Energetics: Lithuania may be among the great profiteers

BP‘s Energy Outlook predicts a loss of significance for gas pipelines. The Baltic States may be among the great profiteers

 

Lithuania: Natural gas as a primary source for energy

[dropcap size=small]I[/dropcap]n comparison with Western Europe, the winter months in Lithuania can represent a severe test – temperatures of -10 or even -15°C are no rarity when looking at the thermometer.

Still, the atmosphere tends to become even more frosty when the heat costs billing procedure is to come: The price charged for natural gas is approximately 30% higher in Lithuania than the German price level, according to a report of the European Commission.

The gas supplier, the Russian company Gazprom, points to an internal formula to calculate the price of gas explaining the differences in price levels among different countries.

Nevertheless, a range of experts states that primarily a country‘s dependence on gas determines the price.

It appears to be Lithuania‘s misfortune that natural gas represents its main source of energy generation and therefore represents a vital factor for the economy.

In addition, the supply pipelines are altogether operated by Gazprom, giving the former Soviet republic of Lithuania no alternative to Russian deliveries.

 

It was not always so

[dropcap size=small]B[/dropcap]ut this has not always been a matter of course. As recently as 2009, the nuclear power plant Ignalia in the east provided not only the domestic market with energy but even made Lithuania an exporter of electricity.

In these times, the percentage of electricity from nuclear generation in proportion of the entire energy sector was as high as nowhere else in the world. However, in negotiations regarding Lithuania joining the European Union a key condition was to shut off the nuclear power reactor as it stemmed from the same production series as the reactor in Chernobyl giving rise to severe safety concerns.

Since a few years, the former centerpiece of Lithuanian energy generation is being stripped down for estimated aggregate costs of 2.9 billion Euro.

The social consequences became obvious when people from surrounding areas took to the streets as their energy prices tripled in a minimum of time.

Nevertheless, a nationwide referendum revealed a refusal of 64.8% against the proposed reconstruction of a nuclear power plant in Visaginas.

Additionally, Russia already announced the construction of new power plants in immediate proximity, for instance in its exclave Kaliningrad, which would make Lithuanian reconstruction plans redundant and uneconomically.

So is the status quo without any alternative?

 

Lithuania’s new bearer of hope is 294 meters long,
comes from Korea and answers to the name of “Independence”

[dropcap size=small]T[/dropcap]he transport ship is part of a new plant in the port of Klaipėda, designed for storage and preparation of Liquefied Natural Gas (LNG).

Grafik EnergieAdvertised as a breakthrough on the journey to more independence in energy issues by Lithuania‘s president Dalia Grybauskaitė, the storage capacity of 170,000 cubic meter is expected to cover up to 90% of the Baltic State‘s gas demand.

The plant i s priced at approximately 145 million Euro and will be provided with liquefied natural gas by a Norwegian energy company.

This year’s “Energy Outlook 2035” by BP, outlining the most probable trend in the energy sector until the year 2035, appears to confirm the initiators in their decision.

The rising oil and gas production of the United States (“Fracking”) leads to an evolution of former trade patterns. Energy is increasingly transported from west to east instead of the other way around.

Furthermore, BP predicts a continuous increase in the worldwide energy demand due to a growing world population (1.6 billion additional people until 2035) in combination with a doubling of the worldwide GDP (Gross Domestic Product).

Especially the economies in India and China hold a key position in the estimated yearly increase in energy demand of 1.4% (altogether 37% until 2035) while the OECD states only expect a growth of 0.1% per year and even a decrease beginning in 2030.

Although oil will most likely keep its position as the most important source for energy generation, a strong increase in the proportion of gas and renewable energies is expected.

By contrast, coal is predicted to await a dark future as climate protection measures and a slowing industrialization in Asia undermine its future outlook.

 

Lithuania’s investment in LNG terminal: A safe investment in the future

[dropcap size=small]O[/dropcap]verall, the changes benefit gas as an energy source making it the potentially strongest sector of growth in the future energy business.

The technology to liquefy gas and the resulting ability to transport it easily over long distances using pipelines or other means of transportation are likely to lead to an increasing integration of global markets and a convergence of price levels.

Actually, BP expects that a major amount of additional trade with gas will be registered in LNG.

On the other side, pipelines tend to lose market share in respect of the new more flexible rivalry.

In Europe, covering about 50% of its gas demand through imports whereby 80% fall upon pipelines which are particularly operated by Russia, the outlook will most likely be received with interest.

BP assumes that Europe’s dependency on gas imports will even increase (from 50% to 75%), primarily associated with an increased demand.

Nevertheless, within the next 20 years the amount of gas transported through pipelines is likely to decrease amounting to two-thirds of the overall consumption.

Insofar, Lithuania’s investment in a LNG plant appears to be meet the requirements of the time, especially as a similar plant already exists in Poland and further plants are in process of planning in Scandinavia and the Baltic region.

 

Not everyone shares the opinion to regard the actual trend as a positive one

[dropcap size=small]I[/dropcap]ndeed, not everyone shares the opinion to regard the actual trend as a positive one.

Admittedly, Lithuania’s dependency on Russian gas deliveries and the price level way above the European average are noticed. But if LNG will be the promised salvation is doubted.

Experts see the rising energy demand of Asian economies as a threat as they might be willing to pay higher prices than the Europeans.

To prevent the European LNG plants from being left without deliveries, long-term contracts have been signed that grant attractive terms especially to the suppliers.

Grafik Energie 2The Polish LNG terminal, for instance, has to deal with prices for liquefied gas lying about 50% higher than gas from Russian pipelines would have been priced.

Nevertheless, there are no tendencies noticeable to change the policy of diversification.

This fact is attributable to Eastern European States granting independence from Russia a higher significance than low costs short-run which is historically justified. Especially the winter 2009 lingers in the memory when Gazprom abandoned its gas deliveries to the Ukraine also resulting in supply shortages in neighboring countries.

That the Ukraine shortly afterwards signed a new contract permitting the Russian fleet another 25 years of access to the port in Sewastopol and in return Gazprom granted a discount on Ukraine’s gas price clearly reveals the connection of political claims and economic pressure.

That Russia’s current gas monopoly is in danger because of liquefied gas simultaneously threatening to cut its political influence puts Russian authorities on the spot. On the one hand they desperately try to frustrate the gas pipeline from Azerbaijan to Europe (“South Stream”), on the other hand the gas prices for the Baltic States were reduced even before the plant in Klaipėda commenced operations.

Whether LNG can fulfil the expectation to be the way to the desiderated and promised independency is still controversially discussed. Still, the effects that could already be noticed are real.

In general, plants of that kind such as the ones in Klaipėda or Poland can only be a component of a new energy policy which needs to go far beyond to achieve real autonomy.

Higher storage capacities and an improved interconnection between the European States are inevitable.

Even completely different approaches such as an improvement of the energy balance through better heat insulation can be just as promising as an expansion of renewable energies where the Baltic States lay under the EU’s average during the last years.

Nevertheless, it can be stated that politicians have discovered the area of energy safety as a central field of interest and the prospective developments promise to be exciting.

 

Sources:

Energy Outlook 2035 (pdf) | Eurostat – Statistics explained | FAZ.net: Gas aus Russland: Die Macht, die aus den Röhren kommt | Financial Times

 

 

 

 

Mirko Kruse
The author is 23 years of age, studies international economics and is currently living in Vilnius.