While from LNG trading and gas flows point of view it doesn't make a substantial difference whether the new regional terminal for liquefied natural gas (LNG) is situated in Inkoo, Finland or Paldiski, Estonia, navigation related issues make it cheaper to build it in Paldiski, a study on the subject for the Estonian Ministry of Economy and Communications by former Eesti Energia board member Harri Mikk says.
Other than navigational issues, the study says that in both cases substantially the same amount of gas can be delivered to the Baltic countries and Finland regardless of the terminal's location. In both cases the effect on the regional gas market and the marine bunkering market will be the same.
As far as the off grid LNG market goes, the location of the terminal will bring advantages to the off grid LNG consumers of the country where the terminal is located due to simpler logistics and shorter distances. If the terminal is built in Finland, however, additional small receiving LNG terminals will have to be built to serve off grid customers in the northern half of the country because distances in transporting gas by road from Inkoo would be too long.
Whether those smaller terminals are supplied from a terminal in Inkoo or Paldiski wouldn't make a difference.
Similarly, in both cases the terminal would support the development of the harbor where it is located.
Both project developers are targeting essentially the same market, that is, mainly the regional bunkering market. In addition the Inkoo project would target off grid gas users in Finland and the Paldiski project the same in Estonia and Latvia. Both are planning to enter and develop LNG as truck fuel. Neither Gasum nor Alexela predict that LNG would be able to oust gas supplied from Russia by pipeline on a significant scale.
From the technical point of view Paldiski has advantages over Inkoo related mainly to issues of navigation, one of which is ice conditions. More importantly, there are several studies about the amount of money needed to enable Inkoo port to receive standard LNG carriers. The estimates range from 50 million euros, which is included in Gasum's project budget, to 250 million euros according to the Navigation Study for LNGC and Qflex Carriers by Tractabel Engineering from April 2013. If the latter figure is correct, the size of the investment into marine works would almost double the terminal cost and make Inkoo an unreasonable option compared to Paldiski where no such costs are required.
From the viewpoint of timing the Paldiski project is more advanced, as the environmental impact studies for it have been completed and approved. The Inkoo project is early in the process of environmental impact assessment with the developer, Gasum, expecting commercial operation to start in 2019. Alexela's estimate as regards the timing of its terminal in Paldiski is the end of 2016 in the best case, and more realistically 2017.
The greatest weakness of both projects comes from the small size of the regional gas market. There are very few market participants that would be effectively able to buy a cargo of LNG and use it itself or place it in the market. One ship of LNG is about 1 TWh of energy and there are few consumers in the region that consume so much in a whole year. In fact today only Gazprom could effectively act as trader if the terminal were there.
The size of the entire region's gas market at this point is close to 100 TWh per year. That is about 100 standard LNG carriers. One has to bear in mind that the current monopoly supplier Gazprom is capable of satisfying the entire region's gas need. There is no real physical or commercial limitation to satisfy the demand by Gazprom. Also, in the pipe grid market it is very likely that Gazprom will have a cost advantage over LNG. No matter what the spot prices of LNG are today compared to current regional gas prices, in the actual competitive situation Gazprom is likely to be the actual supplier. The terminal can bring advantages to consumers through a lower gas price depending where the globally traded price of LNG will move compared to prices for pipe gas in the region, but it will not help the terminal owner who needs physical throughput of LNG to be viable.
Both developers are forecasting a 12 TWh per annum throughput in the early years of the terminal's operation. Such a low utilization rate cannot justify a commercial investment into the terminal. Therefore, either or both, the inclusion of the investment cost into the gas transmission tariff or security of supply payment and extensive EU support are required to build the terminal.
The study recommends the parties involved not to miss out on the deadlines as far as EU finance is concerned. It specifically points out that none of the smaller alternatives would impact the gas market to the same extent and none of them would be eligible for EU support.
«I would strongly recommend a joint study of navigational issues at Inkoo harbor. Justified concerns have been raised and the issue needs to be clarified. The results of the study can be submitted to the Commission as a basis for their assessment,» the study by Harri Mikk says.