Latvian Logistics May Slow Baltic Gas Market

The Baltic states' ambitions to replace Russian pipeline gas with liquefied natural gas (LNGLF) and create a tradable market are unlikely to come to fruition until 2017 or later because of restricted access to the region's sole gas storage site.

Lithuania is due to import the first commercial LNG cargo by tanker from Norway at the end of December. Its president has said that LNG could meet about 90 percent of Baltic gas needs in the future.

Until Lithuania can gain untrammelled access to storage and pipelines across the Baltics and establish a tradable regional market, however, its cost of securing a non-Russian source of supply is likely to be high.

LNG importers need storage to balance flows as demand fluctuates.

But contracts providing third parties with access to the Incukalns underground gas storage site in Latvia are not transparent, which is hindering the emergence of a market, Lithuanian LNG importer Litgas said.

"Without clear rules of access to Incukalns, there will be no Baltics gas market ... It can hardly happen without the middle chain," Litgas Chief Executive Andrius Tuckus told Reuters.

The European Commission said in October that Latvia should urgently establish clear rules for third-party access to Incukalns, including gas from the Lithuanian terminal, in case Russia cuts gas supplies.

Utility Latvijas Gaze, partly owned by Russia's Gazprom, has the exclusive right in Latvia to operate its gas grid including Incukalns and to supply gas.

It is set to lose its monopoly in 2017 under EU competition rules aimed at preventing dominant suppliers from also controlling infrastructure.

"There are no discussions that the monopoly would continue in Latvia after 2017 ... The company will be split and the market will completely change," Latvijas Gaze spokesman Vinsents Makaris said.

Meanwhile, he said Latvijas Gaze had no intention of blocking flows from Lithuania's LNG terminal that must cross Latvia to reach Estonia.

"We are not interfering with the trade between Estonia and Lithuania, but we do have an exclusive license to sell and supply gas in Latvia," Makaris said.

Operation and Ownership
Another obstacle is that Incukalns has little spare capacity. Latvijas Gaze said the site is used during the winter only for withdrawals to supply Latvia, Estonia and northwestern Russia, during which time it cannot take injections.

"Right now Incukalns ... isn't operated as an asset in a genuine liquid market," said Matthew Bryza, a former U.S. ambassador to Azerbaijan who heads a Tallinn-based think-tank.

In 2013, gas injections at Incukalns totalled 2.1 billion cubic metres and withdrawals 1.9 bcm, but in 2012 both were at 2.3 bcm, its full capacity.

Lithuania has considered building its own storage, but preliminary estimates showed it would cost more than a billion litas ($361 million) and take at least seven years, leaving Latvia's storage the best option.

An underlying issue with Incukalns is that Russian companies control Latvijas Gaze, with 34 percent owned by Gazprom and 16 percent by Itera Latvija, a gas firm linked with Russia's Rosneft.

"Gazprom and Itera have together a significant controlling stake in Incukalns, and they can ... prevent the usage of the facility in a normal gas trading market environment," Bryza said.

Gazprom said that EU energy market rules, known as the Third Energy Package, prevent it from blocking access to alternative suppliers in Europe.

"Every supplier intending to use capacity of a European storage site may book it during an open-season procedure," the company said in an email to Reuters.

Gazprom, which also owns gas storage stakes in Germany and Austria, organises transparent auctions, it added.

Unlike Germany or Austria, Latvia has not yet implemented the Third Energy Package and has not decided on how Latvijas Gaze would be split, including whether Gazprom will have to sell its stake in Incukalns.

Meanwhile, Germany's E.ON wants to sell its 47.2 percent stake in Latvijas Gaze, opening a possibility for Gazprom or Itera Latvija to increase their control to 2017 at least.

Itera Latvija has not returned requests for comment.

By Aija Krutaine and Nerijus Adomaitis