told Natural Gas Europe.
Talking of the buzz on the US LNG Europe-bound exports, he said he “does not believe” they will push the gas price considerably down.
“I see it going down if some other major LNG players, like Australia or some African nation with abundant gas resources, for example, stepped into the market, but to make that happen the oil price has to be around $80-90 per barrel- not below than that,” Jankauskas underscored.
Another nation that will likely have a significant impact on the LNG market is Japan, which is expected to start re-launching its power plants sooner or later.
“So, again, it will push the demand for gas down. Once cannot deny the Lithuanian LNGT and FSRU have played their part in the energy geopolitics, first of all in talks with Gazprom over a new price, but with the standoff ever defusing, the issue of the Lithuanian energy security guarantor costs will come up sooner or later,” the Lithuanian energy expert predicted.
Achema may have to pay millions
As the story was written, Lithuania’s Constitutional Court ruled that Law on the Liquefied Natural Gas (LNG) Terminal, as amended, complies with the Lithuania Constitution, a ruling seen as a big blow to the Achema legal expectations.
The court established that the so-called LNG maintenance payment, which was applied in 2013 and has been scrapped, was legitimate.
This means that Achema may eventually have to pay the millions in support of the LNG facility.
Following the court ruling, the fertilizer manufacturer released statement, saying “Achema mulls legal actions in an international court.”