Beginning of the end of Russia’s Gazprom in Europe

Beginning of the end of Russia’s Gazprom in Europe

A ship named Independence has marked a crucial turning point in relations between Russian gas giant Gazprom and its European customers. On October 27, 214, Independence anchored in the harbor of Klaipeda, on the Baltic coast of Lithuania, writes Professor Stefan Hedlund.

The vessel looks like a tanker but is actually a floating terminal built for regasification of liquefied natural gas, or LNG. It is intended to free Lithuania from dependence on Russian energy supply.

It is the length of three football pitches and has an annual capacity of four million cubic metres (bcm). At full capacity, the Independence may fully displace Gazprom from Lithuania, which in 2013 bought no more than 2.7 bcm. And it would still have capacity to also supply the other two Baltic states, Latvia and Estonia.

The Independence was ordered from South Korea, and is leased to Lithuania by Hoegh LNG (a subsidiary of Norwegian energy company Statoil) for a 10 year period, at a daily cost of US$189,000.

Statoil has also signed a five-year contract to supply a minimum of 540 million cubic metres of gas annually. Trial deliveries have already started. The price will depend on the UK’s ‘National Balancing Point’ gas index, currently around US$ 370 per thousand cubic metres (tcm).

In 2013, Lithuania paid Gazprom US$500 per tcm, which was a third more than what Gazprom charged at the German border.

The start of deliveries of LNG to Lithuania represents a true game changer.

In the first round, it gives clout to bargain with Gazprom over the price. Lithuania has already been offered a 23 percent price reduction. Onwards, it offers an option to push Gazprom out of the market altogether.

At full capacity, the Independence has capacity to supply 80 per cent of the total demand from the three Baltic states. At a time of crisis, conservation and rationing could easily push it up to 100 per cent.

Gazprom has long been in denial over the shale gas revolution, referring to it as a myth and drawing parallels to the bubble.

Gazprom management has also developed an attitude or arrogance towards its European customers, based on repeated threats that gas flows may be redirected towards Asia.

Looking towards the future, Gazprom will now need to ponder the possibility of being completely shut out, not only from the Baltics but from Europe as a whole. If the war of sanctions escalates, the European Union may reach complete independence from Russian gas in a couple of years. It would be painful to Europe, but a complete disaster to Russia. Is Mr Putin listening?

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