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A gas-powered independence (FDI magazine feature)

18 Dec 2017

Klaipeda, Lithuania’s third largest city with a population of roughly 150,000, was once dependent on Russia for natural gas. However in recent years, Klaipeda’s liquefied natural gas (LNG) terminal and its free economic zone (FEZ) have driven the country’s economic independence.

The primary objective of the LNG terminal was to secure gas supplies and secure the energy market, according to Tadas Matulionis, the business director at the Klaipeda LNG terminal. Today, however, the terminal (coupled with the Klaipeda FEZ) has enabled Lithuania to break free from Russia’s regional monopoly on natural gas, while creating an attractive environment for foreign investors.

Moored in the northernmost non-freezing port of the Baltic Sea isthe Klaipeda LNG floating storage and regasification unit (FSRU). This 290-metre tanker, named Independence, enables the port to store and convert LNG into other burnable fuels. Owned by Höegh LNG and chartered by Klaipedos Nafta, the FSRU receives gas deliveries via tankers from natural gas-producing countries, such as Qatar, Australia and, more recently, the US. The imported gas is then stored and re-gasified before being transferred to the regional gas grid via an 18-kilometre pipeline.

Diversifying supply

The LNG terminal has played an integral role in transforming Lithuania’s economic growth. Since being commissioned in December 2014, the facility has allowed Lithuania to diversify its sources of gas. Previously it purchased all of its natural gas from Russia’s Gazprom, which charged some of the highest prices in the EU.

“Consumers were forced to pay whatever price was asked [for gas]. Over the years statistics demonstrate that price gap has been 20% – sometimes more – above the EU average,” says Mr Matulionis. With the LNG terminal, Lithuania can buy natural gas on the competitive market, thereby lowering prices and removing the risk of being subject to volatility in Russian gas markets.

“Nobody in Europe had seen an energy project done in that short a period of time,” says Eimantas Kiudulas, director at Klaipeda FEZ. “But it was done. And it happened because the team at the company was new world management, which came to power with no Soviet baggage. They’re just new, young and educated people. So that was a very good example where, if we want to do something confined with a dedicated budget, we can do it.”

Lithuania’s neighbours have also benefited. Because the LNG terminal operates a third party access regime, any country in the EU is entitled to the same terms and conditions as Lithuania. Mr Matulionis says: “A Latvian or Estonian trader could come to the terminal and book capacities exactly on the same terms.” As a result, countries that traditionally had their energy infrastructure tied to Russian markets can now buy gas supplies at a reduced price from Lithuania.

Links beyond Baltics

Beyond the Baltics, Finland, Poland and Ukraine could also benefit from the Klaipeda LNG. Upon completion of the Baltic Connector pipeline, Finland will no longer have to rely solely on Russia for its gas, as the pipeline will allow the country access to EU markets. Meanwhile, the Gas Interconnection Poland Lithuania pipeline, or GIPL, is scheduled to be completed in 2019, and will have the capacity to deliver 1 billion cubic metres of gas a year from Lithuania to Poland and 2.4 billion cubic metres a year from Poland to Lithuania.

For Ukraine, energy security is crucial, particularly given its ongoing conflict with Russia. Although Lithuania and Ukraine are connected via a pipeline that crosses Belarus, the “pipelines do not have an open-access regime”, says Mr Matulionis. Barring any setbacks, the completion of the gas interconnection in Lithuania will allow it to export LNG to Ukraine via Poland in 2021.

The LNG terminal’s success has been complemented by the Klaipeda FEZ. Arturas Drungilas, marketing director at Klaipeda State Seaport Authority, says: “The FEZ is a very important part of our goal because when [manufacturing] companies decide to establish themselves,they are usually choosing clients in a free economic zone because they’re within the vicinity of the port.”

For example, Singapore-based plastics manufacturer Indorama was already operating in the FEZ, “but it was feeling the risk of the increase in gas price because of [Russian imposed price volatility],” says Mr Kiudulas. “But this establishment of the LNG terminal started to be a benchmark between Russian gas and Norwegian gas and US gas, and we had an opportunity for decreasing the gas prices. We allowed for the free market. Before, it was a huge political and economic risk for any company who wanted to invest here.”

Off to a quick start

The FEZ offers a Fast Factory Launch scheme and FlexStart programme that enable investors to hit the ground running. Fast Factory Launch provides companies with completed construction permits and permission to alter a site to meet their needs, while FlexStart enables investors to be operational in less than a month by offering access to pre-built manufacturing facilities.

The growing investment in LNG operations has increased the demand for industry-relevant skills, which is why Klaipeda’s Science and Technology Park is working to develop a new LNG cluster and faculty to train LNG engineers using curricula designed around those relevant fields. “We’re pushing this way through the energy cluster, with new companies joining them, and we’re trying to think of which new industries we can build on that,” adds Mr Kiudulas.

The more than 100 companies that have invested in Klaipeda employ about 4500 people, many of whom work in the ship repair and building industry. In total, Mr Drungilas says the FEZ and LNG terminal have created about 15,000 jobs for Lithuania’s economy.

The Klaipeda FEZ is continuing to invest in additional infrastructure. In October, Klaipeda FEZ Management Company announced an investment of €2.7m into a 6000-square-metre universal production building. Scheduled for completion in early 2018, the building can be customised specifically to the needs of the investor, demonstrating yet again that Lithuania is dedicated to creating an independent economic ecosystem for investment.

(This article was featured at FDI Magazine’s December 2017 – January 2018 issue)

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