Lithuanian LNG: Impact and Opportunity

In a session entitled “LNG: New Market Opportunities in the Region” at the 25th Economic Forum in Krynica, Poland, Mr. Dominykas Tuckus, General Manager, LITGAS, explained how Lithuania's LNG terminal at Klaipeda is impacting the Lithuanian market and offering new opportunities.

In the last 5 years, he recalled, he said the idea of constructing an LNG terminal in Klaipeda had been conceived, and successfully implemented in 2014. “Prior to this, Litgas had negotiated a contract with Statoil that provides baseload supplies for the terminal to be functional.”

Today, Klaipedos Nafta operates the LNG terminal, he reported.

He explained, “Lithuania for quite a while has been paying some of the highest gas prices in Europe, and in some cases even exceeding Japanese prices.”

Then, in May 2014, Mr. Tuckus said, the same week a significant shift in gas prices was seen, Litgas announced it would sign a contract with Statoil, and a significant change in how the market functions could already be seen, and the pricing applied to Lithuania. He quipped, “Currently, we're paying 30% less than we used to pay for natural gas.

“Maybe it's a coincidence, but actual natural gas trading started to take place in the Baltic states.”

The Baltic states, he said, are actually quite well-connected with pipelines and have decent infrastructure connecting all three countries with pipelines connecting all three countries. “This has been the case for over the last 10 years, but has never been used for trading because each of the countries had their own suppliers and no trade was happening with others, despite the significant differences in price,” he explained.

Now, according to him, Lithuania traders are currently supplying around 20% of Estonia's natural gas supplies.

One “obvious opportunity” he named is the interconnection to much larger markets, i.e. Poland.

Mr. Tuckus commented: “We are looking forward to the GIPL interconnection, which we hope will be finalized by 2020 and this would open up the market for us as a trader. There are also plans for a Baltic Connector connecting Estonia to Finland, which would also facilitate the usage of the existing infrastructure.”

In terms of development of the small-scale LNG market, he reported that Klaipeda's terminal will be in a good position to supply smaller terminals, as they are not capable of receiving larger LNG vessels.

“On Litgas' side we're developing a joint venture,” he offered, “together with Statoil, and we'll also be engaging in this market and plan to supply the shipping industry with small scale terminals.”

So, he said, Klaipeda LNG provides conventional opportunities, which could expand with increasing interconnections within the Baltics, and some unplanned opportunities like small-scale LNG.

Litgas, explained Mr. Tuckus, has changed dramatically since getting involved in the LNG market.

“When we started our procurement process, the overall LNG market was undersupplied, so there were quite significant challenges in finding sellers who would be engaging in the procurement process, because of how the market used to function,” he explained.

Meanwhile, he contended that the market is still functioning to a large extent in the same way, with Southeast Asia buying most LNG volumes globally, the Middle East countries supplying the largest portion of volumes.

Mr. Tuckus added, “Since 2011 there have been speculations that the market may change significantly. At the end of last year, we began seeing the impact of those changes: the most significant one is that Australia is starting to become a significant player and will likely overtake Qatar as the country supplying the largest volumes of liquefied natural gas in the world.”

More relevant for the European market, he said, are the US export projects, about which he said: “It is estimated that there will be quite a significant increase in supplies: 30-50% by 2020. Of course many of the projects that would be contributing to the supply might be put on hold, because the current market situation for exporters is not so favorable, but nevertheless we think many of those projects in North America will materialize because of their financing and industrial capabilities and the ability to build large infrastructure.”

A drop could be seen in the level of global LNG pricing, he noted, something which matters for Europe.

“Europeans are importing relatively little LNG,” explained Mr. Tuckus. “Most of the supplies of natural gas are supplied by pipeline from Russia, and some of it comes from North Africa. But LNG is a means to diversify the supplies.”

He explained that Russian gas prices are also very low, but gas sold on the domestic market there still turned a profit, indicating that suppliers' gas floor for Europe is actually quite low.

“Nevertheless, this price has never actually reached European markets. Russian suppliers are probably acting wisely economically – from their perspective they're supplying at the level which Europeans are willing to pay.

“This is where LNG comes into play, because it offers the alternative to the existing supplies.”

Meanwhile, he recalled that LNG used to be sold according to long-term contracts, but now this has shifted dramatically, with about one-third of LNG volumes being traded on a spot basis. “This is making LNG more like a commodity, similar to commodity trading that we see in the oil sector.”

Due to this change, he said Europe has increased its imports and is using existing LNG infrastructure to a great extent.

While domestic gas prices in the US are only $3-4/mmBtu, Mr. Tuckus said significant cost elements like liquefaction and shipping must be added in to sell gas at $7-9/mmBtu. But, he asked, how did this compare to other alternatives available to Europe?

Coming from a small country like Lithuania that is a relatively small buyer, he said his country has three alternatives: sticking to the piped gas supply contract, basing supplies on the LNG spot market, or look for something long-term on the market, considering the US market as a potential supplier.

Pipeline contracts, he said, typically run 5-20 years, maybe on an oil-linked formula (although Gazprom has offered auction-based pricing, he admitted) with a take-or-pay clause likely.

“LNG spot market is a completely different thing – there is no volume obligation; indexation is completely flexible, credit support is limited and there's no take-or-pay obligation – and the price level is $6-9/mmBtu.”

Conditions for the US contracts, he said, are a bit more stringent: “Twenty years and suppliers won't talk to you unless you buy five cargoes a year, and they will require sovereign guarantees. You would end up with $7-9/mmBtu.

So why would anybody buy on a long-term basis from the US? asked Mr. Tuckus, who said: “The answer is the political uncertainty, which is usually attached to pipeline contracts, and more commercial uncertainty, which is attached to the spot trading. So in order to have secure supplies to the extent that you need to secure the security of supplies to your country, a typical buyer will also consider long-term contracts.”

Now, concluded Mr. Tuckus, since the appearance of Lithuania's LNG terminal the Baltic states are no longer isolated markets, global LNG has put a cap on pipeline prices, and the US will definitely make an impact on Atlantic Basin LNG supplies.

-Drew Leifheit