Kristiina Visnapuu, RKK/ICDS
Lately it seems like LNG terminal projects have been popping up like mushrooms after a rainstorm. To begin with, there is the long-promised regional terminal, to be partly funded by the European Union, which now might turn into two separate terminals – one in Finland and one in Estonia. The second one is the smaller Klaipėda terminal in Lithuania, with a promised completion date of December 2014. And the third is the fully privately-funded Sillamäe project in Estonia, which recently has reentered the picture after being considered virtually dead by experts. If those weren’t enough, Latvia’s government is now claiming that it “would only be logical” if the country gets its own terminal as well. Given that the total annual gas demand of the three Baltic countries and Finland combined is only 10 billion cubic meters (bcm), the question then arises: is there really a market for more than one terminal in the region?
Building a regional LNG terminal as part of the Baltic Energy Market Interconnection Plan (BEMIP) is one of the EU’s Projects of Common Interest (PCI). In December 2012 three possible locations were judged suitable by a Booz & Co. consulting report requested by the European Commission: Muuga & Paldiski in Estonia and Inkoo in Finland. While both Helsinki and Tallinn wanted Brussels also to decide among those options, the Commission chose to leave it up to the two countries themselves. After months of little to no progress towards a compromise, Estonian Minister of Economic Affairs & Communications Juhan Parts recently proposed constructing two small terminals, one in Paldiski and one in Inkoo, in lieu of a larger regional facility. Muuga terminal was swiftly left out of the conversation. Nevertheless, Joop Jonker from Vopak, the company in charge of the project, has recently announced that in case the regional terminal will not be built in Muuga, they will still build a smaller, about 30 000 cubic meter, terminal which will then mainly be for marine bunkering.
Estonian Minister of Economic Affairs & Communications Juhan Parts recently proposed constructing two small terminals, one in Paldiski and one in Inkoo, in lieu of a larger regional facility. The Muuga terminal option in Estonia was left out of the conversation. Nevertheless, Joop Jonkers of Vopak LNG, the Dutch company in charge of the project, has recently announced that even if the regional terminal is not built in Muuga, Vopak will still construct a smaller facility (with a capacity of about 30,000 cubic meters) which will then primarily serve the marine bunkering market.
The Estonians also fear that the Commission may ultimately decide that the Finns get to build the terminal. In theory, since the overall goal of a regional terminal is to increase the security and diversity of the region’s gas supply, it should not make a difference which country the terminal is physically located in. In practice, of course both countries want to host the terminal for themselves. First, both want the direct economic benefits that come with having the terminal and its associated infrastructure. Second in Estonia’s case at least, is fear of Gazprom. If the project is awarded to Finland, there is some doubt about whether building a terminal operated by Gasum—a company in which Gazprom is a major shareholder—will really serve the purpose of promoting supply diversity in the region.
Another Baltic LNG project is the floating terminal in Klaipėda. Since Lithuanians have been the ones most affected by Gazprom’s price manipulation tactics – paying the highest price for natural gas in the EU – to accelerate the process of diversifying suppliers the Lithuanians decided to build their own terminal. This has been viewed as a move contrary to regional cooperation, since the regional project still being debated by Estonia and Finland was supposed to cover Lithuanian demand as well. At the moment it seems like this might have been the right decision; the Klaipėda LNG terminal is nearing construction and will start operating relatively soon, whereas the question of where to situate the regional terminal is far from settled. Nevertheless, there are still some questions surrounding the Lithuanian project that remain to be answered, such as: who will supply it? What will its market be — especially if the final price to consumers is higher than that of pipeline gas from Russia?
Lithuania has a long history of tense relations with Gazprom, with Lietuvos Dujos recently deciding to initiate yet another arbitration case against the Russian gas giant. Just when it seemed like the Lithuanians had given up hope that anything will come out of negotiations with Gazprom, they have now decided to take another shot at it. If they succeed in their goal and Gazprom does lower natural gas prices (or if Gazprom lowers prices on its own to compete with the new terminal) it might end up working against the LNG terminal. The current rationale for the LNG terminal is that, even though LNG prices on the world market are generally higher than the price of piped Russian gas, the latter is so high in Lithuania that LNG serves as a viable alternative. If natural gas prices go down it might render LNG uncompetitive.
Furthermore, even though regulations have been established to prevent any single supplier from holding a monopoly of the Klaipėda terminal’s capacity, in practice Russian gas might still dominate. Currently, Russia is preparing to liberalize LNG exports, with terminals planned for the Baltic Sea region as well. Though the bulk of such exports would most probably be oriented towards Asia, there is still a strong possibility that at least two if not three Russian companies (any combination of Novatek, Rosneft, and Gazprom) might operate in the region—and could thus legally control prices at the terminal.
At this stage, however, nothing is certain; things could well turn out better than expected for Klaipėda. There is hope that an EU-US free trade agreement might soon be signed, opening European markets for cheap US unconventional gas production—something for which many Central and Eastern member states, especially Lithuania, are lobbying quite actively.
Thirdly, a former possible location for the regional terminal – Sillamäe harbor in Estonia, one rated as least viable by the Booz & Co report – has risen from the dead. Although it seemed that being denied PCI status by the EC meant that that was the end of it, Sillgas kept developing the project. At the moment the project is further along than the other two Estonian candidate sites (Muuga and Paldiski), according to Endel Siff, the new head of the company and its sole board member. Arguably, the fact that a businessman of Siff’s experience just acquired half of the shares in the company gives much more credibility to the undertaking. Not only is he considered the pioneer of oil transit in Estonia (the owner of two ports), but other successful ventures include companies that operate in fields from laser diagnostics to renewable energy and faming. Hence, the question: why build an LNG terminal in Estonia, where gas consumption is quite low (both in absolute terms and relative to the region as a whole)?
Undoubtedly, Riff is surely thinking ahead; it is true that demand for LNG is growing. Fair enough, but to build a terminal that is bigger than the one that is supposed to cater for the whole region seems still slightly excessive (the regional terminal is planned to have a storage capacity of 320, 000 cubic meters equivalent to about 4 bcm per year in annual deliveries, compared to a figure of 480,000 cubic meters for Sillamäe). Either Siff is betting on the very far future, or he is hoping that Estonia and Finland cannot solve their differences and will miss the deadline for receiving EU funding.
Adding all these together, the region may soon go from having no LNG terminals to having too many. And this isn’t even the end of it. After Minister Parts came up with the compromise of two LNG terminals instead of one, the Latvians, who until then had accepted that either Estonia or Finland would host the terminal, started thinking that maybe they should, in that case, also build their own. They have the right to do so, of course. But one must wonder whether they know something about rising regional gas demand (Latvia’s is widely expected to be flat) that no one else does—since informed predictions do not indicate anything that will suddenly boost the need for gas in the region this much.
Certainly, there are new sources of demand—ones that were not anticipated as late as 2011, when the Lithuanians decided to move forward with the Klaipėda project. One such new use for LNG is in the shipping industry (known as “marine bunkering”) because stringent new EU sulfur emission restrictions come into force in 2015. That is one of the reasons Finland is building small LNG terminals near major industrial centers, with the first planned for Tornio. At the moment most vessels on the Baltic Sea are converting to expensive diesel, meaning that prices for both passengers and commodities are going to be considerably higher starting next year. In the future LNG can be a viable alternative fuel but at the moment most of the ships are not equipped with the necessary technology; converting them will be so expensive that, in light of current world market prices for LNG, it simply makes no sense.
It is quite likely that the demand for gas for electricity production will rise over the longer term, especially since it seems like EU is scaling down its commitment to reducing carbon emissions and promoting renewables. All in all, it is quite clear that the market for gas in the Baltics (as in the whole world) is on the rise and in the long run all these terminals can benefit the consumers, but the current overly ambitious projects also have to somehow survive in the meantime. With a market that consumes less than 10 bcm per year it seems rather unlikely. Even though long-term planning is a welcome notion in the region, these mushrooms are likely to rot before they get eaten.
RKK/ICDS (http://blog.icds.ee/article/ln... )
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