Lithuania has historically imported its gas from Russia and Gazprom. This is about to change however, with the country’s first LNG Cargo being received at its brand new floating terminal. Analysis by Evaluate Energy shows that, by itself, the terminal represents just a small amount of gas that Gazprom needs to find a new market for, but Lithuania’s new found potential independence does form part of a major overall change in the European gas market. This change in Europe means Gazprom will have to adapt in order to remain a major player and to make sure Russia’s new Asian-focused enterprises represent a true success and sustained growth for the country, rather than just a way of filling a hole in the country’s finances that Europe leaves behind .
Lithuania’s First LNG Cargo Arrives
Lithuania’s four year project to introduce LNG imports to the country is complete. The country and the companies involved have been working hard to make this endeavour a reality and Monday 27th October 2014 saw the Baltic nation receive its first ever LNG cargo, around 100,000 cubic metres, or approximately 3.5 million cubic feet (mcf), from Statoil’s Snøhvit terminal in Norway, according to media reports.
Lithuania’s new terminal is one of the world’s first import facilities to be located offshore on a floating vessel. The vessel, which is pointedly named Independence, was built by Höegh LNG and has an annual import and regasification capacity of 2.2 million tonnes per year (mtpa), or approximately 107 billion cubic feet (bcf).
This figure is very significant for Lithuania and could well prove significant for Gazprom. Russian supplies of gas to the Baltic state only amounted to 96 bcf in 2013 according to Gazprom’s annual report of the same year. This means that should Lithuania be able to source the entire capacity of its new import facility elsewhere each year, Gazprom would not be needed as a gas supplier any longer. This is very powerful leverage for the Baltic country; the supply contract between Lithuania and Gazprom is up for renewal next year according to media reports. Lithuania will not necessarily pull away from Gazprom completely of course; if the Russian giant’s notoriously expensive gas prices are lowered, to the point where Russian imports remain viable, due to Lithuania’s new found leverage, then why change? But the leverage is undoubtedly there. Norway’s Statoil will supply the Lithuanian facility from Snøhvit with 2.3 billion cubic metres (bcm) of gas per year, or 81 bcf, meaning around 76% of the Lithuanian facility’s capacity is taken up and 84% of Russian imports in 2013 have effectively been replaced already.
Death by a Thousand Cuts? – Europe Moving Away from Russian Supply
Source: Gazprom Annual Report 2013 (Other Europe represents a combination of gas supplied to all European countries that were each supplied with less than 5 bcm of gas by Gazprom in 2013, see note 3)
In reality, 96 bcf on its own is a very small figure as far as Gazprom in concerned – the company sold well over 8000 bcf to European and Central Asian countries in 2013. The potential complete loss of business in Lithuania will not, as a singular event, impact Gazprom’s financial position or its overall standing in Europe by too great a margin. But this new 96 bcf terminal is part of a desired general transition away from Russian supply by a large portion of Europe. Each move seems insignificant on its own, but together they could in fact end up having a substantial impact on Gazprom.
Starting locally, Lithuania’s terminal may provide gas in excess of what is actually required; after all, the 107 bcf capacity is over 10 bcf per year higher than Russian imports in 2013. Lithuania’s president Dalia Grybauskaite has been quoted by Argus as saying the terminal could meet 90% of the combined gas needs of Lithuania and its Baltic neighbours, Estonia and Latvia, which also have import contracts with Russia. Estonia and Latvia imported 25 and 39 bcf from Gazprom in 2013, respectively. If excess gas is marketed to these countries by Lithuania, it is another loss for Gazprom. Again, as the above chart shows, with all three countries 2013 imports combined, this amounts to another small total for Gazprom, but it is a potential loss of business nonetheless.
Poland is another country in the area with LNG plans on the verge of coming to fruition. Of course, Poland’s desire to break from Gazprom’s expensive gas prices has been well publicised over the past 5 years as its shale gas exploration plans have developed. As these plans began to falter however, LNG became another option. 2015 will see the first Polish LNG imports at the Świnoujście import facility, which will have an initial capacity of around 3.6 mtpa and plans for expansion are already underway. The initial import capacity represents around 39% of Russia’s sales to Poland in 2013. Expansion plans will further eat into this total and Poland still hopes that the country’s shale gas potential can still be realised before too long, despite the recent setbacks. All of these things will give the country its own leverage in price negotiations.
The Netherlands (part of “Other Europe” in the above chart) is one example of a country where evidence suggests that LNG has been used to move away from Russian gas. The Gate LNG terminal in Rotterdam came onstream during 2011 with annual regasification capacity of around 430 bcf; 2012 saw an approximate 37% reduction in Gazprom gas sales to the Netherlands, year-on-year.
All of these LNG imports still represent small numbers and it is a fact that Italy, France, Turkey and the UK all have LNG import facilities but still import a substantial portion of Gazprom’s total gas sales between them. So whilst LNG in Europe isn’t a major problem on its own to Gazprom or Russia, it is one alternative option and now undoubtedly a source of leverage for more European countries than before.
Other alternative options will present themselves to European gas importers in the coming years. The potential influx of gas from the giant fields in Azerbaijan to mainland Europe will provide at least the south eastern European countries on the above chart and a significant portion of the “Other Europe” contingent with a new option for gas imports. The potential arrival of LNG from North America could also play a very significant role in replacing Gazprom as a supplier or at the very least creating negotiation leverage as Gazprom’s long term contracts with the LNG-importing countries in the chart come up for renewal. The South Stream pipeline project, which is a highly controversial topic in most of mainland Europe, would bring more Russian gas into Europe if it is ever approved, but this is still highly uncertain; the conflict in the Ukraine caused the EU to adopt a resolution that opposed the South Stream pipeline and recommend the search for alternatives. If Gazprom wants to remain a major player it seems as though it will have no choice but to adapt to a new pricing structure before too long. The pressure from all these sources, as well as increased global sanctions against Russia in recent times, will create a hole in Gazprom’s and indeed Russia’s finances; retaining as much existing business as possible will be key in making sure that the hole isn’t too big.
Alternative Plans – Russia Switches Focus to Asia after Decades in Europe
After decades of focusing on supplying gas to domestic, European and central Asian markets, Gazprom and Russia are now moving into Asia with some very lucrative opportunities on the table. Just how lucrative these actually end up being and how much growth for Gazprom and Russia they create is, however, very much dependent on how much of a market the company can retain in Europe.
In June 2014, Russia signed a huge gas supply deal with neighbouring China. The deal was for around US$400 billion and 38 bcm (approximately 1340 bcf) of gas annually, ranking as the biggest gas supply deal in history. The gas will be supplied from Siberian gas fields through a new pipeline for 30 years starting in 2018. This supply of 38 bcm should more than make up for the potential loss in business as more of Europe finds alternative sources of energy and, of course, this deal would probably have been signed had Europe been moving away from Gazprom or not. However, the level of potential success for Russia in signing this deal is now mitigated; a large portion of anything made in the Chinese deal could simply just replace lost income from Europe. This would presumably not be ideal; Russia will want the deal to create growth.
LNG is also becoming an option for Russia to continue exporting high levels of gas and the country’s proximity to the premium Asian market makes the country very attractive as a supplier – transportation costs will be lower than from other burgeoning markets such as Australia, Canada and the US. Gazprom is building a 5 mtpa terminal in Vladivostok (due onstream in 2018) and already exports 9.6 mtpa (full capacity) from the Sakhalin project in the far east of the country. Total Russian capacity by the end of 2018 is due to hit around 50 mtpa if all terminals are completed on time, which is a very striking figure considering there was not a single operational terminal until 2009. Again, as Asia is the prime market for LNG, much of this will be headed in that direction and this could prove to be an extremely profitable venture for Russia.
Overall, the singular event of Lithuania’s first LNG cargo may seem an insignificant blot on Gazprom’s, and Russia’s, landscape, but in reality it is another important part of the quickly changing European gas market. Obviously, the move to Asia mitigates the potential loss of business, but to make this venture a true success, it surely cannot afford to lose all business in Europe, as it will be simply filling a hole in its finances with an alternative buyer rather than beginning any substantial growth.
1) All Gazprom historical supply figures were sourced from Gazprom’s Annual Report 2013.
2) All LNG terminal information was sourced from the Evaluate Energy LNG Database, which holds information on all operational, planned and possible import and export terminals worldwide, including details on annual capacity, onstream dates, news, ownership information and project costs.
3) “Other Europe” is made up of Gazprom supply to the following countries: Bulgaria, Bosnia & Herzegovina, Croatia, Denmark, Finland, Georgia, Greece, Ireland, Moldova, the Netherlands, Romania, Serbia, Slovenia and Switzerland.
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