As winter comes, the EU concerns about stability of gas supply amidst the Ukrainian crisis. That pushed EU to seek reliable sources to secure domestic gas supply. It is believed that LNG may protect the EU from possible gas supply disruptions from Russia. Currently the EU meets 25% of its LNG import from Norway, Qatar, Algeria, Nigeria, Egypt, Libya, Trinidad and Tobago and seeks LNG supply from the US, Qatar and Australia. Development of the LNG terminals in Europe is one of the main priorities in EU energy policy to weaken its reliance from single gas supplier. Germany, France and Italy had done a lot for development of their LNG terminals, while Central and Eastern European are still far from this innovation because of lack of enough investment and remain dependent on Russian gas. However, the EU did not impose sanctions over Russian gas or its LNG export. Currently, certain EU Member States refrain to extend the duration of sanctions against Russia. Along with diversification of sources, the LNG trade will avoid risks emerging during traditional delivery (pipeline) of natural gas. With the development of the LNG sector in Europe, the role of pipelines will decrease. The LNG trade can be implemented by long and short-term contacts. Liquefying and regasification of natural gas, its transportation, linking terminal into domestic transmission system are very costly. However, LNG shipments are considered beneficial for distant markets in terms of avoiding transit countries, terrorist attacks on pipelines. However, the LNG trade may also be challenged by political instabilities, such as blockade of sea routes or piracy attacks on vessels in the open seas.
Western Europe – So far, certain EU countries, such as Spain, France, Italy, Portugal, Greece, the UK, Netherlands and Belgium have moved forward with the implementation of LNG terminals. German E.ON has inked three-year agreement with Qatari RasGas for LNG shipments from Qatar to UK. Moreover, Germany’s gas dependence on Russia and Ukrainian crisis, pushed Germany to grant financial support for E.ON to gain stake in oversea LNG projects, in Canada (Goldboro), East Africa (Mozambique), South America (Peru and Colombia) and Mediterranean. France’s GDF Suez also received an approval from the US Department of Energy for LNG export from Cameron project in Louisiana to the countries, which are not signatory to FTA. Meanwhile France’s Total is working with Russian Novatek and Chinese CNPC on options (ports of Belgium, France and Spain) to deliver LNG from Yamal project to Europe. Another new LNG option may come up with the construction of Arc de Dierrey pipeline in the Northern France, which will also link new LNG terminal in the Dunkirk Port with Germany by 2016. Italian Enel signed two 20-years LNG contracts with the US Cheniere Energy for 3 bcm/year of gas from US shale gas fields. British Centrica’s four years agreement with Qatargas for LNG shipment to the UK, as well as the construction of an LNG refueling station for trucks in Veurne, Belgium – all are noteworthy initiatives in this context.
Eastern Europe – As one of the main gas-dependent countries in the Eastern Europe, Poland seeks to buy Australian, Qatari and US LNG to weaken its gas reliance from Russia. PGNiG agreement with Qatargas to bring 1.5 bcm of LNG for 20 years through the Swinoujscie terminal (to be completed by mid-2015) is important in terms of weakening its gas dependence. However, Qatari, US and Australian LNG are supposed to be at its expensive for Poland than Russian gas. However, it is matter of speculation. Thus, Asian countries are more attractive for Australian and US LNG export, given the geographical proximity and high LNG prices there.
Moreover, Croatia and Poland seek to link their LNG terminals via North-South gas pipeline corridor. As an alternative gas corridor, the North-South Gas Corridor is not a single pipeline system, but consisted of: Swinouscje LNG terminal (Poland); Baltic pipe system (to transport Norwegian gas to Poland); Poland-Slovakia and Czech-Poland Interconnector; Czech-Slovakia and Hungary-Slovakia Interconnector; Croatia-Hungary and Hungary-Romania Interconnector. Given their expansion opportunities, the LNG terminals of the Baltics, Poland, Bulgaria and Croatia are beneficial in terms of future diversification. Development of the Swinouscje LNG terminal could strengthen Poland’s hand for price discounts with Gazprom. Because in terms of LNG export, Russia is not much capable in LNG market, as it is rather pipeline-oriented and exports LNG to Asian market only. Moreover, it is also possible that Lithuania can supply additional gas to Poland from Klaipeda terminal, by linking them via potential Polish-Lithuanian interconnector. Polish Gaz-System and Lithuanian AB Amber Grid seek financial support of the EU through Connecting Europe Facility instrument to cover construction costs interconnector.
Another potential LNG project will be the Azerbaijan-Georgia-Romania Interconnector. AGRI is supposed to bring Azerbaijani gas to LNG terminal in Kulevi, Georgia and further deliver it to LNG terminal in Constanta, Romania. However, implementation of AGRI was also delayed because of financial issues, as well as Turkmenistan’s reluctance to participate in the project and Azerbaijani gas has been already sold for TANAP and TAP.
Southern Europe – Greece’s DEPA also considers developing Floating Storage and Regasification Units, upgrading Revithoussa LNG terminal and construction of Aegian LNG terminal in the Kavala region close to Bulgarian and Turkish borders, where it will be possible to link terminal with Trans-Adriatic Pipeline, Greek gas transmission system, and Interconnector-Greece-Bulgaria (IGB). The Revithoussa terminal is important in terms of diversification. The Revithoussa terminal is owned by DESFA, where Azerbaijani SOCAR has 66% of share, which gives SOCAR a voice in the terminal. By creating a gas hub in Kavala, Greece may bring Azerbaijani gas via TAP and Russian gas via IGB. Moreover, Greece also considers bringing Algerian LNG into IGB (5 bcm/year) by 2020. Another Greek company Prometheus Gas plans to construct similar terminal near to the Alexandroupolis port. From the other hand, Greece and Bulgaria could use Turkey’s two terminals in the Marmara Sea by importing Algerian, Nigerian and Qatari LNG and further delivering it via IGB and Turkish-Bulgarian Interconnector to Greece and Bulgaria and later to Bulgaria-Hungary and Hungary-Romania interconnectors.
Croatia’s Adria LNG terminal is planned to be constructed on the Krk Island of the Adriatic. Krk-based LNG terminal is supposed to supply gas to Bosnia-Herzegovina, Bulgaria and Ukraine as well. However, construction phase of all those terminals have not moved on yet because of funding issues. Another Mediterranean country, Cyprus plans to conclude works with Vassilikos LNG terminal by attracting additional gas amounts from its Aphrodite field. Thus, French Total and Cyprus government had already signed MoU for the construction of LNG terminal in Vassilikos, which is expected to be started form 2016.
Northern Europe – On 27 October 2014, Lithuania inaugurated its first LNG terminal in the Klaipeda city. It is expected that this terminal will end “stick and carrot” policy of Russia, as Lithuania pays the highest price for Russian gas. This terminal with 4 bcm capacity, as well as Incukalns Gas Storage of Latvia will be able to meet 90% gas supply of not only Lithuania, but also Latvia and Estonia by linking them via interconnectors. The Klaipeda LNG terminal will be a game changer for isolated “Baltic island”, where energy dependence is an “Achilles Heel” of their national security. Klaipeda will lessen Baltic States’ 25-years gas dependence from Russia, prevent Russia to raise gas prices, gas cut-offs and use it as political tool, by diversifying supply sources, granting Lithuania a bargaining cheap in negotiations with Gazprom and will protect them in case of possible gas disruptions. Klaipeda terminal will foster additional gas supply for Latvia and Estonia with competitive prices and interconnection into EU energy market.
The EU considers Klaipeda terminal one of the number one gas infrastructures to ensure the Baltic States’ energy security. Because, the natural gas infrastructures of those three states were linked to Russian one and lack interconnectors with European energy grid. So far, Russian Gazprom was the main and only gas supplier of Lithuania, while new terminal will enable Lithuania to buy has from different sources with its floating storage vessels and gas pipeline connecting the terminal to the main gas system. Lithuania’s LITGAS has already ensured its supply agreement with Estonian Eesti Energia and Norwegian Statoil. Whereas, it is possible that Lithuania may pay 10% more for Norwegian LNG (400USD) in comparison with Russian gas (360USD). Whereas, the point is that Latvia and Estonia will be able to benefit “Independence” terminal only from 2017, because of privatization issues of Latvijas Gaze, Gazprom’s share in this company and EU’s Third Energy Package exemption for Latvia. However, long-term gas contracts of Gazprom expire in 2015 with Estonia and Lithuania, in 2030 with Latvia.
Another gas dependent countries Estonia and Finland are to sign agreement for construction of new gas pipeline and LNG terminal to connect both countries. However, Estonia and Finland are the odds regarding the construction of LNG terminal, as both cannot agree that who and where to build LNG terminal. Estonia considers three options for LNG terminal in Sillamae, Muuga and Paldiski, while Finland promotes for the LNG terminal in Inkoo and support the Padliski (option of Estonia) in the opposite side. Upon those negotiations, Finland’s Gasum and Estonia’s Alexela Energia have jointly submitted cooperation proposal to the European Commission for the construction of LNG terminals. Both are waiting for EC’s feedback for project funding. Whereas, they should also built 80-km-kong Balticonnector from Finland to Estonia to link it with Estonian gas pipeline operator. However, since Gazprom has 25% share in Finish Gasum and involved in Estonian gas operator system Vorguteenus via its shares in Estonia’s Eesti Gas Company, it [Gazprom] will have indirect participation in both Inkoo and Balticonnector projects. Moreover, Latvia promotes for LNG terminal in Riga (as it locates closer to Incukalns gas storage) and construction of interconnection to Estonia and Finland.
Challenges for Oversea LNG supply – It is believed that, the US LNG export will not be able to break the EU’s gas dependence from Russia. Because, Russia is still considered most-competitive and dominant gas supplier for Europe. Whether the US LNG export will come to Europe soon is under question, as US energy companies had already secured long-term contracts with Asian countries for LNG export and some EU countries still don’t have LNG terminals. Because, most operational LNG terminals located in the Western and Southern Europe. Therefore, even if US LNG reach EU’s western coasts, it will not save Eastern Europe from Russian gas. The US, Australia, Canada and Mozambique are expected to increase their LNG exports. Delinking of the gas prices from oil prices in the US can make its LNG export more attractive for European consumers. Whereas, delays of investment decisions, fall in oil prices, huge costs and lack of basic infrastructure can make Canadian, US, Australian and Mozambique LNG export less attractive too. Moreover, US resource legislation, ownership rights for resources and divergence in Congress on shale gas makes US LNG export doubtful. More export of shale gas might raise domestic gas prices in the US. Moreover, some countries does not have Free Trade Agreement with the US, therefore LNG export to these countries requires to obtain approval of the Department of Energy. Bureaucratic nature of granting approval for LNG export, absence of FTAs with the EU, attractiveness of Asian LNG market etc., explain why US LNG export to Europe will not come soon. Moreover, after liquidation, transit and regasification process, US LNG will cost double prices for EU customers than they pay for Russian gas.
Furthermore, the LNG prices in Asian market, where leading consumers are Japan, China and South Korea (potentially India, Malaysia, Indonesia and Singapore) are higher than the European market, which makes Asian market much competitive and attractive for the US, while Russian gas remain cheaper for the Eastern Europe. As China plans to decrease its coal use and increase LNG import and Japan intends to boost its LNG import after Fukushima case. Waiting for natural gas prices to reach uniform prices in these regions would be naïve, as gas markets of Atlantic, Pacific and Europe are different in terms of geopolitical dynamics. However, as soon as LNG exporters increase in the gas markets of those regions, the price gap may decrease. Another question is whether LNG export from North America, Australia and Gulf States will create significant competition for Russian gas, as well as Caspian gas in the future.