#EnergyDigest (39/22): Goodbye, Northern Streams

What happened in energy this week?

Week 39 of 2022 (I. e. the week starting on 26th of September)

  • Europe has most likely permanently lost the Nord Stream pipelines, which, besides meaning a colossal shift in European gas infrastructure, might also have an impact on the Baltic States.

  • LNG import infrastructure in the Baltics is tight, but only for a little while longer. Growth comes not without tension.

  • We also parse European energy ministers’ decisions on energy savings and what they mean locally.

Let us look at all that in detail.

Nord Stream explosions

Two explosions rocked both Nord Stream pipelines at the beginning of the week. All four strings of the two pipelines were damaged. The fact that it was sabotage and not an accident became clear almost immediately. Denmark, Sweden, and Germany have opened an investigation to identify the culprit. Logical explanations might be hard to come by for such an attack, but most point fingers at Russia.

The outlook for the pipelines themselves is bleak. The damage caused by seawater is likely to require massive repairs. Even if Moscow, hindered by sanctions, could manage it, such an investment would probably never pay off. Europe has enough pipelines for Russian gas - in Poland and Ukraine. Moreover, the war has brought closer the end of the gas era.

The explanation I find most likely, though there are others, is this: Gazprom is ending its presence on the European gas market on political orders. It is looking for a way to cut off gas supplies to Europe without major legal consequences. They want to avoid fines so the company's assets outside Russia would not be seized. Moreover, I suspect that part of Gazprom still hopes to return to the European market sometime before 2050. This may require payment of all the accumulated fines for outstanding current contractual obligations.

Force majeure, such as pipeline explosions, could therefore help stop the metaphorical bleeding. Explosions, of course, have other characteristics of hybrid warfare. However, from the perspective of gas supply, this is the only way I can explain Gazprom's painful self-mutation.

  • Why is this important? The Baltic countries have never been directly affected by Nord Stream pipelines. They were built to take Ukraine out of the Russian gas supply to Germany. Gazprom had laid this out in its public strategic documents. Russian partners in Germany have also found reasons to do this. Hence, the threat to the Baltics was always geopolitical.

    Explosions have sent the gas infrastructure back to a less geopolitically threatening times. It should be a relief for the Baltic countries and, even more so, for Ukraine. Form a less optimistic perspective the explosions, seen as a grimace of hybrid warfare, may be a sign of Moscow's increased tolerance for pain and risk. In that case, disconnecting the Baltic States from Russian IPS/UPS system could be more likely.

    As we discussed last week, such a move would risk Kaliningrad going dark. But now the military bases there are empty. I am not suggesting the threat is imminent. But I’d note that the risk profile in the region has changed somewhat.

Further reading (in LT unless stated otherwise, Google/Deepl are your friends):

More gas infrastructure

Klaipėdos nafta (KN), the Lithuanian LNG import terminal operator, has reserved about 60% of Independence's capacity, 24 TWh/y, to four companies for the next decade (2023-2033). Latvia's Latvenergo and Poland's PGNiG have reported reserving part of these capacities. The remaining two companies are Lithuanian. My guess – Ignitis Group and Achema.

This is the first time such an auction has been organised. The remaining unreserved capacity at the FSRU will continue to be allocated on an annual basis. In 2023, a further 9 TWh will be allocated in this way. The rest can be booked during the year.

Meanwhile, Estonian politicians started complaining publicly that the Finnish side is reluctant to talk about the details of an agreement on their joint gas import terminal. Estonians are seeking confirmation about the port where the LNG terminal will be moored at first. It is also unclear where the gas imports will be coming from.

Skulte LNG, a company poised to build a gas import terminal in Latvia, announced that their project will cost around €120m. This is considerably less than a conventional FSRU (€300-340m). They will skip the gas storage tanks and only build a jetty. The gas will be unloaded via pipeline into the Inčukalns gas storage facility. Supposedly via a regasification facility on the quay.

  • Why is this important? Klaipėda LNG terminal has locked in some customers before competing infrastructure is finished in the region. Both the Poles and the Latvians have plans for new gas import facilities. Meanwhile gas consumers in the northern part of the region - in Estonia and Finland - are willing to wait for their own terminal to arrive (in December).

    The public grumbling in Estonia is not inspiring confidence though. Especially if, as we discussed earlier, Nord Stream pipeline explosions mean a higher risk of being disconnected from the Russian electricity system. Because that would have consequences for the gas sector too.

    A self-sufficient Baltic electricity system would need an additional 8.5 TWh of gas for electricity production. That is 67% of the total gas currently stored in our gas storage for the winter (12.7 TWh). It should be noted that the storage facility is only half full and not without the “help” from the Gazprom-controlled Latvijas Gaze.

    Stress relief comes in the form of the significant reduction in gas consumption, especially in Lithuania. All three governments also claim to have enough gas for the winter needs of their populations. Everyone I speak to informally says that everything is fine. Finally, there is little we can do now.

    It remains an undisputed fact - all these concerns of mine would be resolved by the successful and timely delivery of the Finnish-Estonian LNG import facility.

    The prospects for a third (presumably, Latvian) gas import terminal in the region are less clear. The fact that Latvenergo took part in the KN’s 10yr auction indicates that even local companies do not have too high hopes for the Latvian project.

Further reading:

Meeting of Energy Ministers

EU adopted measures meant to reign in electricity prices at a meeting of Energy Ministers in Brussels on Friday. These include cuts in electricity consumption, levies on businesses benefiting from the crisis and a permission to aid small and medium-sized enterprises. The measures are described as "temporary and extraordinary in nature". They will be implemented from December this year until the end of 2023, unless otherwise specified.

Countries will implement a mandatory 5% reduction in peak electricity demand in December-March. Peak hours are the 10% of the time when electricity demand is highest. Voluntary reductions of 10% in total electricity demand were also agreed. Countries will themselves decide how exactly to achieve these goals.

Wind, solar, lignite and nuclear power producers will be limited to a maximum income of €180/MWh. This is but 50% of last month's average power price in Lithuania, but still 4-5 times more than usual. There is also a solidarity levy on oil, gas, coal mining and refining companies. The growth of taxable profits in 2022 or 2023 will be limited to 20% compared to the average of the last 5 years. The funds these measures will yield will be earmarked to help electricity consumers.

  • Why is this important? It is supposed to be a mechanism to raise money without hurting anyone too badly and thus help electricity consumers with their skyrocketing electricity bills. Market interventions are difficult and often have unintended consequences. But European politicians are not prone to political suicide and are keen to act.

    High electricity price should automatically encourage consumers to save and producers to invest. So, in theory, subsidising electricity bills on one hand and asking to reduce demand on the other are contradictory measures.

    Reducing or shifting demand at peak times sounds legit as it will help to reduce the number of hours when the most expensive production units must be turned on. This can be done, for example, by shifting the opening hours of some businesses or offices. Peak hours in Lithuania seem to be between 8-10am and ~8pm. And largest effect would be achieved by pulling some consumption back rather than pushing it forward. The final verdict will be in the hands of the responsible authorities, naturally.

    The power price ceiling will apply only to solar and wind power plants in Lithuania (no lignite or nuclear here). It is notable that the average monthly power price exceeded €180/MWh only during five months in the last two years. December 2021 and June-September this year. Lithuania is highly dependent on imported power. To recover what will be overpaid to, say, the Swedes, the countries will have to conclude bilateral agreements.

    Lithuania will probably be able to collect the solidarity levy from small local oil producers and Orlen Lietuva, which owns the Mažeikiai refinery.

Further reading:

What next?

  • Teltonika Energy, a subsidiary of Lithuanian high-tech group Teltonika, started mass producing electric car charging stations. The concept for the device was introduced by the end of 2021 and mass production started in the second half of September. They are produced in Vilnius, line consists of 7.4, 11 and 22kW chargers. It is estimated that by 2026 there will be more than 53,000 private low and medium voltage charging points in the country.

  • The shareholders of the Polish energy company PKN Orlen have approved the takeover of another state-owned energy company, PGNiG. The former will take over the assets of the latter, while PGNiG shareholders will receive Orlen shares with a ratio of 0.0925 to 1. PGNiG shareholder meeting on this takeover is scheduled for 10 October. In Lithuania, Orlen owns an oil refinery in Mažeikiai and PGNiG operates an onshore small scale LNG distribution station in Klaipėda.

  • Ignitis Renewables, a subsidiary of Ignitis Group, acquired the Silesia 2 wind park project in Poland. Investment, including construction, should amount to around €240m for a 137 MW project. Just like the nearby Silesia 1 wind park, Silesia 2 is planned as a hybrid project, i. e. it will be accompanied by a solar park. It is scheduled to be operational by the second half of 2024. Power will be sold on the open market.