Trump's Unrealistic Rhetoric on US LNG Exports to Baltic States

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Volume potential and market size are just not big enough for American exporters chasing lucrative Latin American and Asian offtake.

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Europe appears keen to reduce its reliance on Russian natural gas imports. Alongside Poland, those making the loudest noises are the Baltic states of Estonia, Latvia and Lithuania. All three are current NATO and European Union members, but were once part of the erstwhile Soviet Union.

Their energy dependency on Russian gas imports – a hangover from a bygone era and geographical proximity – didn’t enter political discourse until recently, when in 2014 Russia annexed Crimea from Ukraine, and spooked much of the old continent.

If that was a wake-up call, the Lithuanians in particular smelt the coffee. Their Klaipeda LNG import terminal was conceived to serve not just Lithuania, but Estonia and Latvia too. By June 2017, Lithuanian state-owned trader Lietuvos Duju Tiekimas inked a deal with a unit of Cheniere Energy, for its first direct import of LNG from the U.S.

On August 21, 2017, history was made when an LNG tanker from Sabine Pass, U.S. docked at Klaipeda. At no point was the U.S. government involved in the deal; but tell that to President Donald Trump.

Quick to jump in on news of the shipment, and that of an earlier dispatch of U.S. LNG to Polish state-owned trader PGNiG, the President expressed hope for “many more shipments” of natural gas “as we have plenty of it.”

Lithuanian Energy Minister Zygimantas Vaiciunas said: “We are happy to reach a point where importing gas from U.S. is not only politically desirable but also commercially viable.”

The latter point is debatable as cargoes from the U.S. have ebbed and flowed since. However, if you thought political hot air had subsided and that Trump’s attention span for any given issue is usually a short one, then think again.

As recently as last month, Vaiciunas, accompanied by his Estonian counterpart Kadri Simson and Eriks Egilitis State Secretary of Latvia, reaffirmed their cooperation with the U.S. Deputy Secretary of Energy Dan Brouillette in Houston, Texas, at the first ministerial meeting of the “Partnership for Transatlantic Energy Cooperation (P-TEC).”

But market fundamentals narrate a different story at both the U.S. and Baltic ends. Dwelling on the latter end first – the creation of a uniform natural gas market within the Baltics or the Baltic Energy Market Interconnection Plan (BEMIP) underpinned by LNG imports was first suggested in 2014, and surveys and studies commissioned in 2016.

Industry discourse points to the BEMIP’s potential, and how it will ultimately incorporate the Balticconnector (between Finland and Estonia) and Gas Interconnector Poland–Lithuania (GIPL). Yet there is relatively little to show for it. At P-TEC, all officials said was that “technical scenarios for Baltic grid synchronization have been approved.”

The project, slated for a 2025 completion, is likely to cost in the region of €1.5bn ($1.7B). Three-fourths of the cost would come out of the European Union’s coffers. Meanwhile, much of the LNG imported at Klaipeda is put to use in Lithuania itself, which has statistically lowered its reliance on Russian gas imports down to 50 percent.

However, Estonia and Latvia continue to lag, importing more than 75 percent of their national imports of natural gas from Russia, as does Poland where Trump heralded a new era for U.S. LNG exports to Northern Europe. The only thing that is on track is the “commercial pragmatism” displayed by the Lithuanians, according to Ashutosh Shastri, Director at EnerStrat Consulting.

“They decided that a new liquefaction train is going to compete with pipeline imports from Russia and are seeing results. It has compelled Russia’s primary gas exporter – state-owned Gazprom – to react. Having learnt from mistakes of the past when it often chased revenue maximization, Gazprom appears willing to defend its market share by renegotiating lower and competitive prices.”

Competition between Gazprom and LNG imports to the Baltics, not just from the U.S., but Norway and Qatar, is the order of the day. In that sense, Northern Europe owes gratitude to the Lithuanians, according to Laurent Ruseckas, Senior Advisor, Eurasian Gas at IHS Markit.

“The announcement of Klaipeda LNG terminal as a regional alternative was enough in itself. No matter how much gas comes in, the terminal has already done its job. The Russian’s monopolistic pricing power is gone; and that is significant.”

Beyond that Ruseckas doubts the radical steps taken by Lithuania would be replicated elsewhere over the short-term. While Estonian traders have brought in gas via Lithuania, advantages to Latvia currently appear slim.

Switching tack from the importers to the exporters – regardless of what Trump wants, the Baltics aren’t at the top of U.S. exporters’ agenda and for good reasons. According to Eurostat and IEA data, Estonia imports around 0.43 to 0.50 Million tons of oil equivalent (Mtoe) of natural gas per year, Latvia around 0.92 to 1Mtoe, and Lithuania around 1.85 Mtoe.

Should all of it go to U.S. exporters, something that is impractical to assume, even those kinds of numbers will not make the Baltics a priority for them, noted Regina Mayor, Global Sector Head, Energy and Natural Resources at KPMG.

“Exporters are chasing high margin and sustainable offtake agreement in lucrative Asian markets, and in the near neighborhood of Latin America. Admittedly, U.S. LNG cargoes are incrementally heading to Europe, and are expected to double over the medium term. But volumes are nothing like the numbers we see heading to Asia, where India and China, despite ongoing trade tensions, remain the big prizes.

“In a pan-European context, importation potential of the Baltics is pretty small. Even if Europe at some point becomes a key focus of U.S. exporters, Spain, Portugal and the UK are likely to top the list, and not the Baltic nations,” Mayor added.

Additionally, much of that small LNG market, serviced by Klaipeda LNG terminal, is running on a long-term contract with Norway’s Equinor. Pricing is nothing to write home about either, when compared to Asian contracts U.S. exporters have inked.

While data from 2018 is still to be factored in, back in 2017, Lithuania imported 6,844 Mcf at an average price of $3.84/MMBtu while Poland imported 3,440 Mcf at an average price $4.26/MMBtu average price. Comparable agreements with Asian importers have been struck at prices that are 50 percent higher.

What’s more the Russians are not going to give up on their backyard without a fight. Amid all the talk of rising U.S. LNG exports to Europe, let alone the Baltics, Russia’s Novatek – a company that enjoys excellent ties with the Kremlin and is ~10 percent owned by Gazprom – became Europe’s largest LNG supplier in February 2019. It is doubtful Trump or his Baltic counterparts would flag that up.

Gaurav Sharma is an independent oil and gas analyst with over 15 years experience. He provides regular market commentary for events, publishers and broadcasters. Follow him on Twitter @The_Oilholic or email at gaurav.sharma@oilholicssynonymous.com

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