LNG terminal in Klaipėda to remain the main leverage over gas prices after 2024

Date

2018 04 11

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Today, April 11, the experts of Pöyry Management Consulting, an international consulting and engineering company, presented an independent economic analysis of the long-term liquefied natural gas import solution to the Republic of Lithuania. The study deals with two key questions – are Lithuania’s best interests served by having an LNG terminal post 2024? If so, what is the optimal economic solution to access the global LNG market? The study has demonstrated that the LNG terminal will continue to offer an economic benefit to Lithuania after 2024.

The independent experts, who were selected through a public international tender, have assessed whether it is reasonable, from the economic and supply security point of view, to ensure long-term liquefied natural gas import after 2024, when the agreement on the lease of the Independence, an LNG Floating Storage and Regasification Unit, will expire.

The experts have carried out a cost-benefit analysis in order to find out the economically optimal solution to secure long-term LNG supply. Three possible alternatives have been examined: purchasing the LNG terminal after 2024, leasing for a further 10 years or a further 20 years.

The study has demonstrated that the LNG terminal will continue to offer an economic benefit to Lithuania and gas consumers of the region after 2024. As a reliable alternative gas source, the LNG terminal will ensure competition in the gas market and contribute to the energy security of the country.

“The analysis performed by the consultants has shown that the LNG terminal in Klaipėda is to play a role of an effective leverage over gas prices both now and after 2024. It is equally important that all analysed scenarios for long-term LNG supply after 2024, either purchasing or leasing the terminal, would allow reducing terminal maintenance costs for consumers already in the coming years”, says Žygimantas Vaičiūnas, Minister of Energy.

“The results of the study prove that the LNG terminal effectively ensures gas supply competition in the region and enables offering Lithuanian consumers the best gas prices currently available in the world market. Since 2015, a gas price in line with the EU average has been ensured in Lithuania, and this is one of the most important achievements of the terminal’s operation. With the expert analysis insights in hand, we will proceed to the next stage, the objective of which is to provide the shareholders with a well economically weighed and responsibly assessed proposal on a technical solution which would best meet the interests of the country, the shareholders, and KN itself”, says Mindaugas Jusius, Head of Klaipėdos Nafta (KN), the operator of the oil and liquefied natural gas (LNG) terminals.

According to the study, failure to secure long-term LNG supply would pose a risk of failing to ensure sufficient competition between suppliers and competitive pressure on the prices of gas sold by the dominant supplier. The LNG terminal reduces risks related to the possibilities of Gazprom, the dominant supplier in the region, to abuse its dominant position in the market and to unreasonably increase gas import prices to consumers. It is estimated that if not for the LNG terminal in Lithuania, Gazprom could apply an additional price premium of 11% to 20% on gas sold in the region. According to the experts’ conservative assessments, due to lower gas prices alone, the operation of the LNG terminal would result in a benefit to Lithuania of between EUR 20 million to EUR 60 million a year after 2024, depending on the regional market model in place at that time.

The economic benefit of the LNG terminal was assessed from three market perspectives: the Lithuanian market, the common gas market of the three Baltic States, and the common regional gas market with the Baltic States plus Finland.

The analysis considered both opportunities and risks of all the three scenarios in securing long-term LNG supply. According to the experts, the purchase of the terminal provides Lithuania with the most flexibility to react to unexpected circumstances (for example falling gas demand), whereas a long-term lease is a less flexible solution.

The study claims that the construction of the Gas Interconnection Poland–Lithuania (GIPL) will improve the supply security situation but GIPL alone would not be sufficient to ensure a competitive price level. The analysis has also shown that supply security and effective competition between suppliers can only be ensured when at least two sources alternative to Russian gas, i.e. the LNG terminal and GIPL, are available.

The analysis also demonstrates that greater economic benefits can be delivered and infrastructure maintenance costs for consumers can be reduced if decisions to secure long-term LNG supply are taken earlier than 2024.

On Friday, the independent economic analysis will be presented to the Infrastructure Commission of the Government, which will envisage further steps. The final decision on securing long-term LNG supply will be made by the Government. The Plan of Measures to Implement the Programme of the Government provides that it should be done by the end of 2018.

The full text of the study can be found here.