Lithuania plans to seek gas contract review from Norway

Algirdas Butkevičius said that the Litgas company was able to achieve competitive conditions and the Lithuanian authorities were quick to declare the beginning of an era of independence from the political prices of Gazprom
Algirdas Butkevičius said that the Litgas company was able to achieve competitive conditions and the Lithuanian authorities were quick to declare the beginning of an era of independence from the political prices of Gazprom

Due to the reduction of gas consumption in the country, the Lithuanian Parliament is ready to oblige the government to hold talks with the Norwegian gas supplier Statoil to revise the terms of the contract for the supply of natural gas. At the end of August 2014 the state company gas company Litgas and Statoil signed a contract for five years on the annual supply of 540 million cubic meters (the minimum amount necessary for the operation of the terminal) of liquefied natural gas to the floating terminal in Klaipeda (2.7 billion cubic meters of gas). Lithuanian Prime Minister Algirdas Butkevičius, commenting on the deal, said that "the Litgas company was able to achieve competitive conditions." The Lithuanian authorities were quick to declare an era of independence from the political prices of Gazprom.

The Lithuanian society's and the expert community's reaction to the construction of the terminal was ambiguous. Economists had initially indicated the unlikelihood of its profitability, for which it was necessary to pump an amount ten times larger than the current volumes. They also pointed to the onerous financial conditions (under a contract with the Norwegian HoeghLNG, it costs $189 thousand to rent a ship for a day, for a year – $68.9 million, for 10 years – $689 million), and the risks of fluctuations in the price of contract Norwegian gas, which is tied to the UK gas index (seasonality, strong demand in the Asia-Pacific region), which eventually will make gas imports uncompetitive and would increase the cost of utilities (heating and electricity) for the residents of the country.

Given the ambiguous nature of the large-scale project, the Lithuanian authorities should hold a referendum to gain public support. But the authorities chose to take a decision on their own, apparently fearing a recurrence of the negative scenario, when two years ago the people voted against another questionable project lobbied by the government (the construction of the Visaginas Nuclear Power Plant). This is not surprising, because the investment of hundreds of millions of euros by the EU infrastructure funds were at stake, that were supposed to be used by the construction companies of the port of Klaipeda, controlled by the Social Democrats.

The Lithuanian authorities for the sake of political expediency and momentary enrichment turned a blind eye to the stable tendency of decrease in consumption volumes of gas formed since 2010 (from 1.8 billion cubic meters to 1.3 billion cubic meters in 2014 – 30%). Due to the deteriorating economic situation many industrial manufacturers began to reduce their capacity, or, as in the case of one major gas consumer, the concern for the production of nitrogen fertilizers Achema (approximately 1 billion cubic meters), they just moved some of the manufacturing to Finland. In addition, the EU economic sanctions against Russia, which were actively promoted in Lithuanian diplomacy, led to an almost 50% decline in GDP growth in Lithuania (2014 – 3% in 2015 – 1.9%) and a hard slump in the economy.

As a result, the total gas consumption in the country has decreased, and the current costs on the service of the floating LNG terminal remained unchanged. To meet the demand for more expensive (in comparison with Russian pipe energy resources) Norwegian gas, the Lithuanian authorities, violating the competition law, ordered the large industrial enterprises to buy a quarter of natural gas from the terminal. Currently, the European Commission is considering the complaint of the Lithuanian Gas Association on the incompatibility of national legislation with European legislation (the law "On the terminal" is contrary to EU law, which stipulates that "the consumer has the right to freely choose his suppliers, moreover, suppliers have the right to provide free provision to consumers").

Thus, a year later after the conclusion of the "contract of the century" and the achievement of "energy independence" from Russia against the background of a sharp deterioration of the Lithuanian economy, it became clear that the Norwegian contract has become a serious encumbrance to the national budget.

This summer, Bloomberg informed about ongoing talks with Statoil on reducing the volume of LNG imports, with reference to the head of the Klaipedosnafta company, Mantas Bartushka. The news agency appealed to the Norwegian side for an explanation, which preferred not to comment on this information. Bloomberg later issued Bartushka's statement that "neither Klaipedosnafta, nor Lithuania are negotiating with Statoil to reduce the volume of imports."

It is noteworthy that in October 2014, during a press conference in the port of Klaipeda on the arrival of the first batch of gas, the Norwegian Minister for the EU and the European Economic Area, Vidar Helgesen, did not rule out that "liquefied gas delivered by Norway's Statoil may be more expensive than gas proposed by Russia's Gazprom. Responding to a question about what Norway will do if Gazprom reduces prices, Helgesen made it clear that the state is "committed to the principle of non-interference in pricing." That is, the commercial contract is a subject of economic entities' activity.

All this time, the Lithuanian authorities have delayed the negotiations with Gazprom, whose long-term contract expires at the end of the year, while continuing to exude optimism about energy self-sufficiency at the expense of alternative energy sources, as well as the possibility of replacing their main Russian supplier with liquefied natural gas from the US.

But the denouement finally arrived. Following the consultations in the Parliamentary Committee on Energy regarding the new model of the content of the LNG terminal, which was attended by representatives of the state gas distribution company Litgas, Klaipedosnafta (75% owned by the state), the Commission for Prices and the Energy Ministry, it was said about plans for setting the issue to the government on the need to renegotiate the contract with Norway.

Against the background of committee deliberations, the Lithuanian energy workers published a forecast of a sharp jump in prices for heating in connection with the reduction of natural gas consumption. According to Litgas calculations, "the minimum amount of gas necessary for the operation of the LNG terminal will be almost twice as high as projected demand for gas for energy producers in the next year." Experts of the company came to the conclusion that, in the case of implementation of gas through the existing delivery model, "the average price for producers of energy in the next year could grow by about 50%." Thus, all the gas in 2016 will be put out of the LNG terminal, which will lead to "30% higher prices for heat in Vilnius" (the Vilniausenergija company, which provides Vilnius with heat, has to buy all the gas from the terminal).

According to the Director General of Litgas, Dominykas Tuchkus, the current difficult situation is due to the recent changes in the energy market because of the reduction of consumption of natural gas, development of the biofuel segment, modernization of buildings (reduction of energy consumption), and the abolition of quotas for services of the public interest.

It should be recalled that the Lithuanian National Commission for Energy Control and Prices is responsible for the formation of the price of electricity. One of the components of pricing are services of the public interest (contributions to the development of renewable energy, cogeneration, security of electricity supply, optimization of power networks, disposal of radioactive waste, financing of strategic energy projects). Its cancellation allowed the ruling Social Democrats to reduce the cost of electricity for final consumers by 7% (the share of services (1.6 euro cents) for a total cost of 1 kilowatt-hour (20 euro cents) - 8%).

However, the desire of the Lithuanian authorities in the parliamentary election year to report as soon as possible to their constituents about the "successful" implementation of commitments destabilizes the internal energy market. The government was faced with a difficult dilemma: to leave the existing model of gas supplies unchanged, with the prospect of a jump in prices for heating, or to make legislative changes to the distribution of costs for maintenance of the terminal for everyone without exception (both suppliers and customers). The solution is unpopular in both cases, as it directly affects the interests of the electorate, which needs to vote for maintaining the continuity of the current government in a year, or increases the burden of costs on business, which is financing the election campaign of the same power.

That is, the Lithuanian authorities have to make all sorts of statements that in the case of Gazprom's "good" price, they "will buy Russian gas." In this connection, the question arises, and what about energy independence, US gas and biofuels?

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