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Lithuania Towards the Security of Gas Supply

Typography

Lithuania, Latvia, and Estonia, like many other countries in Europe, are facing challenges in the energy sector in three main dimensions: security of energy supply and competitiveness and sustainability of the energy sector.

The development of the gas sector in all three Baltic countries was determined by the same historic and political circumstances, as well as scarce energy resources. After the collapse of the Soviet Union, all three countries had only one gas supplier, Gazprom, which has also partly privatized the gas transmission system operators in these countries. Because all natural gas resources used in the Baltics until the end of 2014 were imported from Russia by Gazprom, the three Baltic countries were not able to satisfy their internal gas demand at competitive prices. The natural gas markets of Lithuania, Latvia, and Estonia were not integrated into the European natural gas markets and therefore remained isolated from the other European Union member states. Consequently, the currently operational cross-border interconnections exclusively allow for natural gas imports from Russia without any other pipeline alternatives for diversified supplies. By the end of 2014, the natural gas markets of all the three countries were absolutely concentrated, i.e. were fully dependent on the single external natural gas supplier, Gazprom.

The situation has led to unreasonably high gas prices in the Baltics and only one supplier with no other alternatives. The market monopoly possessed by the single external supplier of natural gas resulted in unreasonable, discriminatory, and excessive pricing for imports of natural gas. The exclusive market position of Gazprom and its commercial influence upon dominant internal market participants (importers and suppliers) allowed for unilateral marketing and pricing policies without any regard to market-based processes worldwide.

While significantly overpaying for gas, Lithuania has made few important decisions: to go for full ownership, unbundling the gas transmission system operator when implementing the European Union Third Energy Package and developing a liquefied natural gas (LNG) terminal. Both of the decisions were finally implemented in 2014.

The transmission system operator, in which Gazprom had part of the shares, was unbundled from the supply activity, and the shares owned by Gazprom in these companies were bought back from it by the Lithuanian state and state-owned enterprises.

As to the LNG terminal, in the summer of 2012, the Lithuanian parliament adopted the Law on Liquefied Natural Gas Terminal, which provided for the basic legal requirements and principles for LNG terminal construction, activity, and operation. One of the fastest implemented projects in the Baltics, the LNG terminal in Lithuania was launched on December 3, 2014 and now operates successfully. The Lithuanian LNG terminal is based on FSRU (Floating Storage and Regasification Unit) technology provided by Hoöegh LNG. FSRU is permanently moored to a jetty built in the Curonian Lagoon in the southern part of the port of Klaipeda. The LNG terminal is of 4 bcm capacity, enough not only for Lithuanian consumption but potentially by the other Baltic countries. According to the LNG terminal operator’s information, when operating on a full load, the LNG terminal is capable of filling 75% of the whole gas market of the Baltic States.

Thus, following the implementation of these decisions and the launch of the LNG terminal in Lithuania, the situation has changed. Lithuania has ensured the diversification of gas supply sources and is now is one step closer towards the security of gas supply. Based on the adopted regulations, there is a designated supplier, UAB Litgas (a company responsible for LNG supply and trading via the LNG terminal), which has an obligation to import at least a minimum gas quantity necessary for uninterruptedible LNG terminal operation. In the summer of 2014, UAB Litgas has signed an LNG supply contract with the Norwegian company Statoil, which offered the most favorable terms during the tender. Statoil will be supplying annual volumes of 540 million cubic meters of natural gas to ensure the continuous operations of the LNG terminal. The LNG terminal and Statoil LNG supplies will ensure a new gas pricing policy which will be linked to the international markets.

Even though the LNG terminal capacity is enough to serve the Baltic countries, there is still a way to go until the other two Baltic countries can fully benefit from this project. There is still a need for infrastructure development to allow Latvia and Estonia to benefit from the Lithuanian LNG terminal. The underground gas storage facility in Inciukalns, Latvia, could serve as a balancing point for the LNG terminal, however, Latvia must finalize the implementation of the European Union Third Energy Package in the gas sector.

Therefore, regionally, in order to ensure security of supply to all the Baltic States, the situation still requires implementation of joint additional measures by all the three partners.

By Jaunius Gumbis, Partner, and Dovile Greblikiene, Associate Partner, Lawin

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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