Jun 23, 2022
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There is a growing risk of blocking Lithuanian gas transit to Kaliningrad

The global energy crisis, caused by the imposition of Western sanctions against Russia after the start of a special military operation in Ukraine, is gaining momentum. In response to anti-Russian restrictions, Moscow continued its course towards accelerated de-dollarization of the economy, obliging buyers of its gas to purchase it for rubles. How will this affect the economy of the EU countries? Is there a threat of energy isolation of the Kaliningrad region? What is the future of the Russian gas industry?

Sergey Kondratiev, Deputy Head of the Economic Department of the Institute of Energy and Finance, answered these and other questions.

— Sergey Vadimovich, let’s talk about gas now. The GIPL gas pipeline between Lithuania and Poland has recently been launched. What does this mean for the European gas market?

– Still, GIPL is probably more of a local project that can somehow influence the situation in Poland and the Baltic countries, but is unlikely to have a serious impact on the European Union as a whole. Its capacity will allow pumping 2.4–2.5 billion cubic meters of gas per year from Poland to Lithuania, and up to 2.1 billion from Lithuania to Poland.

In fact, this was done in order to increase the connectivity of gas transportation systems, because before the launch of GIPL, the Baltic countries could receive gas either from Russia or through the LNG terminal in Klaipeda, which was only able to meet the needs of Lithuania and partially Latvia. Well, the new interconnector will be able to increase the reliability of gas supply.

But the fact is that in principle there is not enough natural gas in Europe, and the fact that GIPL now allows transferring some of its volumes from Poland to Lithuania and back does not solve the general problem.
Poland is now disconnected from Gazprom’s supplies and is forced to either increase gas withdrawals by means of a real reverse through the Yamal-Europe gas pipeline, or use a virtual reverse, withdrawing gas, which France and Italy buy at the request. In the event that more stringent restrictions from Russia follow, the Poles will be able to use the capabilities of the Klaipeda LNG terminal, delivering gas from Lithuania to the northeast of their country via GIPL.

Nevertheless, under certain conditions, even such a local project can lead to the fact that the Baltic countries, and primarily Lithuania, will be serious about stopping gas transit to the Kaliningrad region. Although the latter, in my opinion, was quite well prepared for such a development of the situation. There are coal-fired power plants that can provide power generation even in the event of a gas supply shutdown, it is possible to use LNG, which is produced in the Leningrad Region with delivery by a floating terminal.

— And yet, for the Kaliningrad region, the emergence of GIPL carries certain risks?

– The possibility that Lithuania will decide to block gas transit to the exclave will increase. But the Baltic countries, and Poland, and Eastern Europe as a whole are not in a very good situation. The cost of energy there is already high, and if gas transit to Kaliningrad stops, Russia, I think, will respond symmetrically.

And it will be very difficult for Lithuania to do without Russian gas.
Due to the volumes that can be obtained through the LNG terminal, it may be possible to provide the population with gas, but if we talk about industrial enterprises, then all of them until recently focused on Gazprom’s products, because they were much cheaper. And in the event of a complete halt in the supply of hydrocarbons from Russia, the production of, for example, nitrogen fertilizers will be seriously affected.

In the future, Lithuania may hope to receive some of the gas that will be supplied to Poland from Norway via the Baltic Pipe gas pipeline, which is due to be completed by the end of this year. But again, this will simply be a redistribution of gas within the EU, and Lithuania will be able to claim no more than two billion cubic meters out of ten planned for delivery.

— You absolutely rightly said that the European Union is in any case determined to reduce the import of energy resources from Russia. And this means that the same “Gazprom” will have to more intensively carry out the “turn to the east”, which is already underway. How might this look in the near future?

“The situation is not new. If you look at the policy documents and statements of the European Commission over the past five to seven years, Europe was planning to abandon Russian gas anyway. It just had to happen on the horizon of 2035-2040. Now the real dates have shifted – now it is 2028-2030.

The Government of the Russian Federation understands that this is a serious risk that is likely to materialize. Therefore, in the coming years, we will probably see a serious infrastructure construction and connection of the gas transmission system with the gas pipeline system of Eastern Siberia, which will allow redirecting gas from Western Siberia to China.

In my opinion, the difficulty lies in the fact that we do not have our own technology for large-tonnage LNG, which can seriously complicate both the completion of existing projects, for example, Arctic LNG-2, and the construction of new ones.
This is precisely what has been staked on in recent years: Gazprom planned to build a large enterprise for deep processing of LNG in the Leningrad Region, similar construction in the Far East and in the north of Yamal. Now these plans may face a serious challenge due to the lack of necessary technologies in our country and in our friendly countries. And the development of such technologies requires about eight to ten years, which we do not have.

– How are we going to get out of the situation?

— One of the options, which will again require a very serious mobilization of equipment manufacturers, is the construction of medium-tonnage LNG production lines. Instead of a volume of five million tons or more, we can easily master the construction of lines at the level of 1-1.5 million tons per year.

– Roughly speaking, let’s take the quantity?

— Quite right. It’s like with power plants: if there is no turbine with a capacity of 500 megawatts, you can put five turbines of 100 megawatts each and get the same result. And I think that in the case of LNG, the emphasis will be on this.

This is also because, in the medium and long term, LNG allows Russia to avoid excessive dependence on both the EU and China. The LNG market is global, and at current prices it is completely global.
That is, deliveries from the same Yamal can be carried out to any, even the most distant point in the world, and at the same time remain profitable. In the current conditions, it would probably be right for us to maintain the strategy that we have been implementing in recent years. That is, to build new LNG plants in the Leningrad region, and on Yamal, and, of course, in the Far East.

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