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“As a newcomer to politics I was shocked that there was so much distrust between the countries,” says Daniels Pavluts, minister of economics.

When I spoke with the Minister of the Economy Artis Kampars (Unity), just after he’d stepped down from his position at the beginning of November last year, he was convinced that there’d be a joint liquefied natural gas (LNG) terminal in the Baltic States, and that it would be located in Latvia. “Agreement was basically reached, and the communiqué just needed to be coordinated,” said Kampars. Only a few weeks later, news was received from the meeting of the Baltic States prime ministers that there wasn’t consensus about the site for the terminal, and that the dispute would be left to the European Commission (EC), the possible co-funder of the terminal, to settle.

What had happened during this time to wreck the almost-signed agreement?

“The Lithuanians had agreed, but the Estonians put a stop to it,” the Economics Ministry’s (EM) State Secretary Juris Puce, who was involved in the LNG terminal discussions, recalls about the events in the autumn. Puce had the feeling, a number of times in the lengthy terminal discussion process, that agreement had just about been reached.

“On joining the Economics Ministry, I encountered everything except a readiness from our neighbors to agree to the construction of the terminal in Latvia,” says Daniels Pavluts (Reform Party), who assumed the role of Minister of Economics along with the change of government. In discussions prior to the prime ministers’ meeting, attempts were still being made to save the agreement, but these didn’t succeed.

Pavluts explains the inability of the Baltic States to cooperate on this project by two factors. Firstly, the countries perceive energy as an issue of state security and consider their national interests very carefully. Secondly, “as a newcomer to politics I was shocked that there was so much distrust between the countries,” admits Pavluts. Estonia and Lithuania view the offer to build the regional LNG terminal in Latvia with suspicion, in that this could be being done in Gazprom’s interests.

Distrustful neighbors

Latvia revealed its idea about a regional LNG terminal in the autumn of 2010. Currently, the only gas supplier to the Baltic States is Russia’s Gazprom, and the LNG is viewed as a way of reducing dependence on this single supplier, which Russia, incidentally, tends to use to achieve its foreign policy objectives. The LNG terminal would open up the possibility of delivering gas by ship from other sources. As energy infrastructure projects of this kind are expensive, it has been calculated that it would be more beneficial to build one terminal for the relatively small Baltic States market. This position is also supported by the EC, which, in the interests of the development of the gas market, is prepared to co-fund an LNG terminal in the Baltic States which would be independent of the current supplier.

Latvia believes that it is the most logical location for such a terminal, as it was historically developed as the gas supply center for the Baltic States — the Incukalns Gas Storage Facility is located here and it has a suitable network of gas pipelines. As a consequence, the costs of developing the regional gas infrastructure would be the lowest. This was also confirmed by a Latvenergo-commissioned feasibility study, which was done by a consortium of British firms: GL Noble Denton and Energy Contract Company.

Kampars tells us that right from the start, the Latvians stated clearly to the Estonians and Lithuanians that the LNG terminal in Latvia would be built by the state-owned Latvenergo, which isn’t connected with Gazprom. Latvia couldn’t involve Gazprom even if it wanted to, as the EC wouldn’t finance such a project. This hasn’t, however, convinced the neighboring countries, and their distrust can be understood.

Firstly, in mid-2000, the LNG terminal project in Latvia was being actively pushed by Itera Latvija chief Juris Savickis, who wanted to attract Gazprom to the liquefied gas business in Latvia. In addition, it’s known from unofficial sources that the Freeport of Riga territory, which is recognized in the research as the most favorable for the terminal, is being leased by the Energo SG company, which belongs to Savickis and Ainars Gulbis. (The EM hopes that if the terminal project succeeds, the contract can be terminated.) Behind the scenes this project was also linked with Andris Skele and an influential Lithuanian player — the now deceased creator of the Achema group of companies, Bronislavas Lubis, but their plans fell through. Kampars says that during his time as minister there weren’t any attempts to get state support and EC funding for this project. When I asked whether other discussions with the Lithuanians and Estonians weren’t held parallel to those with the government, Kampars shrugged his shoulders. “It could be that they thought: these people wouldn’t hold on [to power] for long,” Kampars guesses as the reasons for the lack of trust.

Another aspect may have made the neighboring countries wary: during the term of the previous government, Aivars Lembergs actively promoted the construction of the LNG terminal in Ventspils (and the connection of gas to all of Kurzeme, as there isn’t a gas pipeline leading to Ventspils), and it’s unlikely that the Estonian and Lithuanian governments would want joint projects with this person. The argument that Latvenergo would participate in the project from the Latvian side also may not have sounded particularly convincing, bearing in mind the suspicions about the shadow of corruption which hangs over its former leader and the electricity generation projects which he’d commenced (TEC–2/2 is seen as a victory of the gas lobby, read — Gazprom).

The Latvijas gāze privatization contract, which allocated 20-year monopoly rights to Gazprom, also provides evidence for the neighboring countries to have reason to view Latvia’s relationship with the latter with suspicion. This contract means that the state has given over exclusive rights to gas pipelines and the Incukalns Storage Facility to Latvijas gāze, which is controlled by Gazprom and Itera, and third parties cannot even connect up to them until 2017. Consequently, the use of the existing infrastructure for the transfer of gas imported for the terminal is currently problematic.

It’s true that EU directives foresee that third party access to gas pipelines must be ensured by 2014. Pavluts admits that the neighboring countries have gone further in the liberalization of the gas market, but that Latvia has also now “started moving” in the direction of the EU law and is hoping to agree about its introduction in discussions with Latvijas gāze stockholders.

The Estonians will not agree

Kampars confessed that initially, the tactic was to convince Estonia first about a regional LNG terminal, and then Lithuania, from which the greatest objections were expected. In practice, the hardest nut turned out to be Estonia. Its arguments, according to Puce, have changed over time.

At first, Estonia’s interest was a terminal in which Finland would also participate, and this vision also included a gas pipeline connection with Finland. In this case it would have been logical to build the LNG terminal in Estonia. The Finns weren’t interested in the project and said no.

After that the Estonians said that the Latvian terminal would not increase the technical safety of Estonia’s supply — they’d receive their gas from Incukalns along the same pipeline as currently. Last summer a letter appeared in the press from Estonia’s Minister of Economics which pointed out the lack of transparency in the possibilities of utilizing the Incukalns Storage Facility, due to the long-term agreement with Gazprom.

At the same time private investors are developing LNG terminal plans in Estonia. Due to this, Kampars views Estonian criticisms of Latvia for protecting Gazprom’s interests as “two-faced,” as “the Russians have a great deal of influence” in the Balti Gaas company which is planning the terminal at Paldiski (according to information published in the media, Balti Gaas belongs to Baltic International Trading, Paldiski Arendamise and Sergei Timoshenko).

Puce states that doubts have also been expressed in discussions about whether one regional terminal is the best solution. For example, the suitability of existing pipelines for the transportation of gas throughout the region has been doubted, which the Latvians consider a “strange” argument, as it’s already happening at the moment. “We agreed with the [Estonian] president that the existence of just one terminal could be risky, [as] influence could be exerted on this terminal, and it could be re-sold,” said Lithuania’s President Dalia Grybauskaite last summer after meeting with Toomas Hendrik Ilves.

Lithuania promotes Klaipeda

Lithuania has always been interested in getting an LNG terminal as soon as possible, which can be explained by their bad relationship with Russia, the end of the gas supply contract term and higher gas prices than in Latvia and Estonia. On top of this, Lithuania has to introduce the EU market liberalization directive sooner, as it hadn’t sought a transition period.

For this reason Lithuania’s state company Klaipedos nafta is ready to quickly build its own smaller terminal in Klaipeda, without waiting for the EC’s opinion. Latvia views the Lithuanians’ haste with understanding, but also with surprise as to why they couldn’t have been just as resolute in relation to a regional LNG terminal. The Lithuanians have not offered the Klaipeda project as a regional terminal, but quite the opposite. Officials of the neighboring country state that their project doesn’t exclude a regional LNG terminal. Puce does mention that hints have been received about Klaipeda’s wish to use the Incukalns Underground Gas Storage Facility. For Klaipeda to become a regional project, significant improvements to the transmission system are needed, which makes it more expensive. All in all, Latvia’s EM points out that it doesn’t have sufficient information about the Klaipeda terminal to make any real conclusions.

Latvia views Lithuania’s plans to make a law that gas importers have to buy at least a quarter of their gas from the Klaipeda terminal with great scepticism. This has been perceived as a sign that the Lithuanians themselves are not certain of the project’s competitiveness. Judging from news in the press, such a regulation has also caused concern within Lithuania, where its compliance with the competition law is being doubted.

Latvia is also looking at the Klaipeda terminal with concern because the “Lithuanians are partly forcing the decision for us as well,” says Pavluts. “The Klaipeda project reduces the profitability of the regional terminal, as the economy of the Baltic States is not large. Our greatest responsibility is the cost, as the point of an alternative supply is to achieve a competitive price,” said Latvia’s Minister of Economics.

It should be noted that individual energy specialists doubt the profitability of even one terminal, due to the high cost, as the investment in it will have to be recouped in the price, which ultimately ends up being paid by the consumer, and as a consequence it is doubtful whether the gas provided by the LNG terminal will be cheaper than that provided by Gazprom.
Latvia’s position now is that it will rely on the solution suggested by the EC, even if this ends up being, for example, the Klaipeda terminal. Puce doubts whether the neighboring countries would participate in funding it in this case, as they’ll be unable to assume responsibility for costs incurred in a project which has already been started.

Will the neighbors still agree to a terminal in Latvia, if the EC comes to the conclusion that this is the most viable place economically? Latvia is hoping for pressure from the EC. However, the political arguments, which have made the countries act in a seemingly irrational fashion up till now, will not have disappeared. “The past three years suggest that it might be better to let the Baltic States address gas supply security effectively through national measures, than spend time and
energy trying to overcome serious political hurdles while gas insecurity is left unaddressed,” so ends a Cambridge University researcher’s working paper on the Baltic States’ gas supply security. In this too, a regional LNG terminal based in Latvia has been recognized as the cheapest option.

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