Lithuania’s “floating independence”

Lithuania made its first step toward energy independence on October 27, 2014. On that day, floating liquefied natural gas (LNG) storage and regasification unit Independence moored in the port of Klaipeda.

It was the first such facility in the Baltic States. Lithuanian President Dalia Grybauskaite said then that the event “has brought not only energy independence, but also political freedom.” Over 3.5 years, Lithuania built a unique vessel, which freed it from Gazprom’s shackles.

Officially, 100 percent of the vessel’s equity belongs to the Norwegian company Statoil, while Lithuania is only renting this “floating independence.”

Under the contract, the Lithuanian state-owned company Klaipedos Nafta (operator of the Independence) will be entitled to buy out the tanker at market price in a decade.

Its CEO Mantas Bartuska said during a conversation with The Day that the vessel’s rental came at 65 million dollars a year, and it was quite likely, in his opinion, that the Lithuanians would buy out the vessel before the decade ends.

The terminal is not cheap to own. Klaipedos Nafta signed a lease agreement for the floating terminal with annual throughput of close to 3 billion cubic meters of gas with the Korean Hoegh LNG in 2012. Under this agreement, the Lithuanian state-owned company will pay 689 million dollars in rentals over 10 years, while the construction of coastal infrastructure cost it 200 million euros (about 255 million dollars at the ECB’s current exchange rate).

IN THE BALTIC SEA REGION, THERE IS A SIMILAR OBJECT IN SWEDEN ONLY

Klaipedos Nafta obtained funding for the project, totaling over 300 million dollars, from the European Investment Bank with the government guaranteeing repayment.

Currently, Lithuania’s sole natural gas supplier is the Norwegian company Statoil. The price of the resource is calculated based not on the oil price, like the Russian Federation does, but rather with reference to the British NBP spot trading platform. This hub offers no public data, but experts say that even with the rent, seaborne gas is cheaper for Lithuania.

In addition to the price component, political effects are also important. Firstly, launching the Lithuanian LNG terminal is a step towards diversification of fuel supplies, which aligns well with European legislation. Secondly, Kaliningrad region of Russia is dependent on imports of natural gas from the Baltic countries, giving Lithuania a trump card in any talks about getting fuel supplied via the old route from the Russian Federation, since the very existence of the terminal allows it to negotiate lower resource prices.

The Klaipeda terminal is currently covering 90 percent of Lithuania’s natural gas needs, and every resident of Lithuania is paying for the terminal. Heating and natural gas tariffs include the cost of the terminal’s construction and operational expenses. According to Bartuska, it is no more than five percent of heating tariff, or about 0.03 euros per unit in monetary terms.

Until now, LNG was procured only by the government in Lithuania. However, company Achema, the largest private consumer of gas in Lithuania, recently signed a contract with Klaipedos Nafta. It has not received any gas yet, but supplies are already scheduled for it.

THE KLAIPEDA TERMINAL CONSISTS OF THREE MAIN PARTS: A FLOATING RESERVOIR WITH A REGASIFICATION PLANT, A VESSEL-MOORING QUAY, AND A HIGH-PRESSURE GAS PIPE COUPLED WITH THE MAIN GAS PIPELINE

Lithuanians hope that the terminal will achieve full capacity in 2018-19. It will become the regional hub then.

Lithuania built another gas pipeline in 2015. Now, all Lithuanian gas system is integrated into a ring, which has also significantly expanded access to gas received from the terminal throughout Lithuania. The Day has learned from Klaipedos Nafta that it plans to complete a small onshore terminal in March, which will enable transportation of Norwegian-supplied natural gas by rail or truck to small municipalities.

By 2020, yet another pipeline should be built, which will unite the Lithuanian and Polish gas networks. It will allow the Lithuanians to sell LNG to Poland, and when necessary and economically advantageous, to... Ukraine as well.

The EU’s Third Energy Package rules will come into force in Latvia in 2017. It will further expand Lithuania’s opportunities for exporting imported LNG. In particular, it plans to deliver natural gas to Latvia and Estonia.

And when skeptics say that political reasons are all well and good, but rationality still applies, and question the project’s profitability, the Lithuanians reply with a smile: “our investment in the terminal has already paid off, if only because Gazprom has offered a huge discount.” Effectively, Russia has lowered gas price for Lithuania for nothing, while Ukraine got its discount in exchange for... Crimea. At the beginning of 2014, Lithuania was paying one of the highest gas prices in the EU, at over 460 dollars per 1,000 cubic meters. Following the talks held in May 2014, Prime Minister Algirdas Butkevicius reported that an agreement on a price reduction had been reached; according to sources close to the negotiations, the price fell by 20 percent, to 370 dollars per 1,000 cubic meters. And experts believe that the arrival of the floating Independence played a significant role in making the Russian side more accommodating.

Arvydas SEKMOKAS: “We entered into a cold war with the Kremlin when we began to implement the Third Energy Package”

Arvydas SEKMOKAS is member of the Vilnius City Council and Lithuania’s ex-minister of energy. The construction of an LNG terminal in Klaipeda and of a nuclear power plant, the implementation of the EU Third Energy Package are to his credit. Mr. Sekmokas told about this in an exclusive interview with The Day.

“It was 2010. We, two Ministry of Energy representatives, went to London for a workshop on liquefied gas supply.

“It seemed to us at first that the best option for Lithuania was to reequip a traditional gas tanker into a reservoir to store liquefied natural gas. This was to be the cheapest and fastest option.

“We hired McKinsey to consult us about the project. They suggested that we see a terminal we need in Italy. This involved onshore offloading.

“The second time we saw this technique was in Rio de Janeiro, Brazil. Before traveling there, we had already drawn up plans on where to place this terminal in our country.

“The president of Achema, Lithuania’s largest consumer of natural gas, had just shown interest in the delivery of this fuel to Lithuania by sea. For his company was extremely dependent on Gazprom.

“It is they who hit upon the idea of establishing the terminal where it is now.”

 What did the project cost?

“The cost depended to a large extent on negotiations with partners. As is known, a Norwegian and a South Korean company became the contractor and the subcontractor, respectively.

“When we were launching the project, there were a lot of unknowns on which its cost depended, such as the natural gas price, terminal operation expenses, the loan rate, etc. We estimated at the moment of start that the terminal would set us back 300 million dollars.”

 Did Gazprom pressure you into changing your mind?

“Gazprom’s pressure was negligible in comparison to that of the President Dalia Grybauskaite administration. In Klaipeda, they could tell by my voice that I’d been at the president’s office (laughs).”

 In what way was Gazprom acting?

“Traditionally – by manipulating influential members of Lithuania’s political parties.

“I can remember security service officers conducting classes at our ministry on how to keep the state secret. As a minister, I was to be a role model, so I also attended a class. A security officer was saying that foreign ambassadors might be coming to ask various questions and even look at the documents on the table, trying thus to ferret out some information. The officer said that China, Russia, Belarus, and a number of other countries were highly interested in collecting LNG information. I told the officer that we were aware of the public response to our plans to build a nuclear power plant and a terminal but the Russian ambassador had never come to me. He sent me a New Year gift once – a nice little samovar full of vodka – but he himself or other embassy officials had never come to me. So in what way does their intelligence service work with me? The officer answered that there was a joke at the state security department: what is the difference between a terrorist and Lithuania’s Minister of Energy? The answer is: you can come to terms with a terrorist.

“There is another interesting story about the Achema president. When the terminal’s construction had already begun, he suggested that Gazprom cut the gas price in exchange for his services in torpedoing the project. This in fact stirred up a wrangle between the president of Achema and the President of Lithuania on board a ship in the Curonian Lagoon. I don’t remember the details, but can remember the president asking me rather sternly after this: ‘Will you build the terminal?’ To which I said calmly: ‘We will.’”

 So you gave your word?

“I wouldn’t say it was ‘my word.’ I was sure we would build it because it was very easy.

“I’ve been to Ukraine. You lack a strategy. In addition to ‘extinguishing fires,’ which your government is busy doing, it is of paramount importance to make strategic political decisions. And the economy follows. I failed to see the goals you pursue in the energy sector. Neither privatization nor the increased energy effectiveness is a goal. It is an instrument. But you don’t quite know what you want to use these instruments for.

“In Lithuania, we have publicly set energy independence as a goal. But the projects we have carried out were aimed at increasing our state’s energy security.

“I’ll tell you about an event that had a strong impact on Lithuania’s energy policy. When the EU decided to implement the Third Energy Package in Lithuania, the Seimas hastily declared that Lithuania should not ask for deferring the package’s part known as ‘ownership unbundling.’ This caused both Gazprom and Germany’s E.ON to revolt.

“Our ministry had already begun to prepare the implementation of the Third Energy Package, when the president phoned me. Judging by her voice and question, she was infuriated: ‘What are you up to down there? Come to me within two days and be so kind as to draw up a detailed report.’

“I saw that there would be a not so pleasant conversation. I summoned our ministry’s best lawyer and instructed him to prepare a juridical justification of all the steps we were going to take.

“The plan was as follows: I was to tell about a ‘step,’ about what laws should be passed and what this will lead to, while he was to justify this very clearly on the basis of European and Lithuanian laws.

“We came at the prearranged time. The president received us in a big room together with all her advisors. Once I stepped over the threshold, I felt that she was out of humor. But I knew that we had done a deed for which the president would be grateful and be able to trust us. It was the so-called ‘Leo story,’ when we managed to help Madam President to keep her election promise and buy out Lithuania’s energy sector from private owners. This knowledge made me more assured. So, I began to deliver the report in a very clear voice (at least it seemed to me that I sounded confident and convincing). As I was dwelling on some point, the lawyer was handing out sheets of paper with juridical proof. There were seven points of this kind. It was interesting to see ‘fury’ vanishing from the president’s face. At first she spoke very harshly. But when our report drew to a close, the president said, almost smiling: ‘Enough, let’s go and talk privately.’

“It is now clear to me that our decision to implement the Third Energy Package meant that we were entering into a war against Gazprom. And, as it is Russia’s largest state-run business which makes the biggest contribution to the budget, this meant in principle a cold war with Russia. And I think the president was out of humor for this very reason.

“To tell the truth, I did not understand this at the time. But she saw that there would be a confrontation with Russia. Implementing the Third Energy Package was one of the factors that brought about the current relations with Russia.”