WILL THE DEMAND FOR NATURAL GAS DECLINE IN THE FUTURE?

• The International Energy Agency forecasts (2021) that global natural gas consumption will grow until 2025, while in Europe it will decline until 2030, but this decline will be mitigated by the growing volumes of biomethane and synthetic methane, and methane is the main component of natural gas in the Lithuanian transmission system, accounting for at least 90 percent. The sustainability of natural gas will also be enhanced by the blending of green hydrogen into natural gas. Natural gas will play a significant role in the energy mix of the European Union, including Lithuania, in balancing renewable energy sources on the road to a climate-neutral economy in 2050.
• Continuity of the LNG terminal – the LNG reloading station, which started operating in 2017, from which LNG is supplied to consumers distant from the natural gas network (e.g. to Druskininkai), LNG is used to refuel ships or distribution by road transport. The demand for LNG in these sectors is also growing, as LNG is one of the forms of energy that will help the transition to a climate-neutral Europe in 2050 (the European Green Deal), in line with Europe's climate change goals.

WHAT OTHER POSSIBILITIES DOES THE LNG TERMINAL PROVIDE?

• The usage opportunities of LNG are wide-ranging, therefore the activities related to the development of LNG enable even more efficient use of LNG infrastructure, reducing the maintenance costs of the LNG terminal.
• In some sectors (maritime transport, heavy transport, commercial road transport, etc.) there are no alternatives to LNG. Despite stricter environmental requirements, there are no alternatives to the European Union's Green Deal than natural gas, including liquefied natural gas. LNG contributes in particular to the replacement of diesel in maritime and heavy road transport.
• There are no LNG refueling points in Lithuania, while throughout Europe there are already over 496 refueling points. Subsidies for LNG service stations/vehicles are planned in accordance with the National Climate Change Management Policy and the Lithuania's Plan for the DNA of the Future Economy. Respectively, in the coming years 5 refuelling points should become operational in Lithuania.
• LNG is an enabling energy source and should be used in conjunction with renewable energy sources. LNG usage enables the use of solar and wind energy, and it can be used in the production and transportation of biogas and hydrogen.
• Klaipėda LNG terminal de facto satisfies the needs of the region (natural gas is supplied to Latvia, Estonia, Finland via the Balticconector connection), therefore it must be considered as one of the main preconditions for the development of the regional market.
• The coming year will bring another strategic opportunity to operate the Klaipėda LNG terminal at full capacity. GIPL, the pipeline with Poland, is expected to be launched in 2022 and it will be an important link connecting gas supply points and pipelines in the Baltic region with Poland and the whole of continental Europe, including countries such as Ukraine. The flexibility of supply, price transparency and independence from one supplier provided by the terminal are becoming important factors for the whole region.

IS INDEPENDENCE TOO LARGE FOR LITHUANIAN DEMAND?

• The size of the FSRU Independence (the capacity of 170,000 cubic metres or up to 3,75 billion cubic metres of regasified LNG per year) has been chosen considering, that the typical LNG carriers carry about 140,000 cubic metres of LNG. Therefore, it is possible to reload all LNG cargo to the FSRU Independence, which is sufficient to meet the country's maximum daily gas demand. If the FSRU was smaller, cargo acceptance would become more complicated and costly, LNG suppliers would lose interest in supplying partial cargoes by standard LNG carrier or the FSRU would have to be filled by vessels that are several times smaller in size, in both cases this would increase transportation and total cargo costs.
• Regulary, the FSRU should be at least the same size as the incoming carrier, as the inability of the incoming carrier to discharge fully increases the cost of LNG transportation. Accordingly, a smaller FSRU would also reduce the attractiveness of the Klaipėda LNG terminal to customers, and consequently could reduce the utilisation rate of the terminal and the opportunities for diversification of supply.
• Since 2014, the FSRU market has seen an increasing trend towards FSRUs with a capacity of at least 170,000 cubic metres.
• The LNG terminal can regas 122000 MWh of natural gas. Whereas at certain days in February  2021 the demand of natural gas exceeded 140000 MWh.
• In addition to its main function, a FSRU of this size also enables the development of small-scale LNG activities that help achieve the goals of climate change, sustainable transport: to bunker LNG vessels, to distribute LNG to regions remoted from the natural gas network (by distributing LNG by surface transport) and thus to reduce the maintenance costs of the LNG terminal. LNG can be used as a fuel for heavy transport and as a source of energy for wind and solar energy, enabling the use of hydrogen.
• The utilization rate of Klaipėda LNG terminal ( approx. 37% in 2021, 49% in 2020, 44 % in 2019)  meets trends of the average utilization rate of the European terminals ( approx. 39% in 2021, 45 % in 2020, 47% in 2019) (exluding terminals, which are fully booked by single customer) .

 

IS THE LNG TERMINAL EXPENSIVE?

• As for the price of the LNG terminal, the number of all its components should be taken into consideration. The price does not just cover the lease of the FSRU Independence, but also the operation of the vessel, the construction cost of the LNG terminal quay and the 18 km-long gas pipeline branch.
• The LNG terminal, like any other public service infrastructure, has costs that are included in the natural gas tariff and amount to just a few cents. 
• Once the terminal in Klaipėda launched its operations, the average price difference between the Dutch TTF index and the Lithuanian gas import price is around EUR 2/MWh, compared to around EUR 8/MWh in 2014 (when Lithuania did not yet have a natural gas import alternative). This means that Lithuania saves around EUR 140-150 million annually  (not including terminal maintenance costs), depending on the gas price and the amount of gas consumed.

 

WAS LNG TERMINAL NECESSARY FOR LITHUANIA?

The main preconditions for the emergence of the LNG terminal were: to ensure energy security; to ensure an alternative to natural gas supply (to end the monopoly); to ensure competition; to create conditions for the purchase of natural gas at market prices. All of these goals have been achieved.


Prior to the LNG terminal, Lithuania paid one of the highest prices in Europe for imported natural gas supplied by the monopoly gas supplier, i.e. over 30 percent more than the TTF (Western European Natural Gas Price Index), while currently Lithuanian consumers pay one of the lowest prices for natural gas in Europe.  

THE DECREASE IN PRICE OF NATURAL GAS IN LITHUANIA REFLECT GLOBAL TRENDS, ISN‘T IT?

Once the terminal in Klaipėda launched its operations, the average price difference between the Dutch TTF index and the Lithuanian gas import price is around EUR 2/MWh, compared to around EUR 8/MWh in 2014 (when Lithuania did not yet have a natural gas import alternative). This means that Lithuania saves around EUR 140-150 million annually  (not including terminal maintenance costs), depending on the gas price and the amount of gas consumed.

WHY DO WE LEASE INDEPENDENCE? WE SHOULD HAVE BOUGHT IT INSTEAD

• On September 23, 2011, KN announced an international tender for the purchase of  an FSRU. Three international companies Golar, Hoegh LNG and Excelerate applied for the tender.
• No supplier offered to purchase the FSRU vessel immediately. All suppliers offered FSRU lease with an option to purchase it after the lease period. Until then, only leases with the possibility of extension (e.g. Petrobras, the Kingdom of Jordan, Kuwait National Petroleum Company) have prevailed in global practice.
• The winner, Höegh LNG, is one of the world‘s oldest LNG shipping companies, a Norwegian-owned group of companies that has been active in the maritime industry market since 1973, offering LNG transportation, LNG gasification solutions and vessel management services. Höegh LNG is headquartered in Norway and has offices in Singapore, the United Kingdom, the United States of America, Indonesia, Lithuania, Egypt, Colombia, the Philippines and China.

 

WHO CAN USE THE LNG TERMINAL?

The LNG terminal operates via third party access, i.e. the capacity of the LNG terminal can be used by both Lithuanian and foreign users. The activities of the LNG terminal include LNG reloading, storage and regasification. LNG terminal users pay for LNG reloading and regasification services, more information about them can be found here. Natural gas transmission is also charged (provided by the transmission system operator AB Amber Grid.

The LNG reloading station also operates on a third-party basis. It provides LNG unloading, storage and handling services. All these services are combined into one integrated LNG reloading service, which is subject to a common tariff for the loaded amount of LNG expressed in energy value. Therefore, the development of both LNG terminal and LNG reloading station services increases revenue and at the same time reduces infrastructure maintenance costs.  
 

WHAT IS THE PRICE OF THE FSRU INDEPENDENCE?

The set price for the FSRU INDEPENDENCE is USD 153.500.000,00 (one hundred fifty-three and a half million United States dollars), which excludes value-added tax (VAT). 
 

WHY IS THE PRICE SET IN USD? HOW WILL THE EXCHANGE RATE RISKS BE HANDLED?

In the shipping industry, it is a well-established and globally accepted practice to transact in US dollars. Given that the loan obtained from NIB for the acquisition of the vessel is denominated in euro, KN intends to consult with the banks on financial instruments to manage the negative effects of the exchange rate.
 

WHAT IMPACT THE FSRU ACQUISITION WILL HAVE ON KN FINANCES?

The return on regulated activities depends on the independent regulator and the state. It is important to note that in January 2022, National Energy Regulatory Council (NERC) approved KN investment of up to €138.4 million in FSRU. According to the current regulation, the value of the investment will be included in the base of the regulated assets and will generate a return set by the NERC, which is 4.14% for the period of 2022. One of the most obvious changes following the acquisition of FSRU Independence by KN, is the increase in the regulatory asset base from 2025 onwards, on which the return on regulatory assets is calculated. 

Another change is that, following the acquisition of FSRUs, performance will not be as affected by exchange rate changes, making the assessment of KN performance easier and more transparent for all stakeholders.
 

WHY WAS A TENDER PROCEDURE NEEDED INSTEAD OF ACQUIRING CURRENTLY LEASED FSRU? 

• The LNG Terminal Law taks the LNG terminal operator to ensure the operation of the LNG terminal at least until 31 December 2044 and to select the most economically advantageous offer for the acquisition of a FSRU upon expiry of the lease of the current FSRU Independence and to own the acquired FSRU. 
• Despite the fact that the FSRU Independence is the most economically advantageous solution (according to the market study and the market survey), the terminal operator has decided to launch an international public tender in accordance with the highest standards of transparency and in order to maximise the opportunities for the market to propose alternatives. 
• The tendering procedure was an additional but not obligatory to select the most economically advantageous offer. The LNG Terminal Law does not foresee an obligation to organise a public tender, but KN has sought to ensure that maximum efforts are made to allow all market participants to submit bids. 

 

HOW MANY APPLICATIONS DID YOU RECEIVE DURING THE PROCUREMENT PROCEDURE?

It should be noted that the tender was the final stage after the FSRU market study and market consultation. During the interviews with 11 potential bidders, we received indications that the current opportunity to acquire the FSRU Independence was competitive, and we assessed that the tender might attract few or no bidders. However, the objective of the company was to launch the tender and to make it as transparent as possible and to create opportunities for all market players to propose alternative solutions to the currently leased FSRU. Having assessed the maximum purchase value of the FSRU, the technological aspects and other considerations, the potential FSRU suppliers decided not to participate in the tender. In doing so, they essentially acknowledged that they could not offer a more cost-effective solution than the option available for the FSRU Independence.
 

HOW WAS THE TRANSPARENCY OF THE TENDER ENSURED?

The tender for the FSRU was open and transparent, monitored by Ministry of Energy, Public Procurement Office and other Lithuanian authorities. The procurement documentation, which included the technical specification and the bid evaluation model, was prepared in cooperation with external experts. By implementing all the planned stages of the FSRU procurement process, we are confident that the option chosen was truly optimal for Lithuania, for which no better alternative could have been offered by market players.
 

WHY DO YOU THINK SHIPBUILDERS OR FLEET OWNERS DID NOT PARTICIPATE IN THE TENDER?

KN had three options to choose from at the time of the tender - a new FSRU, already used FSRU and a converted LNG carrier. Although we expected activity in several of these segments, it is clear that, taking into account all the elements - the purchase value ceiling, technological aspects and other market conditions - potential suppliers could not offer a better solution than the option to acquire FSRU Independence, which was included in the contract with Höegh LNG.
 

WHY IS THE KN PLANNING TO PROCURE O&M SERVICES INSTEAD OF CARRYING OUT THESE ACTIVITIES BY  ITSELF?

KN has not been a shipping company before and has no experience in ship operation. KN's responsibilities include ensuring the commercial operation of FSRU-based technology terminals, from the infrastructure running from the vessel‘s connection to the customer or the pipeline, to the berth with all its facilities, to the O&M of the gas pipeline and gas metering stations. Consultations with international experts have confirmed that the use of contractors by the KN would allow it to manage the human and financial costs of the vessel's operation more efficiently, to make more cost-effective decisions on the operation and maintenance of the vessel, and to have more flexibility to respond to the need for additional crew members or repairs. By leveraging market expertise for the operation and maintenance of the FSRU at this stage, KN will be able to ensure the reliable operation of the LNG terminal in a much more efficient and cost-effective manner, while also building up the necessary experience should it decide to operate the LNG terminal on its own in future.
 

WHAT WILL HAPPEN AFTER 2024?

• Since 2014, Lithuania has been leasing the FSRU Independence from the Norwegian company Höegh LNG, which in 2012 won the international tender for the supply of the FSRU. Thus, the FSRU agreement is valid until 2024. Law on LNG Terminal tasked operator of the LNG terminal to ensure long term LNG operations by acquiring FSRU on the most economically viable condition until the end of 2024 and assure LNG terminal operation until end of 2044.
• In 2021 KN performed market research, market consultations on procurement documentation, and public procurement to verify competitiveness of existing purchase option, which is FSRU Independence.  The market research, the market consultations, and the public tender results have clearly shown that the existing purchase option to acquire FSRU “Independence” is the most economically advantageous solution for KN. KN shareholder meeting, convened on 25 February, 2022, approved the acquisition of FSRU „Independence“ under the terms which are predetermined in the Time Charter Party. The contract should be concluded no later than December 6, 2024. By that time KN will have to take the necessary steps to ensure the safe and secure management of the vessel and to prepare for the registration of the FSRU at the Register of Seagoing Ships of the Republic of Lithuania.

IS THE FSRU PURCHASED WITH ITS OPERATION AND MANAGEMENT (O&M) SERVICE? 

The contract with „Höegh LNG“, which leases FSRU Independence, provides only for the option to acquire the storage vessel without any obligation on the part of the company for its future operation and management. In order to ensure comparability in the public tender, it was decided to tender the FSRU without the O&M service.
In Q2 2022 KN will launch a public market consultation on the procurement O&M services. This consultation will aim at familiarising market participants with the future procurement and seeking their comments and observations on the draft procurement documents submitted.
The ability to ensure the uninterrupted and efficient operation of the terminal is a key criterion in the O&M decision, in particular in view of the strategic importance of this infrastructure in supplying gas to the region's gas consumers.
 

WHAT FLAG WILL BE FLOWN BY INDEPENDENCE WHEN THE STORAGE VESSEL IS BOUGHT BY KN?

When KN takes ownership of the FSRU Independence at the end of 2024, it will be registered in the Register of Seagoing Ships of the Republic of Lithuania and the Lithuanian flag will be flown on board the LNG terminal. This decision was adopted by the Lithuanian Government on 11 May 2022.
In order to implement the decision on the Lithuanian flag on board the terminal vessel, a number of legal acts related to the regulation of shipping will be revised. The aim will be to ensure that the applicable regulations allow for the registration of FSRUs such as the Independence and are in line with global best practices in the regulation of LNG storage vessels.
 

WHAT IMPACT WILL THE LAUNCH OF GIPL HAVE ON THE OPERATION OF THE KLAIPEDA LNG TERMINAL?

LNG terminal promotes the competitiveness and liquidity of the natural gas market both in Lithuania and in the regional countries (Latvia, Estonia, Finland and, after the Polish-Lithuanian Natural Gas Interconnector (GIPL) starts operations in 2022, Poland). The LNG terminal operates on a third-party access basis, which clearly identifies the benefits for natural gas market participants, who have access to the LNG terminal’s services, providing them with access to international natural gas markets.
The studies carried out show that although the Lithuanian-Polish pipeline will improve the security of gas supply situation, the GIPL alone will not be sufficient to ensure a competitive price level. Security of supply and effective competition between suppliers can only be ensured when at least two alternatives to Russian gas are available - the LNG terminal and GIPL.
 

WHY OPTIONS FOR CHANGING/MODIFYING EXISTING INFRASTRUCTURE WERE NOT ASSESSED WHEN DECIDING ON THE ACQUISITION OF A SPECIFIC FSRU?

Before deciding on the tender conditions for the public procurement, the company used external experts operating in international markets to identify the specification of the FSRU best suited to Lithuania's needs. All things considered, the technical consultants estimated that the incompatibility of the FSRU with the berth would not only entail additional investments, but also that its adaptation to a specific FSRU would take about a year. In other words, in order to achieve compatibility between the FSRU and the quay, the LNG terminal would not be operating for a period of up to 12 months for the modification works on the quay. As a matter of common practice, all modifications are carried out on board the vessel while it is in dry dock, which allows for maximum modifications and upgrades in a relatively short time. This means that the LNG terminal would not be able to function properly, i.e. to fulfil its essential function of providing an alternative gas supply.
 

WHY A SMALLER FSRU WAS NOT CHOSEN?

In order to encourage competition and the interest of market participants to participate in the tender procedure, KN, having evaluated the results of the market study and the insights from of the FSRU market participants, LNG terminal users, has decided not to apply a maximum limit to the size of the LNG carrier in the context of the international tender, but to set a minimum size of 150 000 m3. The totality of the criteria assessed in the market study indicates that a storage volume of 170 000 m3 is optimal, as:

1. FSRU of this size would be the most compatible with the existing LNG terminal infrastructure;
2. FSRU of this size would ensure the flexibility of the LNG terminal's services at today's level (as highlighted by the terminal's users in the market survey, a smaller capacity of the FSRU would be a serious drawback for the LNG terminal); and
3.  FSRU of this size would be compatible with the realities of today and the future: (a) shipbuilders have been focusing on FSRUs capable of accommodating conventional gas carriers (i.e. 170,000 m3 and above) since 2014; (b) the FSRU must be larger than the incoming LNG carrier: with the increase in the size of LNG carriers under construction, there will be few gas carriers smaller than 150,000 m3 left on the market in 10 years.

Moreover, the existing capacity (3,75 bcm/year) is in line with the country's energy security interests, i. e. the need to meet the country's gas demand in alternative ways.
 

WHAT ARE THE ASSUMPTIONS BEHIND THE FORECASTS FOR THE REGIONAL GAS MARKET?

In modelling the forecasts, KN relies on the forecasts of natural gas consumption in Lithuania, FINESTLAT and Poland, and the share of consumption covered by LNG imports in each of these markets.
 

WHY DO DECISIONS NEED TO BE TAKEN THIS YEAR, WITH TWO YEARS LEFT ON THE LEASE?

The existing contract with Höegh LNG provides for a clear deadline by which KN has to communicate its decision on the activation of the acquisition option, i. e. a specific window of time with a final deadline of December 2022. In addition, time is also needed to ensure a smooth takeover of the FSRU and adequate preparation for O&M.
 

IS THE LNG LONG-TERM SUPPLY PROJECT IN LINE WITH THE VISION OF MARKET PLAYERS?

Prior to the launch of the international tender, KN, together with independent commercial and technical consultants, carried out an overview of the Lithuanian and regional gas market and a market study, the main objective of which was to answer the question which possible FSRU option is the most economically advantageous and acceptable for Lithuania. During the market study, the existing LNG terminal users were also consulted, and their opinion was important for the clarification of the technical specifications of a particular FSRU. As regards the long-term perspective, it is the purchase of a FSRU that gives Lithuania the flexibility to react to unexpected changes in circumstances, such as changes in natural gas consumption. Such flexibility would not be available under the LNG terminal lease agreement.
 

HOW ARE THE PROJECT RISKS MANAGED?

The project was included in the list of Strategic Project Portfolio approved by the Government Project Portfolio Committee in 2017 and is managed in accordance with the guidelines established by the Government Project Portfolio Committee. A monthly report on the progress of the project is provided.
Within the KN, the LNG Long-term Import Solution Project is managed in accordance with Prince2 project management best practices, with oversight and control provided by a formed project oversight committee.
Risk management and control is an integral part of ensuring smooth and efficient project implementation. Project risks are identified, recorded, management measures are planned, and the status of risks is periodically reviewed.