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2014-05-28 18:20:00

LITHUANIA: GAZPROM'S HELP

LITHUANIA: GAZPROM'S HELP

Lithuania's plan to dock a floating liquefied natural gas terminal on the Baltic coast later this year played an important role in negotiating lower prices from Russian gas supplier OAO Gazprom, according to the nation's energy minister.

The Baltic nation is currently dependent on Gazprom for 100% of its gas, and Lithuanians have been paying 15% higher prices than the European average for gas. Concerns about price and energy security prompted Lithuania to lease a Norwegian-built ship--dubbed 'Independence'--that will allow it to process deliveries of liquefied natural gas from non-Russian sources and deliver it to Lithuanian customers at potentially lower prices.

The Independence recently left the South Korean shipyard where it was built and is expected to begin operating at the Klaipeda seaport in December.

Lithuania's state-owned company Litgas is currently in discussions with Norway's Statoil ASA in the hope of striking an LNG supply agreement enabling the Lithuanian gas company AB Lietuvos dujos to take delivery of an annual 0.55 cubic meters of LNG. It will also buy LNG on the spot market.

The Baltic nation of three million people receives the Independence amid a crisis in Ukraine and rising worries over Europe's reliance on expensive and potentially uncertain fossil-energy imports, especially from Russia. In 2012, the European Union imported 88% of its oil, 66% of its gas and 42% of its coal.

Disputes over natural gas supply have been a centerpiece in tensions between Russia and Ukraine.

In an email interview with The Wall Street Journal, Lithuania's Energy Minister Jaroslav Neverovic said the new terminal played a role in recent negotiations with Gazprom that resulted in a new contract expected to deliver at least a 20% price cut starting in July. The pricing for the new contract hasn't been disclosed.

"Without doubt, the fact that Lithuania will have (an) LNG import terminal operating in less than 200 days is an important factor in the negotiations with Gazprom," Mr. Neverovic said. He added a potential arbitrage case between Lithuania and Gazprom also played a role.

Gazprom officials didn't respond to requests for comment. Discussions between AB Lietuvos dujos and Gazprom executives had been ongoing for at least several months concerning altering the existing contract, which runs through the end of 2015.

Mr. Neverovic said the Baltic nation, the first to break away from the Soviet Union in 1991, needed to commission the Independence because Lithuania's dependence on Russian gas was proving too costly. Comparing with Gazprom's lower prices to the neighboring Baltic States, Poland and Germany, "the inadequacy of natural gas pricing in Lithuania was evident, " he said.

The Independence is a large LNG carrier that is also equipped to heat the LNG back to normal temperature and pressure from its highly compressed state at minus 162 degrees Celsius (-260 degrees Fahrenheit)--a process called 'regasification.'

The terminal has a capacity of 4 billion to 5 billion cubic meters of gas a year, more than enough to meet Lithuania's annual demand of 3 bcm. In fact, the capacity nearly meets the entire consumption of the three Baltic countries, including Estonia and Latvia, which equals 5.5 bcm a year.

In an interview, Sveiung Støhle. chief executive of the Oslo-based company that operates the Independence, Höegh LNG, said floating terminals are designed to immediately diversify energy supply.

"The customer that used to buy from a single supplier and a single pipeline, can now buy LNG from the U.S., Nigeria, Australia, or wherever", he said. "It provides a commercial and political freedom."

Lithuania will now be connected to a rapidly growing global LNG market providing increased flexibility for gas importers. Global LNG output was about 312 billion cubic meters in 2013, equal to about two-thirds of the EU's gas consumption, and production is set to rise by more than 100 bcm by the end of the decade, according to independent consultancy Wood Mackenzie.

Karen Sund, head of Oslo-based Sund Energy analysis firm that assisted Lithuania, said in an interview the Baltic nation's leverage will likely grow as LNG supply is diversified.

"Twenty years ago, you needed good relations, with long contracts. In a more liquid market, there is competition. If one supplier starts to argue, you'll have four others to talk to," she said.

"The Ukraine crisis has focused the minds of some buyers in Europe on energy security," said Stephen O'Roarke, Global Gas Team analyst at Wood Mackenzie. "They may look for other sources of pipeline supply, or to build LNG import capacity. But it could also mean a dampening of gas demand itself."

wsj.com

Tags: LITHUANIA, GAZPROM, GAS

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