Lithuania’s US LNG Bid: Geopolitics with Economics Unknown
Praise over the launch of Lithuania's highly anticipated Floating Storage and Regasification Unit (FSRU), a project aimed at increasing energy security in the country, is still in the midst as the Baltic country sets its sights on another milestone - to make it on the list of the first European countries to receive US LNG deliveries, as early as 2016.
“I believe that it is quite realistic. The US will have the technological capacity by then and the United Kingdom, Spain and Lithuania are widely seen to be the first ones to see the Americans imports,” Mikhail Krutikhin, a Russian energy expert at the Russia-based RusEnergy consultancy told Natural Gas Europe.
Unanswered questions remain
Lithuania’s natural gas supply and trading company Litgas’ recent trade agreement with US-based Cheniere stipulates that the first US LNG shipments could reach Lithuania as early as 2016, though some Western experts are more conservative with their estimates. Litgas has also signed a memorandum of understanding with Delfin LNG, the first offshore floating natural gas liquefaction project in the United States.
It is estimated the US projects may bolster LNG output by 30 billion cubic meters per year by 2018, which would account for roughly 10 percent of the current global LNG market.
The Baltic region consumes approximately 4 billion cubic meters of natural gas annually.
“From what I see and hear I believe the plans of the US natural gas deliveries to Lithuania from 2016 are quite feasible. America will have the necessary capacity by then and necessary agreements in that regard have already been done,” says Krutikhin.
Mr. Krutikhin, however, insists that Lithuania, an outspoken critic of the Kremlin over the conflict in Ukraine, has been focusing on energy geopolitics, albeit successfully, but is silent about the economic side of the transatlantic deal. The small country relied on Russian gas for 90 percent of its imports until recently.
“Lithuania does need natural gas. But among the answers I’d like to hear from the Lithuanian authorities is this, for example: how will Lithuania get around the contractual LNG supply deal with the Norway’s Statoil when the US gas is cheaper? (Norway has committed to deliver to Klaipeda LNGT 540 million cubic meters of natural gas yearly)?” the Russian analyst asked rhetorically.
But Arvydas Sekmokas, the former Lithuanian Energy Minister, says it should be “of the least concern,” as the terminal’s maximum capacity is 4 billion cubic meters of gas, so the bottom line, according to him, is about securing “various suppliers.”
“The demand for liquefied natural gas will definitely be increasing and Lithuania has an edge in the regional market with its LNG facility already in operation,” the former-minister-now-energy-consultant told Natural Gas Europe.
Gazprom gas price will be pushed down
Like many, he is convinced the prospects of US LNG exports boost Lithuania’s and Europe’s, bargaining position with Russia and contribute to creating a more diverse global gas market.
“We may see some contract renegotiating, which will lead to lower natural gas prices. Look, the US natural gas boom is hurting Russia – it makes it reassess the energy strategy, profits and prices. And that is just not an end,” the Lithuanian expert pointed out.
This does note bode well for Gazprom, agrees Krutikhin.
“If the US LNG export endeavor pans out well on a larger scale in Europe, it will bring quite gloomy times for Gazprom. Liquefied natural gas is kind of trending now in Europe and the demand for it will, certainly, be increasing, which is bad to Gazprom. We may be seeing a glut of liquefied natural gas in the global markets and in Europe first of all, so all that will push the Gazprom gas price constantly down, a bad omen to the Russian company,” the Russian expert said.
If it happens, it will be also affecting the prices of long-term gas contracts.
“Obviously, Gazprom will be inevitably dealing with the shrinkage of its markets which we already see happening in the tiny Baltic countries of Latvia, Lithuania and Estonia. I reckon this is imminent in all Northern Europe. Look, the United Kingdom has already refused to sign new contracts with Gazprom, as well as Belgium, France and the list will be growing,” Krutikhin noted.
As a result of fewer clients, Gazprom, he says, has already put on hold the expansion of Nord Stream gas pipeline and frozen new gas extraction site plans, in Bolonensk, for example.
Yet it’s too early to write off Gazprom, Krutikhin warns, as the US, to different estimates, will be able to provide Europe by 2020 only 15-16 billion cubic of meters of gas yearly.
“For comparison, the Russian supplier’s exports to Western Europe last year amounted to some 125 billion cubic meters of natural gas. But the United States has the capacity of producing cheap LNG and its output will be surging. Considering the surplus of natural gas in the Asian markets and elsewhere, the prospects of European market, for many suppliers - and the Americans, too - seem very good,” he emphasized.
Gazprom could also get a blow from the European Commission, which launched an antitrust probe against it back in 2012.
An unfavorable ruling will likely require the Russians it to eliminate any remaining destination constraints, or, some American experts say, possibly even to replace oil-indexation with hub-based pricing formulas in all of its long-term supply contracts.
Gazprom may also end up with paying fines up to 10% of the company’s annual revenues in the markets.
Lithuania hinges its fate on America
With the Russian gas giant going through hard times, Lithuania feels it cannot miss its new chance with the US which the Baltic country sees as a fulcrum of its national security, defense and, without exaggeration, existence.
Amid the threat from the East some of the Lithuanian officials’ public rhetoric, like the statement coming from the lips of the Lithuanian Energy Minister made during his recent visit to the US, illustrates the perception well.
“There is much discussion now as to whether the US should supply arms to Ukraine. However, a decision to supply energy resources may be no less important than arms. If the US started supplying energy resources to other countries, that would deprive Russian of the key weapon it is now actively using, which is energy blackmail,” Rokas Masiulis, the minister, said. He added: “The US energy sector operates very efficiently and, therefore, it has a competitive advantage over those exporters that are using energy as a tool of political pressure. The activities of the latter are not as efficient.”
It is clear that Lithuania’s main goal is to rid itself of Gazprom.
“Indeed, that is exactly what Lithuanian wants - ditch Gazprom as soon as possible and rely on more reliable energy suppliers, who also happen to be long-term credible partners,” Vytautas Bruveris, a known Lithuanian commentator, told Natural Gas Europe.
But he also points out to something that all the Lithuanian power echelons remain mum on: economics.
“With all focusing on the geopolitics, I just don’t hear anything about the economics. How much the US natural gas imports will cost? How will the country’s Klaipeda LNG terminal be able to increase its competitiveness which lags now? What will happen with the contract with the Norwegians? How the other LNG facilities in the region - in operation already or about to be built –will affect the Lithuanian terminal? There are quite many questions to be answered, but I don’t see anyone willing to do it,” the analyst noted.
“No doubt, the US liquefied natural gas’ deliveries to Klaipeda LNG terminal would significantly boost Lithuania’s security, but, again, I haven’t heard anything on the costs. If some estimation in that regard has been done, it is definitely kept under the lock from the public. Unless the data is out and available for the scrutiny, there will always be a suspicion the whole undertaking might be unviable economically,” Bruveris said.
Gazprom’s recent announcement on the gas price cut up to 30 percent to some of the clients have gone unheeded in Lithuania, though some politicians, like Zigmantas Balcytis, a Social Democratic euro parliamentarian, insists Lithuania should explore the possibility.
“Cat-and-mouse game” is ongoing
Other Lithuanian experts such as Martynas Nagevicius, head of Lithuania’s Energy Consultants Association (LECA), are left scratching their heads over the plans.
“Klaipeda LNG terminal is necessary, because it, first of all, is a means of our safety – like a jet-carrier, tank or another weapon. It is will be necessary as long as our economy will depend on the supply of natural gas, especially when the disruption of the supply coming from the single source would be very detrimental to the economy,” the LECA head told. “When the gas consumption will considerably decrease in the near future, we just won’t need the terminal,” he insists.
The expert says he “cannot see” how Lithuania will to outstrip other, much bigger European LNG markets with already developed and fully functioning gas supply infrastructures.
“The economics of the US LNG endeavor is opaque, to put it mildly. But if the United States singles out Lithuania in the bunch of possible LNG importers, then, definitely, it’s worth pursuing the bid. At the end of the day, the US natural gas price in Europe will be considerably lower than that by Gazprom,” the expert said.
He says that, for now, there will be some “cat-and-mouse play” ongoing between the EU, US and Gazprom over who can supply cheaper gas and who makes a reliable partner.
“The near future will show how it plays out, but the US hold the ace card now,” the association president told Natural Gas Europe.