UNTAPPED POTENTIAL

The economy of the Baltic states that do not possess hydrocarbon resources depends entirely on foreign supplies. Why are these former Soviet countries, now members of the European Union, trying to get supplies from alternative sources? Specifically, possibilities for a broadening of cooperation with Azerbaijan present themselves. And the Klaipeda liquefied gas terminal on Lithuania's Baltic coast looks like being the first sign of a solution to the problem of energy security.

Lithuania's Energy Minister Jaroslav Neverovich discussed in an interview for R+ the prospects for the development of relations between official Baku and Vilnius and the impact Azerbaijani gas supplies will have on the Lithuanian market and the markets of the other Baltic countries.

- How do you assess the level of economic relations between Azerbaijan and Lithuania, in what areas is there potential for the development of relations and what measures are being taken to expand cooperation? 

- I am sure we have a great many unexplored possibilities for developing bilateral economic relations. Lithuania has the potential to increase the export to Azerbaijan of Lithuanian-manufactured goods, such as dairy products, mineral fuel, oils, electrical machinery and mechanical equipment and optical, medical and pharmaceutical goods. Of course, Lithuania can offer not just goods but services, too, including transport, logistical and IT services.

The European Union recognizes Lithuania as the main transport centre in the region, linking the EU with the East. Lithuania lies at the crossroads of international transport routes and the two transport corridors that are a priority for the EU: the North-South road and rail routes linking Scandinavia and Central Europe, and the East-West route linking eastern markets with Western Europe. The international airports situated in central, eastern and western Lithuania, with direct flights to Europe's major cities, and the only warm-water port on the eastern seaboard of the Baltic - Klaipeda State Maritime Port - are some of the most important logistical advantages. 

I believe there could be interesting opportunities for Azerbaijani companies to invest in the projects under development at the Klaipeda deep-water port, the Klaipeda Free Economic Zone and the Baltic Logistics Centre, as well as the expansion of cooperation between the business partners of Lithuania and Azerbaijan in utilizing the capacities of Klaipeda port to transport Azerbaijani freight. The potential of Klaipeda port could be of interest to Azerbaijan, as a state in which oil and petroleum products are a most important engine of the country's economy. This is a strategic area in which in the last three years freight volumes have increased considerably thanks to investments in the port's infrastructure, and therefore the port's capacity has increased considerably, especially in the transhipment of freight from other countries - petroleum products, containers, ro-ro vessels and so on. Two oil terminals are currently operating at Klaipeda port, whose overall annual capacity is about 12m tonnes.

With regard to cooperation in the energy sphere, I would like to point out that Azerbaijani energy enterprises have already become players in the global market. They have made very serious investment decisions on pipelines to the EU - TAP [Trans-Adriatic Pipeline] and TANAP [Trans-Anatolia Pipeline]. These are very serious strategic decisions which show the intentions of the Azerbaijani companies. We can also see the intentions of Azerbaijani companies to develop LNG (liquefied natural gas) business. We think there are possibilities here for cooperation, but we must leave these negotiations to the companies, and if these opportunities materialize we will be able to speak about them in more detail. At meetings with the Azerbaijani government I heard that SOCAR intends to become a world player in the gas trade, including LNG, and we see SOCAR as a player in the Baltic region market.

- Lithuania is one of the few states in Europe which is 100-per cent dependent on Russian gas supplies. At what level is gas consumption at in Lithuania at the moment and what measures are you taking to reduce gas consumption?

- As you rightly point out, in the gas sector Lithuania is 100-per cent dependent on one supplier. We can see that this ineffective and it does not meet the interests of our industry and economy and, of course, our consumers, when a monopoly supplier fixes the highest price for energy resources in the EU. We have decided to diversify our gas sector and to build inter-connectors with other countries and a liquefied gas terminal. This guarantees an acceptable price level. In other words, we know that even if our main supplier decides to increase his price, it will not be higher than the price of liquefied gas on the world markets. For this plan to work we need an independent operator for the gas supply system. The first step towards diversification is the construction of the liquefied gas terminal at Klaipeda. This will virtually enable us to supply gas to Lithuania, Latvia and Estonia, from any direction where the best price is.

- Recently Lithuania managed to get a reduction in the price of gas purchased from Gazprom. What was the price for gas and what is it now? And how long is the term of the new contract?

- We have managed to take a step in the right direction with Gazprom and the price of gas has been reduced by 20 per cent, and this is positive news for our economy, industry and consumers. We shall continue to have negotiations, including on the question of gas supplies, after 2015.  

- Before the agreement on a discount with Gazprom, Lithuania threatened to go to the International Arbitration Court. Have these plans been shelved for the moment? What are Lithuania's claims against Gazprom at this stage?  

- I would like to draw attention to the fact that agreement has been reached between the two commercial structures - the Lithuanian Letuvos Dujos enterprise and OJSC Gazprom. During privatization an obligation was undertaken to the government of the Lithuanian Republic - but not to the company - to apply fair prices throughout the whole period of validity of the contract on gas supplies, and therefore the government's position on a continuation of the proceedings at the Stockholm Court of arbitration and the demand for compensation remain unchanged. The agreement between the two companies - Letuvos Dujos and Gazprom - has no impact on the Stockholm proceedings on repayment. 

- A liquefied gas reception terminal is being built at Klaipeda. How much is this project going to cost and how much gas can be purchased on it?

- If you take into account all the components of the terminal - investments in the infrastructure of the LNG terminal, all the preparatory work at the port and the work on constructing the embankment, as well as investments in leasing the storage vessels with the gas equipment for a term of 10 years - the total sum of investments and costs will be 2.1bn litas (0.58bn euros).

The pace of the implementation of the project is really high, and I am pleased to say there have been no delays. We feel confident that we shall have a functioning LNG terminal in Klaipeda in December this year. The terminal will enable consumers to choose alternative sources of gas supplies, thereby reducing their dependence on one external supplier, and create an opportunity to participate in international gas markets, reduce the average price for imported natural gas and also provide a security standard for supplies in line with EU law requirements.

During the first year of the terminal's operation it is planned to pump about 0.5bn cu m of gas, and in the future its capacity will reach 3bn cu m a year. In 2012 Lithuania consumed almost 3.4bn cu m of gas which it imported from its only supplier - Gazprom. So, in the future the LNG terminal could meet Lithuania's total annual consumption of natural gas.

Other strategic projects are also being implemented which will enable natural gas supplies to be diversified. One of these is the Lithuania-Poland gas pipeline project. The linking of the Lithuanian and Polish gas pipeline systems is a step in the direction to end Lithuania's energy isolation in the gas sector and towards integration into the EU's common energy market.

The construction of the link, which was initiated by the state leaders of Lithuania and Poland and is due to be implemented in 2018 and which is strategically important for the unity of the European Union's gas market, is supported by the European Commission.

- It is no secret that liquefied gas is dearer than pipeline gas. To what extent will this terminal influence Lithuania's gas market, as well as that of the neighbouring countries - Latvia and Estonia - which are also wholly dependent on Russian gas? 

- In the never-ending discussions about the site of the regional LNG terminal, Lithuania had no alternative other than to eventually come to a decision: either build its own terminal in Klaipeda or continue to take part in discussions on the site of the regional terminal with no clear outcome in sight and the vague prospect of this terminal actually coming into being.

The state's decision to build the LNG terminal is based on a desire to create an alternative thanks to the acquisition of cheaper gas on the market and the strengthening of its negotiating positions on the question of lower gas prices when buying from the Russian supplier, Gazprom. If we could have reduced the price of gas by 5-6 per cent, the costs of operating the terminal would have been covered annually.

Providing alternative gas supplies is important not only to Lithuania, but to the whole region. Although the question of the regional LNG terminal has been discussed for five years already, no decision has yet been reached. So our aim is to implement as soon as possible the LNG project in Klaipeda which is already the "ice-breaker" in the whole process of seeking alternative gas supplies. We have made it clear to our regional partners - Latvia, Estonia and Finland - that we are open for negotiations regarding the use of the LNG terminal in Klaipeda for providing regional needs.

- What discussions did you have during your recent visit to Azerbaijan and how realistic is the possibility of Azerbaijani gas supplies to Lithuania? 

- Cooperation between Azerbaijan and Lithuania presents opportunities for linking the Caspian and Baltic regions on the most acute issue on the agenda - the distribution of energy markets. At meetings with Azerbaijani Prime Minister Yaqub Eyyubov and Energy Minister Natiq Aliyev, Taxes Minister Fazil Mammadov noted that relations between Azerbaijan and Lithuania are developing in the right direction.

Azerbaijan is aiming to diversify the sales markets of its energy resources. This provides an opportunity not to be dependent on one geographically or historically established buyer. Lithuania is also aiming towards this same idea, only in providing itself with gas. The strategic projects being implemented by both countries make it possible to see real cooperation in the near future. The inter-governmental commission on bilateral cooperation between Lithuania and Azerbaijan, which is represented on the Azerbaijani side by F. Mammadov, is providing for good and established political and economic conditions between the states.

- Will the expected supplies of Azerbaijani gas to Europe from 2019 have any impact on the gas market of Lithuania and the other Baltic countries?   

- The European Commission is aiming for broader diversification of energy supplies and sources of the EU member-countries. That is why the TANAP and TAP projects being implemented by Azerbaijan, which provide for gas supplies to the EU, are important for Lithuania and the whole Baltic region. Lithuanian companies responsible for purchasing gas should take advantage of this competitive opportunity. This gas does not have to be physically supplied to the Baltic countries - so-called "virtual swaps", which are possible on a liberal market, exist for this purpose.