Download - 2009 Bemip Ramboll Bemip Final Report

Ref. 953106/BEMIP Final report

Prepared for the EU Commission DG TREN C1

Future Development of the Energy Gas Market in the Baltic

Sea Region

Final Report

June 2009

Ramboll Oil & Gas Teknikerbyen 15 2830 Virum Denmark Phone +45 4598 6000 www.ramboll-oilgas.com

Rev. Date Made by Checked by Appr. by Description

2009-06-12 PEJ/SFK PEJ/SFK/ADM PEJ/SFK Final Report

Ref 953106 Ref. 953106/BEMIP Final report

Final Report

June 2009

Prepared for the EU Commission DG TREN C1

Future Development of the Energy Gas Market in the Baltic Sea Region

Ref. 953106/BEMIP Final report I

Table of contents

0. Executive summary 1

1. Introduction 4 1.1 Baltic Energy Market Interconnection Plan – this report 4 1.2 The Amber project – different definitions 5 1.3 Nord Stream, Yamal-Europe II, Nabucco 5

2. Conclusions and recommendations 6 2.1 Status of conclusions and recommendations 6 2.2 Market Issues 6 2.2.1 No need for permanent derogation of Baltic gas markets 6 2.2.2 Polish gas transmission pipeline Yamal-Europe should be opened for market

access in normal and reverse flow directions and preferably integrated with Gaz-system network 7

2.2.3 Integration of the gas networks in the East Baltic Sea countries (Finland, Estonia, Latvia and Lithuania) will be an advantage for the market 8

2.2.4 Establishment of uniform regulation in order to ensure investment incentives in region 8

2.2.5 A time limit to 2014 should be used for the full opening of all markets and the establishment of new infrastructure 8

2.2.6 Low gas end-user prices gives room for investment in market opeing and security of gas supply without jeopardizing social aspects 9

2.2.7 Suspension of Skanled raises uncertainty about Norwegian gas supply to EU and in particular to the Baltic Sea region and opens for LNG 9

2.3 Infrastructure 10 2.3.1 Focus on market integration and security of supply 10 2.3.2 East Baltic Sea bridging the “gas islands” to the integrated EU gas transmission

system and securing alternative gas supply. 10 2.3.3 Further investments in East Baltic Sea depends on the status of the Yamal-

Europe pipeline with respect to reverse flow 11 2.3.4 West Baltic Sea – depletion of Danish field requires urgent action for new

supply to Denmark and Sweden. 12 2.3.5 LNG recommendations 13 2.3.6 Interconnection of the East Baltic gas markets opens for development of large

scale, strategic and commercial, underground gas storage in Latvia 14 2.3.7 Financial crises and lower oil prices reduce cost and time of establishing gas

network substantially 14 2.3.8 Russian gas system development may impact the project usage in the longer

term, but should not delay implementation of recommended projects 14

3. Objectives and criteria 14

4. Analysis of indigenous production/transmission/storage and LNG 15 4.1 Gas demand around the Baltic Sea 15 4.2 Indigenous production/transmission/storage/LNG capacities 17 4.2.1 Norway is the main gas source in North-West Europe 18

Ref. 953106/BEMIP Final report II

4.2.2 Germany 19 4.2.3 Poland 20 4.2.4 Denmark 20 4.2.5 The Netherlands 21 4.2.6 The UK 22 4.3 Gas transmission in the region 22 4.3.1 Integration of gas networks in Germany 24 4.4 Gas storage in the region 25 4.4.1 Geological potential, existing and planned facilities 25 4.4.2 Demand for storage capacity in the Baltic countries and Finland 25 4.5 LNG around the Baltic Sea 26 4.6 Conclusions on gas reserves and indigenous production 26

5. Links of the three Baltic countries with the Gazprom system 27 5.1 Overview over system 27 5.2 Capacity assessment of normal operation 2009 28 5.2.1 Pipeline capacities 28 5.2.2 Demand peaks during cold periods 29 5.2.3 Supply-demand balance area 1 29 5.2.4 Supply-demand balance area 2 29 5.2.5 Supply-demand Finland 29 5.3 Capacity assessment after Nord Stream in operation 29 5.4 Summer operations of the Baltic gas system 30 5.5 Latvian gas storage interrupted 31 5.6 Belarus supply interrupted 31 5.7 Russian supply interrupted 32 5.8 Dispatching structure and decision making 32

6. Identification of the benefits of the interconnections through the value of capacity 33

6.1 Benefits of the interconnections – whole sale prices – net back value of gas 33 6.2 Russian gas supply prices 33 6.2.1 Gas import prices and contracts 33 6.2.2 Netback prices in the Baltic countries and Finland 34 6.2.3 Impact of decreasing transportation costs 35 6.3 Gas retail prices 36 6.3.1 Low retail prices compared to other EU member states 36 6.3.2 Potential for market integration 38 6.4 LNG prices 39 6.4.1 EU LNG import prices 39 6.4.2 LNG price in the Baltic Sea 39 6.5 Conclusion on prices 41

7. Main infrastructure gaps and bottlenecks 42 7.1 Missing links 42 7.2 Principles for interconnections around Baltic Sea 42 7.3 Bottlenecks in the system 43 7.3.1 Latvian/Lithuanian border 43 7.3.2 Polish- German border - Reverse flow in Yamal-Europe pipeline 44 7.3.3 Denmark-Germany 45

Ref. 953106/BEMIP Final report III

7.3.4 LNG storage 45

8. Identification of pending questions preventing the implementation of an integrated energy market 46

8.1 Derogations status and conditions 46 8.2 Uniform regulation 47 8.3 Security of supply 48 8.3.1 Low security of supply Baltic Sea countries 48 8.3.2 Security of supply costs in general 50 8.3.3 Security of supply costs in the Baltic countries 50 8.3.4 Security of supply costs in Denmark 51 8.4 Improving market mechanisms and strengthening incentives 51 8.5 Identification of possible market related actions 51

9. Prioritisation of necessary interconnections, gas storages and LNG terminals 52

9.1 Methodologies, suite of models and evaluations 52 9.2 Baltic Sea projects are relatively small investments compared to major supply

systems to EU 53 9.3 List of project and project assessment 53 9.3.1 SWOT Pipeline projects – short to medium term 53 9.3.2 SWOT Pipeline projects – Long-term 56 9.3.3 SWOT LNG projects 57 9.3.4 SWOT Storage projects 58 9.4 Pipelines versus LNG projects 59 9.5 LNG assessment 61 9.5.1 Small or “large” scale LNG 61 9.5.2 Conclusions on LNG size 62 9.5.3 Location of LNG 63 9.5.4 LNG options – traditional with storage or direct gasification on ship 63 9.5.5 Gas storage versus pipelines and LNG 65 9.6 Qualitative comparison of projects 65 9.7 Quantitative comparison model 67 9.7.1 Model description 67 9.7.2 Conclusions on quantitative analysis 69

List of appendices

A. [Appendix]

Ref. 953106/BEMIP Final report 1/73

0. Executive summary

The East Baltic Sea member states of Finland, Estonia, Latvia and Lithuania are the only four member states which remain isolated from the present integrated EU gas transmission system. The gas demand in these member states, which can be considered as a separate “gas island” from the rest of Europe, is approximately 10 bcm per year. The isolation mentioned above is further aggravated by the East Baltic States and Poland’s continued reliance upon gas supplied from one source, Russian gas, which is supplied either directly from or via Belarus. Subsequently such states are afflicted by both low levels of diversification and security in their gas supplies.

Considerable gas reserves are still available in Norway which is in close proximity to the Baltic states and Finland and has significant levels of resources available with 3000 bcm of remaining and a further 1900 bcm in undiscovered fields. This is the only long-term supplier in the region, other than Russia, as gas fields are rapidly being depleted in UK, The Netherlands, Denmark and Germany. However in the short-term these countries still have an active part to play in contributing to gas supply in the region. In addition to the above mentioned suppliers gas can also be supplied as LNG, as all member states are located with direct access to the Baltic Sea. Geological conditions for underground gas storage vary in the region with Finland, Estonia, Sweden and Norway having no suitable locations whilst there remains good conditions in Latvia, Germany, Poland, Denmark and possibly also in Lithuania. The most important gas storage in the region is Incukalns in Latvia.

The pipeline system in the Baltic Sea region has historically been developed as two main systems with the West supplied by The Netherlands, Germany and North Sea resources, and the East supplied by Russia. The Yamal-Europe pipeline constitutes the main connection between the two systems but is only open from East to West. The lack of reverse flow possibility in this pipeline constitutes a major hindrance for market integration and security of supply. With the establishment of the Nord Stream pipeline there will be an even stronger connection between the overall systems, but this alone will not solve the issue of “gas islands”.

The capacity from Russia to the East Baltic Sea market is adequate to meet today’s demand, however such supply may only be achieved by use of the Incukalns gas storage and the balance is sensitive to disruption of supply from the storage or one of more pipelines from Russia. When Nord Stream is established the balance is dependent upon the supply from new Russian onshore pipelines, the development of the Shtokman gas field and furthermore how flexible the offtake to Nord Stream will be in view of the creation of connection to the large German market with numerous gas storages available.

So far the end-user gas prices in the East Baltic Sea region have been lower than in the rest of EU, this is probably due to depreciated gas systems and their vicinity to


the main gas supplier, however there increasingly seems to be a tendency towards convergence of gas prices within the EU.

In the West Baltic Sea area the depletion of gas fields in Denmark means that within a few years time there will be a lack of capacity to Denmark and Sweden, who both already have a low security of supply and diversification with only one pipeline.

A considerable list of infrastructure projects has been presented in the region to improve diversification and security of gas supply. This includes numerous methods including pipelines, underground gas storage and LNG projects. These listed projects have been compared by their strengths, weaknesses, opportunities and threats as well as by a quantification of these aspects with a focus on the principal aim of the Baltic Energy Market Interconnection Plan which is to improve both diversification and security of supply by means of interconnection and providing alternative supply options. The list of projects and qualitative comparison is shown in the table below:

A

mber

Bal

ticc

onnec

tor

Am

ber

PolL

it (

OS)

Am

ber

PolL

it

Bal

tic

Pipe

Bal

tic

Gas

Inte

rconnec

tor

Inte

rTra

nsG

as (

DE -

PL)

DK/S

V -

Lat

via

Mid

Nord

ic

Ska

nle

d

NO

-DK

Deu

dan

Latv

ia-L

ithuan

ia

LNG

Pola

nd

Finngulf L

NG

LNG

Lithuania

Dobel

e U

GS

Incu

kaln

s ex

pansi

on

Lith

uania

UG

S

Connect energy islands Lift Derogations Finland Latvia Lithuania Estonia Supply New supply to East Baltic New supply in general Access to gas exchange Diversification to region Security of Supply Short term technical Long term Transit possibility Finland Estonia Latvia Lithuania Poland Sweden Maturity Ownership to project Operational within 5 years Capacity Regional capacity Legend Yes Uncertain


Based on these analyses the following projects are recommended to be implemented within a time frame of 2014:

Table 1: Summary of recommended investments in the East Baltic Sea

Amber PolLit

Balticconnector

Latvia to Lithuania (upgrade of cross-border capacity and internal systems)

Latvia to Estonia (upgrade of cross-border capacity and internal systems)

Base case investments

LNG terminal in Finland (alternatively Estonia)

InterTransGas and small local DE-PL pipelines

LNG in Lithuania

Additional investments only in case reverse flow in Yamal-Europe is not established New gas storage in Latvia or Lithuania

Table 2: Summary of recommended investments in the West Baltic Sea

Strengthening of Germany-Denmark (Deudan)

Strengthening of the Danish system to bring the gas to Sweden

Polish LNG

Norway-Denmark connection (could be a revival of Skanled, a North Sea connection or a direct pipeline from Karstø in Norway to Denmark)


Baltic Pipe/Intertransgas or Baltic Gas Interconnector

Due to a lack of data from feasibility studies a firm cost benefit analyses has not been carried out, additionally some of the measures to be ensured are not easily quantified from an economic viewpoint as their value may differ when seen from alternate stakeholder’s perspectives.

With respect to LNG facilities there are considerable economies of scale and it is recommended to limit the number of facilities, furthermore it is recommended that potential locations for such projects are in the far end of the supply system for security of supply reasons. As the main objective of the plan is to connect the


aforementioned “gas island” to the integrated EU gas system, any pipeline connections should in general be established before or at the same time as LNG projects in order to avoid a cementation of the present situation and lack of diversification.

Interconnection of the Baltic Sea region will open further long term investments and provide a more direct supply. It is also prudent to remember that the overall gas balance in the region is related to the development of the Russian gas system.

1. Introduction

1.1 Baltic Energy Market Interconnection Plan – this report The Baltic Energy Market Interconnection Plan is one of the six priority areas identified by the EU Commission in the Second Strategic Energy Review as published in November of 2008.

A High Level Group was set up and began to work on the issue from November 20 2008. One of the decisions was to establish a working group specifically for gas.

The present report is based upon the input presented by members of the working group on gas, whilst the analyses, assessments and comparison models are made by Ramboll are partly based on the work carried out by Ramboll in 2008 for the study of “TEN-E Priority Corridors for Energy Transmission.” Methodology for the selection and accelerated implementation of projects of European interest in preparation of the forthcoming revision of the TEN-e guidelines”.

In the present report we have chosen to focus on short to medium term projects and actions, i.e. projects and actions, which can be implemented before 2014. We analyse the core of the problem with regard to the “energy islands” of the four Member States Finland, Estonia, Latvia and Lithuania, i.e. the East Baltic Sea. Further we look at the West Baltic Sea and evaluate and analyse the demand for investments.

The recent decision to suspend the Skanled project, in its current form, does not in any way affect the analysis, ranking or recommendations on the East Baltic Sea made in this report. The issues concerning the East Baltic Sea set up by the Second Strategic Energy Review of increasing security of supply and market integration are still highly relevant and the arguments are still valid. Due to the suspension of the Skanled, Ramboll has introduced a Norwegian-Danish (NO-DK) project to illustrate the general value of bringing Norwegian gas to Denmark, as well as the expansion of the pipeline connecting Germany and Denmark (Deudan). The Norwegian-Danish connection could be a revival of Skanled, a connection between the offshore fields e.g. Ekofisk-Harald or a direct line from Karstø to Northern Jutland.


Ramboll has outlined a number of conclusions and recommendations based on the analyses of the present report, and the information obtained from the presentations to the Gas working group and e-mail dialog with individual members of the working group.

However it has not been possible to present and discuss the findings with main stakeholders in the region, which apart from the ministries, gas companies and regulators of the member states around the Baltic Sea includes the main gas supplier Gazprom, the main transit country Belarus and the governments of Russia and Belarus. It is assumed that coordination with these stakeholders takes place in the forum of EU-Russia energy dialogue.

1.2 The Amber project – different definitions The Amber project was first defined as a pipeline between Poland and Lithuania in a study performed in 2002 by PGNIG, LD and DONG Energy. Since then the term “Amber Pipeline” has been used for different lay out of pipeline projects which connects the Lithuanian and Polish gas systems.

Four different versions of the Amber project are included in this report:

Amber – is the major 30 BCM onshore import pipeline From Russia to Germany via the Baltic States and Poland

Amber PolLit – the 3 BCM interconnection between Lithuania and the Yamal-Europe pipeline in Poland

Amber PolLit (OS) - is the connection between the Polish and Lithuanian gas system described in the Polish open season, capacity is 1.5 BCM from Lithuania to Poland and 0.6 BCM from Poland to Lithuania

Amber Baltic - is a connection from North West Poland (with Baltic Pipe, LNG or InterTransGas as possible supply sources) along the Baltic coast to Gdansk area and further to Lithuania along the Kaliningrad border.

1.3 Nord Stream, Yamal-Europe II, Nabucco Large scale gas import pipelines to EU, which do not directly affect the issue of energy islands in the Baltic Sea region are not included in the analysis. The Nord Stream project has filed the applications for approval and the lay-out is hence frozen to a direct pipeline from Russia to Germany. The Yamal-Europe II, if constructed, will not contribute to the connections of the energy islands. Nabucco together with a North-South pipeline in Eastern Europe could contribute to increased security of gas supply to Poland and Germany but would not solve the issue of energy islands.


2. Conclusions and recommendations

2.1 Status of conclusions and recommendations Ramboll has prepared a number of conclusions and recommendations based on the issues raised in Second Strategic Energy Review and in the Terms of Reference for the Baltic Energy Market Interconnection Plan and the working group on gas. The recommendations and conclusions have been divided into two main parts: market issues and infrastructure.

This final report has been updated with the comments and contributions received from the HLG meeting on 18 May and from direct communication with members of the Gas Working Group as well as from the by correspondence with stakeholders.

The recommendations and conclusions in this report have not been discussed with the major shareholders of the different projects outside the gas working group meetings.

2.2 Market Issues 2.2.1 No need for permanent derogation of Baltic gas markets

In the working group meetings the Latvian Ministry of Economy presented the following conclusion: “Latvia sees no possibilities how to diversify the sources of gas supply and as a result considers that the gas market of Baltic Sea region will remain isolated, dependent of one supplier.”

Ramboll does not agree with this viewpoint for the following reasons:

- Gas sources North Sea, Norwegian Sea, Barents Sea, Poland/Germany/The Netherlands are located relatively close to the East Baltic Sea. Furthermore there is a possibility for LNG import as all Baltic Sea member states are located at the sea. Supply of other sources of gas apart from Russian gas may therefore be supplied at reasonable cost.

- Convergence of wholesale gas prices in the EU has occurred in recent years and full implementation of the EU gas directive will create scope and incentive for investments and sourcing of additional gas supplies in the region.

- Only relatively small investments are needed to connect the East Baltic Sea region to the existing interconnected EU gas system. A typical interconnector or LNG plant will require approximately 300 MEUR or corresponding to a few percentages of the large scale investments seen elsewhere in the area and in the North Sea.

- Even a dedicated direct pipeline from Norwegian Sea or from Germany or Denmark to the East Baltic Sea could be established for less than 1 billion EUR, which when compared to the value of the existing gas system and other alternative energy supply sources are manageable.


- Other “corners” of the EU have managed to open their markets with the use of interconnectors and LNG systems, even if the demand has been much smaller than seen in the Baltic Sea region.

In the HLG meeting some delegates expressed the view that security of supply should be considered as more important than market issue for gas. We do not agree on this, as the size of the combined gas markets of the four isolated EU member states at present is more than 10 bcm, with an increasing trend leading to a likely size of 15 bcm in 2030. Also, in the four member states the size of the gas market is larger, measured in energy content, than the electricity market for which the market issue has been a high priority.

2.2.2 Polish gas transmission pipeline Yamal-Europe should be opened for market access in normal and reverse flow directions and preferably integrated with Gaz-system network The Yamal-Europe gas pipeline owned by EuRoPol Gaz is one of the most successful investments in the region. However the pipeline is still operated in a mode corresponding to the pre-accession of Poland and other Baltic Sea countries to the EU.

- Derogation has not been formally applied for by EuRoPol Gaz and in our opinion the pipeline should be used to serve the EU gas market, where there is a need for transport, even if this will require smaller extra investments in meter stations and new offtakes.

- Reverse flow can ensure security of supply to Poland and to a new Poland-Lithuania pipeline from the West in case of disruption of supply from Belarus or Ukraine.

- The uncertainty of the status of the pipeline makes it difficult to prioritise other projects in the region, as alternative supply sources can be dismissed as ineffective by the Yamal-Europe pipeline if opened.

- It should be considered to integrate the Yamal-Europe pipeline into the Gaz-system network in Poland, at least from a market point of view with a common network code and tariff system.

The opening of the Yamal-Europe gas pipeline for reverse flow should be discussed with the main shareholders of EuropPolGas, Gazprom and PGNIG, and on a political level between EU and Russia.

If the Yamal-Europe is opened for third party access and reverse flow, the proposed Baltic Pipe and InterTransGas may lose some of their importance. If this should be the case, then these investments could be used as an interconnector for balancing the Danish/Swedish gas market with the Polish and German markets.


2.2.3 Integration of the gas networks in the East Baltic Sea countries (Finland, Estonia, Latvia and Lithuania) will be an advantage for the market With the unbundling of the gas systems in the aforementioned countries there is a risk for sub-optimisation and high cost due to the size of the systems. The tendency at present in other EU member states has been toward the creation of large entry-exit systems of which some are cross-border. An integrated system will have a number of advantages for the market including but not limited to:

- Economics of scale will bring down cost for development of IT systems, network codes etc.

- Gas suppliers and shippers would have easier access to the system, as there would only be one entry-exit system

- A gas exchange and hereby transparent price information could be established as there would be more liquidity than in individual markets.

2.2.4 Establishment of uniform regulation in order to ensure investment incentives in region An integrated market would benefit from uniformity in the regulation of the transmission systems and commercially attractive conditions. It is recommended to:

- Ensuring a homogenous and common regulation regarding investments in gas infrastructure is prerequisite for all international projects in the region.

- Use ERGEG to play a coordinating role and use a common regulation in the East Baltic Sea area as a test project for cross-border regulation.

2.2.5 A time limit to 2014 should be used for the full opening of all markets and the establishment of new infrastructure The integration of the East Baltic Sea countries to other Baltic Sea countries has been discussed for 20 years or more, and in particular since the independence of Estonia, Latvia and Lithuania in 1991. The EU enlargement in 2004 and the implementation of the EU market conditions has added further incentive to avoid such energy islands being the prevailing condition.

- The EU gas market directive cannot be fully functioning before all member states are connected to the integrated system.

- For larger consumers and in particular power and fertilizer producers, this creates unclear competition situation with other member states.

- Experience from other corners of the EU shows that setting fixed timelines for EU support has created an incentive to make decisions and hereby implement projects.


- The potential capacity shortage and the lack of security of supply in the energy islands call for fast integration of the energy island the EU gas market.

2.2.6 Low gas end-user prices gives room for investment in market opeing and security of gas supply without jeopardizing social aspects End user gas prices in the East Baltic Sea region are among the lowest in EU. Even when adjusted for GDP the prices are in the middle range. The low prices are mainly due to the age of the existing gas system, which has already been depreciated. Whereas investment in new pipeline for security of supply reasons may seem high when compared to the existing depreciated asset value, the investments will be reasonable as compared to replacement values. Also, the proposed investments are comparable to the investment carried out for security of supply and market reasons in the newly gasified EU member states.

We therefore recommend that the regulation of gas transmission systems should allow for inclusion of interconnectors and LNG terminals in the asset base for the purpose of market opening and increase of security of supply.

2.2.7 Suspension of Skanled raises uncertainty about Norwegian gas supply to EU and in particular to the Baltic Sea region and opens for LNG The suspension of the Skanled project, in its present form, and the simultaneous downgrading of the official Norwegian gas production forecast from 125-140 bcm to 115-140 bcm, raises uncertainty about Norwegian willingness to supply gas to the Baltic Sea region. According to Gassco “subsequent uncertainties related to timing of new field developments on the Norwegian Continental Shelf” was one of the reasons for suspension of the Skanled. In view of the likely remaining gas resources of more than 5000 bcm, the downgrade of production forecast is a consequence of the economics of field development, including taxation, and the producers view on gas prices.

The high transit cost for gas via Denmark (Energinet.dk system and DONG Energy offshore pipelines) may also be a hindrance for transportation of Norwegian gas to the Baltic Sea region. It should be considered if the tariff systems and regulation of them should allow for special incentives for such transit.

Suspension of a project as Skanled may delay other projects due to uncertainty about the possible revival. We therefore recommend that a time limit should be put on the suspension, e.g. ½ year, after which the project should either move forward or be abolished.

As Norway is the only supplier in the region, apart from Russia, which in the longer term can supply gas to the Baltic Sea region there is consequently a need to ensure possibility for import of gas from sources outside the region, which means LNG.


2.3 Infrastructure 2.3.1 Focus on market integration and security of supply

It is recommended that the main priority of projects and the focus of the EU should initially be on the East Baltic Sea area (Finland, Estonia, Latvia and Lithuania), which are currently not connected to the integrated EU gas system. Further focus should be on Poland which can act as a bridge to the other countries. Supply systems to Poland from Germany, Denmark or as LNG are necessary in order to bring gas from Poland further on to the East Baltic Sea

Infrastructure in the West Baltic Sea is mainly necessary to compensate for the decline in the Danish gas reserves and hereby need for new gas sources to Denmark and Sweden. Sweden which currently only has one pipeline from Denmark and no storage is in a poor situation in terms of security of supply.

Norway has the potential to increase its low, but rapidly increasing gas consumption if new infrastructure is established. This could also be used to balance the power and gas system.

2.3.2 East Baltic Sea bridging the “gas islands” to the integrated EU gas transmission system and securing alternative gas supply. In order to connect the two energy islands of the East Baltic Sea region, Finland and the connected system of Estonia, Latvia and Lithuania, the following base investments are recommended:

- The Amber PolLit pipeline with connection to the Yamal-Europe pipeline (330 km capacity, at least 3 bcm/year)

- The Balticconnector (100 km, capacity at least 2 bcm/year)

- Latvian to Lithuania upgrade of cross border capacity and internal systems

- Latvia – Estonia upgrade of cross border capacity and internal systems

- An LNG terminal in Finland

This package of investment is considered as the base package of investments, which should be carried out in the short term, before 2014, in order to create market opening and increase security of gas supply.

The investment cost of this base package is in the order of 1000 MEUR. However, some of the projects, like the LNG in Finland, still require feasibility studies to be carried out. In case such studies show that a location in Finland is not the most optimal, then a location in Estonia or increased focus on underground gas storage are alternatives.

Pipeline projects should be established before the LNG and storage projects in order to avoid cementation of the countries as energy islands.


By creating an interconnected East Baltic Sea gas market the doors is opened for creating a liquid gas market, which could attract commercial investments in underground gas storage and potentially also in more direct pipeline connections.

Table 2 Summary of recommended investments in the East Baltic Sea

Amber PolLit

Balticconnector

Latvia to Lithuania (upgrade of cross-border capacity and internal systems)

Latvia to Estonia (upgrade of cross-border capacity and internal systems)


LNG terminal in Finland (alternatively Estonia)

InterTransGas and small local DE-PL pipelines

LNG in Lithuania

Additional investments only in case reverse flow in Yamal-Europe is not established New gas storage in Latvia or Lithuania

2.3.3 Further investments in East Baltic Sea depends on the status of the Yamal-Europe pipeline with respect to reverse flow If the Yamal-Europe pipeline is opened for reverse flow then there will potentially be many new gas suppliers who could sell gas to the region on a contractual level thus opening the Baltic market for new gas suppliers. This does however require that Lithuania and Poland are connected as included in the base package.

Furthermore physically, gas from the North Sea, Germany, The Netherlands etc. could be available in the event of a disruption of supplies from the East towards EU, as was the case for South-East Europe during the latest Ukrainian gas crisis when gas flowed from West to East in Europe.

If Yamal-Europe is not opened for reverse flow there will be a need for gas alternatives from other sources to ensure security of supply for the East Baltic Sea region, this could be in LNG form or long direct pipelines.

If Yamal-Europe cannot be opened for reverse flow there will be a larger need for investments in the region, as it will be necessary to import gas from further away.

There will hence be a need for investment in a new pipeline from Germany to Poland.

- InterTransGas from Germany to Poland and small local DE-PL pipelines

Due to the limited capacity of the national Polish gas system, there will be a need to further increase LNG import and underground gas storage capacity for security of gas supply and market opening, in particular for the Lithuanian market:


- LNG in Lithuania

- New gas storage in Latvia or Lithuania

The extra investments necessary in case reverse flow in Yamal-Europe pipeline is not ensured will be in the order of 1000 MEUR.

And eventually in order to ensure supply of gas from new sources in the longer term there will be an advantage of more direct pipeline connections to the East Baltic Sea region:

- Polish connection from Baltic Pipe to the Lithuania (Amber Baltic)

- Copenhagen/South Sweden – Latvia or Lithuania, or

- Mid Nordic Gas Grid with gas supply from Norwegian Sea fields

2.3.4 West Baltic Sea – depletion of Danish field requires urgent action for new supply to Denmark and Sweden. Depletion of the Danish gas fields threatens to create a new gas island of Denmark and Sweden. So far it was assumed that Skanled should be used to connect these markets to the gas reserves in Norway and the integrated Norwegian gas transmission system in Karstø.

In view of the suspension of the Skanled project, in its current form, the focus of the West Baltic Sea will naturally be on alternatives for supplying additional gas to Poland, Denmark and Sweden in line with depletion of the Danish gas reserves.

The most obvious gas supply sources to Denmark and Sweden will be gas from Russia via Nord Stream or Yamal-Europe pipeline. Gas to Poland could be from various sources via Germany and LNG import from sources outside the region.

This will require the following investments:

- Strengthening of Germany-Denmark (Deudan)

- Strengthening of the Danish system to bring the gas to Sweden

- Polish LNG

- Norway-Denmark connection (could be a revival of Skanled, a North Sea connection or a direct pipeline from Karstø in Norway to Denmark)

The overall investment level for these investments is approximately 1000 MEUR.

Further an eastern connection to Denmark/Sweden is recommended mainly to improve security of gas supply in Sweden and to diversify supply to Denmark, Sweden and Poland, which could either be:


- Baltic Pipe with increased focus on using the pipeline for transportation of gas from Poland to Denmark/Sweden together with

- InterTransGas; or

- Baltic Gas Interconnector, which can be used to bring gas from the Nord Stream pipeline to Denmark/Sweden.

Different options exist for combining these projects, and new may be developed in an optimisation effort. It is recommended that Sweden, Germany, Denmark and Poland create a special task force to optimise the solution. Such work should not delay implementation of the other projects mentioned.

With the suspension of the Skanled project, in its current form, there is a need to make long term planning of the gas supply to Denmark and Sweden. This could involve previous projects analysed during the last decades.

Table 3 Summary of recommended investments in the West Baltic Sea

Strengthening of Germany-Denmark (Deudan)

Strengthening of Danish system to bring gas to Sweden

Polish LNG


Norway-Denmark connection

Baltic Pipe

InterTransGas

Possible additional investments to strengthen security of supply in Sweden, Poland and Denmark Baltic Gas Interconnector

2.3.5 LNG recommendations In terms of investments in LNG facilities the following overall recommendations apply for investments in LNG terminals.

- LNG facilities should include LNG storage facilities to meet peak demand and short term supply disruptions.

- The relative small gas markets in Finland, Estonia, Latvia and Lithuania do not generate scope for more than one LNG terminal.

- It is important to ensure the largest market possible for any LNG terminal in order to ensure economic viability and utilisation of the LNG terminal.


2.3.6 Interconnection of the East Baltic gas markets opens for development of large scale, strategic and commercial, underground gas storage in Latvia The particularly good geological conditions for underground gas storage in Latvia, with possibility for billions of m3 gas storage, can at present not be utilised within the EU due to lack of interconnection.

- With establishment of interconnections to Poland it will be possible to utilise the storage potential for the entire Baltic Sea region.

- With development of large scale underground storage it may be possible to load LNG directly into storage and hereby avoid the establishment of costly LNG storage facilities.

- In the longer term regarding the development of gas fields in the Barents Sea and Norwegian Sea there may be a need for low cost large scale storage in the region.

2.3.7 Financial crises and lower oil prices reduce cost and time of establishing gas network substantially The financial crisis and the fall in oil and gas prices has resulted in a much lower level of activity in the upstream oil and gas sector. This has in turn contributed to lower cost and lower delivery time for steel, construction work, compressors etc. Further, short and long term interest rates have been reduced further contributing to lower overall cost. However, the financial crisis has also made it more difficult to secure financing via banks in particular for countries with large deficits.

2.3.8 Russian gas system development may impact the project usage in the longer term, but should not delay implementation of recommended projects Gas infrastructure developments in Russia and Belarus may impact the use of the gas system in the Baltic Sea Region. This includes establishing new capacity for the Nord Stream project, including the Shtokman field, but also re-opening of the direct pipeline between Estonia and St. Petersburg, increased capacity to Latvia and new gas storage in Russia and Belarus.

We also recommend that the overall development of the gas infrastructure in the region should be analysed and discussed with the Russian partners on EU level, but such optimisation should not delay the projects and market initiatives recommended above.

3. Objectives and criteria

The terms of reference for the working group on gas, states the following objectives for the working group:


The long term underlying objective is to introduce and promote internal market objectives and create any necessary infrastructure in the Baltic Sea Region to enable a proper and full functioning of an integrated internal energy market and strengthen security of supply through diversification of sources and routes.

For this purpose, the tasks of this group include:

- Assessment of the gas market in the Baltic Sea Region in terms of market opening and third party access, as well as infrastructure related issues, including the assessment of any difficult projects

- Identification of the necessary market related actions

- Identification of any necessary investments in existing infrastructure

- Identification of the necessary interconnections, gas storage or LNG terminals

- Assign roles and responsibilities

The following sections assess the need for new investments around the Baltic Sea and will evaluate which projects are best able to ensure an integrated internal gas market as well as strengthen security of supply in the region. This assessment is divided into two main parts: Market issues and Infrastructure.

4. Analysis of indigenous production/transmission/storage and LNG

4.1 Gas demand around the Baltic Sea Overall gas demand in the EU Member states around the Baltic Sea is around 115 bcm/year, with the majority of demand emanating from Germany. Considerable demand is also shown from the North-West Russian region with more than 10 bcm/year.

The demand in the four East Baltic Sea member states which are presently isolated from the integrated EU gas system is approx. 10 bcm/year and this amount is likely to increase slowly in the coming years. Historical as well as future gas demand in the four East Baltic countries is shown in the figure below.


Figure 1 Gas consumption in the Baltic countries and Finland

0

2

4

6

1990 2000 2010 2020 2030

Finland Estonia Latvia Lithuania

Source: European energy and transport – trends to 2030, update 2007

After the collapse of the Soviet Union gas consumption in the former Soviet republics Lithuania, Latvia and Estonia declined sharply, but has somewhat increased in recent years. Gas consumption is projected to continue to increase at a low growth rate.

In Finland there has been a considerable increase in gas consumption up to around year 2000 followed by a smaller growth in gas consumption. Growth in gas consumption is projected to continue at a relatively low rate, with a possible decline from 2020.

The main uncertainty of gas demand in the Baltic counties is the share to be used for power production. Gas consumption for power generation is in competition with new and existing nuclear power plants as well as wind power. Further the use of gas for non-energy purpose in fertilizer and petrochemical industries also plays a vital role in terms of its demand. Thus the issue of gas consumption is dependent on two main issues, firstly politically in terms of government policy regarding Nuclear and wind power and secondly in the level of gas prices.

In Poland gas consumption is around 15 bcm/year and is foreseen to increase to 20 bcm in 2030. However, there is large uncertainty in this forecast due to the high penetration of coal, which has an upper limit for production, the possible use of nuclear power and renewable energy and not least the economic growth. As the country has a very low gas penetration there is a considerable upside potential for gas use.

In Sweden, which today has a gas demand of less than 1 bcm/year, there is likely to be an increase in gas consumption due to the commissioning of new gas fired power plants and possible use for the petrochemical industry.


In Denmark the gas consumption, which at present is 4 bcm/year is likely to decline with up to 20 percent according to new forecasts from the Danish Energy Authority due to increased production of renewable energy and energy savings.

In Norway there has been a rapid increase in indigenous gas consumption in recent years, although at a very low level. However the development shows that the demand for gas exists when infrastructure has been established.

In Germany, the second largest consumer of natural gas in the EU, the increase in gas consumption has peaked and consumption declined by approximately 5 % in 2007 to 86 bcm, bringing gas consumption to the level of the early 2000´s.

4.2 Indigenous production/transmission/storage/LNG capacities

The Baltic Sea region is close to gas fields in Siberia, North Sea, Norwegian Sea, Barents Sea, Germany and Poland. No major gas finds have so far been made in the region itself.

Figure 2 The Baltic Sea and gas resources

Russia has the largest gas reserves of more than 45000 bcm. Seen from a security of supply point of view in the Baltic Sea region and a diversification point of view, the more interesting gas reserves are the ones outside Russia and in the Barents Sea part of Russia.

The North-West European gas reserves are indicated on the chart below


Figure 3 North-western gas reserves

North West European Gas Reserves 2008

-4000 -3000 -2000 -1000 0 1000 2000 3000 4000 5000 6000

Norway

UK

Netherlands

Germany

Denmark

*Poland

Produced Reserves and resources in producing fields and new discoveriesRessources in future discoveries

Source: National authorities

The largest part of the gas reserves has already been produced in The Netherlands, UK and Germany. The smaller producers, Denmark and Poland still have some gas reserves, but the main gas reserves in the region are in Norway.

4.2.1 Norway is the main gas source in North-West Europe The Remaining resources in existing finds exceeds 3000 bcm and a further 1900 bcm is assumed to be existing in undiscovered fields.

Figure 4 Norwegian gas resources

Source: NPD


Norwegian gas sales are foreseen to reach a level of between 115 and 140 bcm during the next decade. This corresponds to a lifetime of more than 50 years for the gas resources given the reserves available.

Figure 5 Norwegian gas sales

Source: NPD

New gas finds are most likely to be made in the Norwegian and Barents Sea, which physically is closer to the Baltic Sea region than the North Sea fields. This was the background for the Mid Nordic Gas pipeline, which had the purpose of bringing gas from the Haltenbanken to Finland. No work has been made on the Mid Nordic Gas pipeline during the last five years.

It should however be noted that close geographical vicinity is only one parameter in terms of assessing project feasibility, factors such as costs and market size also affect the viability of a project.

4.2.2 Germany The German gas reserves have been declining rapidly since the year 2000.


Figure 6 German gas reserves

Source: ERDÖL ERDGAS KOHLE 124. Jg. 2008, Heft 7/8 It is unlikely that major new gas finds will be made. The production level has been declined from approx. 20 to 16 bcm per year. This is however still a considerable production corresponding to almost double of the yearly consumption in the four East Baltic countries not yet connected to the integrated EU gas system.

The depleted German gas fields offer an excellent opportunity to large scale gas storage.

4.2.3 Poland The Polish gas reserves are calculated at around 110 bcm. The yearly production is around 4.3 bcm which gives a fairly healthy R/P ratio of more than 25 years.

New production fields are being planned and new exploration activities take place. It is foreseen that the yearly production could increase to 5.2 bcm/year.

4.2.4 Denmark The Danish gas reserves are valued at around 100 bcm today. Gas production is expected to decrease in the coming years from around 9 BCM in 2008 to being depleted in around 2030. However new gas findings are still possible in the Danish part of the North Sea.

With the expected fall in gas production currently in line with the depletion of gas fields, Denmark will become a net-importer of gas within the next decade, but with the risk of this to happen earlier if no new investment decisions for smaller gas fields are taken very soon. The depleted Danish gas fields could eventually be used for large scale storage in combination with gas pipelines from Norway.


Figure 7: Gas production in Denmark BCM per year

Source: Danish Energy Authority

4.2.5 The Netherlands The remaining gas reserves in The Netherlands are around 1400 bcm of natural gas.

Gas production in The Netherlands is regulated in order to “stretch” gas reserves and to maximise the small field production in the Netherlands. This is done imposing an upper limit to the production from the large Groningen field. Gas production in 2007 was around 65 bcm, but the potential production is more than 80 bcm. This leaves a considerable flexibility, which is of interest for the Baltic Sea Region in case of supply reductions from Russia or other sources or in case of exceptional cold temperatures and high demand.

Figure 8 Gas production profile for The Netherlands

Source: TNO (National Geological Survey)


4.2.6 The UK The remaining gas reserves in the UK are approximately 1000 bcm and production is around 70 bcm per year, which is expected to decline rapidly in the coming years. A number of LNG plants are planned to be constructed in the UK for import of natural gas within the coming years.

Major investments in new gas storage facilities in the UK are also planned. More than 20 bcm of gas storage capacity is currently planned in the UK, which is around four times as much storage capacity as is currently available in the UK.1

Figure 9 Gas production and demand profile for the UK

0

400

800

1200

1600

2000

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Rem

aini

ng R

eser

ves

(bcm

) .

0

20

40

60

80

100

120

Dem

and

/ Net

Pro

duct

ion

(bcm

)

Proven Probable Possible

Net Production Range NTS Demand inc Exports

Historic Forecast

Source: National grid

4.3 Gas transmission in the region The gas transmission system in the region is shown in the map below.

1 Source: Gas Storage Europe (GSE)


Figure 10 Gas transmission in and around the Baltic Sea

Source: Gas Infrastructure Europe (GIE) Historically the network has been established as two systems from respectively West and East. This is reflected in restrictions in the flow directions in some of the main pipelines in the area, like EuRoPol Gaz, which currently only allows for transportation of gas from East to West.

The interconnectors and the capacities of the linkages between the countries are shown in the following matrix.

Table 4 Pipeline linkages and capacities in and around the Baltic Sea (mcm/day)

From / to Russ

ia

Finla

nd

Est

onia

Latv

ia

Lith

uan

ia

Bel

arus

Pola

nd

Ger

man

y

Den

mar

k

Sw

eden

Norw

ay

Russia 19 5 20 NO 250? 165 Finland NO 10 MN Estonia NO 10 NO Latvia NO 7 5(10) DK-LV Lithuania 7 5(10) NO 6 Belarus NO 30 130

Poland 3 NO 72 7 Germany NO 9 2 9 NO Denmark DK-LV 9 8 30 6 NO Sweden MN 4 NO NO Norway 120 132 12 Existing BEMIP Speculative Nord Stream Source: Gas transmission Europe (GTE) and infomation from TSO’s

2 Using existing infrastructure via Syd Arne, can be increased considerable by new investments


4.3.1 Integration of gas networks in Germany In Germany, the gas transmission system is not one system, but consists of several different zones or smaller networks. Work is ongoing to establish a common northern integrated system in Germany. The new integrated system will connect 6 countries (Poland, the Czech Republic, Denmark, the Netherlands and Belgium) as well as it will connect Russian and Norwegian gas imports. Further the integrated new German network zone will allow gas suppliers easy access to a large market area and thereby increase competition in not only in Germany but in the Northwest European gas market.

This will allow an easy transportation of gas from Denmark and The Netherlands and also from German gas storages to the Polish border. This creates further scope for allowing a pipeline, specifically the Yamal-Europe pipeline, for reverse flow i.e. transportation of gas from West to East.

In addition to the system mentioned above, NetConnect Germany, the cooperation of E.ON Gastransport and Bayernets, also covers a large part of Germany, including entry- and exit-points and connections to huge storages as well. The most eastern part of the grid is close to the Polish border in Kienbaum, so that the grid covers the starting point (Börnicke) of the proposed pipeline from Germany to Poland (InterTransGas).

Figure 11 Map of the integrated German systems

Source: http://www.wingas-transport.de and www.net-connect-germany.de


Thus, these two market areas in Germany are capable of supplying additional Gas from German storages, Norwegian sources, LNG-terminals in the Netherlands and Belgium or Western European trading points to the Baltic States via Poland.

4.4 Gas storage in the region 4.4.1 Geological potential, existing and planned facilities

Physically, gas storage possibilities exist in Latvia, Poland, Germany, Denmark, Belarus and Russia, and are also likely to exist also in Lithuania. In Finland, Estonia, Sweden and Norway no possibilities exist for natural gas storage as depleted gas fields, aquifers or salt caverns.

The geological conditions for gas storage are seen to be particularly good in Latvia where a storage potential of several bcm working gas has been identified.

Table 5 Gas storage around the Baltic Sea (bcm)

Geological potential Existing storage Planned storage

Finland 0 0 0

Estonia 0 0 0

Latvia 5+ 2 1

Lithuania ? 0 1

Poland ? 2 4

Germany ? 20 8

Denmark 3+ (plus offshore) 1 1

Sweden 0 0 0

Norway 0, possibly offshore 0 0

Belarus - - -

Russia - - -

4.4.2 Demand for storage capacity in the Baltic countries and Finland Demand for storage capacity is determined by three factors: temperature dependency, flexibility of imports and flexibility of indigenous production. As the Baltic countries rely completely on imports, they only have two means to ensure the flexibility they need and since the only storage available is the Incukalns facility in Latvia, the Baltic countries are very dependent on imports for not only supplies of gas, but also the flexibility they require.

Based on the level of consumption and the temperature dependency of consumption, the demand for flexibility has been calculated for the Baltic countries and Finland.


The demand for seasonal adjustment is approximately 2600 MCM3. The flexibility is supplied via the Incukalns storage and flexibility in import volumes. Finland who has no direct access to storage, is in principle importing all its flexibility from Russia, however as Russia relies on the Incukalns storage for flexibility in winter, Finland is indirectly also supplied by the Incukalns facility.

With the expected increases in gas consumption, see Figure 1, the requirement for flexibility will increase to approximately 3900 MCM, main increase in demand will be in Lithuania and Latvia, due to the fact that this is where the largest increase in consumption is forecast4.

The increase in demand for storage can either be met by flexible imports, new storage facilities or expansion of existing storage. Flexibility in imports could also, to some extent be provided by LNG imports.

Further access to storage is crucial for new players in the market, thus the requirement for additional storage is not only important in order to ensure seasonal balancing but also in terms of securing a level playing filed for competition.

4.5 LNG around the Baltic Sea So far no LNG import facilities exist in the region.

A small LNG receiving terminal is under construction in Sweden, but will initially not be connected to the integrated gas network.

However there are several plans for LNG receiving terminals with the Polish terminal in Swinoujscie being the most advanced, with an ongoing FEED study and signing of a Head of Agreement for gas purchase from Qatar.

LNG supply to the region could come from such major suppliers like Qatar, Nigeria or Barents Sea by use of large LNG vessels with a capacity up to 200.000 m3. However, for smaller LNG terminals it is also possible to reload LNG at existing terminals in Western Europe and use smaller vessels with a size of less than 50.000 m3.

4.6 Conclusions on gas reserves and indigenous production The following conclusions can be made on reserves and indigenous production:

- Only Norway has any long term reserves in the region and new production capacity is most likely to come from the Norwegian and Barents Sea, which is relatively closer to the Baltic Sea region than the present North Sea production is.

3 This means the amount of additional gas in winter time compared to summer i.e. the storage capacity required, calculations have been made using the Ramboll Storage model for (seasonal) storage demand. 4 Consumption forecast data, source: European energy and transport – trends to 2030 update 2007


- Reserves and production are declining rapidly in Germany and Denmark, creating the background for new infrastructure to these countries and to Sweden, which in turn can be combined with infrastructure to the Baltic Sea countries.

- The Netherlands still has considerable reserves and in particular production flexibility, which could be used to supply the Baltic Sea countries in case of short to medium-term supply disruptions from Russia.

- UK reserves and production are declining rapidly and being replaced by new pipeline import from Norway, interconnection to The Netherlands and additional LNG import capacity, combined with considerable planned investments in gas storage.

- Due to the depletion of gas reserves the entire North European gas market should be seen as one market, which emphasis the need for connecting energy islands and removing barriers for east-west transmission

Figure 12 North European gas market region

Source: Ramboll

5. Links of the three Baltic countries with the Gazprom system

5.1 Overview over system The major part of the gas infrastructure in Finland, Estonia, Latvia and Lithuania was established before the break up of the Soviet Union and before the four countries became members of the EU.


Figure 13 Baltic countries and Finland’s gas transmission system

Area 1Russia IRussia IIRussia III

Belaruspipeline

Area 2

Not in operation

Not in operation

Area 1Russia IRussia IIRussia III

Belaruspipeline

Area 2

Not in operation

Not in operation

The capacity to the East Baltic Sea region is considered an evaluated for two main areas. Area one constituting of Estonia, Latvia, Lithuania and Kaliningrad and area two which additionally includes Finland and St. Petersburg.

Finland is to be considered a separate supply area as long as the country is only supplied from Russia.

5.2 Capacity assessment of normal operation 2009 5.2.1 Pipeline capacities

For area one there are only two operational pipelines, from Belarus to Lithuania (with a capacity of 30 mcm/day) and from Russia to Latvia and Estonia (with a capacity of 30 mcm/day of which 20 mcm/day to Latvia). However, during winter the capacity of the pipeline to Russia is not available, as the pipeline is used for export of gas from Incukalns to Northwest Russia.

Smaller older pipelines from St.Petersburg to Estonia and from Belarus to Lithuania are not in use at present but could possibly be reactivated.

For area 2, there are two additional pipeline systems from Russia (with capacities of respectively 40 and 80 mcm/day).

The delivery capacity of the Incukalns gas storage is approximately 24 mcm/day of which the lions share, approximately two third is allocated for Russia and only 8 mcm/day for Latvia and the other Baltic countries.

The Russian gas storage in NW Russia Nevskoye/Gatchinskoy is excluded from the present balance due to lack of information.


5.2.2 Demand peaks during cold periods The maximum daily demand in the three Baltic countries plus Kaliningrad is estimated to be 40 mcm/day, with an additional 20 mcm/day for Finland. The maximum daily demand in NW Russia is estimated to be 100 mcm/day.

5.2.3 Supply-demand balance area 1 For Area 1 winter balance of supply and demand constitutes of a total supply of 30 mcm/day from Belarus, plus 8 mcm/day from the Incukalns gas storage i.e. a total of 38 mcm/day. Peak demand is around 40 mcm/day which means that supply and demand are barely in balance, there is actually a small supply deficit. This means that there is a security of supply issue during cold snaps and highlights the need for one or more of the following actions:

- Allocation of a larger part of the present Incukalns gas storage to the Baltic countries

- Establishment of new pipeline connections (or revitalising the two pipelines not in use)

- Establishing LNG supply facilities

5.2.4 Supply-demand balance area 2 For area 2 the balance during winter, before implementation of Nord Stream, is on the supply side that we have three pipelines with a total capacity of 150 mcm/day plus the gas storage in Incukalns of 24 mcm/day, in total 174 mcm/day. Peak demand is 40 mcm/day in the Baltic countries, plus 20 mcm/day in Finland and another 100 mcm/day in Northwest Russia, in total this is 160 mcm/day. This means that there is a capacity surplus of around 15 mcm/day, assuming that all pipelines and the gas storage are working.

It seems as if the overall supply situation for area 2 is slightly better than for area 1, which highlights the advantage of full integration and smoothening of demand peaks.

5.2.5 Supply-demand Finland For the Finnish supply area the supply capacity is 225 GWh/day (22.5 mcm/day) and the peak day consumption in a cold winter is 216 GWh/day (21.6 mcm/day). There is hence no spare capacity and new supply sources seem necessary in order to meet the foreseen increase in demand in the coming years.

5.3 Capacity assessment after Nord Stream in operation To supply the Nord Stream pipeline a new 56”, 100 bar pipeline is being installed with a capacity of around [100] mcm/day. Further, a new pipeline from the Shtokman field is planned with a capacity of [100] mcm/day. However, the yearly production of the Shtokman field in the first phases is only foreseen to be around 13 bcm/year which corresponds to around 40 mcm/day.


The maximum demand from Nord Stream will be approximately 85 mcm/day for each pipeline, in total 170 mcm/day.

If the Shtokman gas pipeline is in place at the same time as the second Nord Stream pipeline, there may be a slight reduction in the supply balance of area 2 of 30 mcm/day.

If the Shtokman gas field and pipeline is not in operation at the time of the Nord Stream implementation, there may be a reduction in the balance of up to 70 mcm/day, compared to the previous surplus of 15 mcm/day today.

On the other hand, the large flow into Nord Stream also leaves flexibility and the possibility for smoothening demand between the Baltic countries and Germany via the Nord Steam pipelines, by a reduction of the flow to Germany during periods with cold temperatures. This will however depend on how the market operation of the Nord Stream pipeline will work and the priorities of the shippers using the pipelines.

In conclusion the need for new supply capacity to the Baltic and North West Russian region will depend on the following factors, which are outside the scope of the present study:

- Will the Shtokman gas field be in operation in line with Nord Stream?

- How will the shippers of the Nord Stream use the system? Will there be flexibility with respect to reduction in flow (corresponding to reverse flow)

- New storage facilities in Russia

- Development in gas demand in NW-Russia, in particular peak demand

5.4 Summer operations of the Baltic gas system The gas supply system to Latvia is unique as gas is only supplied during summer. The injection capacity of the Incukalns gas storage will hereby become an important factor for the operation of the entire gas system in the region as an increase in the storage injection capacity may be needed to upgrade of the internal system. At present the injection capacity of Incukalns is 12 mcm/day.

Gas is supplied via pipeline from Russia with a capacity of 20 mcm/day. Further gas can be supplied via Lithuania, who has increased the capacity with the commissioning of a new compressor station to 5 mcm/day. A further increase to 10 mcm/day is possible.

If the Balticconnector is established there will further be a possibility for supply of gas to or from Finland.


5.5 Latvian gas storage interrupted In case the Incukalns gas storage is interrupted a total of 8 mcm/day will be missing in the Baltic countries (Area 1). However, the impact may further spread to Russia and hereby indirectly to Finland and/or Poland as they are supplied indirectly from Incukalns via Russia.

The impact corresponds to:

- A 20% reduction of the supply to Baltic countries, area 1.

- A 15% reduction of the supply to the larger area 2

Historical examples as the UK gas storage Rough fire during the winter 2005/2006, have shown the severe impact on the market an interruption of supplies may have.

Establishing a new gas storage facility or parallel surface facilities on the Incukalns gas storage could reduce the risk which only having one storage facility imposes on the supply in the region.

Better integration of the Baltic area with the rest of the EU integrated gas system could reduce the impact of a supply interruption. For the larger area, Nord Stream is the most obvious instrument which could simply just lower the flow in order to increase the available gas in the Baltic region (Area 1). For the Baltic countries a connection to Poland would open for smothering of impact over a larger market as some of the Polish gas storage could replace the Incukalns capacity.

5.6 Belarus supply interrupted In February 2004 the gas supply from Belarus to Lithuania was interrupted. Also, Poland and Germany the impact of the disruption was felt. The impact was severe in the Baltic countries, but could to some extent be countered by opening of gas supplies from Latvia to Lithuania.

Depending on the duration of a disruption from Belarus the impact would differ. With an import capacity of 30 mcm/day to Lithuania and 100 mcm/day to Poland, of which most is in transit for Germany, the impact could be severe and could not be covered by the present system.

Some redirection of gas from Latvia to Lithuania and Kaliningrad is possible, but the present capacity of the pipeline, between the two countries is only 5 mcm/day5, although physically the capacity may be higher.

The most obvious solutions to increasing security of supply and to reduce the impact would be to:

5 Source: GTE


- Allow for reverse flow in the Yamal-Europe pipeline, in combination with a Lithuania-Poland pipeline

- Increase capacity from Latvia to Lithuania

- Establishing the Lithuania-Poland pipeline

- LNG in Lithuania

5.7 Russian supply interrupted The most serious threat to security of gas supply for the Baltic region would be a full or partial disruption of Russian gas supply. The only supply available in the region would be the gas storage in Latvia, which could supply gas to Latvia, Estonia and Lithuania. In such a situation it is assumed that all gas could be used, also the volumes contracted to Russia.

The country most exposed in the event of a supply interruption from Russia would be Finland as long as there is no interconnection to the other countries, because no alternative supply options exist for Finland at the moment.

In Poland it would be possible to use the Yamal-Europe pipeline for reverse flow and thereby smoothen the impact to North West Europe, where European production from The Netherlands, Norway and Denmark could be rerouted and further production could to some extent be increased and supply from gas storage and LNG imports could be used to ensure additional supply.

The solutions to reduce the impact of a Russian gas disruption are:

- Pipeline connection between Poland and Lithuania

- Pipeline connection between Finland and Estonia (Latvia)

- LNG terminal

- Increased UGS in Latvia and Lithuania

5.8 Dispatching structure and decision making Today the dispatching of gas in the Baltic Sea Region is divided onto different transmission system operators, of whom some receive commercial booking and nomination from the shippers on a daily basis.

The decision of the supply of gas to the East Baltic Sea region is made by Gazprom after consultation and information to the national gas companies. As an example the gas supply to Lithuania is a combination of supply from Belarus and from the gas storage in Latvia, where the supply from Latvia is a residual between the needed volumes and the volumes which can be supplied from Belarus.


The gas companies in the countries have the responsibility for balancing which takes place on a daily basis. By use of line pack capacity etc. it is possible to maintain certain flexibility, typically between 5 and 10 percent.

In Russia the dispatching is centralised and the nomination of gas to the different pipeline systems depends on bilateral agreements. On the EU side there is no formalised coordination on a day-to-day basis for receiving gas from Russia.

For the large transit pipelines like Yamal-Europe and Nord Stream it is assumed in the present study that nomination is relatively rigid. However one way of securing gas supplies to the Baltic countries, in situations where not enough gas supplies is available from Russia, would be by lowering the offtake in Germany from these two major pipelines.

If no coordination takes place, in particular Finland will physically be at the “low pressure” end of the pipeline in the future, after offtake to St. Petersburg and Nord Stream however large new volumes of gas will be brought to the region via new pipelines in Russia.

6. Identification of the benefits of the interconnections through the value of capacity

6.1 Benefits of the interconnections – whole sale prices – net back value of gas

Gas consumers in the Baltic countries have traditionally benefited from having low gas prices, due to the Baltic countries and Finland being very close to Russian gas sources, thus benefiting from low transportation costs. However in recent years the netback principle, which was one of the main reasons for the low import prices in the Baltic countries and Finland, has been abandoned. This has lead to higher import prices in the Baltic countries and Finland, and has lead to a convergence of prices between Northwest Europe and The Baltic countries and Finland.

The following section takes a closer look at gas prices and the development of prices in the Baltic countries and Finland. We take a look at what the change in pricing regime, i.e. the abandonment of the netback principle will affect gas prices in the Baltic countries and Finland and thus the incentives for investment.

6.2 Russian gas supply prices 6.2.1 Gas import prices and contracts

Gas import prices (wholesale prices) today in the Baltic countries and Finland are in general based on “long” term contracts (the duration of contracts differ between countries) which are linked to the oil price.

The duration of the contracts differ from country to country with Lithuania having a gas contract to 2015, Latvia to 2030, Finland to 2025 and Estonia to 2015.


The oil price used in the contracts is subject to a delay of time i.e. a time lag is included, this time lack differs between 6 and 9 months in the Baltic countries. The difference in time lag implies that gas prices differ considerably between the countries, when we have very volatile oil prices. This difference in prices gives basis for implementation of interconnectors between the Baltic countries in order to smoothen gas prices in the region.

Further in the event of very volatile oil prices we may have that LNG imports could be economic viable in times of falling oil prices, because the spot market price for LNG may adapt quicker to the lower oil price. This could also allow for LNG imports into the gas storage in Incukalns during summer, when gas prices on the spot market are generally lower.

Gas import prices, in the Baltic countries, have over the recent years changed from being based on the netback principle to the principle of fuel-to-fuel competition as described above. This shift in pricing paradigm should eventually lead to a complete convergence in gas prices between the EU gas market and the Baltic countries as fuel-to-fuel prices are based on international prices and are not subject to regional price differences as has been the case for gas prices.

Differences in prices may still occur as the specific formulas, which gas import prices are based on, may differ from contract to contract. The introduction of oil based gas import contracts have already created situations where gas prices in the Baltic countries were not only the same, but even higher than in e.g. Germany.

In order to evaluate the impact of the change in pricing regime, we take a look at how prices used to be set in accordance with the netback principle.

6.2.2 Netback prices in the Baltic countries and Finland Historically gas import prices from Russia have been subject to the principle known as netback gas price. The principle bases the gas price in a geographical location on the price of competing fuels at the market centre minus the transportation costs of the gas. In recent years Russia has been abandoning the principle of netback pricing and has started applying a “common” gas import price for the entire EU. However the idea of netback prices still allows us to evaluate the value of the gas at different points in the system, due to varying transportation costs.

Reviewing the netback prices also enables us to evaluate how the value/price of gas depends on the proximity of the gas resources, as well as the impact of integrating gas markets and reducing transportation costs.

Netback prices in the Baltic countries and Finland are calculated the following way: German import prices (market prices) minus transportation costs through Poland, through the Yamal-Europe pipeline and through the Belarus transmissions system. The below table shows the German gas import price, the transportation costs and the calculated netback costs for gas in the Baltic countries and Finland. Table 6 below shows the different components of the Baltic netback gas price.


Table 6 Netback gas price calculation for Baltic countries (USD per 1000 m3)

Transportation Costs

German gas import price

Poland, Yamal (700 km)

Belarus (800 km) Baltic Countries Netback price

3256 18,57 21,58 285

The netback price is also illustrated in the below figure:

Figure 14 Netback gas price in the Baltic countries

6.2.3 Impact of decreasing transportation costs Transportation costs are and were not only an issue for the gas importer who could import gas at lower costs the lower transportation costs were. Lower transportation costs also imply that the gas exporter can reach markets further away, at a relatively lower price. Although gas prices today are linked to oil, there still is leeway in gas contracts to shift the overall level of the gas price. Thus a decrease in transportations costs from Russia to the European gas markets could affect the Baltic countries and their import contracts, when they have to renegotiate import contracts, which for Lithuania and Estonia is already the case in 2015.

Any large scale export project, pipeline or LNG, with low transportation costs from NW Russia to NW Europe could thus potentially have an impact on future gas prices in the Baltic region through gas contract renegotiations.

One such project could be the Nord Stream, which according to plan is scheduled to be implemented in 2011 i.e. the first phase. The Nord Stream pipeline will set a new benchmark for gas transportation costs, as the project is characterized by relatively low costs per m3 of gas transported.

6 Source: Bundesamt für Wirtschaft und Ausfuhrkontrolle (average 2008, Jan - Jun), http://www.bafa.de/, 1 EUR = 1.462 USD 7 Polish regulator, URE, 1 EUR = 1.462 USD (2008 average) 8 Transmission costs for Belarus are assumed to be the same as in Poland

0

100

200

300

400

Gas price

Netback gas price - Baltic countries Transport (BEL to RUS - 800 km)Transport (POL to BEL - 700 km)

Baltic gas price 285 $ per 1000 m3

Netback 40 $ per 1000 m3

German import price 325 $ per 1000 m3


Thus if the Nord Stream pipeline starts operation, it will become cheaper to send gas from NW Russia to NW Europe and could as argued above increase import prices in the Baltic countries, when gas contracts are due for renegotiation.

Today transportation costs from the Baltic States to Germany can estimated as approximately the costs of transporting gas through the Yamal-Europe pipeline through Poland and Belarus. Existing transportation costs and future Nord stream transportation costs are shown in Table 7.

Table 7 Transportation costs from Russia to Germany, estimate (USD per 1000 m3)

Transit costs, total (Poland and Belarus) Transportation costs, Nord Stream,

estimate9

39 20

As can be seen from Table 7 transportation costs from the Baltic Sea to Germany are likely to halve if Nord Stream comes online.

As import prices in Finland and the Baltic countries are based on long-term oil-based contracts, the implementation of any large scale projects like, the Nord Stream project will not directly affect prices. However it is important to consider that, as the netback analysis above showed, the Nord Stream project will due to relatively low transportation costs, increases the value of exporting gas to Germany. This may not affect the Baltic countries right away, but this could affect renegotiations of contracts, which in particular is an issue for Lithuania and Estonia who both have long-term contracts ending in 2015.

If the Baltic countries were integrated to the rest of EU gas market and receive access to supplementary gas supplies, this would not only improve their options in terms of supply sources but it could also create leverage in future gas import contract negotiations.

6.3 Gas retail prices 6.3.1 Low retail prices compared to other EU member states

When comparing consumer gas prices in the Baltic countries and Finland, to the other countries around the Baltic Sea and to the EU27 in general, we have found that for both Domestic as well as industrial consumer’s prices are lower.

9 Assumptions made: total investment costs 7.4 Billion €, Operational costs 2 % of investment costs annually and an IRR of approximately 8 %.


Figure 15 Gas prices, domestic consumption

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EU27 DK DE EE LV LT PL SE

US

D p

er

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Source: Eurostat, 2008S01, 20 GJ < Consumption < 200 GJ, without taxes, DK prices are from 2008S2, 1 EUR = 1.462 USD (2008 average)

Figure 15 shows how the three Baltic countries benefit from lower gas prices compared to the rest of the EU. Average EU gas prices are around 50 % higher than gas prices in the Baltic countries where prices range from 410 to 435 USD per 1000 m3 in the first half of 2008. Average EU prices were approximately 650 USD per 1000m3.10

When looking at the industrial prices we see that industrial consumers do not benefit as much from the lower gas prices as the domestic consumers do. Prices in the Baltic countries and Finland are between 375 USD per 1000 m3 in Estonia and 488 USD per 1000 m3 in Lithuania, see Figure 16.

Figure 16 Gas prices industrial consumption

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$ p

er

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m3

Source: Eurostat, 2008S01, 10000 GJ < Consumption < 100000 GJ, without taxes, 1 EUR = 1.462 USD (2008 average)

10 No prices for Finland were available


When looking at gas prices in the Baltic countries and comparing them to overall gas prices in the EU, we see that gas prices in the Baltic countries are among the lowest in the EU, see Figure 17. The low prices are likely a combination of the following issues: Networks and infrastructure in the Baltic countries and Finland have already been amortized and thus do not impact prices, this could also explain why so few investments have made in the Baltic countries and Finland, because any new investment would increase the regulatory asset base by relatively much and thus in effect the gas prices as well. Regulation in the Baltic countries and Finland is “stricter” compared to the rest of Europe, which also would give low incentive for new investments. The level of security of supply is very low and costs of security of supply are therefore not affecting gas prices.

Figure 17 Gas prices in the EU, domestic consumption

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RO EE

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HU PL

UK

SK CZ

EU27

NL IT

SI FR

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er

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Source: Eurostat, 2008S01, 20 GJ < Consumption < 200 GJ, without taxes, price from Denmark from 2008S02, 1 EUR = 1.462 USD (2008 average)

6.3.2 Potential for market integration Pricing data gives evidence to the fact that there is some potential for optimisation of the gas markets. E.g. the price difference between Finland and Estonia is almost 90 USD per 1000 m3. This implies that implementation of the Balticconnector and an opening of the market would allow gas consumers in Finland to import gas from Estonia saving with savings of almost 20% (minus additional transportation costs).

Further potential for beneficial market integration is between Poland and Lithuania. Industrial consumers in Lithuania paid almost 490 USD per 1000 m3 of gas whereas polish industrial customers only paid approximately 410 USD per 1000 m3.


6.4 LNG prices 6.4.1 EU LNG import prices

To estimate what the price of LNG would be in the Baltic Sea we first take a look a historic LNG import prices in the EU. IN 2007 the average import prices for LNG were:

Table 8 Average LNG import prices, USD per 1000 m311

Spain average EU average UK average

2008 (Average Jan – Jun) 313 311 357

As data for LNG is the most abundant for Spain, we will base our calculations for an LNG price in the Baltic Sea on the Spanish LNG price, further the Spanish LNG price is also very close to the average EU price12. Prices may however diverge from the Spanish price as can be seen by looking at the UK LNG import price (see Figure 18).

Figure 18 LNG import prices

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2007 2008

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Spain average EU average UK average

Source: IEA - Energy Prices and Taxes Fourth Quarter 2008

6.4.2 LNG price in the Baltic Sea We assume that Baltic Sea LNG import prices are equal to Spanish import prices plus additional transportation costs. Additional transportation costs are calculated in the following way:

11 Source: IEA - Energy Prices and Taxes Fourth Quarter 2008 12 This is partly due to the fact that Spain has the largest import of LNG and thus make up a large part in the calculated EU average


Estimated distance from Spain (Barcelona) to the Baltic Sea is 6000 km13, at an average speed of 35 km/h, it takes approximately seven days to travel the distance (assuming the ship has to travel back and forth, we have a total of fourteen days of travelling. The daily LNG carrier costs are 50.000 USD14 for a tanker able to carry 145.000 m3 of LNG (87 million m3 of gas), thus we have that total travelling costs are:

14 (days) x 50000 USD = 700.000 USD,

Which is equal to (700.000 USD / 87.000.000 x 1000) = 8 USD per 1000 m3

Further additional re-gasification costs will also affect the final Baltic Sea LNG import price, due to the fact that, because the Baltic Sea is colder than e.g. the Mediterranean, seawater cannot be used for re-gasification. This implies that re-gasification costs are approximately 2 % higher in coldwater compared to warm waters, as 2 % of the imported LNG is used for re-gasification purposes in cold water.

The below table shows the different price components of a Baltic Sea LNG price:

Table 9 LNG price in the Baltic Sea, USD per 1000 m3, 2008 Jan – Jun Average

LNG price 15

Additional Transport

costs

Additional cold water/

re-gasification

costs16

Total Baltic Sea LNG

Price

Spain 313 8 6,5 328

UK 357 4 7 368

With German gas import prices averaging 325 USD per 1000 m3 and LNG import prices being 313 in Spain and 357 in the UK, it seems a fair assumption that LNG and pipeline imports are relatively competitive in the EU. Based on Spanish import prices we thus have that LNG import prices in the Baltic countries, would incur a price premium of around 15 USD per 1000 m3 and based on UK prices the premium would only be 11 USD per 1000 m3.17

However the difference between LNG in Spain and the UK is that Spain relies on LNG for almost 70 % of total consumption and in the UK LNG makes up around 2 % in

13 For calculations for the UK we assume the travelling distance is half, i.e. 3000km 14 Source: Bloomberg, Tanker rates are relative volatile and are subject to fluctuations in demand and supply for LNG tanker capacity, tanker rates have decreased considerably over the last few years 15 IEA - Energy Prices and Taxes fourth Quarter 2008 16 Assumed to be 2 % of total gas, 17 Additional costs because of icy waters may also incur, but are not included in this analysis.


2007.18 If we look at import prices we also see that UK prices are much more volatile. This indicates that LNG imports, in Figure 18, in the UK are based on spot market trading and in Spain Long term contracts and a steady import flow of LNG.

Assuming that LNG would not constitute the main import source in the Baltic countries, it seems plausible to assume that LNG prices in the Baltic countries would resemble the LNG prices from the UK. That is LNG would play a relatively small role and prices would be more volatile like in the UK.

Thus if LNG is only used as a minor supplement e.g. for security of supply purposes, this could entail higher LNG prices. Because if LNG is only imported when there is a gas shortage in the Baltic countries (e.g. when it is cold), then this is likely to coincide with an overall high LNG price, because it is likely that it will be cold in all of Europe, which will lead to higher gas spot market prices and higher LNG prices.

Recently it has been argued that the significant increase in LNG import capacity in Europe, in combination with the relative low utilisation rates of the LNG terminals, that LNG imports in the future may not lead to gas-to-gas competition but in effect terminal-to-terminal competition.

How a LNG terminal in Finland or one of the Baltic countries will affect competition in the end and what the price will be will to a large extent depend on the specific contract that is made. The increased costs for additional transportation and re-gasification may to some extent be shared between the LNG buyer and seller.

6.5 Conclusion on prices Gas prices between the Baltic countries, Finland and the EU gas market are converting, due to a change in pricing regimes. This increases the incentive for investment and makes diversification of gas supplies increasingly economically viable for the Baltic countries and Finland.

This increases the economic viability of LNG imports, as well as other pipeline imports, considerably. However the specific contract, which can be negotiated with the LNG supplier, will too a large extent, determine how competitive LNG exactly will be compared to Russian pipeline imports.

Furthermore, the convergence of prices and the potential implementation of new large scale transportation projects, like the Nord Stream project, puts added emphasis to the fact that additional gas supplies and integration of these isolated gas markets has to be secured in order to not only increase security of supply and competition, but also in order to ensure a level playing field when gas import contracts are due for renewal.

18 Source: BP Statistical energy review 2008


7. Main infrastructure gaps and bottlenecks

7.1 Missing links The main infrastructure gaps and bottlenecks in terms of ensuring the integration of the four Baltic countries and Finland into the EU integrated system, which today includes 21 member states (only Malta and Cyprus are not connected to the system apart from the Baltic member states), are:

- A connection from Finland to another member state. Two possibilities are in principle possible, Estonia and Sweden. However as the plans for establishing a gas network in Sweden, including connection of Stockholm has been halted the only short term solution seems to be a connection to Estonia, e.g. the Baltic connector.

- A connection from one of the Baltic Countries, Estonia, Latvia and Lithuania to one of the member states which are already interconnected. Here the likely possibilities are:

- Lithuania-Poland (Amber PolLit or (OS))

- Lithuania or Latvia to Germany

- Lithuania or Latvia to South Sweden

- Lithuania or Latvia to Denmark/Sweden directly or via Poland

- Norway to Denmark or Norway to Sweden connection

- Denmark to Poland

- Germany to Sweden

7.2 Principles for interconnections around Baltic Sea As part of the Baltic Energy Task Force in 1999 the following three principle variants of how to integrate the Baltic countries were evaluated.

Figure 19 Baltic Sea integration variants

Baltic Ring Zipper Fishbone


With the establishment of the Nord Stream without any branch lines, the Fishbone solution is at present not viable.

Also the lack of decision to bring gas to Stockholm by pipeline the full Baltic Ring will be difficult to establish. The western part of the ring may hence be replaced by LNG import i.e. instead of having pipeline connection to Denmark, Sweden and Norway, and hence access to gas supplies, this part of the ring could be replaced by LNG imports.

The eastern part of the Baltic Ring has partly been physically established by the Yamal-Europe pipeline and the opening of the connection between Latvia and Lithuania. The only missing part is hence the Lithuania to Poland and the Baltic Connector to have the link within the EU territory.

The Baltic Pipe and Baltic Gas Interconnector can establish a more direct connection between the North Sea and the Polish gas market. Alternatively a direct connection could be established between Denmark/Sweden and either Latvia or Lithuania. This would however leave the North Eastern part of Poland without a gas supply.

Eventually gas interconnectors like Balticconnector and Baltic Pipe could be connected to the Nord Stream pipeline and hereby establish a part of the Fish bone solution.

7.3 Bottlenecks in the system 7.3.1 Latvian/Lithuanian border

In the above assessment no detailed flow calculations have been carried out and no assessment of the availability of the gas at the fields and distribution between different Russian outlets have been made either.

The following graph shows the gas flow to and from Lithuania in 2009 as an example on the dynamics of gas supply in the region. At present there is a capacity limitation on the Latvian/Lithuania border, mainly due to the size of meter station. However the technical condition of the pipeline itself may also need some improvement. This is presently being assessed by inspection. It is assumed that the capacity of the connections based on the existing pipelines can be increased to 10 mcm/day


Figure 20 Gas flow to/from Lithuania 2009

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1 14 27 40 53 66 79 92 105 118 131 144 157 170 183 196 209 222 235 248 261 274 287 300 313 326 339 352 365

cm/

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Belarus Kaliningrad To/from Latvia Source: Lietuvos Dujos

7.3.2 Polish- German border - Reverse flow in Yamal-Europe pipeline The capacity from Germany to Poland is today limited to around 9 mcm/day in a direct pipeline from Germany to Poland. The limited capacity is hence due to lack of reverse flow in the Yamal-Europe pipeline, which physically has a much higher capacity.

The Yamal-Europe pipeline is stretching from Siberia via Belarus and Poland to the German/Polish border, where it is connected to the Wingas-transport system in Mallnow at Frankfurt an der Oder. The Polish part of the Yamal-Europe pipeline is 680 km long, has a diameter of 1420 mm (56“), design pressure of 84 bar. The capacity of the system is approximately 35 bcm/year. In 2007 the transported volume was 31 bcm. There are 5 compressor stations along the pipeline. At two of these systems the national Polish gas transmission system in the western part of the country. Originally the route was prepared for two parallel pipelines and stations, river crossings take this into account.

The project was established in 1996 before Polish membership of the EU and before the first EU Directive on the internal gas market. The pipeline is as such not prepared for the internal market.

There is no access to third party transportation in the pipeline neither from the Belarus border, from within Poland or from Germany in reverse flow. However, no formal derogation is given to the pipeline. The tariffs for using of the Yamal-Europe pipeline in Poland are regulated by the Polish regulator.

If reverse flow in the pipeline was possible, the pipeline could be used for diversification of gas supply in Poland (via Germany) under normal operation and for Security of supply in case of interruption of supply from Belarus or Ukraine. The pipeline could also be used as connection to an interconnector to Lithuania (Amber) and hereby provide the same services to Lithuania and further to Latvia and Estonia.


The recommendations given for infrastructure projects depends on the opening of the Yamal-Europe pipeline and therefore two sets of recommendations are given with and without such opening.

The main shareholders in EuroPol Gas, the company owing the polish section of the Yamal-Europe pipeline are PGNIG and Gazprom each with a 48% interest. Contact to the company EuroPol Gas has shown that a decision to open the pipeline for reverse flow is an issue to be decided directly by the shareholders. It is therefore recommended that this issue should be opened by the EU Commission as it impacts not only Poland but also Lithuania, Latvia, Estonia, Finland and Germany and potentially also impacts some of the proposed projects in the region.

7.3.3 Denmark-Germany The capacity in the Danish-German system is limited to only around 9 mcm/day from Denmark and only 2 mcm/day from Germany to Denmark, mainly due to lack of compressor facilities within Denmark.

7.3.4 LNG storage The Finnish gas import is currently close to maximal utilisation, approximately more than 95 % of total capacity is used during a very cold day and more than 90 % of total import capacity is utilised during a normal winter day. This implies that if additional peak supply capacity is implemented in Finland, then this would allow for a better utilisation of the current import pipelines i.e. increase capacity, as well as it would increase security of supply. However the Finnish import capacity is not the only potential bottleneck that may be cause for concern.

Another potential concern is that flexibility of supply during winter could be limited, because storage flexibility in supply during winter is relatively low compared to other countries around the Baltic Sea, which increases vulnerability in terms of increases in peak demand.

Table 10 shows the level of flexibility provided by gas storage in the Baltic Sea Countries. Thus supply of peak capacity could also

Table 10 Storage flexibility

Country Storage flexibility (withdrawal/volume) Latvia 1,0 %

Denmark 1,6 %

Poland 2,2 %

Germany 2,4 %

Considering the high utilisation of the Finnish import capacity, as well as the low flexibility of the Incukalns storage, we have that the entire Baltic region in general, and Finland in particular, faces a security of supply risk in terms of peak supply and demand. Increasing flexibility and peak supply by constructing LNG storage in connection with LNG import capacity is an efficient way of increasing security of


supply in Finland and in turn the rest of the region, as more peak supply in Finland would allow Incukalns to supply other countries in the region during in the event of e.g. a cold spell.

In Figure 20 the flow pattern to and from Lithuania is shown, the figure indicates how consumption in the region is characterized by a number of peaks during the entire year.

8. Identification of pending questions preventing the implementation of an integrated energy market

8.1 Derogations status and conditions Today Latvia, Lithuania and Finland all benefit from having derogation from the EU gas market directive. Only Estonia has since the 1st of July 2007 opened its gas market. This opening is however only effective legally, in reality no competition exists because the market is dominated by one large natural gas supplier. Nevertheless Estonia has (legally) unbundled the integrated gas company Eesti Gaas and this market opening means that the infrastructure for competition in Estonia is already in place once the Estonian gas market is integrated with the rest of the EU gas market or is connected to additional gas supplies, even though the current impact is perhaps negligible.

Latvia and Lithuania have derogations until 2010 based on Directive 2003/55 article 28 (2) on emerging markets, which states that: A Member State, qualifying as an emergent market, which because of the implementation of this Directive would experience substantial problems may derogate from Articles 4, 7, 8(1) and (2), 9, 11, 12(5), 13, 17, 18, 23(1) and/or 24 of this Directive.

Lithuania has already said they will not apply for a new derogation and will therefore be obliged to follow the market directive from the 1st of January 2010.

Latvia will be obligated to open their gas market to competition by January the 1st 2010. However the “unusual” circumstances in the Latvian gas market will likely constitute an obstacle in terms of establishing a functioning market. This is due to the fact that Latvia is, during wintertime, exclusively supplied by the Incukalns gas storage, which is subject to a long-term agreement between Latvijas Gaze and OAO Gazprom valid until 2030. Further Exclusive rights for Latvijas Gaze exist in terms of transmission, storage and distribution until 201719.

The long term agreement with Gazprom, as well as the exclusive right given to Latvijas Gaze, constitute a considerable obstacles in terms of establishing a functioning market in Latvia, but also potentially the rest of the Baltic countries, as they rely on Latvia for storage services. Access to storage services is vital in order to

19 Source: Latvian Ministry of economics


enter any market, this could be an obstacle for the entire region. However, it does not imply that a market opening is not possible, especially if the Baltic gas market is integrated with the EU gas market and new sources of supply are introduced, then the importance of Incukalns could be reduced somewhat.

According to the EU gas market Directive 2003/55, Article 28 on Emergent and isolated markets which states that: “Member States not directly connected to the interconnected system of any other Member State and having only one main external supplier may derogate from Articles 4, 9, 23 and/or 24 of this Directive. A supply undertaking having a market share of more than 75 % shall be considered to be a main supplier. This derogation shall automatically expire from the moment when at least one of these conditions no longer applies.”

Finland has attained derogation in accordance with the above directive. This derogation will in principle apply until one of these conditions is no longer valid. This could imply that building a LNG terminal in Finland with less than 25 % of total Finnish supplies would still allow Finland to uphold the derogation unless an interconnector is built. [The Ministry of Employment and Economy in Finland have commented that: In the 3rd gas market directive the derogation applicable for Finland will be amended by stating that a connection between Finland and the Baltic States would not remove Finland’s rights for derogation] With the objective of the BEMIP to enable full functioning of an integrated internal energy market this would hence include one of the following steps for Finland:

- Creating an interconnection to one other EU member state (most reasonably Estonia or Sweden)

- To open for one more gas supplier with a market share of at least 25 percent. As it is at present not likely that Russia will open for such new entrants to their system, the most likely solution would be to establish a LNG terminal and hereby create the possibility for a new supplier.

Poland has not been granted any such derogation, however the Yamal-Europe pipeline in Poland, owned by EuRoPol Gaz is not following the EU gas market directive, as no network code or third party access is granted. In practice the company hereby acts as if derogation had been granted.

8.2 Uniform regulation All four countries in the region have somewhat different setups and preconditions in terms of regulation and legal framework e.g. Estonia is unbundled, Latvia has specific conditions regarding its storage and Finland has derogation.

Network tariffs and prices are regulated in all four countries. Even though all four markets are regulated the methodologies which are applied in the various countries, may differ from country to country. Thus tariff and prices or formulas for calculating


them must be approved by the appropriate authority e.g. in Estonia the energy regulator must approve the network tariff and gas prices.

This means that prices and tariffs differ from country to country and thus the economic viability of projects may also change depending on what regulation applies. This may create an obstacle in regards to implementation of cross-border investments, because some investments may be profitable under one set of regulation and not under another.

Thus it is vital that rules and legislation are as uniform in all the countries in order to create the appropriate investment climate and in order to ensure the creation of a functioning gas market in the region.

The issue of such a “regulatory gap” in terms of cross-border investments is an issue, which has also been addressed in the third package on the amending of the 2003/55 gas directive. Here it has been proposed to introduce an Agency for the Cooperation of Energy Regulators (ACER). The ACER agency would among other things, provide a framework for national regulators to cooperate, with the specific task of handling cross-border situations.

The Baltic countries could, whether or not the ACER is adopted in a new gas market directive, increase cooperation on a regional level, as the issues in the Baltic countries are mainly of a regional nature, possibly including ERGEG in a guiding or coordinating role. The cooperation could be of a bilateral nature between neighbouring countries or it could include 3 or all 4 countries. However, some form of cooperation is critical in terms of ensuring that cross-border investments are implemented in due time.

8.3 Security of supply 8.3.1 Low security of supply Baltic Sea countries

Security of supply is relatively low in most of the countries in the East Baltic Sea region due to lack of interconnection and only one main supplier. Furthermore only a few countries have access to underground gas storage and no countries have so far access to any LNG facilities.

The low level of security of supply is illustrated in the below figure.


Figure 21 Security of Supply in the Baltic sea Region

Source: Ramboll security of supply model20

The supply situation to Latvia and in turn to the entire East Baltic region differs from the situation in the rest of the EU as gas is only supplied during summer and the large Incukalns gas storage is used for gas supply during winter as the only supply source in the region. Hereby the country becomes very dependent on the technical integrity of this storage. In the Figure 21 a relatively high weight is given to underground gas storage and the full capacity of Incukalns is allocated to Latvia and the lack of gas supply by pipeline during winter is not taken into consideration.

Gas supply to Lithuania normally only takes place via a pipeline from Belarus. The country is hence exposed to events in Russia as well as in Belarus. Only small volumes of gas can be supplied from the gas storage in Latvia. Major volumes of gas are supplied in transit to Kaliningrad, which gives a more balanced situation in respect to political and commercial risk for a gas disruption from Russia, but not for technical risk or transit risk in Belarus.

Gas supply to Estonia takes place mainly via one pipeline. The older pipeline directly from St. Petersburg is not normally used. Gas can be supplied from the gas storage in Latvia.

Gas supply to Finland takes place via two parallel pipelines from Russia. No storage is available and security of supply is mainly achieved by possibility for dual fuel usage by end-users. The supply situation in Finland is exposed to a situation where the country is located supply wise after large consumption centres like the St. Petersburg and from 2011 and 2012 the first and second Nord Stream pipelines. It is therefore assessed that the security of supply to Finland may impacted with new

20 The Ramboll SoS index is based on a set of quantifiable parameters like number of supply countries and pipelines, indigenous gas production, gas storage, LNG terminals, gas substitution and country risks for supply and transit countries, which have been weighted and then compared.


supply sources from Shtokman and Siberia on the one hand and new outlets on the other. This is the background for the ongoing work on Balticconnector and LNG.

The security of gas supply to Poland is better than to the rest of the region as the country has a considerable domestic production and import possibilities through the three neighbouring countries, Belarus, Ukraine and Germany. However as the recent gas crises in the Ukraine have shown Poland is still vulnerable to disruption and new transportation routes and supply are being analysed.

Furthermore when evaluating security of supply it is important to keep in mind that security of gas supply and security of energy supply may differ, for example a considerable share of consumers in Finland are able to switch to other fuels in the event of a supply disruption.

8.3.2 Security of supply costs in general Security of supply is a cost which is not always internalised by the market. Therefore projects which provide security of supply should be evaluated considering this. If a project delivers considerable security of supply benefits, which are not internalised by the market, e.g. higher gas costs from LNG imports, then these additional costs (the price difference) should perhaps be paid by all (gas) consumers in the benefiting countries though e.g. a security of supply premium or tax collected by e.g. the TSO.

8.3.3 Security of supply costs in the Baltic countries With some of the lowest prices in the EU, it seems there is room for increased costs due to security of supply considerations. However it should be kept in mind that even though gas prices are relatively low in the Baltic countries, gas costs make up a relatively large share of GDP compared to other EU countries. The graph below shows how much 2500 m3 of gas costs compared to GDP per inhabitant in the respective countries.

Figure 22 Gas costs share of GDP per inhabitant, 2008

Gas costs (2500 m3) share of GDP per inhabitant, 2008 (without taxes)

0,00

0,04

0,08

0,12

0,16

0,20

LU

DK IE

NL UK

BE FR

SE DE IT

EU27

AT ES

EE

SI

CZ LT

LV

SK HU RO

PL

PT

BG

Source: Eurostat


8.3.4 Security of supply costs in Denmark In Denmark the TSO is responsible for ensuring security of supply. The TSO has to fulfil Danish security of supply regulations which constitute that there is at anytime enough gas for either one of these emergency situations: 60 days interruption of supply or 3 days with minus 13 degrees Celsius, thus a supply interruption scenario and an increased demand scenario. The Danish security of supply setup is ensured via a combination of storage, interruptible consumers and alternative sources and it costs around 40 MEUR every year to uphold this level of security of supply.

Spending as much as 40 MEUR would in comparison allow the Baltic countries to build the Amber PolLit connection between Lithuania and Poland.

8.4 Improving market mechanisms and strengthening incentives If the Baltic markets and Finland are integrated with each other and with the EU gas market network, creation of a common Baltic Gas exchange or could be established in order to create transparency in the Baltic gas market.

Otherwise if a common TSO or a common integrated network was established, then a common virtual trading facility like e.g. the Danish Gas Transfer Facility (GTF), which allows shippers to trade with each other, could be established allowing players in the Baltic gas markets to optimise their gas port folios on a daily or weekly basis.

In turn a Baltic gas trading platform or exchange could become a part of e.g. a larger Baltic Sea Trading platform as is the case on the electrical side, where the Baltic countries are joining Nordpool.

A common TSO for the Baltic gas network, could have a common Baltic gas market open season to strengthen investment signals in the region and to ensure coherence and coordinate co-dependence between investment in the Baltic countries and Finland.

8.5 Identification of possible market related actions Based on the above analysis and the overall purpose of this report, i.e. the integration of markets and increase of security of supply, the following possible market related actions have been identified.

- EuRoPol Gaz. Yamal-Europe gas pipeline:

- Implementation of gas market directive incl. reverse flow

- Alternatively merging with the national Polish gas transmission system

- Unbundling of gas transmission systems in the Baltic countries and Finland.


- Cooperation between regulators or even a common Baltic regulator in order to ensure a common policy and thus to ensure economic viability of projects on a regional basis.

- Cooperation or merging or gas transmission companies in two or more of these member states in order to secure fully integration and economics of scale [same model as GTS and Gasunie Deutschland], including:

- Common open season on new investments.

- Storage release program for Incukalns gas storage to reduce the amount of long term storage contracts.

- Establishment of a common electronic trading platform with the goal of a gas exchange.

9. Prioritisation of necessary interconnections, gas storages and LNG terminals

9.1 Methodologies, suite of models and evaluations The following sections further evaluate the different projects in terms of which ones “perform” the best with regards to the overall objectives that have been set, i.e. focus is mainly on security of supply and market integration of the Baltic countries and Finland.

Different approaches have been used to assess and evaluate the projects, in order to ensure a thorough and balanced evaluation.

The analysis does not include a cost-benefit analysis of the different project as was originally intended. This is due to three principal reasons. Firstly all detailed Cost-benefit analysis has not been possible due to a restricted timetable. Secondly cost-benefit analysis may not give adequate information, as project information is restricted and thus any CBA would be based on assumptions which to a large extent would be equal for all projects. Thirdly and most importantly, the different projects evaluated in this report cover pipelines, LNG terminals and storages all projects which main purpose is to increase security of supply and to ensure market integration in the region. These two factors are very difficult to assess in CBA, because the value of security of supply is not directly assessable by CBA, which also goes for the value of increased competition.

However, wherever it has been possible CBA elements have been incorporated in the various analyses performed in this report.


9.2 Baltic Sea projects are relatively small investments compared to major supply systems to EU

Compared to major supply systems to EU and to the value of the existing gas network in the Baltic Sea regions the projects considered under the BEMIP are relatively small, although the investments can be considered relatively large compared to the market size of the Baltic gas market. As an illustration the total investment of Nord Stream is compared to a LNG chain and a pipeline interconnector in the following graph. This is naturally reflecting the relatively small capacity of the system and that they will use existing network to connect to.

Figure 23 Baltic Gas Market Interconnection Plan – investments in perspective

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

Nord Stream Finnish LNG Lithuania-Poland

ME

UR

Offshore Onshore Compressors LNG receiving LNG ship LNG gasification Source: Ramboll and BEMIP project implementation sheets

9.3 List of project and project assessment This section lists the various projects that evaluated in this report and further provides a brief SWOT analysis/comparison of the different projects.

Some of the Projects have been presented in the BEMIP working group others have been included by Ramboll. The pipeline projects have been divided into two subcategories, short to medium term and long term.

9.3.1 SWOT Pipeline projects – short to medium term

Table 11 Pipeline projects – Short to medium term

Cost and capacity

Strengths Weaknesses Opportunities Threats


Am

ber

PolL

it (

OS)

(1 bcm/year) - Obvious connection between two networks

- Only two TSO´s need to be involved

- Limited gas available in Poland in national system

- Connection to Yamal-Europe

- Local supply to Suwalki region

- Extension of northern polish network

- Balticconnector

- Unit transportation cost due to low capacity

- Environmental challenge due to natural habitats

- Regulation of tariffs

Am

ber

PolL

it

292 MEUR (3 bcm/year)

- Integration of EU gas networks with energy island in Estonia, Latvia and Lithuania

- Limited gas available in Poland in national system

- Involvement of three TSO´s necessary

- Transit of gas to/from Poland from Storage in Latvia

- By using a larger diameter (36” instead of 26”) pipeline the connection can also be used for larger scale import and transit

- Extension of northern polish network

- Balticconnector

- Access conditions to Yamal-Europe and possibility for reverse flow

- Environmental challenge due to natural habitats-


Bal

ticc

onnec

tor


- Integration of energy island in Estonia, Latvia, Lithuania and Finland

- No new gas

- Environmental and approval process is a challenge, ESPOO

- Capacity of network in Estonia

- Involvement of three TSO´s necessary

- Amber

- Combine with LNG in Finland or Estonia

- Mid Nordic could be woken alive

- Connection to Nord Stream

- Lack of political and commercial support

- Relatively large increase in tariff asset base


Inte

rTra

nsG

as

180 MEUR (3.5 bcm/year)

- Local supply

- Integration of Poland and Germany

- Reverse flow

Strong political and commercial support

- Physical gas flow against main flow direction

- Integration into existing network

- May become less economically viable by implementation of Baltic Pipe, LNG, Yamal-Europe

Ska

nle

d


- New gas from interconnected Norwegian system

- Strong governmental support

- Complex system

- Many stakeholders


- Availability of gas

- Development of Norwegian and Swedish gas market

- Increase competition

Increases SoS in Poland and Denmark

- Unit cost due to long pipeline small diameter

- Swedish policy versus gas

Bal

tic

Pipe


- Short route for North Sea gas to Poland, bypassing Germany

- Security of supply to Copenhagen and Sweden

- Polish gas company has gas reserves in Norway

- Need for strengthening of Danish Polish system


- No long-term supply in Denmark at the moment

- Deudan

- Large scale import to Denmark as Danish gas goes to the west

- Combine with LNG in Poland

- Interconnection to Nord Stream

- Opening of Yamal-Europe in reverse flow may outcompete project

- Insufficient gas in Denmark

- Gas transmission tariffs in Denmark/Poland

Bal

tic

Gas

Inte

rconnec

tor 350 MEUR (3

bcm/year) - Connects three countries

- Security of supply to Sweden and Copenhagen

- Environmental approval obtained in DK and SE

- No new gas

- Avoid transmission cost in Denmark to Avedøre power plant

- Fit with Skanled

- German authority process

- Congestion in Denmark


Latv

ia-

Lith

uania

(2 bcm/year extra)

- pipeline in place, only meter station needed

- Need for rehabilitation of pipelines

- Increase use of gas storage on regional level

- Gazprom may want to limit interconnection

DK-N

O

(4 bcm/year) - Short distance, less than 100 km

- System already planned for interconnection

- Capacity of Norwegian system

- Different owners of platforms and pipelines in Denmark

- Use of depleted Danish fields for gas storage

- Transit from Norway to The Netherlands

- Need for gas treatment between Denmark and Norway

Deu

dan


- Pipelines already in place

- Capacity of German system

- Increase security of supply in Denmark and Sweden

- Regulation in Germany and Denmark

9.3.2 SWOT Pipeline projects – Long-term The following projects may not be implementable for the short- to medium term, but can be considered for the long-term development of the Baltic Sea gas market in particular to connect the East and West Baltic Sea in case an opening of the Yamal-Europe for reverse flow is not secured.

Table 12 Pipeline projects – Long-term

Am

ber

Bal

tic

(Szc

zeci

n -

Gdan

sk-

LT)

(5 bcm/year) Already a part of Long-term polish planning from Szczecin to Gdansk

- Moving gas against dominant flow direction

- Strengthening of gas supply in Nortern Poland

- Environmental problems, nature reserves from Gdansk to Lithuania

- Reverse flow in Yamal-Europe

- Cost

Mid

Nord

ic

1000 MEUR ( 3 bcm/year)

- Direct way for gas from Mid Norway to Finland

- Gas to Trondheim

- Project is discontinued, no owner

- Resistance against project in Sweden

- Gas suppliers not interested

- Connection to Stockholm

- Balticconnector

- Environment

- Cost and timing

DK-L

atvi

a


- Direct east-west connection

- Alternative to Baltic Pipe + Amber PolLit

- New project


- Interconnection to Nord Stream

- Large scale import direct to Denmark

- Complicated ESPOO procedure

- Cost and timing


9.3.3 SWOT LNG projects

Table 13 LNG projects

Strengths Weaknesses Opportunities Treats

Sw

eden

LN

G


- Under construction

- Not connected to network

- First mover - Cost

Polis

h L

NG


- Large market in Poland

- Mature project, transferred to system operator

- First gas contract being completed

- Easy access by ship

- Strong company as developer

- Competition from Baltic Pipe

- Competition from reverse flow in Yamal-Europe

- First mover

- Location in centre of market with use of Baltic Pipe for DK

- Use for Germany

- Unit cost due to small size

Finnis

h L

NG


- Directly connected to a large market

- Strong company as developer

- Existing port facilities in Inkoo and Sköldvik

- Ice problems

- No agreement with gas suppliers and ship owners

- Combined with Balticconnector and use for the region

- Opening of gas market

- Increased competition

- Potential for peak supply

- Environmental issues

- Ice conditions and requirement to special ships



Est

onia

n L

NG


- Existing port facilities can be used in Paldiski or Tallinn

- Small market for Estonia

- Competing with UGS in Latvia

- Combined with Balticconnector and use for the region, opening of gas market, increased competition


- Ice conditions and requirement to special ships


Lith

uania

n L

NG


- Use of existing port facilities

- Shorter sailing distance than Finland/Estonia

- Competing with UGS in Latvia

- No TSO active in development

- Regional use with strengthening of system



Further to these LNG projects there could also be possibilities in Latvia and Denmark. These projects have not been included in the assessments.

9.3.4 SWOT Storage projects

Table 14 Storage projects

Strengths Weaknesses Opportunities Treats

Incu

kaln

s ex

pansi

on

390-490 MEUR (0.9 bcm/year)

- Proven reservoir

- Experienced company

- No diversification of supply

- Need for strengthening of transmission system

- Long term contracts for existing storage, uncertainty

- Strategic storage for entire Baltic Sea region

- Ownership and concessions

- Requirement to competition

New

sto

rage

Latv

ia 2300 MEUR (6

bcm/year) - Good geological conditions

- Not yet developed and uncertainty about cost

- Could be used as strategic storage for the region

- Expensive compared to expansion of Incukalns



New

sto

rage

Lith

uania

347 MEUR (0.5 bcm)

- Need for storage for seasonal use and Security of supply

- No existing storage in Lithuania

- Cost compared to Incukalns

- Combination with interconnectors

- Sale of storage capacity to Kaliningrad and Poland

- Uncertainty about geology and reservoir conditions


Exp

ansi

on o

f st

ora

ge

Den

mar

k

- Low cost as expansion of existing facilities

- Flexibility of North Sea production decreases in line with depletion of fields

- Regulated tariffs

- Need for strengthening of transmission system

- Combination with Skanled

- Sale of storage products to Sweden

- Combine operation with wind development



New

sto

rage

Ger

man

y

- Good geological conditions

- Reduced flexibility in production in line with depletion of gas fields

- Competition from existing storage

- Combine with new import infrastructure like Nord Stream

- Export of storage services to UK, Poland

- Combine operation with wind development

- Oversupply of storage services

New

sto

rage

Pola

nd - Good geological

conditions

- Regional location will reduce need for transmission lines

- Lack of connection to Yamal-Europe

- Connection to Yamal-Europe


9.4 Pipelines versus LNG projects When prioritising the different projects one of the main decisions is whether to invest in pipelines or LNG. As all countries in the region have access to the sea, import of LNG is an option for all. This section evaluates the pros and cons of LNG versus pipeline investments.


Table 15 Comparison of LNG and pipeline investments

Pros Cons

Pipelines / Interconnectors

- Completes network with well known technology

- Low operational cost

- Low total cost

- remove missing links and eliminate reasons for derogation

- No new gas sources for the short pipelines

- Environmental impact during construction

LNG - New gas sources (but no deals so far)

- Volumes could be increased during supply disruptions, high flexibility

- Low cost of receiving terminal, while other investments in gasification and ships will be outside the region

- New technology in Baltic Sea

- Cold water, ice – need for dedicated LNG carriers

- High operational cost

- Energy consuming technology (gasification and transport) with high CO2 emissions

Based on the above comparison the important issue is: how long pipelines are necessary in order to get access to other than Russian gas sources and to other transportation routes than via Russia and Belarus.

The distance to closest other sources of gas are as follows, assuming that at least 3 bcm/year should be available:

- Finland to Norwegian Sea: 900 km

- Latvia to Germany: 600 km

- Lithuania to Denmark/Sweden: 600 km

- Lithuania to Poland (Yamal-Europe): 330 km

- Lithuania to Poland (Baltic Pipe/LNG): 800 km

If no connection to Yamal-Europe is possible the Lithuania-Poland pipeline will be somewhat longer, approx. 450 km and the available capacity from Poland to Lithuania will only be 0.6 bcm/year.


9.5 LNG assessment 9.5.1 Small or “large” scale LNG

An important decision in terms of whether to invest in LNG terminals is to decide whether to go for several smaller LNG terminals or for one large terminal possibly with integration to the neighbouring markets. This is especially relevant seeing as most of the countries around the Baltic Sea are investigating the possibility of building a LNG terminal in order to solve the issue of security of supply.

The construction of LNG terminals is associated with considerable economics of scale. This is to several issues such as Harbour costs, large scale LNG carriers tanks etc. Especially harbour costs can be significant, if the terminal has to built a new harbour this constitutes considerable additional costs compared to a terminal, which can utilise existing infrastructure e.g. an existing harbour.

Looking at investment data available on LNG terminals, we see that there seems to be noticeable economics of scale i.e. smaller re-gasification plants have higher investment costs per BCM of capacity.

Figure 24 LNG economics of scale, re-gasification investment costs

y = -96,368Ln(x) + 270,15R2 = 0,9326

0

100

200

300

400

500

0 2 4 6 8 10 12

Total capacity of terminal (BCM)

Mil

lio

n E

uro

pe

r B

CM

ca

pa

cit

Source: Gas infrastructure Europe (GIE) and Ramboll LNG investment database

The projects which the above assumptions are based on are the following projects:

Table 16 LNG terminals under construction

Country Name Capacity (BCM) Costs per BCM in

MEUR Total costs in

MEUR

France Fos Cavaou 8,3 52 430

Italy Porto Levante 8,0 100 800

Italy Toscana 3,8 160 600

Netherlands Gate terminal 9,0 89 800


Turkey Aliaga 6,0 76 455

UK Dragon 6,0 44 266

UK Southhook 10,5 54 569

Poland Swinoujscie 2,5 200 500

Lithuania N/A 1,5 200 300

Sweden Nynäshamn 0,3 400 120 Source: GIE and Ramboll LNG investment database

In terms of ship size there is also considerable economics of scale, the main size of ships that has been built since 1990 are around 130-150.000 m3 of LNG. Recently ships with a capacity up to 250.000 m3 LNG have been emerging. The graph below shows how costs and LNG ship capacity display considerable economics of scale.

Figure 25 LNG Tanker, economics of scale

y = -2,1475Ln(x) + 26,862R2 = 0,8331

0

2

4

6

8

10

0 50000 100000 150000 200000

Tanker total capacity m3

Co

st (

Mio

. U

SD

pe

r 1

00

0 m

3

cap

aci

ty)

Data on ships from 1990-2005

Furthermore there are also likely some economics of scale in terms of contract negotiations, i.e. larger contracts are likely to be able to negotiate a better price for the LNG. Also, a smaller terminal could be less active on the spot market, if the size of the terminal causes any restrictions in terms of e.g. maximal vessel size.

9.5.2 Conclusions on LNG size The fact that these economics of scale exist for LNG terminal investments, indicates that it is economical optimal not to invest in many smaller LNG terminals but instead only to invest in one “large” terminal in the Baltic countries. As it is now LNG terminal projects seem to exist in almost all countries, it is however not feasible to construct them all considering the small size of the individual markets.

Thus construction of a LNG terminal is dependent on whether the Baltic markets and Finland are integrated, as only the combined demand for gas in the Baltic countries


and Finland may justify the construction of even a relatively small LNG terminal of somewhere between 1 and 3 BCM.

Therefore it should be analysed where a LNG terminal would be optimal, considering demand and existing infrastructure, as well as planned investments and what investments are required in combination with the terminal in order to ensure the highest level of economic viability.

9.5.3 Location of LNG As discussed above the economics of LNG and the size of the Baltic and Finnish markets imply that investments in LNG should be bundled into one, maximum two LNG receiving terminals. As all countries in East Baltic Sea are considering investing in an LNG terminal, a decision as to where the best location is needs to be made. An LNG terminal should be located close to any market to avoid additional transportation costs after re-gasification. This also indicates that LNG should be established were there are the fewest alternatives, which in this case is at the end of the system i.e. away from Poland and western European pipeline gas. The important issues concerning location of a East Baltic Sea LNG terminal are:

- Somewhere were there is a relatively large market that could be supplied

- At the “end” of EU network to limit the need for network investment.

- Where the preconditions are the best in terms of establishing of a terminal e.g. an existing Harbour and/or access to the gas system.

9.5.4 LNG options – traditional with storage or direct gasification on ship Different LNG options are being considered in the region. The two main options are traditional port facility with unloading facilities and LNG storage tanks and new technology for re-gasification onboard the LNG vessel and feeding the gas directly into the network and possibly underground gas storage.

Overall re-gasification cost only comprise of approximately 10 % of the total share of LNG costs, whereas production, liquefaction and shipping make up 90 % of the value chain.

The advantage of the traditional option with LNG storage tanks is that this solution can also be used to smoothen short term peaks in demand due to very cold weather and to supply gas in case of short term disruption of supply, which could be due to a technical failure. Due to the occurrences of very cold peaks LNG storage can be used to limit the investments in transportation capacity and in underground gas storage. A LNG storage could potentially also be used for own production of LNG during periods of time with surplus gas supply during summer period and low electricity prices.


Furthermore, because traditional LNG terminals allow for base-load21 supply they provide a better basis for new competition, especially in markets with a single or dominant supplier, as it allows new players with no additional supplies in a specific market to enter the market. The disadvantages of traditional LNG terminals are higher investments costs and more environmental complications.

Direct gasification is in particular a good option for large gas system which can easily absorb large volumes of gas. Therefore the option has been developed for e.g. the UK and US gas systems. Direct gasification can also be used in case of long disruptions of gas supply to the region. The number of ships with direct gasification is limited and direct gasification would probably require dedicated contracts with such ships.

LNG re-gasification vessels (LNG RV) provide an alternative to traditional LNG terminals, they benefit from lower investment costs and as they do not include large onshore re-gasification facilities they are especially useful in locations were traditional terminal face a lot of difficulties in terms of environmental issues. As LNG RV feed the gas directly into the gas grid, it requires several vessels mooring at the same time if base-load capacity is to be supplied. However for security of supply or for supplies only during seasonal peaks, LNG RV makes a good alternative to the traditional terminals. LNG-RV is a relative new technology, which implies that although LNG RV’s are not significantly costlier, compared to traditional LNG vessels without re-gasification, only a smaller number of LNG RV are being used today, this limits the potential to buy and sell the LNG on the international market, because vessels as well as receiving terminals require specific installations. Below are listed the pros and cons of the two LNG alternatives.

Table 17 Pros and cons of different LNG technologies

Pros Cons

Traditional LNG incl. Storage capacity

Base-load supply

Storage option allows for peak supply

Market development

Access to world spot market

Storage for peak supply

Developed technology

More expensive

Not in my backyard

LNG re-gasification vessels Less investment required

Less environmental issues

Requires dedicated fleet of vessels

Less market benefits in terms

21 Base-load is used for continuous supply, while peak-load is used for short term supply, e.g. due to meet demand during short periods of time with cold weather or need for replacement of supply due to short interruption of other supply for technical or non-technical reasons


Cost effective short term security of supply

Seasonal peak balancing

of demand

Smaller market in terms of supply

Less access to spotmarket

No storage option

Total LNG terminal costs for a 2.5 bcm import terminal are approximately 500 MEUR of which 150-200 MEUR are investments in storage facilities and the rest in harbour, pipelines, compressors etc.

The LNG options presented by Poland and Lithuania are based on traditional LNG options with storage.

Comparing the two options we have that traditional LNG has its strength in terms of market development and provision of both long and short-term security of supply. Using Re-gasification vessels provide less flexibility and even though investments are slightly lower, this only makes up a very small percentage of total investment costs.

As there is no potential for underground gas storage in Finland and Estonia and as the Incukalns gas storage in Latvia has a low withdrawal rate we recommend establishing LNG storage in connection with a LNG import terminal.

9.5.5 Gas storage versus pipelines and LNG Gas storage is only available in Latvia of the four East Baltic countries. The geological conditions in Finland and Estonia have not shown any suitable locations for underground gas storage. Also in Lithuania it is doubtful if gas storage can be established as several feasibility studies have so far not demonstrated the feasibility of such an investment.

In Latvia there are possibilities for enlargement of the existing Incukalns gas storage and also to establish new very large storage facilities with relatively low cost due to favourable geological conditions.

Thus potential for gas storage investments in the region are limited e.g. the largest market, the Finnish market has no geological potential for storage. Further compared to LNG and pipelines, storage does not bring in any new gas and “only” increases security of supply in the event of supply interruption in gives not alternative supply option.

9.6 Qualitative comparison of projects The overall objective is to increase security of supply in the region, as well as ensure the integration of the gas markets in the region with the rest of the EU. The following matrix compares some of these qualitative objectives in a simple red/yellow/green light methodology. This is done to ensure that focus in relation to the overall


objectives is preserved. Table 18 below highlights how the various projects, perform in terms of a ensuring that the overall goals of the BEMIP are obtained. These goals are:

- To ensure market integration requiring physical connection to the EU gas market and full adaptation of the gas market directive.

- To increase in security of supply, this requires new import capacity to the region.

- To ensure that projects can be fully implemented within approximately 5 years to ensure both market integration and Security of supply.


Table 18 Qualitative comparison of projects

A

mber

Bal

ticc

onnec

tor

Am

ber

PolL

it (

OS)

Am

ber

PolL

it

Bal

tic

Pipe

Bal

tic

Gas

Inte

rconnec

tor

Inte

rTra

nsG

as (

DE –

PL)

DK/S

V -

Lat

via

Mid

Nord

ic

Ska

nle

d

NO

-DK

Deu

dan

Latv

ia-L

ithuan

ia

LNG

Pola

nd

Finngulf L

NG

LNG

Lithuania

Dobel

e U

GS

Incu

kaln

s ex

pansi

on

Lith

uania

UG

S

Connect energy islands Lift Derogations Finland Latvia Lithuania Estonia Supply New supply to region22 New supply in general Access to gas exchange Diversification to region Security of Supply Short term technical Long term Transit possibility Finland Estonia Latvia Lithuania Poland Sweden Maturity Ownership to project Operational within 5 years Capacity Regional capacity Legend Yes Uncertain

9.7 Quantitative comparison model 9.7.1 Model description

For further assessment, the different projects have been evaluated in the Ramboll Gas infrastructure model, which evaluates projects on 5 overall categories: security of supply, market, climate and environment, General (timeframe and economics of scale) and cooperation (implementability).

Each category is described using a set of parameters. The parameters have been assigned different weights, scores are then multiplied and normalised within each category to find a total score for each project, which can then be compared. The

22 Region in table 13 refers to Baltic countries and Finland


parameters used for evaluation of the Baltic energy market interconnection plan are listed in Table 19.

Table 19 Parameters for quantitative comparison

Categories Parameters

Supplier country

Size of supplies new market

Size of supplier country's reserves

Number of countries which receive new import source

Distance from field to EU border

Supply competition

Transit, risk profile of transit countries

Replacement of current "risky" infrastructure

Storage capacity (existing or new market)

Offshore (risk)

New gas to isolated markets - new gas goes to

- Country with only one connection

Security of supply

- Country with only imports from one country

Dual direction of pipes

Connection of not already integrated networks

Provision of Third Party Access

New gas supplied to market

Market development

Seasonal differences in temperature

Degree of abundance of gas

Potential replacement (coal and oil) Climate change and renewables Terrain (onshore) highlands

Time frame of the project General

Economies of scale (Pipe diameter x Pressure)

Cooperation # of countries cooperating

The 5 categories are weighted in accordance with the below diagram.

Figure 26 Weights of categories

Security ofsupply

Market

Climate changeand renewables

General

Cooperation


The projects that score the highest are the projects that provide both market integration and security of supply. This is mainly large projects or combinations of projects, but also the two interconnectors Amber PolLit and Balticconnector score high.

Results of the quantitative analysis are shown in Figure 27, where both total scores as well as individual performance for each category can be seen.

Figure 27 Quantitative analysis (scores)

0

5

10

15

20

25

Ambe

r

Small A

mbe

r, Ba

lticc

onne

ctor

, LNG

Balticc

onne

ctor

+ LNG

Small A

mbe

r - Yam

al Eur

ope

Balticc

onne

ctor

Small A

mbe

r - G

az sys

tem

DK/SE

- La

tvia

Mid nor

dic

NO-DK

LNG P

olan

d

Baltic Pipe

InterT

rans

Gas (G

erman

y - P

olan

d)

Finng

ulf L

NG

Deuda

n

Skan

led

Lithu

ania, U

GS

Baltic Gas

Intercon

nector

Lithu

ania-L

atvia

Incu

kalns ex

pans

ion

LNG L

ithua

nia

Dobele, U

GS

Security of supply Market Climate and environment General Coorperation

9.7.2 Conclusions on quantitative analysis LNG terminals do not come out as top scorers in the analysis, this is due to the fact that LNG terminals provide no integration of the markets and they mainly increase security of supply in the country where they are built. However, if an LNG terminal is combined with an interconnector then the score is of the combined project is increased considerably, this is illustrated by the combination of a LNG terminal and the Balticconnector which scores third highest of all the projects evaluated.

Storage facilities also score relatively low, as they provide no additional gas supplies and only limited market integration. This however does not imply that gas storages are of low importance or value. The overall importance of gas storages in order to provide flexibility and to optimise gas systems is of utmost importance, however in the context of creating integrated markets, they score low compared to e.g. interconnectors. The highest ranking storage project is the Lithuanian project in Syderiai, which benefits from providing additional storage capacity which constitutes an alternative to Incukalns.


In terms of the West Baltic Sea the Top scorers are NO-DK to supply the Danish and Swedish markets, which is an important issue due to indigenous production in Denmark phasing out. Further the LNG terminal, Baltic Pipe and InterTransGas in Poland all receive a relative high score, because they ensure additional import capacity and diversification for Poland.

Further two long term projects score relatively high in the analysis that is the Mid Nordic project and the DK/SE – Latvia project. Both projects however do currently not have any “ownership” and possible implementation of these projects are thus only to be considered in the medium term (5+ years), not short term (<5 years).

Ref. 953106/BEMIP Final report

A. [Appendix]