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Midsummer 2011. Estonian entrepreneur Heiti Hääl gets an offer which he cannot refuse: the local security police Kaitsepolitsei invite him for “a cup of coffee.”

Hääl wants to construct a liquefied natural gas (LNG) terminal. Gas, when transported overseas, has to be carried in special tankers, as the liquefied gas is maintained at a deadly frozen minus 162º C.

A new and very expensive terminal is expected to supply gas to all three Baltic countries and Finland. This is a question of security for Estonia because the terminal will reduce its dependence on the Russian company Gazprom, which is under the control of the Kremlin. All gas sold in Estonia is bought from Gazprom and imported by Eesti Gaas, in which Gazprom is the biggest shareholder. All three Baltic States and Finland are between 90-100% dependent on supplies from Russia.

Estonian counter-intelligence is curious in what kind of relations Hääl has with Russia and the Russians, especially with Gennadi Timtchenko, who is one of the biggest energy traders in the world. Western security services believe that Timtchenko is a close ally of Russian President Vladimir Putin.

Tallinn is an important city for Timtchenko. His company, Gunvor, started 15 years ago out of Tallinn. He used the port of Tallinn for Russian oil exports. All the logistics, accounting and IT work of Gunvor are based in Tallinn. One of the conference rooms at Gunvor headquarters in Geneva is named, symbolically, ‘Tallinn.’

Hääl says to Kaitsepolitsei that his regular business is Russian oil transit, but that he is not a henchman of Gazprom and has no connections with Timtchenko, as his business partner in the oil transit operations is Trafigura, of the Netherlands. Trafigura and Timtchenko are strong competitors in the market.

Before the Second World War the north-eastern part of Estonia was referred to as a local oilfield because of the valuable oil (from oil shale, or kerogen, which is a brown or grey rock) that was recovered there. Even Nazi Germany’s navy used it for motor oil.

After the war, the Soviets started to produce gas from the oil shale. Gas was exported to Russia, for the city of Leningrad. German war prisoners constructed a pipeline from Estonia to Leningrad.

Approximately 50 years ago, however, there was a U-turn. Local production of the gas stopped and Estonia became a gas importer.

At present Estonia gets all its natural gas from Russia. Gas to Estonia is supplied from two sources: directly from Russia or via Latvia. Russia meets most of the Estonian gas demand in the summertime, whereas winter demand is met by the gas held in the underground storage facility located in Inčukalns, Latvia.

Ten years ago Russian natural gas had a good image in Estonia. It was a cheap and nature-friendly fuel. Estonia held to the official scenario that the biggest power stations would be using gas as fuel.

But there was another U-turn during 2006-2007. This was a period when Western secret services started to spread the theory that the Kremlin uses its supplies of gas as an energy-weapon. If some country didn’t fulfill Russia’s demands, then the Kremlin would shut the gas tap. A good example of this was a dispute between Russia and Ukraine.

The energy security discussion also arose in Estonia. One of the leaders in this discussion was President Toomas Hendrik Ilves, who has lived most of his life in the West.

The trend toward wider consumption of gas was now out, because tiny Estonia didn’t want to depend on huge Russia. Estonia started to speak even about having its own nuclear power station.

But there were, at the same time, new trends in the global gas production. The Yankees started to use new technology to produce shale gas. Shale gas permitted the USA to import less LNG, which they had bought even from as far away as Middle East.

So, the supply of LNG around the world grew. Prices fell.

Estonian businessmen detected all these moves. Former Minister of the Environment Heiki Kranich understood that it would be profitable to ship Middle East gas to Estonia, and construct its own LNG terminal: “I made calculations, it all seemed beautiful. I made additional calculations. Maybe there were some mistakes… but there weren’t,” said Kranich.

He made a deal with a well-known entrepreneur, Andres Sarri, and signed a contract with the state-owned company Port of Tallinn. The port was interested in beginning a gas business, because it wanted to reduce dependence on Russian oil transit.

At the same time, another group of businessmen (headed by Hääl) started their own plan. They wanted to build an LNG terminal close to Paldiski, which was a closed town during Soviet times due to a submarine base located there.

Both projects had pluses and minuses. For example, the harbor of Muuga (Port of Tallinn) was full of oil tanks, and there is also a big fertilizer terminal. An LNG terminal would only add to the dangers of a huge explosion.

A location close to Paldiski occupies an empty space, but there is no infrastructure. The terminal needs 50 km of new pipeline to connect it with the present gas network.

Finnish gas company Gasum has chosen Paldiski for where it starts a future underwater pipeline – Balticconnector – which will link the Estonian and Finnish gas markets. Prospects to sell the gas to Finland make an LNG terminal more attractive. But the Balticconnector plan has not yet received final approval.

In the summer of 2010, Andrus Ansip, Estonia’s prime minister, visited Vilnius. He returned home with the idea that Estonia had to follow the Lithuanian example and separate the transmission pipelines from the distribution system. At present both are owned by Eesti Gaas (Gazprom).

Ansip said that behind this idea is the need to raise the competition in the gas market. The main competitor to Russian gas then has to be LNG. It also means another U-turn. Gas is in again.

An LNG terminal has to raise the level of Estonian energy security. A terminal would end the single supplier (read: Russian) risk. There is also a physical infrastructure risk: for example, the pipeline between Latvia and Estonia exploded in 2005.

The Estonian government ordered state-owned company Elering (which owns the high-voltage electricity lines – the transmission network – and electricity cable Estlink between Estonia and Finland) to start work on the idea to build an LNG terminal.

Elering has started cooperation with the Port of Tallinn. Basically, it has taken over the project which was started by Kranich. “If we finish the LNG terminal, the gas price in Estonia will drop 25-30 percent,” predicts Ain Kaljurand, CEO of the Port of Tallinn.

The security police Kaitsepolitsei are also satisfied because there is no risk that state-owned companies will sell the LNG terminal to the Russians.

In May 2012, Elering and the Port of Tallinn announced that they have chosen Vopak LNG as the strategic partner for the Tallinn LNG terminal project. They will together start a feasibility study comprising both the technical and economic parameters, the cost of construction and the need for European Union funding for a Tallinn LNG terminal.

Vopak LNG has good know-how in this area because it already operates LNG terminals in Rotterdam (Netherlands) and Altamira (Mexico).

The European Union is ready to fund the construction of an LNG terminal, but only in the case where it covers all three Baltic countries. Estonia’s gas market is small by international standards. Annual consumption is only 7.1 TWh. But we can talk about a 14 times’ larger market if we add Latvia, Lithuania and Finland (annual consumption 99.1 TWh).

There is only one, very big, question: which country has the best location for where an LNG terminal should be built?

Now we can see the competition on a higher level. Competition which is a mixture of business interests and national pride.

The Baltic countries are not as united as they were 20 years ago, when people joined together and created a human chain across all three states. At present all Baltic joint energy projects have big problems. Latvia and Lithuania broke a contract where they would buy shares in the electric power connection to Finland, Estlink. The Baltic electricity exchange doesn’t yet work as planned. The idea to build a new nuclear power station in Visaginas, Lithuania, has smoldered.

The most aggressive hunters for the rights to construct an LNG terminal (with money from Brussels) are the Estonians and Latvians. The Latvians say that they have the moral right to get an LNG terminal, because Lithuania has a project to build a new nuclear power station, and Estonia received funding from Brussels to build undersea electricity cables to Finland (Estlink 1 and 2). Latvia doesn’t have anything on this same level.

Lithuania is the first who quit the game. In the spring of 2011, Lithuanian Prime Minister Andrius Kubilius announced at a dinner of the Baltic States’ prime ministers that Lithuania will rent an LNG tanker (ship) and use it as a small, floating terminal.

In the summer of 2011 the Latvians announced that the best location for construction of an LNG terminal is Riga. In this case, it was said, there would be no need to build new, very expensive storage tanks because the terminal can use the underground storage facilities in Inčukalns.

The Estonians are against this plan.

Firstly, the Latvian plan is to use the existing pipeline between Inčukalns and Estonia. The diameter of this pipeline is enough to supply the Estonian market, but not big enough to also supply the Finnish market. According to Hääl, a new, bigger pipeline between Estonia and Latvia will cost 350 million euros. But if a terminal is built in Estonia, then the current pipeline is sufficient for Latvia. And for the Finnish market there is still the need to build the new pipeline Balticconnector.

Secondly, the underground storage facility at Inčukalns is currently contracted out solely to Gazprom. There are also concerns that the Inčukalns facility may not be able support the high levels of demand from Estonia, Latvia and northwestern Russia when they have peak consumption all at the same time. No such shortfall has occurred yet, but it may have been close on some previous occasions.

Thirdly: the Port of Riga has the biggest problems with ice among the ports of the Baltic.

The conflict has gotten sharper and sharper. In November 2011, the prime ministers of the Baltic countries decided during another meeting that they were unable to reach agreement on where is the most suitable place for the LNG terminal. Estonia and Lithuania demanded that a study be done by the European Union, which would be best at determining where the terminal should be built.

Latvian Prime Minister Valdis Dombrovskis suggested that, in addition to an LNG terminal, the construction of a gas pipeline between Lithuania and Poland also be analyzed.

The most electric moment happened on November 24, when the economics’ ministers of all EU member countries discussed energy issues in Brussels. Daniel Pavluts, from Latvia, threatened to block the start of negotiations between the EU and Russia and Belarus regarding the synchronization of the electricity system if Latvia was not chosen as the best place to construct the Baltic LNG terminal.

Estonia and Lithuania didn’t give up.

One observer described the meeting in Brussels as a madhouse. After the meeting Parts said to BNS that Latvia unexpectedly tied one point of the agenda – synchronization of the electricity systems – with the location of the LNG terminal. Parts said that the Latvian demand was a surprise for everyone.

Estonia and Lithuania said no to Latvia. They explained that the best solution for the location will be the study done by the EU.

Latvia didn’t give its nod to start negotiations with Russia and Belarus. It was the same as a veto.

Juhan Parts, Estonia’s Minister of the Economy, said that Latvia’s step was regrettable: “If we talk about a common Baltic and Nordic electricity and gas market, it also needs common efforts.”

“I don’t believe in a regional terminal,” confessed Ain Kaljurand, CEO of the Port of Tallinn, in the autumn of 2011. His idea is to construct a small LNG terminal for only the Estonian market as a first step. This kind of terminal will cost approximately 125-150 million euros.

His competitor, Hääl, also says that at the start it is reasonable to build a 60,000 m³ storage tank just for the Estonian market.

But a report, ‘Liberalization of the Estonian gas market,’ prepared by Pöyry Management Consulting (UK) for Elering, says that “a small-scale LNG facility would struggle to compete, on price, with Russian pipeline supplies.” A medium size facility – for all Baltic countries – has the potential to compete. But as Pöyry notes: “If the current Estonian Gazprom contract is renewed under the existing terms from 2015, the LNG [terminal] is unlikely to be able to compete.”

One cannot forget Finland. In April 2012, Estonian authorities received a letter where a Finnish company explained its plans to construct its own LNG terminal. Possible locations are in Porvoo and Inkoo.

A full-scale terminal (2 billion m3 capacity per year) has to be ready in 2018.

The biggest winner during the present battle between companies and countries is, of course, Gazprom. So far all four countries continue to buy their natural gas from this Russian giant.

A Baltic terminal gives the best price option (source: Pöyry):

Approach Total construction
cost (€ million)
  Additional costs per year,
for 20 years (€/1,000m3)
   % increase over
the current gas price
 Local Terminal  125  8.9     2.0
 Regional  972  4.7     1.1
 Estonia and Latvia  412  8.2     1.9
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