GAS LNG Norwegian Corridor 14 June, 2018 10:00 am   

Baltic Pipe can win the LNG-Gazprom rivalry

In spite of major savings brought to Lithuania by the floating terminal in Klaipeda, the Lithuanian counterpart of Grupa Azoty complains that it obligatorily pays for the maintenance of the object. This is another argument for the Baltic Pipe gas pipeline, which is to provide a stable alternative to supplies from Russia, writes Wojciech Jakóbik, editor-in-chief of

Savings of 130 million euros

Nathalie Hinchey’s study at Rice University “The impact of providing alternative sources of supply on Russian-European gas prices” shows that thanks to the alternative in the form of FSRU in Klaipeda, the Lithuanian state was able to reduce prices of supplies from Russia by 25 percent, which brought EUR 130 million savings. Anna Mikulska from Rice University talked about it during the GAZTERM 2018 conference.

Relief for chemistry

However, not everyone is happy with such situation. The profitability of the FSRU is guaranteed by a support mechanism in the form of an obligation to purchase LNG from Klaipeda. Achema, which is the equivalent of Grupa Azoty in Lithuania, complains that it must reduce production and quench the part of the installation due to high prices of natural gas and low prices of its products.

– We have a very unfavorable situation called price scissors, because global fertilizer prices are low and gas prices remain very high. The price of gas increased more than in the winter. For this reason, we are forced to respond to the difficult situation of our installation and take action to regain control over the situation – said Ramunas Miliauskas, president of Achema.

– All fertilizer producers in Europe buy gas at similar prices, but Achema has to pay a fee of around 20 million euros for the LNG terminal per year, even if it does not use local gas. This increases production costs and undermines competitiveness on the domestic and global market – warned the head of the company. Lithuanian energy minister Zygimuntas Vaiciunas assured that the maintenance of the LNG terminal in Klaipeda will be about 40 times cheaper in the middle of next year.

Achema has filed a complaint under EU law on state aid against the FSRU support mechanism, which must be co-financed. Since 2012, the Lithuanian terminal law imposes a fee on all users of the gas transmission system, which goes to the account of Klaipedos Nafta, the terminal operator. In 2015, the law was amended to pay for the purchase of gas from Statoil by Lithuanian Litgas.

In this way, the lease of the terminal in Klaipeda borrowed in 2014 for 10 years is co-financed. In the period of decline in oil prices, and thus the costs of contracts indexed to it, such as the contract with Gazprom, recorded worse results. In April this year, LNG purchases fell by 19,19 percent compared to the previous year. The FSRU provides Lithuania with about half of the national needs, the rest of the demand comes from the Russian Gazprom.

Mysterious sinusoid

The Polish Grupa Azoty also complains about the price squeeze effect, but sees the reason somewhere else. According to Azoty, the price of gas has been speculated. – The beginning of 2018 was difficult if we look at what was happening with gas prices. We have contracts that are comparable to those of competitors on the market. What happened in February and March with gas prices requires analysis and consideration of how it was possible that such a sinusoid occurred at gas prices. The difference between the highest and the lowest prices of the raw material amounted to 300 percent – said Wojciech Wardacki, president of Grupa Azoty. These fluctuations forced the Polish company to limit production.

The profitability of the Polish LNG terminal is guaranteed by the fact that it is state-owned, and the entire capacity by 2035 has been reserved by Polish PGNiG. It is also the main supplier of the Polish chemical company. Azoty declares that they are considering the possibility of renegotiating the prices of supplies from PGNiG in the event of a price improvement on the market.

The problem is that the gas company is dependent on the contract with the Russian Gazprom, which expires in 2022. Poles must buy a minimum amount of gas from this direction. Meanwhile, the price dispute remains unsettled and went to the Stockholm arbitration tribunal. According to PGNiG, the offer from the Yamal contract is the most expensive among available ones. The company increases LNG purchases, which in spot delivery will be more attractive than Russian deliveries. In the first quarter of 2018, PGNiG imported 31 per cent more LNG than in the corresponding period of the previous year.

Security and competitiveness

Poland and Lithuania remain customers of the Russian Gazprom. The alternative in the form of LNG terminals allowed Lithuanians to reduce the prices of supplies from Russia. The supplies of liquefied gas themselves, however, are periodically profitable, depending on market conditions. When they are not, their costs are felt by the participants in the gas market. The situation in Poland is to be improved by the Baltic Pipe gas pipeline, which will allow imports to 10 bcm in 2022. These deliveries are to be permanently competitive to the offer from Russia, because they will be deprived of transport costs quoted on deliveries of liquefied gas.

However, depending on the level of EU support, the costs of the facility will be more or less reflected in gas tariffs. The state will have independence, but the market should receive a lower price of gas. One can hope that this will be the case, because it results from the experience of more mature markets, such as the United Kingdom, which, thanks to the expansion of gas infrastructure, has gained a price reduction and independence at the same time. The discussion on the costs of diversification continues.