Ukraine Crisis to Boost Baltic's LNG Imports
Spurred by the Ukraine crisis, the Baltic region is fast-tracking plans to boost its liquefied natural gas (LNG) imports, hoping to drastically cut Moscow's grip on the region's supply.
Russia's seizure of Ukraine's Crimea region has chilled political relations between Russia and the European Union, prompting governments across the bloc to look at ways to cut its reliance on Russian supplies, which meet around a third of the bloc's gas demand.
Europe had in any case been looking to diversify gas supplies after Russia's state-controlled Gazprom halted deliveries to Ukraine during price disputes in the winters of 2008-2009 and 2005-2006, disrupting supplies of Russian gas that is piped to Europe via Ukraine.
The urge to reduce Russia's energy grip is particularly strong in the Baltic region, where memories of Soviet dominance are still fresh.
Additionally, many Baltic states such as Estonia, Latvia, Lithuania and Finland rely entirely on Russia for their gas demand while the region's biggest economy, Poland, buys almost two thirds of its gas requirements from Russia.
Reuters calculations show that the plans being pushed ahead in the region could soon drastically change its energy supply, with Russia's share of Poland's gas market set to drop from 90 percent in 2009 to 66 percent in 2013 and with the potential to fall as low as 15 percent in the next two years.
"Poland will never be subject to any blackmail in this respect," Prime Minister Donald Tusk said last month.
While LNG has been prohibitively expensive in recent years, putting in doubt the region's plans to build costly terminals, political developments between Russia and Ukraine and global market movements now indicate that buying LNG cargoes could become cheaper in the next few years.
"Europe might be just lucky enough that the global LNG market rebalances towards the end of the decade," said Massimo Di-Odoardo, senior analyst at energy research and consultancy firm Wood Mackenzie.
"There are currently around 150 billion cubic meters (bcm) of LNG projects under construction globally, and we don't believe there is enough additional LNG demand outside Europe. This means that a lot of the LNG from the Atlantic and Middle East now being diverted to Asia will eventually come back to Europe," he added.
Benchmark Asian LNG price projections point to a 10-15 percent drop in prices between 2014 and 2017, enough to make LNG competitive with European pipeline gas.
POLAND SHAKES OFF RUSSIAN GRIP
Poland plans to start a 5 bcm per year capacity LNG terminal by next January to import gas from overseas countries such as Qatar and, later this decade, Canada and the United States, where a shale gas production boom has led to a supply glut.
Improved links with Germany, a shift towards using more domestically sourced coal and renewables, as well as plans to produce shale gas and import LNG could soon bring Russia's import share of Poland's 15 bcm demand to under 15 percent.
Neighboring Lithuania also hopes to begin importing LNG next year via the "Independence" floating LNG facility.
From 2015, the "Independence" will allow imports of 2-4 bcm of natural gas per year, potentially enough to meet all of the country's 3 bcm annual gas needs.
Beyond reducing Russia's grip on its supplies, Lithuania plans to use some of the fuel for shipping, where new environmental controls are coming into place in 2015, making LNG a competitive fuel with oil for small ships.
"We will be able to load LNG into smaller vessels and... supply smaller terminals in the Baltic countries," said Rokas Masiulis, CEO of Klaipedos Nafta, the state-owned petroleum company that will operate Lithuania's LNG terminal.
Some of that LNG for transport would go to Estonia and Finland, who also so far also buy all their gas from Russia. They signed an agreement in February to build either a single terminal that would give both countries on each side of the Gulf of Finland access through a planned pipeline, or to build two LNG terminals, one on either side of the Gulf.
Industry members involved in the decision say a final decision is expected in May.
With enough capacity soon in place to meet most of the Baltic's gas demand through LNG, pricing will be key to determine the new share of supplies.
So far, LNG import prices have struggled to compete with Russian pipeline prices.
A typical price to import a cargo of LNG is $16-20 per million British thermal units (mmBtu), compared with European pipeline prices of $8-17 per mmBtu.
The higher LNG price is a result of booming demand in Asia, where around 70 percent of global LNG trading takes place since a supply shortage after Japan closed its entire nuclear fleet. The closure followed the 2011 Fukushima reactor meltdown which led to LNG spot prices shooting as high as $20.5 per mmBtu.
Yet analysts say that some of the Asian LNG cargoes may become available for Europe very soon.
"If Japan restores its nuclear capacity before the end of this year that would free up the equivalent of 100 million cubic meters of gas a day. A good part of that gas could be diverted to Europe," said Mikhail Korchemkin, director of U.S.-based consultancy East European Gas Analysis.
Japan's government has said it wants to restart most of its nuclear fleet soon, and analysts say between one and two thirds of its reactors would pass the country's more stringent safety checks that were introduced after Fukushima.
BY HENNING GLOYSTEIN (C) Reuters 2014.